WEALTH MANAGEMENT FORUM

WEALTH

MANAGEMENT

FORUM

CITYWIRE FUNDS INSIDER 3WEALTH MANAGEMENT FORUM

The Citywire Wealth Management forum saw a wide-rangeof speakers present their views on the future of marketsand the industry.

Kicking off was keynote speaker Professor DougMcWilliams, chief executive of the Centre for Economic andBusiness Research.

McWilliams’ thesis is that we are in the early stages of a 20-year bull run in equities. Of course we all hope he is right.

Following him was investment trust manager JamesHenderson from Henderson Global Investors. Henderson dis-cussed his views of managing equities for income both in thefund he runs and on the range of investment trusts where hehas made his name.

Following him is Chris Higham, one of the rising stars at OldMutual Asset Managers, who runs the Old Mutual Dynamicbond fund. Higham saw value in credit even after a difficultyear for the asset class.

The last of our fund managers was Andrew Jackson fromStandard Life Investments. Jackson manages a range ofproperty portfolios and explained why he has chosen to useboth bricks and mortar and securities in a bid to get theright returns with appropriate volatility.

Finally, Richard Nicolas from Peak Investment Partnersgave us a unique perspective on his work as a wealth

manager in Australia. He raised the prospect of sepa-rately managed accounts which are being pioneered byPraemium both in Australia and the UK and urged wealthmanagement practitioners to move into new technology toenhance the service they are offering clients.

Charlie ParkerFunds Editor

In association with

Chasing the 20-year bull run

4 CITYWIRE FUNDS INSIDER WEALTH MANAGEMENT FORUM

The Speakers

1. James HendersonDivisional Director UKInvestments, Henderson GlobalInvestors

Henderson joined HendersonGlobal Investors in 1983 as atrainee fund manager and in 1985became a unit trust, investmenttrust and international assistantinvestment manager. In 1990Henderson managed the LowlandInvestment Company and in 1992he managed the ENIC InvestmentTrust. He has been in his currentrole since 1999.

4. Chris Higham Fund Manager,Old Mutual Asset Managers

Higham joined Old Mutual AssetManagers in June 2005 fromMorley Fund Management, wherehe was a credit researcher coveringboth high yield and investmentgrade bonds. He has a degree ineconomics from Durham Universityand is a Chartered FinancialAnalyst Charterholder.

2. Douglas McWilliams Chief Executive, Centre forEconomic and Business Research

After a career in industry as IBM’schief economist in the UK,McWilliams was appointed chief eco-nomic adviser to the Confederation ofBritish Industry, where he receivedthe Sunday Times’ Golden Guruaward for best UK economic fore-caster in 1992. In the same year, hefounded the Centre for Economic andBusiness Research.

5. Andrew JacksonInvestment Director,Standard Life Investments

Jackson is responsible for theStandard Life Investments’Continental European DirectProperty funds and Listed Propertyfunds. The two global propertyfunds are primarily invested instock exchange-listed propertycompanies and real estate invest-ment trusts (Reits).

3. Richard NicholasDirector of Portfolio Management,Peak Investment Partners

Nicholas has over 20 years’ interna-tional experience in private clientportfolio management and hasworked in the UK with Five Arrows,UBS Laing & Cruickshank. Duringthe 90’s he worked for Hill SamuelPacific, Hambros and AllianceCapital in Hong Kong and morerecently in Sydney with ANZ PrivateBank and Peak Investment Partners.

6. Lawrence Lever Executive Chairman, Citywire

Lever was educated atManchester Grammar School, TheSorbonne and Oxford Universitywhere he read law. He qualified asa solicitor in 1983 and went on tooccupy senior editorial positionson The Times and Mail on Sundaywhere he was financial editor. Hefounded Citywire in 1999.


1.

4.

2.

5.

3.

6.


A global perspectiveDoug McWilliams, Centre forEconomic and Business Research: I’mgoing to talk about what’s going on inthe world economy and try and relate itspecifically to the world of equities.

We’ve got two extraordinary phenom-ena taking place in the world at themoment. They’re both well known buttheir implications are less so. The firstis the impact of technology as we moveto an information society. We’re allaware that the information society hasgot some interesting facets, the biggestof which is the extent of the economiesof scale.

When Bill Gates developed his secondedition of Windows he spent $550 mil-lion developing it, which was quite a lotof money in the 1980s. If he’d sold amillion licenses at this time, which wasquite a decent sale for a product, hisresearch costs would have worked outat $550 dollars per license, which ispretty hefty for something that retails at$69.99. He would have made a loss. Inthe end, he sold a billion and so pro-duction became seriously profitable.When research is your main cost of pro-duction, you have super economies ofscale.

It’s moderately well known that theeconomics of information works likethat. What’s slightly less well known isthat we’ve got another phenomenongoing on at the moment, which is associ-ated with what I call the ‘telephonemodel’.

I think the question to ask is, whobought the first telephone? It’s aninteresting question, isn’t it? Whywould you buy a telephone if no oneelse had one? Indeed, who would buythe second one, unless you really want-ed to speak to the person who had thefirst one? And that’s the telephone

economy. The value of each phonedepends on the number of other peoplewho take it up. In other words, one isthe supply-side phenomenon, theother’s a demand-side phenomenonbut it has the same effect, which is tocreate an economy of scale becausethe value goes up as the marketexpands.

