confidant - winter issue 2016

CONFIDANTActing for clients as they would want to act for themselves

January-March 2016Published quarterly

DON’T LOSE YOUR WAY How our natural human biases can lead us astray, page 6

The Generations Game Paul Killik on the family of the future p4

Big Banks vs Fintech Who will win the battle for the consumer? p9

The rise of the Mumpreneur Sarah Lord on the true cost of childcare p11

Car Wars How technology is disrupting a key industry p18

C O N T A C T S

H E A D O F F I C E46 Grosvenor Street, London W1K 3HN

Private Client Team Simon Marsh/Fred Robinson/Kristian Overend/Mike Pate

Telephone 020 7337 0400 [email protected]

B R A N C H E S

Mayfair Team Julian Spencer/ Jeremy Sheldon Tel: 020 7337 0715

Grosvenor TeamFabrizio Argiolas/

Jan Wood Tel: 020 7602 8423

Killik Asset Management Graham Neale/

Henry EvansTel: 020 7337 0008

Family OfficeJer O'Mahony/Anna Beament

Tel: 020 7337 0554

ChelseaJames Dunn

45 Cadogan Street London SW3 2QJ Tel: 020 7337 0590

Email: [email protected]

ChiswickMichael Berry

23 Chiswick High Road London W4 2ND

Tel: 020 8090 3303 Email: [email protected]

City

Nicholas Crellin 20 King Street

London EC2V 8EGTel: 020 7600 9990


EsherPaul Martin

9 High Street, Esher Surrey KT10 9RLTel: 01372 464877


Hampstead Peter Day

2a Downshire Hill, Hampstead London NW3 1NRTel: 020 7794 3006


KensingtonJulian Chester

281 Kensington High Street London W8 6NATel: 020 7603 3618


RichmondSam Petts

2 Paradise Road, Richmond Surrey TW9 1SE

Tel: 020 8948 7337 Email: [email protected]

Dubai Dan Dowding

DIFC P.O. Box 506606 Dubai, UAE

Tel: +971 (0) 4 425 0354 Email: [email protected]

Wealth PlanningSarah Lord

46 Grosvenor StreetLondon W1K 3HNTel: 020 7337 0788


Killik & Co is a trading name of Killik & Co LLP, a limited liability partnership authorised and regulated by the Financial Conduct Authority and a member of the London Stock Exchange. Registered in England and Wales No OC325132. Registered office:

46 Grosvenor Street, London W1K 3HN. A list of partners is available on request. Killik & Co (Middle East and Asia) LLP is regulated by the Dubai Financial Services Authority. Telephone call are recorded for regulatory purposes, your own protection and quality control.

This communication has been approved by Killik & Co for distribution to retail clients.

The value of investments and the income from them may vary and you could lose some or all of your investments. Past performance of investments is not a guide to future performance. The tax treatment of investments may change with future legislation. Prior to taking an investment decision based on the content of this publication, investors should seek advice from their Broker on the

suitability of such investment for their personal circumstances. Neither Killik & Co or Killik & Co (Middle East & Asia) LLP accepts liability for any loss or other consequence arising from the use of the material contained in this publication to make investment decisions, where advice has not first been sought from their Broker. Neither Killik & Co or Killik & Co (Middle East & Asia) has an obligation to notify a reader or recipient of this publication in the event that any matter, opinion, projection, forecast or estimate

contained herein changes or subsequently becomes inaccurate, or if research coverage on the subject company is withdrawn.

Partners or employees of Killik & Co may have a position or holding in any of the investments covered in this publication. You may view our policy in respect of managing conflicts of interest on our website.

