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

MULTI-MILLIONAIRES Do multi-manager funds offer value?

STRANGER THINGSThe trusts investing in obscure assets

(DON’T) DO IT YOURSELFIs DIY investing too risky?

Issue 53 / July 2019

FE TrustnetFE TrustnetFE Trustnet

A s the fallout from the suspension

of the Woodford Equity Income fund continues, the latest edition of FE Trustnet Magazine focuses on liquidity issues. In this month’s cover story, Rebecca Jones finds £16.4bn has flowed from UK funds

over the past year and asks if it could cause a Northern Rock-style run on the sector, while Hannah Smith looks at some of the illiquid areas of the market that the closed-ended structure of investment trusts allows them to access. I look back

Editor’s letter

Contents

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

MULTI-MILLIONAIRES Do multi-manager funds offer value?

STRANGER THINGSThe trusts investing in obscure assets

(DON’T) DO IT YOURSELFIs DIY investing too risky?

Issue 53 / July 2019

FE TrustnetFE TrustnetFE Trustnet

CREDITSISSUE 53

FE TRUSTNET MAGAZINE 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

EditorialGary Jackson Editor (FE Trustnet)T: 0207 534 7680Rob LangstonNews editorT: 0207 534 7696 Eve Maddock-JonesReporterT: 0207 534 7676 Mohamed DaboReporterT: 0207 534 7634

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

Photos supplied by iStock

Parched!Rebecca Jones investigates whether the suspension of Woodford Equity Income could be the “canary in the coal mine” of a bigger liquidity crisis P. 4-11

Streaming the future Scottish Mortgage’s Tom Slater considers Amazon’s

prospects in the changing world of new mediaP. 12-15

Stranger thingsHannah Smith names three trusts investing in obscure areas that would be completely off-limits were it not for their closed-ended structureP. 16-19

at the warning signs about Woodford that the financial press missed and ask how this should affect your investment process in the future. Amid the ongoing controversy, John Blowers asks whether DIY investing has become too risky.

In our regular columns, Adam Lewis

asks if multi-manager funds are worth the extra charges, Square Mile’s Daniel Pereira reveals why he is buying the T. Rowe Price Global Focused Growth Equity fund and Unicorn UK Growth’s Alex Game names three UK stocks that are disrupting established industries.

FE Trustnet Magazine will take a break for summer but we will be back in September. Until then, enjoy reading,

Anthony LuzioEditor

Data hubIn numbers: Woodford Equity Income’s liquidity crunch P. 46-47

(Don’t) do it yourselfThe controversy over Neil Woodford has highlighted the problems of DIY investing. John Blowers asks – is it worth the risk?P. 48-55

Taking on the establishmentUnicorn UK Growth’s Alex Game names three UK stocks that are disrupting established industriesP. 56-57

What I bought lastSquare Mile’s Daniel Pereira says T. Rowe Price Global Focused Growth Equity’s punchy target means it is not for the faint-heartedP. 58-59

16

Having bond exposure in a world of uncertaintyThe ability for income-seekers to invest in equities and bonds can be beneficial, particularly in the current climate, says Henderson High Income Trust’s David Smith P. 20-23

The naked emperorAnthony Luzio attempts to explain why no one in the financial press spotted potential problems with the Woodford Equity Income fund until it was too late P. 24-31

Fund, pension, trust Rathbone Global Opportunities, Investec Diversified Income and Fidelity China Special Situations find themselves under the spotlight this monthP. 32-37

Multi-millionairesThe high charges on multi-manager products ensure the fund houses will be taken care of. But, asks Adam Lewis, do they really offer value for money to the end investor? P. 38-45

48

Cover Story

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Parched!

Rebecca Jones investigates whether the suspension of Woodford Equity Income could be the “canary in the coal mine” of a bigger liquidity crisis

T he current predicament of the now gated Woodford Equity Income fund may end up being passed off

as an isolated incident. An unusual liquidity crisis was propelled by a powerful manager’s penchant for early-stage companies, combined with unwavering support from the UK’s biggest fund platform – both of which have seen their reputations suffer.

However, such an assessment may be misguided. As we know, Woodford’s dilemma was exacerbated by mass withdrawals from his once £10bn fund – which forced him to sell his liquid assets en-masse, increasing the concentration of his illiquid positions. It was a similar case for GAM during its liquidity crunch last year and at the time of writing, H20 appears to be in the same boat. Woodford is not alone in losing money – and lots of it.

Fund runAccording to figures from the Investment Association (IA), UK-domiciled funds shed £5.5bn in 2018 – the first time annual flows

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[ LIQUIDITY CRISIS ]

have been negative since 1999. Even in 2008 – the worst financial crisis since 1929 – funds managed to squeak £202m of net sales. And this – chillingly – isn’t a patch on the £16.4bn of net losses we’ve seen in the 12 months to April this year.

All of this reverses an epic flow of money that, since the financial crisis, has seen assets under management in UK-domiciled funds grow by £792bn to more than £1.2trn as a constant flow of freshly printed money has suppressed interest rates and turned cash savers into investors. In comparison, total fund AUM grew by just £107bn between 1999 and 2008.

While fund managers have been readily receiving this cash, less consideration has been given to whether they would be able to give it back in a hurry – particularly if there is a Northern Rock-style run on their capital. Governor of the Bank of England Mark Carney recently warned this is a very real possibility.

*Ongoing charges as at 31.03.18. **Source: Morningstar, share price, total return as at 31.03.19. 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.

TECHNOLOGY TRANSFORMS TRADITION.Technology’s ability to transform business is at the heart of the Scottish Mortgage Investment Trust.

Our portfolio consists of around 80 of what we believe are the most exciting companies in the world today. Our vision is long term and we invest with no limits on geographical or sector exposure.

We like companies that can deploy innovative technologies that threaten industry incumbents and disrupt sectors as diverse as healthcare, energy, retail, automotive and advertising.

Several of these such as Amazon and Facebook have already created exceptional franchises and continue to fund significant growth from cash flow. Companies like this are playing the Scottish Mortgage tune.

Over the last five years the Scottish Mortgage Investment Trust has delivered a total return of 157.1% compared to 96.5% for the sector**.

Standardised past performance to 31 March**:

2015 2016 2017 2018 2019

Scottish Mortgage 29.6% -0.7% 40.9% 21.6% 16.5%

AIC Global Sector Average 17.8% -1.7% 36.7% 13.8% 10.6%

Past performance is not a guide to future returns.

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

For new technology that plays the right tune for your clients, call us on 0800 027 0132 or visit us at www.scottishmortgageit.com

A Key Information Document is available by contacting us.

COSTS MAKE A REAL DIFFERENCE TO PERFORMANCE – OUR ONGOING CHARGES ARE JUST 0.37%*.

SCOTTISH MORTGAGE INVESTMENT TRUST

Long-term investment partners

6 / 7

FE TRUSTNET

Cover Story

Caroline Shaw, head of fund and asset management at Courtiers Asset Management, says: “There are only a few hard and fast rules on liquidity in our industry, [although] there are many guidelines. This leaves a lot of areas open to interpretation and, of course, leaves the door open for managers to push limits – particularly if there is weak governance at the corporate level.”

Desperately seeking regulation Shaw says key rules include the portfolio diversification requirements of the UCITS Directive, otherwise known as the 5/10/40 rule. Meanwhile, the IA provides guidance for calculating liquidity, but no prescriptive formulas, something the Alternative Investment Fund Managers Directive also fails to dictate. She adds that many in the industry test fund liquidity by assuming 25 per cent participation in average trading volume. But this

trading information is not easily accessible to the end investor.

Could Woodford Equity Income, then, be the canary in the liquidity coal mine? Shaw does have concerns, particularly in UK equities where more than £12.4bn has been lost since 2016: “There are some big funds out there with big liquidity problems should every shareholder run for the exit at the same time.”