You take the two together and youget very hefty critical mass required forinvestment and then very sharplydeclining costs and increasing value asthe numbers go up, so technology real-ly changes world economics.

The second thing is globalisation.What we are seeing now is the mostexciting time to be alive in economicterms. We’re seeing the sort of pros-perity that used to be confined tobetween 5% and 10% of the world’spopulation is spreading gradually toabout 80% of the world’s population,which is huge.

It’s even more important than theindustrial revolution in terms of scale.Moreover, the industrial revolution wasa 150-year process. This is reducingdown a 150-year process into about ageneration, which is stunning. It’s notsurprising that in these circumstanceswe see quite a lot of disequilibriaemerge, and what I’m essentially goingto be talking about today is the implica-tions of some of these disequilibria.

We should not assume that relation-ships and ratios, which held in the past,will hold in the future. Now, in theinternational economy you’ve got thisextraordinary rise of easterneconomies, particularly China andIndia. It means faster world GDPgrowth.

We’ve got a big rise in the world’ssavings ratio, so you have two phe-nomena here. Firstly, because of thelabour surplus, profits are going up.

Secondly, because of the surplus ofcapital that can be invested, yields aregoing down and a combination of lowyields and high profits is the most phe-nomenally attractive set of circum-stances for equities.

The futureWhen can the bull run end? It can’t goon forever and one just needs to thinkwhat might bring it to an end. The nor-mal mechanism would be for firms totake advantage of the cheap capital,invest very heavily, expand until they’recompeting then bring the price down,forcing profits back down again.

That mechanism at the moment isnot fully operating. It’s not 100% clearwhy, but I think if one wants to venturea suggestion it’s that the nature of reg-ulation and also expectations byinvestors in the Western world hastended to discourage fixed investment.It will eventually, I’m sure, but it seemsto be happening very slowly.

The second thing that could makethis phenomenon come to an end is ifworld growth becomes a zero sumgame, and world growth could becomea zero sum game if there are environ-mental limits to growth or if there arenatural resource limits to growth.

My guess is that we’ve probably gotabout a generation where the phenom-ena are very positive for equities whilethis world adjusts itself.

In terms of the short-term we seeslower business investment being domi-nated so far by oil, but this should slowas time moves on. We think the poundwill remain strong because of hot moneyand we think the balance of paymentswill continue to deteriorate, but thatwon’t matter as far as the pound’s con-cerned because capital flows are muchmore important than current flows.

So this is what we did last month. We

Value stocks for valuable clients

A UK Equity Income Fund that’s setting the pace

- it’s happening at Henderson

Henderson UK Equity Income Fund

• Since James Henderson took over managing our UK

Equity Income Fund, he has transformed its performance:

the Fund is delivering top-quartile returns at below average

risk levels.

• A long list of stocks allows the Fund to take exposure across all

market capitalisations including smaller companies and AIM.

• The Fund is different from many other UK Equity Income

Funds and is highly attractive to your Equity Income clients:

James takes a contrarian approach, focusing on out-of-favour

and neglected stocks. The team spends considerable time

analysing recovery opportunities which form an important part

of the portfolio.

Henderson outperformance

Henderson UK Equity Income Fund

Sector Average

% Change over

+11.3

+9.0

+2.3

6 Mths

+20.3

+13.2

+7.1

1Yr

+69.7

+63.3

+6.4

5Yrs

+73.5

+65.1

+8.4

3Yrs

Fund performance as at 30 April 2007*

Traditional values modern thinking

Intended for professional advisers only and should not be communicated to or relied upon by private investors. *Source: Standard and Poor’s as at 30 April 2007, on a mid to mid basis (excluding initial charge), with net income reinvested for a basic rate taxpayer. All Figures are for shareclass A unless otherwise stated. Please note that past performance is not a guide to future performance. The value of investments may fl uctuate and your clients may not get back their original investment. Henderson Global Investors is the name under which Henderson Global Investors Limited, Henderson Fund Management plc, Henderson Administration Limited, Henderson Investment Funds Limited, Henderson Investment Management Limited and Henderson Alternative Investment Advisor Limited (each authorised and regulated by the Financial Services Authority and of 4 Broadgate, London EC2M 2DA) provide investment products and services. We may record telephone calls for our mutual protection and to improve customer service.

0800 88 11 44www.henderson.co.uk

H-CFI-June07.indd 1 25/5/07 11:33:41


said that the Dow ought to be 13,200and the FTSE ought to be just short of6,500. Having made that prediction amonth ago, the markets seem to havemoved more or less in that directionsince. That’s just the short-term, but ifyou look out further we are still going tosee pressures keeping wages down.

We are still going to see companiesable to put prices up at various times.We are still going to see relatively lowyields, at least for the next two or threeyears, and I would say probably for thenext 15 years or so. If we add thosethings together, this produces a reallypositive global underpinning for equi-ties. Apart from the view that we took amonth ago that equities were slightlyundervalued, there is a medium-termphenomenon and we’re still looking forgrowth of between 8-9% for the next10-15 years.

Eventually it will end in tears but myview is that quite a lot of fortunes will

have been made before that happens.

Lawrence Lever: Okay, do any of thefund managers have a comment or aview? James, what do you think?