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F R O M T H E E D I T O R

HOW TO FILL A LONG WINTER’S EVENING

CONTENTS

Simon Marsh on the next Chinese revolution p8 | Argentina tame the Baa-Baas p10 | Tim Price picks his financial bad men p12 | Power to the pre-nup p13 | Broker interview with Peter Day p14 |

How our mid cap with yield service could suit you p17 | The top charts from 2015 p20 | Bond market review p21 | Four fund favourites for 2016 p23

KILLIK & CO SECURITIES MENTIONED IN THIS ISSUE

Ardevora UK Equity Fund p6 | Cobham p17 | ICAP p17 | Jupiter Fund Management p17 | Marston’s p17 | Kier Group p17 | Continental Tyres p18 | Lloyds Banking Group p19 | Starbucks p19 | AstraZeneca p19 |

Taylor Wimpey p19 | Beazley 5.375% 2019 p21 | Provident Financial 7% 2017 p21 | Tesco Bank 5% 2020 p21 | Lazard Emerging Markets Fund p22 | Morant Wright Japan Fund p22 | Scottish Mortgage Investment Trust p23 |

Aviva Investors Multi-Strategy Fund p23

Over Christmas I was reminded of the words of my old secondary school Head Master, BED Cooper, on his retirement after a highly successful career. “Whatever your talents, try to accept your limitations with fortitude and good fortune with humility. Respond graciously to success and cheerfully to temporary failure. Above all, determine to make a contribution to society.” The financial services industry certainly tested the fortitude of many investors to the limit in the wake of the last financial crisis and the trust it lost back then is still being rebuilt (for more on this please see Paul Killik’s article on page 4).

I see investor education as a vital part of this process. Through it, I hope to make my own small contribution to society as BED Cooper would have wished. My library of over 120 short, educational videos is free and available to all at killikexplains.com. In the words of one kind viewer, “I watch all of them, even if I think I know the subject. It is chastening to find that I have always learned something I

thought I already knew.” I hope you and your family will take advantage of this unique resource and I wish you every investing success in 2016.

ANOTHER GREAT YEAR FOR AWARDS

Killik & Co were delighted to win another clutch of awards at the Investors Chronicle & Financial Times annual Investment and Wealth Management Awards ceremony this year. In all we won four including Best Wealth Manager and Best Discretionary/Advisory Wealth Manager, both for the second year running. We also won Best Full SIPP Provider for the fourth time and took home a joint award for the Best

Inheritance Tax and Succession Planning Service Provider. We are very grateful to all those clients who voted for us.

KILLIK ACADEMY

Towards the end of last year I was pleased to deliver a highly successful one day seminar. As one of the attendees, CityWire’s Suzie Bliss, put it “Killik & Co opened its doors to female clients and prospects for a crash course in finance”. Session topics included: how and why we save, tax-efficient ways to build wealth and an overview of the property and equity markets. Please watch out for further seminars in 2016 on this and a range of other topics, including a day designed for our younger clients who are Junior ISA holders and about to take control of their funds for the first time.

Tim Bennett, Editor, Confidant

January-March 2016 — 3

http://killikexplains.com

TODAY’S NOT-SO-LUCKY GENERATION

I was born into the baby-boomer generation. A benevolent state offered free health-care and good welfare benefits. Generous pension schemes were widespread and property values boomed. Today, however, the state has been forced to cut back, firms have phased out final-salary pensions, and the job-for-life is a memory. On top of that, the huge recent growth in property prices is taking home ownership beyond the reach of those not already on the ladder.

It’s no wonder that young people feel disillusioned. Following the last financial crisis, many also feel that the financial services industry cannot be trusted to help them. However, I passionately believe that we carry an obligation to do just that and doing so excites me as much today as it did when I started Killik & Co 27 years ago.

A TIME FOR CHANGE

This point in the year is traditionally about looking forward and laying plans for personal growth. I have always believed that everyone, of whatever age and means, should be given the opportunity to make adequate financial provision for their own future. This is a basic principle that has been at the heart of many of my biggest initiatives during a long career in stockbroking and wealth management.

THE BIG DISCONNECT

Killik & Co has constantly sought to make wealth planning more accessible, but more needs to be done. The gap between the richest and the poorest in society grows ever wider and swathes of people plainly feel a huge disconnect with financial services. This is not merely due to recent banking scandals

P E R S O N A L V I E W

– it is far more profound than that. I sense that many people, and especially the young, no longer feel that our industry serves them well. To be frank, I agree with them! There have been too few genuine innovations in recent years within our sector, which almost defies belief given the pace at which technology has reinvented so much of the fabric of modern life. As an industry, we have collectively failed to convince a new generation that we deserve their trust and that we are actually on their side.