She adds any fund with more than £1bn of assets under management may struggle to wind down positions in a run – even large liquid ones. During Woodford Equity Income’s heyday in 2014, for example, her analysis shows it would have taken weeks to liquidate its 9 per cent holding in AstraZeneca.

You do not have to look far to find mega UK equities funds. Lindsell Train UK Equity, for example, is the largest active fund in the UK All Companies sector with £7bn AUM. In current

£16.4bn– net outflows from IA

funds over one year

While fund managers have been readily receiving this cash, less consideration has been given to whether they would be able to give it back in a hurry

8 / 9Cover Story

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conditions, large liquid portfolios like this one could be sold faster. Under more stressed conditions, this could change – especially if anything more punchy is lurking at the bottom. Shaw adds: “The thing is, everything’s alright until it’s not. You don’t have a liquidity problem until you do – and then you can’t run for the exit quickly enough and the price goes against you.”

In an asset class not too far away, chief economic adviser to Allianz, Mohamed El-Erian, also detects trouble. In a recent article for Bloomberg, the economist pointed to UK high yield as an area for concern. In a chillingly familiar analysis, El-Erian says the constant flow of cheap money from

central banks over the past decade means a “significant number” of companies have issued debt to buy back stock. The result has been mass downgrades to BBB ratings, filling the high-yield sector with junk.

While times are still rosy – borrowing costs for A-rated and BBB-rated companies are fairly similar – El-Erian says any significant downturn

Source: FE Analytics

PERFORMANCE OF SECTORS 1YR AFTER BREXIT VOTEIT Property UK Commercial (13.49%) IA UK Direct Property (3.04%)

Jul16 Aug

SepOct

NovDec

Jan17 Fe

bMar Apr

May Jun

-10%

-5%

0%

5%

10%

15%

“You don’t have a liquidity problem until you do – and then you can’t run for the exit quickly enough and the price goes against you”

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Cover Story

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would likely drag on these ratings further, the result of which could be “quite a disorderly price adjustment”. Incidentally, IA statistics show IA Sterling High Yield has seen net outflows in 11 of the past 13 months – bested only by the UK All Companies sector (12 out of 13).

In closed-ended, we trust?Industry ears are certainly twitching and, alongside the usual sabre-swinging at the FCA and HM Treasury, there is even some creative thinking going on, with the IA proposing a new hybrid between a fund and a trust: the long-term asset fund. This, it

says, could facilitate more long-term illiquid investing in open-ended funds by limiting dealing to just a few times a year, rather than daily.

Unsurprisingly, the Association of Investment Companies (AIC) is not a fan, pointing out that the ability to buy and sell holdings when investors choose has been the “lynchpin” of fund regulation for decades. Moreover, as the body is usually keen to point out, illiquid assets should be held in a trust anyway as, well, it’s what they do best.

The property sector is often used as a case in point, with the AIC highlighting the carnage in the open-ended universe in 2016 as evidence of trusts’ superiority in illiquid markets.

This hinges on the fact that, under stress, trusts are not forced to sell their best assets. However, while this will mean a stronger recovery later, during the sell-off trusts and funds suffer equally, with the value of many property trusts falling harder than funds in 2016, for example.

Ultimately, in a serious crisis of confidence, the structure of your fund or trust is less likely to save you than

your investment process. And as asset managers take stock post-Woodford, many seem confident.

Commenting on its liquidity process, a Fidelity spokesperson says: “Portfolio liquidity is, and always has been, taken very seriously at Fidelity.” Similarly, Will McIntosh-Whyte, co-manager of Rathbones’ multi-asset funds, says his team does not invest in companies smaller than £3bn, and in nothing unlisted.

Few other managers were willing to talk at length on the subject – if at all. As the Woodford saga continues to unfold, the next 12 months may prove a testing time for many asset managers: one that could see the prudent sorted from the prideful.

[ LIQUIDITY CRISIS ]

Ultimately, in a serious crisis of confidence, the structure of your fund or trust is less likely to save you than your investment process

trustnet.com

Streaming the future

Following a meeting with Amazon boss Jeff Bezos in Seattle, Tom Slater considers the online giant’s prospects in the changing world of new media

I n the past Scottish Mortgage has drawn a distinction between offline and online media, but as the issues have moved on, so

has our portfolio. Today Amazon and Netflix, along with Tencent, Alibaba and Spotify, dominate our media exposure.

We see the decline of the traditional media industry accelerating. ESPN, the sports TV channel and powerhouse of the US cable industry, peaked at 100 million subscribers in 2011. Since then that number has fallen by 14 per cent. Disney’s 2018 purchase of 21st Century Fox and Comcast’s purchase of Sky, also

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last year, illustrate the kinds of market pressure this is creating.

Since peak ESPN, Netflix has grown from 25 million subscribers to 137 million today. It is spending close to double what the biggest traditional media companies spend on content and customers are voting with their eyeballs. As many as 45 million households watched Netflix’s horror

thriller Bird Box in its week of release, more than twice the total number of cinema tickets sold that week in North America for all films.

Even some of our best-loved programmes have made the shift too. Amazon poached the trio of hosts from the BBC show Top Gear in 2015, producing The Grand Tour for Prime Video a year later.

With the industry in flux, it is understandable why this area is such a priority for Jeff Bezos. Amazon spent just under $5 billion on content last year, signing Jen Salke from NBC as the new head of its studios business. As Amazon is data-driven, this outlay is motivated by data derived from customer spending patterns. When a Prime member watches their first piece of content on Prime Video, they

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 ]

become a much more committed Prime member. Renewal rates improve.

This brings us back to Amazon’s business model advantage: it doesn’t have to make money right away. Spending on content sells more product. And in the age of on-demand viewing, channels no longer compete for audience share at a particular time of day. All the competition is for the talent that creates unmissable content.

Music streaming is another area where Amazon has focused attention. The Amazon Music service competes with Spotify, giving users the opportunity to stream their favourite tracks and albums. As with Prime Video, the attraction for Amazon is to offer yet another channel of compelling

In the age of on-demand viewing, channels no longer compete for audience share at a particular time of day. All the competition is for the talent that creates unmissable content

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in the first week, there is significant potential to add users incrementally from India’s vast population of over a billion people.

But competition for content is not just coming to our video screens and headphones. The gaming industry continues to grow, and in the UK, it is now bigger than the music industry and video industry combined. The British-made Grand Theft Auto franchise holds the record as the most financially successfully media title of all time. It is a trend that Netflix CEO Reed Hastings knows all too well, noting in a recent investor call: “We compete with – and lose to – Fortnite more than HBO”. Fortnite is the popular online video game developed by Epic Games, where another portfolio holding Tencent has a controlling interest.

Amazon is also active in the industry through its gaming streaming-platform Twitch, which it bought five years ago for $1bn. A few years earlier, Facebook paid a similar price for Instagram, now a hugely popular platform with over one billion users. More than ten million people log-on to Twitch every day and the number of viewer hours on its platform totalled over nine billion in 2018, 50 per cent more than the National Football League (NFL) gets each year. Twitch streams the feats of gamers to an engrossed audience, in the same way Instagram ‘influencers’ post photos and videos to their followers.

Streamers charge subscriptions to their channels with advertisers happy to pay for such valuable screen time during streaming breaks.

It is still early days for Twitch, but it is an example of the prescience of Jeff Bezos and that preference he told us about for “spending most of [his] time in the future”. Gaming has been a popular pastime for decades, but the Twitch business model has only content that will draw users into

their ecosystem. It offers discounts for subscribers to Prime or for those who plan to play their music through an Echo device. In a recent article discussing the Amazon digital assistant, we touched on the potential of voice-driven content search and discovery. The cut-price music subscription when played through an Echo device shows the importance Amazon places in the development of Alexa.