James Henderson: Just very briefly, thecentral bit, and I’m a bit frightened ofcriticising a professor, but I don’tunderstand how you have operatingmargin as a percentage of profit stayingso high. You have that written in andthen at the same time you’re saying,‘we’re living in this wonderfully compet-itive world where inflation stays down’,and just applying it to the UK.

Doug McWilliams: A very good point,and I did say it’s a bizarre phenomenon.I think there’s probably more inertia inthe market than you might imagine,partly because most economies areservice economies and not goodseconomies. The thing about services is

‘Globalisation is evenmore important thanthe industrial revolu-tion in terms of scale. Itis reducing down a 150-year process into abouta generation, which isstunning’

Doug McWilliamsCentre for Economic and BusinessResearch

they’re much easier to differentiatethan goods.

The US slow down is not so great thatit offsets a buoyant economy in the FarEast and a not too bad economy inEurope. I say not too bad, we’re nottalking about super growth there; we’retalking about 2.5%, which is only aquarter of the rate of growth in Chinabut at least for us it looks good. Wethink there’ll be a soft landing in theUS. We think eventually they’ll be ableto reduce interest rates. We don’t thinkthere’s enough inflation and momen-tum to stop them doing that. We tend tothink of the dollar as being weak in theshort-term and stronger, at leastagainst the euro, in the medium-termbecause we think the European’s prob-lems are medium-term. NorthAmerica’s problems are short-term,and obviously that’s part of the phe-nomenon we’re seeing at the moment,added to by the short-term interest rateexpectations, which are for rising ratesin Europe and rates holding and proba-bly weakening in the US.

Asia is averaging between 7 and 8%.It’s not just China now but the Indianrate of growth, which for years seemedstuck at 6%, has been ratcheting up to9% and now looks to be almost asimportant a driving factor in some waysas China.

Richard Neville, Coutts: I agree withthe thesis but one of the things thatconcerns me, and you haven’t touchedupon it really, is the demographics inthe US and Europe and especially theUK, where over the next 10 or 15 yearsthe baby boomers of the late 50s and60s are entering into retirement and theimpact that’s going to have on the econ-omy generally.

Doug McWilliams: The baby boom isreally a US phenomenon and the reasonwas because they fought the war awayfrom their own shores and you need tohave both men and women, at least inthe technology of those days, to pro-

duce children. So when they got back,you had this huge expansion between1945 and 1947.

For us it was a much smallerincrease. It was about a 10% increase inthe birth rate when it took place,whereas they had a 50% increase thatwas concentrated over a very shortperiod, so it is a very different phenom-enon here.

It’s an important phenomenon in theStates. They’re making up for it, partial-ly through immigration and makingolder people work. In the UK we nowhave 1.1 million people over retirementage in work. The success of the fundmanagement industry in destroyingtheir pensions has of course con-tributed to this, so the fund manage-ment industry is making a major contri-bution to economic growth in that way,combined with Gordon Brown of course.Sorry, I’m joking!

But it’s being made up for in all sortsof unusual ways and that I think isgoing to continue to be a phenomenon. Ithink immigration is going to be suckedin as a further result of this.

An aggressive approachJames Henderson, Henderson GlobalInvestors: I won’t give a plug for thefund, I am going to talk about what Iam doing as an equity income manag-er and use the fund to illustrate whatI’m saying. Much of what I did in the1980s at Henderson Global Investorswas with a value bias.

Recently, that has adapted but ithasn’t really changed. As an incomemanager I am finding it more difficultat the moment than I have for a while.

My approach was born on theLowland Investment Trust, which I’verun since 1990. When we’re runningmoney I try to be aggressive. When theworld’s getting worried and nervous Iget greedy, and when the world is get-ting greedy, we get more worried andnervous. That is what has happened inmy trusts over the last year. This time

last year I was about 20-25% gearedon the investment trusts. With both ofthem I’m now depositing cash, so I ammarginally lower than 100% invested,not because I’ve got some great call orso I can get into a debate with therenowned economist in the room, butjust because, as a bottom-up stock-picker, I’m struggling to find ideas.

I use a value approach to move upand down the size scale. If I look backand test what I’ve run, I’ve had my bestcapital and income growth from smallcompanies. But if I can’t find the valuein small-cap, I buy large-cap and thereis an element of that going on with meat the moment. Last year, I would havetold you I had a large amount in theFTSE 250. My FTSE 250 holdings aregoing down the whole time and I ambuying some selective small-cap anddoing more in AIM.

I’m currently running quite a longlist of stocks. To modify risk in recov-


‘Despite the knock oneffect from the US slowdown it’s not so greatthat it offsets a buoy-ant economy in the FarEast’

Doug McWilliamsCentre for Economic and BusinessResearch


ery situations, I think you need a longlist. Also, this is a bit more controver-sial. I find that a long list makes youbolder in some ways because you’rebuying earlier. I don’t have 100% con-viction about what I’m buying, I justthink the balance of probabilities isthat it’s a cheap share and I’m taking0.5% holdings. I’m running over 100stocks in every portfolio.

Talking stocksMy best recovery situation in recentyears in Lowland and Law Debenturewas Cape Industries. I remember buy-

ing it at 40p, buying some more at 20pand losing my bottle at 4p. It is £2.70now. But, again, it does require longlists and a portfolio approach. I findrecovery situations now in the mainindex more difficult to see.