CONSCIOUS CAPITALISM

The answer may lie within a new school of economic thought known as “conscious capitalism”. Put simply, this argues that the businesses most likely to succeed in the future are those that place as much value on ‘human’ needs as the accumulation of capital for its own sake. I also believe that any services firm will ultimately live or die by how well it serves the needs of its customers.

That’s why I feel we are well positioned to play our part in re-forging the close bond that should exist between the financial services world and the public. We have always tried to listen hard to our clients and stay attuned to the new ways in which they would like to be able to access financial services. I look forward to sharing my solution with you shortly. Opening up a dialogue with the industry as a whole about how to improve communication

with the wider community will also help to raise trust across the whole financial services industry.

THE EVOLVING FAMILY

Another key part of my vision is to guide family members to help one another more effectively. It’s no surprise to see young people increasingly turning to the ‘Bank of Mum & Dad’. And yet if we really want to look after our families over the long-term, this is just a stop-gap. What we really need is a whole new perspective on how to pass wealth through the generations.

That’s partly because rising longevity has changed the structure of the family unit.

Despite this sea-change, many families take a traditional approach to wealth-management – parents pass down assets to their children as if only these two generations exist. This thinking remains heavily governed by the mores of the 19th century family. However, in the same way that the family has evolved so, too, should the way it handles wealth. It makes sounder financial sense for those approaching later life to pass assets a generation or two further down the

MY V ISION FOR THE 21ST CENTURY FA MILY

PAUL KILLIK

SENIOR PARTNER

Back in the 19th century, most families would typically have only two generations alive at a time: parents and children. Fast forward to the 20th century and this was often extended to include the grandparents. Today, though, many families proudly boast of four consecutive generations alive at the same time.

4 — January-March 2016

P E R S O N A L V I E W

family tree than to their direct children – and, if they can afford to, they should do so earlier as well.

HARNESSING THE WORLD’S EIGHTH WONDER

The main reason is simple – to maximise the extraordinary long-term power of compounding. That’s the ability of money to accumulate money over time. During the past 100 years, the British stock market grew at a real (i.e. post-inflation) compound rate of 5.5% per year, assuming dividends were rolled up, according to the Barclays Equity Gilts Study. That equates to a 5.5% annual increase in purchasing power for the sum invested.

Let’s assume a great-grandparent invested the full £4,080 allowed in a Junior ISA for a child once on behalf of a new-born. Even with a slightly more conservative real return of 5%, this would be worth almost £125,000, in today’s money, by the time that child reached 70. If that same sum were invested once again in the following year after the child’s birth, the tax-free pot would be worth nearly a quarter of a million pounds at the same age. Alternatively, by the time this child was aged 30, these two investments would be worth about £35,000 in today’s money – enough for the deposit on a house. Naturally, this is a significant amount for one

great-grandparent to put aside. Yet there is no reason they couldn’t club together, along with family friends.

KEEPING THE TAX BILL DOWN

The other huge benefit of this approach is that it saves inheritance tax (IHT). If assets are passed down one generation, the family is hit each time a member of the oldest generation dies. By skipping generations, the risk is vastly reduced or eliminated.

My point is that in the 21st century extended family, the upper generations should earmark at least part of their estate for its youngest members. Not only does this make sound financial sense but doing so will give a child valuable early experience of investing.

A WIN-WIN SUGGESTION

Our increasing longevity does however pose a problem – how do we avoid passing down too much of our wealth knowing that we might need it ourselves? One option, but by no means the only one, is for the older generation to put some money into an Inheritance Tax Portfolio that invests in companies subject to Business Property Relief. Provided they live for at least two years after making such an investment, these funds should be free of IHT (subject to certain conditions) upon their death. A codicil in the will The four generation family of the future

could state that these funds are to be used to fund ISA contributions for grandchildren and great grandchildren.

The result? Funds that have been mentally earmarked for younger generations get invested in smaller, growing companies. Since these generally offer little income in the short-term, they are well suited to being passed on. However, these funds ultimately remain the property of the donor while alive, so they can still be sold should the need arise.

WHAT LIES AHEAD?

As we head into 2016 it is clear that my industry faces a number of challenges and that in order to stay relevant we must adapt to address the needs of the 21st century family. Rest assured that we will strive to play our part without sacrificing any of our core values.