I mentioned Spotify, which is still the market leader in music streaming. But original content production is just as important to the Swedish company. Its recent acquisitions of Gimlet Media and Anchor – both podcast-related businesses – are a testament to that. By taking control over the creation of original audio content, it can better balance the revenues directed to record labels as its business grows. There was positive news for Spotify in March as it released its service in India. With over a million users added

Advertorial feature [ BAILLIE GIFFORD ]

There is a revolution happening within the media industry, and Bezos is more likely than most to have seen it coming many years ago

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

Tom SlaterTom joined Baillie Gifford in 2000 and became a Partner of the firm in 2012. Tom was appointed joint manager of Scottish Mortgage Investment Trust in 2015, having spent five years as deputy manager. Tom’s investment interest is focused on high growth companies both in listed equity markets and as an investor in private companies. He graduated BSc in Computer Science with Mathematics from the University of Edinburgh in 2000.

become viable recently, as improving computer processing power and faster network speeds – combined with the rise of social networks – facilitate seamless streaming of content to desktop computers and mobile phones.

In other words, there is a revolution happening within the media industry, and Bezos is more likely than most to have seen it coming many years ago.

The third article in the series, ‘Head in the Cloud’, will be published in September’s issue.

This is the second of three articles.

trustnet.comFE TRUSTNET

[ ESOTERIC TRUSTS ]

Stranger things

T he suspension of the Woodford Equity Income fund last month may have sent shockwaves through

the industry, but one area of the market that has seen no reason to panic is the closed-ended universe. Investment trusts’ set number of shares in issue and fixed pool of assets mean they are not subject to the same pressures as an open-ended fund manager who must sell holdings in order to meet redemptions. If an investor wants out of a closed-ended fund, they can simply sell their shares. This means trusts have fewer liquidity constraints and are an ideal vehicle for holding more esoteric investments. Here are three examples for investors who fancy trying something a bit different.

16 / 17Your portfolio

Hannah Smith names three trusts investing in obscure and esoteric areas that would be completely off-limits were it not for their closed-ended structure

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18 / 19Your portfolio

Hipgnosis gives investors exposure to musical intellectual property by buying the rights to songs and earning royalties when they are played. It was set up by Merck Mercuriadis, who knows a thing or two about the industry, having managed Elton John, Guns N’ Roses and Morrissey.

Mike Pinggera, who holds the trust in Sanlam Real Assets, likes the fact music is uncorrelated to traditional asset classes.

“Every time you hear Umbrella by Rihanna or Single Ladies by Beyoncé, we get paid,” he says. “I arrived in Cape Town a couple of months ago, jumped in an Uber and Smooth by Santana was

the first song on the radio. I didn’t care what plan Theresa May was hatching, I didn’t know what President Trump was tweeting, it didn’t matter because one of our songs was on the radio.”

However, Nick Greenwood, manager of LF Miton Worldwide Opportunities, warns the trust’s assets could be difficult to value and their current price may be out of sync with what they could sell for. Analyst Liberum recently said it would like to see more detail on how the trust calculates its NAV.

Hipgnosis is on a premium of 8.29 per cent and is yielding 4.8 per cent. It has made 3.64 per cent since launch one year ago.

It is not just individual investment trusts that provide exposure to illiquid assets – the closed-ended universe has entire sectors offering access to areas that are off limits to open-ended funds.

One of these is IT Leasing, where trusts own and rent out large-scale business-critical equipment, predominantly aircraft.

Amedeo Air Four Plus, for example, uses investors’ capital and gearing to buy planes, which it then leases to airlines. The airline pays for maintenance and insurance, while its interest payments allow the trust to pay off its loan and distribute dividends to shareholders.

HIPGNOSIS SONGS

AMEDEO AIR FOUR PLUS

It currently has 14 aircraft on long-term leases to Emirates, Etihad and Thai Airways.

However, shares nosedived in February when Emirates reduced its order book of A380 aircraft. Amedeo owned eight of these planes.

Numis says “the difficulty in trying to assess the value of these funds has always been due to uncertainty over the residual values of the A380 given that it has no secondary market”. It predicted continued share price volatility for this reason.

Amedeo Air Four Plus is yielding 9 per cent and is on a premium of 6.7 per cent. It has made 22.51 per cent since launch in May 2015.

AUGMENTUM FINTECH Managers Tim Levene and Richard Matthews launched Augmentum Fintech in response to a funding gap in post-seed capital, noting valuations in the UK sector are considerably lower than in the US.

The trust invests in early-stage,

high-growth fintech businesses in the banking, insurance and asset management sectors and holds the likes of Interactive Investor, Iwoca, Monese, Zopa and Seedrs.

The trust intends to realise value through exits and is committing to return up to 50 per cent of gains on disposal, annually, through tender offers or special dividends.

Numis says Augmentum appears well-placed to exploit rapid growth potential

in European fintech companies seeking to disrupt traditional banks and financial services.

“The manager is also open to contrarian, value ideas, which have not fulfilled their early promise,” it adds.

“We regard the management team highly and we believe that the fund is an attractive long-term investment, albeit that the early-stage nature of the companies means that it may not always be a smooth ride for investors.”

Greenwood says this is typical of the new breed of investment trusts that are coming to the market. Only a few of the early-stage investments it holds are likely to win, but when they do, “they win big”, he adds.

The trust has returned 11.33 per cent since launch in March last year. It is on a slight premium to NAV.

[ ESOTERIC TRUSTS ]

[ JANUS HENDERSON ]Advertorial feature 20 / 21

Having bond exposure in a world of uncertainty

The ability for income-seekers to invest in equities and bonds can be beneficial, particularly in the current climate, says David Smith, Fund Manager of the Henderson High Income Trust

Over the past 12 months there have been signs that the global economy is slowing at the same time as corporate profitability and equity markets are close to peak levels

FE TRUSTNET trustnet.com

W hen economic growth is looking fragile and uncertainty creeps into equity markets,

having the flexibility to diversify your exposure to different asset classes can be beneficial – particularly for income-seeking investors.

At Henderson High Income Trust (HHI), we have the ability to invest in bonds (government and/or corporate debt) in order to diversify the income generated from the underlying holdings and reduce the overall volatility of the Trust. In recent years, government and investment grade corporate bonds (the higher quality bonds as defined by the rating agencies), have offered little in the way of income for investors given the level of interest rates and bond yields.

That has been reflected in the Trust’s positioning, with around 90% typically invested in equities. However, with yields becoming more attractive recently, we decided to move part of the portfolio out of equities and into bonds, specifically US investment grade corporate bonds, including some well-known companies like Amazon and McDonald’s.

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End of cycle?Over the past 12 months there have been signs that the global economy is slowing at the same time as corporate profitability and equity markets are close to peak levels. Closer to home, the UK is surrounded by Brexit and political uncertainty, so we believe it’s prudent to both move defensively and consider other markets for investment opportunities. Having the ability to own bonds and invest overseas are key benefits of the Trust in this regard.

Why US bonds?With the US Federal Reserve increasing interest rates, we saw an opportunity late last year to buy investment grade US corporate bonds, yielding on average an attractive 4.5%, which hasn’t been possible for some time. The rationale was two-fold: firstly, it meant we could reduce our exposure away from equity markets by allocating more to bonds without impacting the income of the Trust; and secondly, it presented an opportunity to diversify away from the UK by buying the debt of US companies.

BorrowingThe bond portfolio has always been a key feature of the Trust; it dampens the overall volatility of the NAV and offers a predictable revenue stream. The other important aspect of the Trust is its ability to use gearing*, especially to fund the bond portfolio given its relative stability, to help enhance the overall income of the Trust.

With the Trust’s borrowing costs currently lower than the yield on the bond portfolio, we have utilized gearing fully to fund the bond portfolio, which boosts the revenue generation and

[ JANUS HENDERSON ]

helps support the Trust’s 5.5% dividend yield. It also means that within the equity portfolio we don’t have to chase the highest yielding areas of the market where dividend cuts and value traps are more prevalent. With this structure the equity portfolio can continue to own some high quality companies with attractive dividend growth prospects.