Aiming for recovery stocksI’m finding interesting recovery situa-tions in AIM stocks at the moment. Ilike AIM because the good quality com-panies are getting support.

People are buying them for inheri-tance tax purposes and because theylike good quality growth stocks. Some

houses say they don’t like AIM at all,others think that AIM is there just forgood quality growth stuff, so that leavesquite a lot of stocks that have problemsand sometimes those problems arebeing over-exaggerated.

I’m doing one or two rescue rightsissues in AIM companies and any brokerthat has got a problematic AIM companythat needs a little capital and is happy todo it at a very low price, do give me aring. We are going to make good moneyin that area, whilst I think I won’t bedoing so much in smaller companies onthe main market or the 250.

‘I use a value approach to move up and down the size scale. If I look backand test what I’ve run, I’ve had my best capital and income growth fromsmall companies’

James HendersonHenderson Global Investors

Marcus Holden-Craufurd, RathbonesInvestment Management: I think whathe’s saying makes a lot of sense. Itreflects a lot of equity income man-agers’ ideas at the moment – that weare seeing the mid-cap as overvaluedand the AIM market and mega-caps aswhere the value is.

I was quite surprised to see that hewas underweight oils, banks, pharma-ceuticals and mining, which is probablywhere the mega-caps are. Possibly,there might be a little bit more valuethere than James is seeing at themoment.

Lawrence Lever: There are so manygood quality equity income fund man-agers. How do you see JamesHenderson as different from some ofthe others? What is the rationale forowning him versus some of the others?

Marcus Holden-Craufurd: A number ofother managers won’t go quite so fardown the market-cap scale as James. Ifyou want a little bit more exposure tothe smaller companies, especially inthe AIM market, then James offers youthat ability to do so.

The importance of asset backingChris Higham, Old Mutual AssetManagers: I want to talk about some ofthe opportunities that we see withinfixed interest today. There is a feeling ofgeneral disappointment about thereturns that were achieved in 2006. Iwouldn’t advise anybody to buy anyasset class if your time horizon is a 12-month view. If that is your time horizonthen clearly there’s only one asset classfor you and that is cash.

I think it’s important to bear in mindthat in terms of fixed interest returnslast year, whilst they were disappointingin terms of government bonds andinvestment grade bonds with returns ofaround zero, European high yield bonds

actually returned around 8%, whichenabled our dynamic bond funds to pro-duce returns (gross return net of cash)of around 5.6%, a gross return of about7% before tax. These are still prettyattractive returns in what’s generallybeing perceived as a disappointing yearfor fixed interest asset classes.

The fund is dynamic in terms of assetallocation and I’ll come onto that short-ly. It’s also very focused in terms ofstock selection, which is where the vastmajority of our returns are generated interms of this fund. This is essentially thebest ideas of fixed interest.

There’s around 70 holdings in thefund at the moment. You should typical-ly expect to see between 60 and 80holdings. Each one of these is prettymuch equally weighted, but it is verymuch an equity approach to bond fundmanagement. Every stock in this fund isa winning stock.

The first two are historic examples,how we generated our returns in 2006and the next four are actually currentpositions we’ve got in the portfolio ofthings that we think are likely to help usadd value in 2007.

The first example is a name you’re allvery familiar with, BAA. It was acquiredby Ferrovial mid-2006 using a signifi-cant amount of debt. Through thecourse of BAA getting acquired it didget its credit rating downgraded, sothese two things are typically bad news

for bondholders. The company was acquired using a

lot of debt. From a peak of around 120basis points, these bonds are actuallynow trading on a spread of around 25basis points, so you’ve seen over 100basis points of tightening in the creditspread. This is despite the fact thatFerrovial used £12 billion worth of debtto buy it and it got downgraded, so whyhas this happened?

BAA has got very strong governanceon this bond, which means bondholdersare actually protected from this, ineffect, leveraged buyout activity. Thishas meant that the credit spread hastightened. So, what’s going to happen isthis unsecured bond will most likely bemoved into a securitised structure andthis bond will ultimately be secured onthese assets. As a result of thistakeover, the situation of bond holdershas actually been improved substantial-ly so it will become secure.

Another example of mergers andacquisitions (M&A) being positive forbondholders last year, and indeed thestart of this year, has been theTussauds Group.

This is a name I’m sure you’re veryfamiliar with from Madame Tussauds,London Dungeons, Alton Towers andindeed the London Eye now as well.What you can see in terms of Tussaudsis these bonds historically traded verywidely in terms of their credit spread –


‘I’m finding interesting recovery situations in AIMstocks at the moment. I like AIM because thegood quality companies are getting support ’

James HendersonHenderson Global Investors

around 180 basis points. This isbecause these assets are very seasonaland cyclical.

Clearly, they’ve gone through quite aturbulent past in terms of foot andmouth and 9/11.

What’s actually happened withTussauds bonds is these triple-B bondsthat we owned are secured again as awhole business securitisation. So, wewere secured on these assets and ifanything goes wrong, we own Alton

Towers and the London Dungeons,among others. This means we’re in apretty strong position from a landingperspective.

But, Tussauds Finance was owned byDubai Holdings who sold this toBlackstone Group, one of the world’slargest private equity groups, at the endof last year. You can see these bonds interms of the credit spread, so they aregetting bought back at a level flat to gilt –180 basis points tighter than where they

were trading in the middle of last year. I’ll turn to four examples of holdings

that we’ve actually got in the fund at themoment.

The first is investment grade. Thesecond is a non-rated holding and thenext two are high yield holdings, to giveyou a feel within all the different assetclasses within the fund. The first oneagain is BT.

Everybody’s got a view about BT. Thereason we like it, apart from the improve-ment in operating performance, is there’sbeen a lot of speculation in the pressabout the future corporate structure.

It’s recently created a division calledOpenreach. Openreach is BT’s networkassets and what’s been talked about quitea lot in terms of sell-side equity research.There is the potential for BT to look tosecuritise this part of its business.

It generates very predictable cashflowsand from BT’s perspective it’ll be able toincrease the amount of debt on its bal-


‘I am concerned about the demographics in theUS, Europe and especially the UK, where overthe next 10-15 years the baby boomers of thelate 50s and 60s are entering into retirement’

Richard NevilleCoutts

For professional advisers only and not to be distributed to or relied upon by private investors. Issued by Old Mutual Fund Managers Limited. Authorised and regulatedby the Financial Services Authority. A member of the IMA. Telephone calls may be recorded for security purposes and to improve our customer service. U3547/05/07

OLD MUTUALDYNAMIC BOND FUNDA bond fund with the freedom toperform in all market conditions

The Old Mutual Dynamic Bond Fund is designed to deliver an attractivetotal return in all market conditions through dynamic asset allocationacross a broad range of fixed interest investments and active stockselection. The fund offers many benefits to investors wishing to gainexposure to the fixed interest markets without necessarily wanting tomake their own asset allocation decisions.

The choice of investments, which includes high yield and investmentgrade bonds, non-rated bonds and gilts, gives the investment team thefreedom to emphasise the areas expected to produce superior returnsat any given stage in the credit cycle.

The fund managers, Andrew Tunks and Chris Higham, make full use ofthe available talent in Old Mutual’s fixed interest team, including StephenSnowden, manager of the highly rated and very successful Old MutualCorporate Bond Fund.

For more information please call 0808 100 2715 or visit www.omam.co.uk

Available through major platforms including:

Standard & Poor’s Fund Awards 2007Best Fixed Income Global STG Based (1 year)


ance sheet to reduce its interest costs.The second example is First Hydro.

It’s one of our non-rated holdingswithin the 20% of the fund that’s innon-rated. You’ve probably not heardof First Hydro, it’s actually a hydro-electric power station in Snowdonia.This bond again is secured on theseassets so if anything goes wrong withFirst Hydro, we own a hydroelectricpower station in Snowdonia – verystrong asset backing.

We might not know how to manageone yet but we’ll work it out when itgoes into administration. This bond issecured. It’s got a very high coupon at9%, so it’s got a lot of nuisance valuebecause this bond was issued 20 yearsago when interest rates were a lot high-er. Generally, companies aren’t fundingthemselves on a 9% coupon anymoreand it is secured on these assets, so itdoes restrict what International Power,which actually owns First Hydro, is ableto do with that asset.

My third example is the RussianPromsvias Bank. It’s one of the top 10banks in Russia. Again, you can seehere a very high coupon, nine and fiveeights. It is one of our high yield hold-ings. It is currently rated single-B.

Andrew Bell, Rensburg Sheppards:What’s your view on spreads? Also, howquickly do you think risk might berepriced and are you going to be watch-ing for signs that the market might re-price as central banks tighten global liq-uidity even before defaults start rising?

Chris Higham: Yes, there are a lot ofthings we look at and take into account.

At the moment, I think the environ-ment is very positive and one miscon-ception about spreads is how tight theyactually are.

Over the last two years, investmentgrowth spreads have widened and lastyear a lot of people thought they weretighter but they weren’t. They wereabout five basis points wider and one ofthe other things which, from our per-

‘I wouldn’t advise anybody to buy any asset classif your time horizon is a 12-month view. If that isyour time horizon then clearly there’s only oneasset class for you and that is cash’

Chris HighamOld Mutual Asset Managers

CITYWIRE FUNDS INSIDER 15

spective, makes investment grade moreattractive has been the increase inunderlying government yields.

This is why I’m talking about beingable now to buy Standard Life onalmost a 7% yield, which a year agowould have been a 6% yield givenwhat’s happened to base rates. But interms of what we’re looking at, leadingindicators being in equity markets, wethink corporate profitability is the mainthing likely to drive any concerns aboutcorporates.

The other major risk at the moment,which I’ve touched on, is M&A and LBOand I’d say our portfolio is pretty muchimmune to that risk.

We’re positioning ourselves to bene-fit from things like BAA or Tussauds,potential situations where we may beable to benefit through better gover-nance, but there is a lot of data-watch-ing at the moment. A lot of eyes are onthe US, so that’s obviously somethingwe’re watching very closely – thehousing market specifically – but we’repretty relaxed about what that actuallymeans in terms of how we’re posi-tioned. The other things are corporateprofits, which so far have been prettystrong in Europe and in line in the US.

Going globalAndrew Jackson, Standard LifeInvestments: Why do we build globalproperty portfolios? There are two rea-sons. One is our belief that the UKproperty market cycle is reaching itsend, which we knew 12 to 18 monthsago. We weren’t facing a crash but wewere certainly coming towards the endof the cycle and we needed to look atother markets overseas.