Given the increasing probability of an economic slowdown and uncertainties in the UK, we have utilized the Trust’s ability to own bonds and invest overseas to position the Trust more defensively.

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Increasing the bond exposure also helps reduce the overall volatility of the Trust’s net asset value (NAV), given bond prices, especially investment grade credit, generally fall less than equities in more challenging economic environments. Having increased the Trust’s exposure to US investment grade bonds, the overall bond portfolio is now 19% of net assets.

The UK is surrounded by Brexit and political uncertainty, so we believe it’s prudent to both move defensively and consider other markets for investment opportunities

*Gearing is a measure of the debt level of a company. Within investment trusts it refers to how much money the trust borrows for investment purposes and is normally expressed as a percentage of net assets

The past performance of an investment is not a reliable guide to its future performance. For UK investors only. For promotional purposes. The value of investments, and the income from them, can go down as well as up, and you may not get back the amount you invested. Nothing in this communication is intended to be or should be construed as advice. Before investing in any investment referred to in this communication, you should satisfy yourself as to its suitability and the risks involved. Nothing in this communication is a recommendation or solicitation to buy, hold or sell any investment. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Janus Henderson, Janus, Henderson and Knowledge. Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.

FE TRUSTNET

[ WARNING SIGNS ]

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The naked emperor

Anthony Luzio attempts to explain why no one in the financial press spotted potential problems with the Woodford Equity Income fund until it was too late

I t may not have escaped your notice that one fund manager in particular has dominated the headlines in the financial press

since the start of June. However, amid the media pile-on over the past seven weeks, with a flood of articles dissecting every aspect of Neil Woodford’s existence, from his favourite horse Willows Spunky to his ex-wife and his “Bond villain lair” holiday home, you may have found yourself asking one question: where was this press scrutiny before the manager suspended his fund?

The truth is, the warning signs about what could go wrong with Woodford Equity Income were there from the very start. And we, the financial press – and that includes FE Trustnet – missed them all. Here we

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look back at the red flags that got past us – and how this should affect your investment process in the future.

Jack of all trades…There is a long list of star managers who have tried something different – and failed. Perhaps most famous of all is Anthony Bolton. His Fidelity Special Situations fund made more than 14,000% for investors between launch in 1979 and his departure at the end of 2007. After a two-year hiatus he launched the Fidelity China Special Situations trust, but fell foul of lower corporate governance standards in China and blamed fraud in two of his holdings as his vehicle slumped to double-digit losses.

*Ongoing charges as at 31.03.18. **Source: Morningstar, share price, total return as at 31.03.19. 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.

TECHNOLOGY TRANSFORMS TRADITION.Technology’s ability to transform business is at the heart of the Scottish Mortgage Investment Trust.

Our portfolio consists of around 80 of what we believe are the most exciting companies in the world today. Our vision is long term and we invest with no limits on geographical or sector exposure.

We like companies that can deploy innovative technologies that threaten industry incumbents and disrupt sectors as diverse as healthcare, energy, retail, automotive and advertising.

Several of these such as Amazon and Facebook have already created exceptional franchises and continue to fund significant growth from cash flow. Companies like this are playing the Scottish Mortgage tune.

Over the last five years the Scottish Mortgage Investment Trust has delivered a total return of 157.1% compared to 96.5% for the sector**.

Standardised past performance to 31 March**:

2015 2016 2017 2018 2019

Scottish Mortgage 29.6% -0.7% 40.9% 21.6% 16.5%

AIC Global Sector Average 17.8% -1.7% 36.7% 13.8% 10.6%

Past performance is not a guide to future returns.

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

For new technology that plays the right tune for your clients, call us on 0800 027 0132 or visit us at www.scottishmortgageit.com

A Key Information Document is available by contacting us.

COSTS MAKE A REAL DIFFERENCE TO PERFORMANCE – OUR ONGOING CHARGES ARE JUST 0.37%*.

SCOTTISH MORTGAGE INVESTMENT TRUST

Long-term investment partners

26 / 27Your portfolio

A flood of money into illiquid stocks will quickly push their price higher – which is all well and good if it keeps on flowing, but a very different case when it begins to reverse

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Lack of oversightAs fund manager and founding partner, Woodford was in effect answerable to no one but himself. While other managers have been able to make this work, alarm bells should have been ringing when chief legal and compliance officer Gray Smith left in the first year and his replacements – head of compliance Simon Osborne and chief risk and operations officer Gavin St John-Heath – also departed, the latter lasting just eight months.

Spectacular early performanceIt may seem like an odd thing to question, but with the benefit of hindsight, the spectacular early performance of Woodford Equity Income merited a closer look. Woodford was known for his steady gains and generally proved his worth in crises by avoiding the latest fad and relying on old fashioned value investing. Yet he more than doubled the gains of his IA UK Equity Income sector in his first year, and quadrupled the returns of his FTSE All Share benchmark.

While not a fool-proof study, a portfolio of Woodford Equity Income’s original top-10 holdings – which were equivalent to 50 per cent of its assets – would have performed broadly in line with his peers over the first year.

This meant the outperformance

was generated by the smaller, less liquid positions outside of his top-10, yet IA UK Smaller Companies barely did much better than IA UK Equity Income over this time.

Everyone chose to believe Woodford’s table-topping performance was down to stockpicking, rather than because a flood of money into illiquid stocks will quickly push their price higher – which is all well and good if it keeps on flowing, but a very different case when it begins to reverse.

For example, an FE Trustnet story published shortly after the fund’s launch highlighted a 0.35 per cent holding in £44m stock Oxford Pharmascience Group. In June 2014 when the fund was £1.6bn, this would have equated to £5.6m, but after the first year when the fund reached £6.1bn – assuming no share price move – this would have been worth £17.8m, or about 40 per cent of the company. In

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the event, the share price rocketed in early 2015 before quickly collapsing. By the time the stock entered voluntary liquidation in 2018, Woodford owned 33 per cent of the company, although its share price decline meant this was worth just £4m. Many other of the fund’s smallest holdings followed a similar return profile, surging in early 2015 before fading.

Data from FE Analytics shows the fund’s assets peaked in June 2017 at £10.1bn, the same month as its performance – it was all downhill for both measures from there. A year earlier, the Fidelity UK Smaller Companies fund soft-closed at just

Analysts warned it was inevitable there would be a repeat if open-ended funds continued to invest in illiquid assets

£368m, which Fidelity said had been to protect existing investors.

Suspension of funds holding illiquid assetsAfter the UK voted to leave the EU in June 2016, investors in UK property funds panicked and tried to pull their money out. Numerous IA UK

Source: FE Analytics

PERFORMANCE OF FUND VS SECTORS AND INDEX IN 1ST YR

FTSE All Share (4.35%)

IA UK Smaller Companies (9.61%)

IA UK Equity Income (7.18%)

LF Woodford Equity Income (16.77%)

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“Reasonable fees are a positive outcome if someone is giving you sound financial advice and continuing to look after you through that journey”

Direct Property funds couldn’t meet redemptions and suspended trading. At the time, analysts warned it was inevitable there would be a repeat if open-ended funds continued to invest in illiquid assets. Yet no one imagined this would apply to a mainstream equity fund. A year later when Woodford Equity Income’s assets peaked, the fund already had an unlisted stock in its top-10 holdings.

“But he isn’t wearing anything!”It was in March 2018 when Woodford sold out of AJ Bell just before its flotation that people began to ask if something was up. By the time the manager tried to list some of his unquoted holdings in Guernsey to get around FCA limits, it was apparent he was in trouble, but still the coverage was limited.

Of course, not every journalist missed it. Our competitors Portfolio Adviser flagged potential problems with liquidity as far back as 2017, while Citywire unpicked its flaws in great detail in the months before the fund’s suspension, by which time the volume of outflows suggested many investors had also smelled a rat.