Standard Life Investments has beeninvesting directly in commercial prop-erty markets throughout Europe sincethe early 1990s and has built up a size-able portfolio in France, Spain, Belgiumand some of the central Europeancountries as well, so we wanted to

build on that expertise. My background is in direct property.

I believe that’s very important whenrunning a property equity portfolio ora hybrid portfolio, which I’ll come onto later.

Firstly, if we look at why we didn’tassemble a purely direct portfolio for aglobal fund. There were two reasonsand they’re mostly to do with liquidity.As you probably know, direct commer-cial property offers certain liquiditychallenges. It takes time to buy a shop-ping centre or office and to sell it.

We wanted to offer a property fund toinvestors that was open-ended, whichwe weren’t going to close after a coupleof months because cash had built up.That is one of the problems with purelydirect commercial property funds.

So we looked at property securities.At the moment there are three pureproperty securities funds and one hybridselect property fund in our fund range.

Why didn’t we go the whole hog forthat fund? Well, we wanted some of thelack of correlation that the direct prop-erty markets bring. We have the expert-ise in some of those markets as well,and importantly, they do lower thevolatility of the portfolio overall.

If we turn to real estate investmenttrusts (Reits), effectively they’re a con-duit to the underlying bricks and mor-tar. In the short-term they’re listed onthe stock exchange. They’re going to besubject to equity market sentiment andvolatility, but a lot of research andanalysis suggests the relationshipbreaks down over one and three yearsand they start to behave more likeunderlying property markets.

Over three years the correlation isvery much in line with direct propertymarkets. So you do get the benefit ofincreased liquidity and with Reits youget the benefit that they are tax efficientstructures. Incidentally, this is whathappens when you run this by yourcompliance team, you get a rather largesecond paragraph added in.

Essentially, these are solutions for a

lot of the negatives that certain propertyinvestors have had because of liquidity.

To give you a feel for how we invest inlisted property as opposed to directproperty, we use our direct propertyexpertise. We know how direct propertyworks and the sort of entrepreneurialflair that you may need within a proper-ty portfolio, so we look at the manage-ment and their access to the markets.

There are lots of barriers of entry inproperty markets. Property is and willremain a local game. So it is importantthat you invest in those managementteams that have access to the planningsystem, the construction companiesand the occupiers within those mar-kets. When we’re buying into a stock inAustralia, for example, and they’re say-ing they’ve got prime offices in Sydneyand Melbourne, do they really?Understanding those portfolios finan-cially is important.

There has been a lot of new propertycompany issuance in AIM, some ofthem, frankly, charge ridiculously largefees. So it’s important to understandhow much is being taken out of the potbefore it goes back to investors – clear-ly pricing is important.

There is relative immaturity in globalproperty. North America and listedproperty are Reit markets that tend tobe driven more by earnings-typeappraisals, whereas in Europe it tendsto be more net asset value based.

To give you a feel for our listed capa-bility, how have we done? Over the last16 months our list of property holdingsproduced a bit more than 54% againstthe upper benchmark of just under50%, so some good outperformance.What is important is that we’re gettingconsistent outperformance across thecountries that we’re investing in.

There are two areas to highlight.Firstly, France – where we have under-performed. We stopped investing inFrance and sold our investments.

However, France has done well andwe have got some of the performanceas well.

WEALTH MANAGEMENT FORUM


The other area in which we haveunderperformed is Hong Kong. Wewere not big on China-focused propertystocks domiciled in Hong Kong, whichare high risk and very volatile.

Where we have done well is the AIMmarkets. We’ve achieved quite a lot ofour continental European exposurethrough the AIM markets, simplybecause of the pricing and manage-ment teams that we were seeing com-ing through those markets.

Lawrence Lever: Any questions? Okay, David.

David Clinkard, Wise Speke: Yes, it’s aquestion about volatility. You mentionedthat you are looking to increase yourdirect exposure. Is the volatility ondirect property equities lower merelybecause they are priced monthly andlisted daily, or are there other dynamicsas to why directs should be less risky?

Andrew Jackson: A very good question.

Direct is subject to comparable valua-tion methodology. It’s not price-based.And what I mean by that, if you’re goingto value an office building, a valuerwould come along and look at compa-rable transactions.

Let’s say you’re looking at the WestEnd. They’ll look at a similar area, simi-lar quality of building over the last threemonths, any other buildings that havebeen sold, what yield, what capitalisa-tion rate they’ve been sold at. In addi-tion, they’ll take account of any lettingevidence, and compare it to the samesort of space.

It’s a comparable valuation and that’swhat smoothes it, rather than themonthly. It’s not really to do with theperiods, it’s smoothing in terms of com-paring it to other transactions, and alsothe time-lag effect. That tends to be thesmoothing. When it comes to stockexchange-listed, clearly it is price-based but it is also subject to sentimentmuch more as well. That’s primarily thedifference between the two. You’re quiteright, it’s probably overstated. The lowvolatility on direct, is a little bit morevolatile if you purely look at the transac-tional market.

Lawrence Lever: How many people inthe room have exposure to propertyfunds? Surprisingly not that many. Iwonder why.

You talked about derivatives and I thinkI read somewhere that you bought putoptions and global equities, so the deriv-atives you use aren’t necessarily totallycorrelated to property, is that right?

Andrew Jackson: That’s correct. InFebruary we were getting a little bitconcerned that some of the Reits andproperty companies around the worldhad been driven a little bit too far byequity sentiment, so for our SelectProperty fund we took out half a billionof put options on equity, basically globalequity markets.

The timing was excellent. Clearlywhat happened at the end of February

‘How quickly do you think risk might be repricedand are you going to be watching for signs thatthe market might reprice even before defaultsstart rising?’

Andrew BellRensburg Sheppards


into March protected the downsidevolatility for the Select Property fund.The approach for Select Property isthat we’re not benchmark-driven.

It’s much more about absolutereturns and I think, had that been abenchmark-driven fund the fundmanager wouldn’t put it in place.But I’m much more interested inwhat’s happening to the absolutereturns for investors within the fundand protecting that downside equitymarket volatility.

Evolving over 20 yearsRichard Nicholas, Peak InvestmentPartners: My remit today is built aroundsomething called ‘Evolving Over 20Years’. I’m going to run through some ofmy experiences in the UK, Hong Kong,and Australia. I’ll also cover some of theimplications on future and presentwealth management models from a cor-porate perspective. As a businessman,that’s pretty important to me.

The futureI want to start by talking about technology.

When I was a manager in the UK in 1985the technology backup appeared veryadvanced, but it's amazing today to seethat technology, particularly on portfoliovaluations has not changed much.Australia really opened my eyes to aweb-based technology system. When Istarted the business, I went along actu-ally to a bankers trust, and for a brandnew business with one client, they want-ed to charge me nearly £40,000 forimplementing a web based system. Atthat point in time I met Praemium, whocould do it at zero implementation, andcould provide me with everything I want-

CITYWIRE FUNDS INSIDER 19

ed in terms of valuation, tax reports,performance reporting, and could dothat almost immediately. The other greatbenefit that we found as an early adopterof Praemium is that the client also hasaccess to the whole portfolio, 24/7, any-where in the world. It’s a very valuabletool, and particularly at only £200 perportfolio per annum. And it's a real com-modity service, and a very valuable one,where clients are enjoying the benefitsand the costs of 2007 technology.

Building a businessThree of us established Peak Investment

WEALTH MANAGEMENT FORUM

‘The other major risk at the moment is M&A andLBO activity and I’d say our portfolio is prettymuch immune to that risk. We’re positioning our-selves to benefit from things like BAA or Tussauds,potential situations where we may be able to ben-efit through better governance’

Chris HighamOld Mutual Asset Managers


Partners four-and-a-half years ago.We’re a young, private client fund manag-er in the niche between transaction-driv-en stockbrokers and managed fund-driv-en financial planners.

We run discretionary money for highnet-worth individuals and we invest intodirect Australasian equities. We chargeonly management and performancefees, which is a little unusual for privateclient fund managers.

‘We know how direct property works and the sortof entrepreneurial flair that you may need withina property portfolio, so we look at the manage-ment and their access to the markets’

Andrew JacksonStandard Life


The last 10 years have not been a bullmarket to the global investor. But whenyou look at the return from Australianequities, you might actually say to your-self, ‘I can understand why Richard wentto Australia after Hong Kong and didn’treturn to the UK’.

I have a long held belief that assetallocation is difficult, nigh impossible.How many of you had any meaningfulexposure to Australian equities to benefitfrom massive outperformance over 10years? I certainly wasn’t that clever.

If you look at the actual returns fromthe global bond index, you see it’s up thererelative to 10-year global equity returns.Let’s look at some of the market influ-ences, particularly on private clients.

I was first given discretionary money tomanage three months before the crash.So, that was a baptism of fire and it beganmy journey of managing private clients.

We run a program whereby we state abenchmark, and we are accountableagainst that benchmark that the clienthas set, as long as that benchmark iscorrect for their risk and their objectives.So we are accountable for our perform-ance. It's funny that quite a lot advisers inAustralia don't put a benchmark againsttheir portfolios. I wonder why not?

We put either an absolute benchmark,if that's what they want or link it to anindex. Every private fund manager hasgot to be accountable. And I think theother point is managing downside risk.

Clients generally feel falling prices fourtimes more profoundly than rising prices.

So we need to get performance runson the board to attract clients, but I didbring a large measure of clients from aprevious relationship where I had pastperformance. In this society where I'mnow working, I need to perform, becausethat's our rationale for surviving in busi-ness. If I don't, then the clients can gooff to far cheaper index funds, or farmore expensive hedge funds, that's ourrationale for being in business. It's inter-esting, isn't it, that crucially, everywealth adviser must look at themselvesand say, what is the main skill I have?

‘I was first given discretionary money to managethree months before the crash. So, that was abaptism of fire and it began my journey of man-aging private clients’

Richard NicholasPeak Investment Partners


Am I a great relationship manager? Ifthey are, they'll probably end up beingeither a stockbroker, or they might be amarketing person for James.

If, on the other hand, they're actuallynot really a people person, but a reallygood stockpicker, they'll probably end upbeing an institutional fund manager, ananalyst. If they're a combination of both,you might well find they're actually a pri-vate client fund manager. So you've gotto decide what you're best at and go anddo it.