Most others – and that includes FE Trustnet – accepted his explanation that even the best

managers go through periods of underperformance, pointing out he was also criticised for avoiding tech stocks in the run-up to the dotcom bubble – and repeated the trick by shunning banks ahead of the financial crisis. This was emphasised by research notes from trading platforms – and it wasn’t just Hargreaves Lansdown. This doesn’t excuse the fact a few hours’ research would have revealed the emperor was walking around town stark naked and, in his list of portfolio holdings, he had even placed the evidence on his website.

Kerry Nelson, managing director of Nexus IFA, had spotted something wasn’t right early on and says she flagged it with a journalist 19 months

ago – but no action was taken. She doesn’t just blame the media though.“You can do this against not only the

financial press but also against the big advisory firms,” she says.

“They’ve got massive resources, Hargreaves has got 20

to 50 people with umpteen years of

experience in its research team, and St. James’s Place – look at the resources in terms of investment proposition.

“Then there’s little old me who manages her clients’ money but who worked it out herself. This is why it is so shameful, it’s been buried deep.”

So, what can investors do to ensure they don’t fall into the same trap, putting their faith in journalists who have fallen for a star manager’s charms? One easy solution would be to stick to passive funds. However, with global valuations peaking and the market cycle entering its final stages, whacking all your money into an MSCI World tracker may not be the best idea at this point in time.

Nelson says that now more than ever, getting impartial advice is key.

“Everyone has been told to do it themselves and the fees charged by advisers are a bad thing,” she adds, “but reasonable fees are a positive outcome if someone is giving you sound financial advice and continuing to look after you through that journey.

“I have long said we can’t do all things all of the time. I wouldn’t dream of operating on myself, so why do we advocate people self-manage their own financial affairs?

“Money is one of the most emotive subject matters because it drives everything. It just makes so much difference if people engage with that professional environment.”

[ WARNING SIGNS ]

In focus

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Source: FE Analytics

MANAGERS: James Thomson & Sammy Dow / LAUNCHED: 09/05/2001 / FUND SIZE: £1.7bn / OCF: 0.78%

FACT BOX

FE CROWN RATING

Rathbone Global Opportunities

Manager James Thomson likes to be upfront with potential investors about the areas where his expertise is lacking

F or investors who often find themselves doubting that a fund manager’s ability could

ever hope to match their self-belief, James Thomson may represent a breath of fresh air.

The FE Alpha Manager has the freedom to invest across the market cap scale in any country or sector in his Rathbone Global Opportunities fund. Where he does have some restrictions, however, are the ones he imposes upon himself where he finds his knowledge to be inadequate.

“I have to admit where I’m lacking and where I don’t have the skills or the expertise,” he said.

“Rather than dabble in those areas and pretend I know what I’m doing, I just have no exposure. So, from an early stage I realised that I had no interest investing in emerging markets – China, Russia, Brazil, India. These are local nuanced markets that require local expertise and a

PERFORMANCE OF FUND VS SECTOR AND INDEX OVER 10YRS

dedicated emerging markets fund manager. So from very early on I said global means flexible, but I just look for opportunities where I have the expertise and skills to do it properly.”

Thomson likes to be upfront with potential investors about where his expertise is wanting, telling them it may be a reason not to invest in his fund. He said he is not in the business of speculating or following a trend for fear of missing out.

The manager does seem to have an edge in the areas where he does claim to have some expertise. Rathbone Global Opportunities’ strong long-term performance – it has made 338.47 per cent over the past decade, compared with gains of 264.39 per cent from its FTSE World index benchmark and 194.55 per cent from its IA Global sector – had previously earned it a place on the FE Invest Approved Funds List. However, it was removed in March 2017 due to

concerns about the sustainability of returns and the fact it is too similar to another name on the shortlist: Fidelity Global Special Situations.

“We feel that the Rathbone fund has relied too much on top-down bets, whereas the Fidelity fund has derived more of its returns from stockpicking, which ultimately we think will prove

the more repeatable process,” said the analysts on the FE Invest team.

Thomson is currently overweight the US at 65.74 per cent of assets, having cut his UK exposure to just 5.56 per cent after the result of the 2016 referendum.

The fund is £1.7bn in size and has ongoing charges of 0.78 per cent.

IA Global (194.55%)

FTSE World (264.39%)

Rathbone Global Opportunities (338.47%)

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Source: FE Analytics

MANAGERS: John Stopford & Jason Borbora-Sheen / LAUNCHED: 18/04/1994 / FUND SIZE: £1bn / OCF: 0.76%

FACT BOX

FE CROWN RATING

Investec Diversified Income

This was the only fund in the IA Mixed Investment 0-35% Shares sector that made a positive return last year

L ast year was a challenging one for fund managers of all stripes as markets dealt with several

macroeconomic headwinds. Up and down the risk scale, funds struggled to protect investors’ cash, even at the more cautious end.

As such, just one fund in the IA Mixed Investment 0-35% Shares sector – where only 35 per cent of assets can be held in equities and at least 45 per cent must be held in investment grade fixed income or cash – managed to deliver a positive return in 2018: Investec Diversified Income.

Jason Borbora-Sheen, co-manager on the fund alongside industry veteran John Stopford, highlighted the strategy’s flexibility in volatile conditions as one of its major strengths.

“I think that brought it on to people’s screens – the ability to use the fund as an alternative in a context where most asset classes had a negative year,” he said.

PERFORMANCE OF FUND VS SECTOR OVER 10YRS

While the average IA Mixed Investment 0-35% Shares fund lost 3.35 per cent during 2018, Investec Diversified Income remained in positive territory with a small gain of 0.41 per cent.

A stronger correlation between bonds and equities meant many funds in the sector struggled in the second half of last year; however, Borbora-Sheen said the relationship between the two assets is something he has long been wary of.

Instead he credited his navigation of 2018’s tricky markets to his move from defensive stocks – which became expensive towards the end of the year – into cheaper cyclical areas.

However, the manager said this is not about timing the market.

“We struggle with macro questions,” he continued. “What we’re trying to do is select individual securities and size them so that we’re not overly correlated when there’s a risk of markets not

producing positive, forward returns, then hedge the strategy when there’s a risk of a drawdown.”

He added the fund’s yield – currently 4.13 per cent – will become more important in future as the market cycle reaches full maturity.

“If you look at most asset classes over the last 20 years, even with equities

more than half of returns have come from dividends,” said Borbora-Sheen. “In the case of fixed income assets, it’s more than 80 per cent – and sometimes more than 100 per cent – coming from their coupons.

“So we’re trying to get investors to focus on the importance of a compounding yield.”

IA Mixed Investment (65.05%) Investec Diversified Income (75.59%)

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36 / 37 [ TRUST ]

Source: FE Analytics

MANAGER: Dale Nicholls / LAUNCHED: 19/04/2010 / DISCOUNT/PREMIUM: -5.3% / OCF: 1.02%

FACT BOX

FE CROWN RATING

Fidelity China Special Situations

This trust has turned itself around after initially floundering under a former star manager

F or investors in Woodford Equity Income desperately looking for a reason to stay

positive, the resurgence of Fidelity China Special Situations may offer some hope. Launched as a vehicle for star manager Anthony Bolton – whose performance on the Fidelity Special Situations fund was nothing short of spectacular – it soon became apparent the investment environment in China was completely different to the one in the UK where he made his name, and after three years the trust was down more than 20 per cent.

He eventually began to turn things around, however, and the resurgence has continued under current manager Dale Nicholls – the trust is up 128.59 per cent since he joined in April 2014, compared with 120.10 per cent from its IT Country Specialist Asia Pacific

PERFORMANCE OF TRUST VS SECTOR AND INDEX SINCE LAUNCH

ex Japan sector and 97.27 per cent from its MSCI China benchmark.