But certainly, the need to hone rela-tionship skills is probably first and fore-most across all three continents I'vemanaged money. The number one crite-ria is to convey trust. The last two pointsare that, like it or not, we have the nec-essary evils of administration and com-pliance. So you've got to be sympatheticto them. But let's move on and say,bearing all those points in mind, whatare some of the issues that are going toinfluence future wealth managementmodels?

I do very strongly believe that everywealth manager must have a stockpick-ing process. Exactly the same as Jameshas as an institutional fund manager,every wealth adviser has got to havetheir own process. Not just pick out bitsof broker research, which is good inresearch, but usually rotten recommen-dations, they've got to have their ownprocess. And that's actually findingvalue, and cutting through the constantnoise in the market.

I'm also aware that, certainly in thelarge firms, there is a splitting ofresponsibilities between the relationshipmanager and the fund manager. Nowthat makes a business scalable, andthat's perfectly natural. But all I'd saythere is that it puts greater onus on therelationship manager to really be thetrue mouthpiece of the fund manager.He must think, speak, drink, and knowexactly what the fund manager is doingthe whole time to do his job, otherwise, ifthey do disconnect, that model actuallyfalls apart very quickly.

‘I’d like to thank you all for attending and makingthis another fascinating forum’

Lawrence LeverCitywire

Citywire Funds Insider™ is published by Citywire Financial Publishers Ltd. 1st Floor, 87 Vauxhall Walk, London SE11 5HJ. Tel: 020 7840 2250. Fax: 020 7840 2251 [email protected]

Printed by Printech Europe Limited. Distributed by Data RunCopyright of this material is owned by Citywire Financial Publishers Ltd (“Citywire”). No part of this material may be copied, reproduced, distributed, stored or adapted inany form or by any means without Citywire’s prior written consent. Unauthorised copying, reproduction, distribution, storage or adaptation of any part of this material is inbreach of the Copyright, Design and Patents Act 1997 and may give rise to civil damages and criminal penalties. Citywire Funds Insider ™ is a trademark of CitywireFinancial Publishers Ltd. Reproduction of the Citywire Funds Insider ™ database is also subject to the Copyrights and Rights in Databases Regulations 1997.

All material in Citywire Funds Insider™ has been issued by Citywire Financial Publishers Ltd (“Citywire”) 1st Floor, 87 Vauxhall Walk, London SE11 5HJ. Citywire FundsInsider™ is directed at persons having professional experience in matters relating to investments and any investments or investment activity with which it deals shouldonly be used by such persons or investment professionals. Persons who do not have professional experience in participating in unregulated collective investment schemesshould not rely on material relating to such schemes. Material contained in this publication is for general information only. No advertisement or advice given amounts to apersonal recommendation. Individual circumstances vary and you should seek your own advice on the suitability to you of any investment or investment techniques thatmay be mentioned. Citywire does not accept any liability for any loss suffered by any reader as a result of such a decision. Persons associated with or employed byCitywire may hold positions or take positions in investments referred to in this publication.

Citywire operates a policy of independence in relation to matters where the operators may have a material interest or conflict of interest. Unregulated collective investmentschemes are not available to private customers.

Citywire is authorised and regulated by the Financial Services Authority to provide investment advice and is bound by its rules.Registered office of Citywire Financial Publishers Ltd. 1st Floor 87 Vauxhall Walk, London SE11 5HJ.©Citywire Financial Publishers Ltd 2007

Isn’t it time you

got on the global

property ladder?

The Global REIT Fund

Our £1.5bn† Select Property Fund was only the first step. Now it’s time to join

the award winning team* behind it and take further advantage of the growth

potential of global property investing.

And our new Global REIT Fund has been created to help your clients do just

that…by leveraging our expertise in commercial property management,

combined with the research and analytical skills of our property and equity teams

to invest in a diversified blend of global listed property assets.

Your next step? Simply speak to your Standard Life Consultant for full details.

www.globalreitfunds.com 0800 33 33 53

Please note that past performance is not a guide to future returns.

STANDARD LIFE INVESTMENTS LIMITED, TEL. 0131 225 2345, A COMPANY REGISTERED IN SCOTLAND (NO. SC 123321) REGISTERED OFFICE 1 GEORGE STREET EDINBURGH EH2 2LL. THE STANDARD LIFE INVESTMENTS GROUP INCLUDES STANDARD LIFE INVESTMENTS (MUTUAL FUNDS) LIMITED, SLTM LIMITED, STANDARD LIFE INVESTMENTS (CORPORATE FUNDS) LIMITED AND STANDARD LIFE INVESTMENTS (PRIVATE EQUITY) LIMITED. STANDARD LIFEINVESTMENTS LIMITED ACTS AS INVESTMENT MANAGER FOR STANDARD LIFE ASSURANCE LIMITED AND STANDARD LIFE PENSION FUNDS LIMITED. STANDARD LIFE INVESTMENTS MAY RECORD AND MONITOR TELEPHONE CALLSTO HELP IMPROVE CUSTOMER SERVICE. ALL COMPANIES ARE AUTHORISED AND REGULATED BY THE FINANCIAL SERVICES AUTHORITY. †AS AT 07.05.07. *”PROPERTY MANAGER OF THE YEAR 2006” – PROFESSIONAL PENSIONS AWARDS.

WEALTH MANAGEMENT FORUM

Documents

Transcript of WEALTH MANAGEMENT FORUM