With GDP growth of 6.6 per cent in China last year, Nicholls aims to profit from the surge in the country’s middle class. To achieve this, he looks for companies with good long-term growth prospects that have been underestimated by the wider market.

The manager has a bias to small- and medium-sized companies, but will invest in large or mega cap stocks such as state-owned enterprises where mispricing appears.

Some investors are steering clear of China due to concerns it has the most to lose from a trade war with the US. However, Nicholls believes his portfolio is likely to be well insulated from further escalation.

“I would like to stress the limited potential direct impact tariffs are likely to have on the holdings in the

portfolio given its low exposure to exporters,” he said.

He is also positive about the prospect of a compromise being reached, “the simple reason being the mutual damage to both economies that a prolonged full-blown trade war would bring, starting with higher prices for US consumers”.

Trade wars aside, the sizeable exposure to China, an emerging market, combined with gearing of 25 per cent and an upper limit of 10 per cent in unlisted companies mean Fidelity China Special Situations is probably best used as a satellite holding as part of a well-diversified portfolio rather than a core fund.

IT Country Specialist Asia Pacific (145.50%)

Fidelity China Special Situations (144.23%)

MSCI China (88.80%)

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Multi-millionaires

The high charges on multi-manager products ensure the fund houses will be taken care of. But, asks Adam Lewis, do they offer value for money to the end investor?

It is little wonder that advisers have been tempted by the lure of multi-manager funds in the last couple of decades.

Rather than having to select from thousands of different active funds, they now have the option to effectively outsource fund selection to one manager who, for a price, will do the job for them.

Since the turn of the decade, many of these managers have become household names in their own right, appearing in the media as often as those running the funds they select. However, in an environment in which costs are under increased scrutiny, are these multi-managers truly delivering value for their end investors?

Reassuringly expensiveAlex Farlow, head of risk-based solutions research at Square Mile Investment Consulting & Research, says his firm’s focus is on value for

FE TRUSTNET

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“Traditional multi-manager funds generally invest in other actively managed funds. Therefore, when passive funds outperform, it can be a tough environment”

[ SECTOR PROFILE ]38 / 39

money, not simply costs. With this in mind, he says some multi-managers are still worth paying for.

“However, it is fair to say this approach is under pressure in the wider market and only those funds that are able to demonstrate consistent added value are likely to endure over the long term,” he adds. “Traditional multi-manager funds generally

invest in other actively managed

funds. Therefore, when passive funds outperform, it can be a tough environment for them, which has been the case over the recent period in what has been a narrowly led market.”

While there is no official multi-manager sector, with funds sitting

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FE TRUSTNET

in various IA Mixed Investment, Targeted Absolute Return and Unclassified sectors, an equally weighted portfolio of multi-manager funds with a track record of at least one year returned 3.62 per cent over the past 12 months. This compares with an 11.09 per cent return from the MSCI World index and a 1.52 per cent gain from the FTSE All Share.

At a priceFunds with top-quartile performance over this period include the high-profile Jupiter Merlin Worldwide Portfolio, co-managed by John Chatfeild-Roberts, and the £1.7bn BlackRock NURS II Global Equity fund. Several smaller, less well-known funds also rank highly, with Margetts Sentinel Enterprise top with gains

ongoing charges figure (OCF) for multi-asset funds was 1.34 per cent, while the average multi-manager OCF was 1.73 per cent,” he says. “The figures for 2018 show these numbers have fallen to 1.13 per cent and 1.37

per cent, respectively.“While some funds have achieved

this through the use of fettered funds and/or passive funds, as actively managed funds continue to

lower fees, it’s a trend we can expect to continue, with multi-managers being cognisant of the growing need to keep costs as low as possible.”

Source: FE Analytics. 6.31% assumed annualised returns (FTSE All Share’s 5yr average), 1.37% fund charges

IMPACT OF MULTI-MANAGER FEES OVER 25YRS

One such multi-manager is IBOSS Asset Management. Having launched its risk-rated OEIC fund range in 2016, a year later it took the decision to lower charges through the use of more passive funds.

In focus [ SECTOR PROFILE ]

of 16.9 per cent, VT Alligator the best performer over three years with gains of 59.1 per cent and Thesis Eldon Income winning out over five and 10 years with returns of 105.4 per cent and 315.3 per cent, respectively.

FundCalibre research analyst Chris Salih says the problem for the multi-manager sector is that this performance has always had the caveat of an additional layer of charges. However, he notes that fees in the sector have been falling consistently in recent years.

“According to Defaqto, in 2014 the average

The problem for the multi-manager sector is that this performance has always had the caveat of an additional layer of charges

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Pressure will only increase as charges remain under the regulatory and media spotlight, which is exacerbated when something goes wrong

In focus

Growing pressure“We have said for some time that we expect charges to become a bigger percentage of returns, whether these returns are positive or negative,” explains Chris Metcalfe, investment and managing director at IBOSS. “The pressure is increasing on all parts of the value chain, platforms, fund houses, DFMs [discretionary fund managers] and advisers.”

He adds this pressure will only increase as charges remain under the regulatory and media spotlight, which is exacerbated when something goes wrong.

“There were two parts to our decision to increase the use of passive vehicles in our investment range, and we view both positively,” Metcalfe explains. “For 10 years the team has managed our multi-asset funds on a multiple fund and sector basis. For example, we have held three funds in each of the European, Asia and global emerging market equity sectors.

“Before 2017 we would normally have held three actively managed funds, with each having a different approach. What we found in some cases however was there would be periods when their high-conviction approach would temporarily align their fund selections. This obviously leads to a reduction

in diversification and a potential increase in relative volatility.”

He says the introduction of a passive vehicle into each sub-sector meant they had larger coverage of the geographical area, but still have a strong emphasis on stock selection.

“We found this new combination helped smooth out the return profile of each sector, while maintaining significant alpha over each of the respective sectors,” he adds.

The income option:Premier Multi-Asset DistributionThe Premier Multi-Asset Distribution fund, launched in October 1995, boasts one of the longest track records in the multi-asset sector. Managed by industry veteran David Hambidge, it targets a natural and growing income. The fund comes recommended by FundCalibre and Square Mile, with Farlow also a

fan of Premier’s Monthly Income, Growth & Income and Global Growth funds, based on the strength of the multi-asset team that Hambidge heads. Premier Multi-Asset Distribution has made 145.42 per cent over the past decade compared with 84.24 per cent from its IA Mixed Investment 20-60% Shares sector. It has ongoing charges of 1.3 per cent and is yielding 4.26 per cent.

The stalwarts: Jupiter Merlin Salih describes Chatfeild-Roberts and his Jupiter Merlin colleagues as the “stalwarts” of the multi-manager world, given their impressive track record across numerous market conditions. The team runs £8bn in assets across six funds – Conservative, Real Return, Income, Balanced, Growth and Worldwide – and each member has an average of 23 years’

industry experience. “While there have been some personnel changes over the years, we believe the team can continue to deliver competitive total returns for investors,” says Farlow. The biggest fund in the range, the £2.3bn Jupiter Merlin Income Portfolio, which sits in the IA Mixed Investment 20-60% Shares sector, has made 108.6 per cent over the past decade. It has ongoing charges of 1.48 per cent and is yielding 2.7 per cent.

The dynamic duo: Potter and BurdettGary Potter and Robert Burdett, the co-heads of multi-manager solutions at BMO Global Asset Management, have worked together for more than 22 years. They began at Rothschild in 1996 before moving to Credit Suisse in 2001, joining BMO when it took over Thames Capital in 2010. Square Mile is a fan of the pair, saying: “Their main strength is uncovering

talented investment managers, sometimes in the early stages of their career, and backing them over the longer term. The team has excellent knowledge of the industry.” Potter and Burdett’s largest fund, BMO MM Navigator Distribution, which is also in the IA Mixed Investment 20-60% Shares sector, has made 98.47 per cent over the past 10 years. It has ongoing charges of 1.44 per cent and is yielding 4.9 per cent.

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FE TRUSTNET

PERFORMANCE OF FUNDS VS SECTOR OVER 10YRS“Cost considerations have also meant that the fettered fund-of-funds model has started to look more appealing”

Source: FE Analytics

[ SECTOR PROFILE ]In focus

Moving onFarlow has noticed a recent shift in interest away from the traditional multi-manager model, driven by a greater focus on investor suitability, risk profiling and cost. This model, he says, while historically peer-group aware, now favours risk-based multi-asset solutions and manager-of-manager approaches.

“Cost considerations have also meant that the fettered fund-of-funds model has started to look more appealing,” he adds. “Many of the players in this market are now able to draw on a wide selection of funds across multiple asset classes. Historically, this approach fell out of favour with investors as asset

managers were deemed not to have investment expertise across the board.”

For Salih, the growth of the multi-manager industry proves its success.

“They take away the strain of fund selection which, to a degree, justifies the extra cost,” he says. “There has been lots of consolidation in the market in the past decade, indicating how competitive the space is, and the middle-of-the-road offerings will struggle to succeed in the future.”

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Premier Multi-Asset Distribution (145.42%)

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BMO MM Navigator Distribution (98.47%)

IA Mixed Investment 20-60% Shares (84.24%)

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Crunching the biggest trends down into figures

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Woodford Equity Income’s liquidity crunch

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– increase in AUM in first year

– increase in AUM in first three years

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280%

7

2

530%

– number of FTSE 100 stocks in top-

10 at launch

– average daily outflows

– proportion of portfolio in illiquid

stocks

Exposure to unlisted companies

Maximum unlisted exposure permitted by FCA

– losses over one year. The FTSE All Share

was down 3.85%

– number of FTSE 100 stocks in top-10 when it

suspended tradingSources: FE Analytics, MSCI, Woodford Investment Management

When fund suspended trading

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(Don’t) do it yourself

The controversy over Neil Woodford has highlighted the problems of DIY investing. John Blowers asks – is it worth the risk?

I t’s been a tumultuous few months in the world of investing, with our very own poster-boy, Neil Woodford, delivering a real

shock by suspending his already ailing flagship Woodford UK Equity Income fund.

Taking a wider view, it begs the question: should us hobbyist investors hang up our DIY boots and rely on the experts to manage our money?

In the UK, there are broadly 2 million private individuals managing around £2bn of their own money. Around half of these people are clients of Hargreaves Lansdown. That’s an average portfolio size of £1,000, so it stands to reason that many people have tried investing and given up, with only around half a million people actually running their own portfolios.

As such, some observers would say the UK’s hobbyist investors are in a niche, with enough knowledge to

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In the back [ PLATFORMS & PENSIONS ]

In the UK, there are broadly 2 million private individuals managing around £2bn of their own money. Around half of these people are clients of Hargreaves Lansdown

make decisions, thus saving a bunch of cash on professional fees.

Further, if these 2 million investors actually wanted to use a financial adviser, the industry simply wouldn’t be able to service them.

There is a dearth of capacity for all but the very wealthiest investors in the UK, with most IFAs not getting out of bed for portfolios of less than £250,000 and this number seems to be rising.

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50 / 51In the back [ PLATFORMS & PENSIONS ]

This advice gap has been a constant source of concern since the rule-changes arising from the Retail Distribution Review (RDR) in 2013. It is argued that if the general population are left to their own devices, they will either mess up their investments by making poor decisions or, more likely and just as worrying, do nothing at all.

This would explain why there are around 2 million investment accounts with almost nothing in them. People have had a go at investing and either got bored, scared or confused.

If my hunch is correct, DIY investing has become an elitist pursuit, with a relatively small group of smart people managing their money, rather than the millions of people that the number of DIY accounts seems to suggest.

This is worrying as it implies there are even more people occupying the gap between having a financial adviser and managing their own money – probably doing nothing at all.

If we are to save the DIY investment industry and encourage more people to take back control of their finances, there are many areas the industry must address

with Woodford on it attracted much higher levels of interest and stellar fund sales.

As an industry – particularly the consumer-facing side of it – we have to be more responsible as to how we communicate to investors and more innovative as to how we provide understandable investment solutions.

If we are to save the DIY investment industry and encourage more people to take back control of their finances, there are many areas the industry must address. It really does need a proper reboot to make it relevant for the 21st century.

UnderstandingThe financial services industry still communicates in a language that

few people understand. Sure, it’s a complex field and we fundamentally deal in unknowns with no guarantees, but the principles of investing still hold true, more so than ever with interest rates at historic lows.

The asset management industry is not short of a few quid and it has always surprised me that it has not

And this number of disaffected consumers is set to rise significantly given the widely broadcast news that the doyen of the fund management industry – the man who couldn’t help but make investors money – has failed.

As I write, my holdings in each of Woodford’s funds are down significantly.

Not pretty reading for a seasoned investor and downright terrifying if you have entrusted your retirement fund to the man who could do no wrong.

The ripples of the Woodford debacle spread far and wide. Hargreaves Lansdown is in the dock because it kept the manager on its select list for far longer than his performance justified. This was something I pointed out earlier in the year when I looked at the consensus in platform buy-lists. Credit to other platforms, who ignored the “Woodford-effect” and concentrated instead on actual performance.

Having run platforms in the past, there was no doubt about it. Anything

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PERFORMANCE OF WOODFORD FUNDS IN AUTHOR’S PORTFOLIO

Source: Author’s portfolio, 1 July 2019

Fund Performance since purchaseWoodford Equity Income -13% (and suspended)Woodford Income Focus -27%Woodford Patient Capital IT -49%

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committed to marketing its benefits to consumers as an industry. Some kind of education-led campaign would help more people understand the advantages of investing, expanding its potential market. In addition, the funds it sells to people are opaque, too numerous and are not allied to any particular objective or solution.

This is an unfortunate by-product of designing its products primarily for the financial advisory community, rather than the end-user, and in an example of misplaced loyalty, it forgets about who ultimately invests in its funds.

I would be thrilled if the asset management industry completely rethought its strategy as to what it does, focusing more on using funds to create well-diversified solutions that meet investors’ objectives, such as building a retirement pot, medium-term saving or in-retirement solutions. There really aren’t that many things people invest for, so it should create

Whether you invest directly or via a platform, there is a feeling that you’re taking your financial life into your own hands and that nobody is focused on looking after your interests. Your investments might bomb, but you’ll always get charged.

More evidence of “doing the right thing” for investors needs to be

produced to keep people engaged and confident in

their investment journey.If interest rates on

deposit accounts were to rise to even 3 or 4 per cent, I

think we would witness a mass exodus from equity investing

back to the banks and building societies, such is the mistrust of the investment industry.

Fund selectionThe rumour is that picking an investment

portfolio from the 6,000+ funds out there

is harder than ever and designed to drive people

into the arms of financial advisers.

Fund management groups love IFAs and rely heavily on their business, so it’s no wonder that they pitch their offering at a professional level.

The good news is that we are beginning to see some products that can help us avoid the pitfalls of fund selection and, although they are rather simplistic at present, point a way to the future.

Discretionary managed portfolios are effectively an IFA-grade product available to the masses and are beginning to be offered by fund managers and platforms. They may also be named multi-asset or multi-manager funds and come in both active and passive flavours.

The idea is simple. You pick a portfolio you like the look of, where all the underlying funds have been selected to provide a risk/return profile and bung your money in. The fund manager will then keep finessing the portfolio to keep it true to its original objectives.

This means you neither have to pick the funds nor manage them on an ongoing basis. Sounds good, but it comes at a cost.

However, there are low-cost versions – usually based on passive funds – such as the famed Vanguard LifeStrategy range. They have never shot the lights out on performance but have done what they have said they’d do – a quality to look out for.

Moving with the times

The asset management industry is not short of a few quid and it has always surprised me that it has not committed to marketing its benefits to consumers as an industry

strategies that meet individual needs. This would be appealing for both DIY investors and people who just want a simple solution – managed on their behalf – that they understand.

Some investment platforms are beginning to offer solution-driven portfolios, but they are still more complicated than they need to be.

TrustIs it me or is there a feeling that the industry is preying on amateur investors like you and me? The media is full of stories of people being hoodwinked into this scheme or that scam, most of them far-removed from what we would call the established fund management industry.

Woodford’s fall from grace will have muddied the waters between boiler room scams and the legitimate investment industry, simply because they have one thing in common – they lost investors’ money, at least for the moment.

If Woodford can get it so wrong, what about other fund groups?

Although investors are generally well-protected and the industry well-regulated, it doesn’t seem to stop the constant stream of poor outcomes that affect UK investors.

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54 / 55In the back [ PLATFORMS & PENSIONS ]

IFAs are the chefs, concocting solutions from the huge range of funds to suit the palette of individual clients. Generally, they do a great job – if you can afford them, or they agree to work for you.

Otherwise, it’s pin the tail on the donkey for DIY investors. Some platforms have focused their efforts on distilling down the funds available to a much more manageable quantity by publishing buy-lists. Ratings agencies such as FE Research also publish lists of the funds they feel are most consistent for the purpose.

However, it’s still a bit like asking someone who’s just passed their driving test to pilot a Boeing 747, such is the huge amount of information that needs to be taken into account – and that’s just the start.

It’s relatively easy to construct a portfolio but a hell of a lot harder to keep it operating at maximum efficiency. When to sell funds, what to buy to replace them and rebalancing of holdings takes DIY investors into dangerous territory.

My strategy – picking funds and leaving them alone – has backfired, given the Woodford situation and the fact I’m carrying a couple of other turkeys in my portfolio, too. I’m really not sure what to do. Do I leave them and hope they recover? Or bail out with a small loss and buy something better?

I often feel a bit lost. How many DIY investors are having similar thoughts and are considering bringing in the experts?

So many DIY investors founder on the reef of fund selection that investment gains are severely restricted and the whole idea of persisting becomes increasingly daunting.

More to doIf the fund management industry is to “re-boot”, then it needs to focus on investment solutions such as long-term retirement planning, sustainable investing and decumulation strategies.

Individual funds are just ingredients and people now want experts to bake them in an appropriate recipe that meets their needs.

There is a huge disconnect with the UK’s burgeoning fintech industry, which has devised ingenious methods of delivering services to new audiences, far in advance of the old-fashioned, stuck-in-a-rut investment management industry.

Fund management groups have brand and distribution as well as investment management skills.

Between these two industries must lie a modern approach to building and delivering simple and inclusive investment solutions that more people can live with.

If the industry is to not only survive but thrive, it has to modernise its approach, remember who the end customer is and deliver relevant solutions to them.

Otherwise, the DIY investment landscape looks too dangerous for all but the bravest and most experienced investors to profit from.

It’s relatively easy to construct a portfolio but a hell of a lot harder to keep it operating at maximum efficiency

[ STOCKPICKER ]

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In the back 56 / 57

We see plenty of opportunities, particularly in the small- and mid-cap space, of companies that are differentiating themselves in the sectors they serve

Taking on the establishment

Unicorn UK Growth’s Alex Game names three UK stocks that are disrupting established industries

D uring phases of strong economic growth when confidence is high, there is an

abundance of growing businesses for investors to back. In times of lacklustre economic performance, these opportunities are more difficult to come by and investors need to be more creative in where they source growth. During such periods, companies with disruptive yet proven business models can continue to thrive regardless of

Alpha FX is a foreign exchange service pro-vider, predominantly serving small and me-dium businesses. These clients have traditionally been served by blue-chip banks in a largely trans-actional capacity with minimal levels of service. Alpha FX differentiates

itself by acting as a part-ner and using technology to enhance the customer experience, creating strong relationships.The corporate foreign ex-change market is estimat-ed to be worth more than £400bn so the opportu-nity for Alpha FX to gain market share through its disruptive, service-led of-fering is significant.

First Derivatives is a “big data” software and consulting company, whose market-leading technology allows its cus-tomers to process and analyse vast amounts of data in real-time, providing insights that have never be-fore been achievable. The company has historically

sold into financial services, but has recently gained traction expanding into new areas, disrupting tradi-tional analysis techniques. These sectors, which in-clude utilities, marketing and manufacturing, are be-ginning to realise the true potential of harnessing the data at their disposal, with First Derivatives’ technol-ogy enabling this change.

Gym Group is a fast-growing low-cost gym operator with 150 gyms and more than 700,000 members. Low-cost gyms are disrupting the tradi-tional health and fitness market by offering flexibil-ity to users at competitive rates. The dynamics of the

low-cost gym market are attractive and demand is expected to continue for some time, according to a recent report by PWC. Gym Group is opening 15 to 20 sites a year which typically deliver quick and predictable returns on investment, leaving it well-placed to continue to gain market share within the health and fitness sector.

broader economic or sector-specific growth. The disruptive differentiator may come in the form of technology or, more simply, an enhanced customer-centric business model, typically enabling the challenger to take market-share from much larger incumbents that are slow to respond to changing customer demands. We see plenty of opportunities, particularly in the small- and mid-cap space, of companies that are differentiating themselves in the sectors they serve and have a long runway of growth ahead of them.

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[ WHAT I BOUGHT LAST ]In the back 58 / 59

Daniel Pereira is an investment research analyst at Square Mile Investment Consulting & Research

The fund has demonstrated an ability to deliver strong relative performance in rising markets, but this has tended to come at the expense of underperforming the index during times of stress

conviction ideas which he feels have the strongest return potential.

“Rather aggresive”Given the type of company that Eiswert seeks to meet the rather aggressive performance objective, which is to beat the MSCI AC World index by 3 percentage points per annum over the long term, we believe this fund is best suited for investors with an appetite for risk. The fund has demonstrated an ability to deliver strong relative performance

in rising markets, but this has tended to come at the expense of underperforming the index during times of stress. Despite this, we believe investors will be well served over the course of a full market cycle, which we believe to be at least five years.

Charismatic and passionate Overall, there is a lot to like about the fund, including its charismatic and passionate manager. Essentially, this is the best ideas portfolio of the firm’s entire equities capability, and the well-

T. Rowe Price Global Focused Growth Equity

Square Mile’s Daniel Pereira says this fund’s punchy target means it is not for the faint-hearted

O ne of the benefits of global equity

funds is the large opportunity set in which they can invest. With more than 10,000 companies to pick from, skilled fund managers can exploit the inefficiencies within equity markets and opportunistically invest in stocks they believe can deliver outsized returns. Investing in global equities can be challenging, however, and fund managers need a robust process and complementary resources to help them deliver attractive

returns. Given the nature of such a large investable universe, it is important for investors to understand where their choice of global equity fund is likely to invest, and of equal importance, where it is not. 

Size and prestigeOne strategy we have recently added to our Academy of Funds is T. Rowe Price Global Focused Growth Equity. Given the size and prestige of T. Rowe Price, its analysts enjoy some of the highest levels of access to company management

around the globe. Manager David Eiswert has run the fund using a clear framework since he took over in 2012, leveraging off the firm’s large pool of resources. The fund has a distinct bias towards growth stocks further up the market capitalisation scale, but it operates within sensible parameters that should provide investors with broad regional and industry exposure to companies in both developed and emerging countries. It is well diversified and consists of 60 to 80 of the manager’s highest

defined process has allowed the manager to deliver a strong and consistent set of returns. We believe this fund has all the ingredients required to achieve its long-term performance objective.  

School’s outFE Trustnet Magazine will be taking a break over August, but we will be

back in September.

In the meantime, enjoy what is left of the summer and we will see you

again in the autumn.