Will your finances survive the cost of care in later life?The fact that we are all living longer on average is clearly something to celebrate. However it means that some form of care in our old age is likely to be a reality for many of us.

The cost of nursing and retirement homes continues to outpace inflation so, more than ever before, careful consideration and planning is essential to ensure you are prepared for the future.

Please call your Broker for a copy of our 2015 Cost of Care in Later Life report or to discuss planning for long term care. Alternatively, please contact Killik Chartered Financial Planners directly on 020 7337 0788 or [email protected]


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T H E B I G I N T E R V I E W

BEN FITCHEW

PARTNER AND FUND MANAGER

Your investment approach is built on spotting and then exploiting “behavioural biases”. How does that work?We look at three groups who we think move the market and are prone to specific patterns of behaviour and biases. In particular we focus on company management since a lot of stock market risk stems from their actions. The next group are the sell-side analysts who produce forecasts and recommendations. The third group are investors.

Our approach isn’t anchored in traditional value investing, or the idea that there is an “intrinsic value” that you can compare to the current price of a stock. I think that is too hard to quantify with any accuracy, given all the assumptions needed. Instead, we look for situations where company managers are behaving counter to their risk-loving instincts, and investors or analysts are exhibiting bias.

What sorts of bias do you see most often?Let’s start with company managers. Capital allocation is a key part of their job and in order to get to the top they often take risks with it. They are, by definition, optimists, or have enjoyed good results to date from taking risky

decisions. They also tend to be incentivised to take risks to achieve growth. So situations that interest us might involve managers who have had access to cheap capital, are too optimistic (“optimism bias”) about how they have achieved growth and are heavily incentivised to take more risk. That’s because although optimism is crucial to personal business success, it can also lead to poor capital allocation.

Next the sell-side analysts. Like company managers, this is a group comprised of

highly intelligent and often highly visible people. However these high-functioning individuals are also prone to rationalise their decisions quickly (“confirmation bias”). Managers and analysts alike come to a decision and then “data-mine” to back it up. That means sell-side analysts, who usually focus on a particular industry, have a tendency to underreact to anything that is unusual or game-changing within it. They sometimes struggle to rationalise unusual or new business models or changes that do not conform to their views. They can sometimes almost behave like political pundits, frantically rationalising wrong calls.

Then there are investors. Their common biases include a tendency to be overly influenced by a compelling story (“story loving”). They also overreact to traumatic, or recent, events (“recency bias”). As humans we

HOW ANALYSTS CAN GO ASTRAY

Imagine you are a weather forecaster and you start to pitch your forecast of summer temperatures a bit low, because of a subtle shift in the climate. After a while you might tinker at the margins of your model, as it is a bit off in the same direction each week. Each little tinker you make is in the same direction, and every other weather forecaster is struggling too (“herding”). Since you know a lot about the weather, and your model took a long time to build with all the “right seeming” factors, it survives for ages before you finally ditch it – you underreact. This is something we can sometimes see, and react to, by watching sell-side forecasts.

“under-reaction”

“excessive risk-taking”

CompanyManagement

InvestorsAnalystsGrowth stocks

Value stocks

“over-reaction”

Human behaviour drives our stock selection

HOW IN V ESTOR S CA N BE LED ASTR AY

Company directors, analysts and investors are all prone to “behavioural biases”, says Ben Fitchew, a Partner with Ardevora

Asset Management. Confidant met him to find out how this influences his investment approach


P E R S O N A L V I E WT H E B I G I N T E R V I E W

dwell on bad news and sometimes overlook the fact that circumstances may have moved on. When sectors or industries go through big traumatic changes, for example, investors often anchor on the trauma and fail to spot the opportunities that arise.

Do these biases show up in a firm’s numbers?Cash flow can be revealing. As risk takers, managers need to source cash and then allocate it. So obvious questions include: where are they raising cash from – internal or external sources? If the latter – debt or equity? If there is a large gap between cash flow and net income – does that suggest a firm may be taking some hidden risk?

We also look at the types of investment that managers make. On a spectrum of risk, smaller, consolidating acquisitions naturally tend to be far lower risk than strategic, non-core, large-scale ones. Equally, acquisitions from within a sector are less risky than land-grabs in a different one and so on.

We think balance sheets can hide a lot of risk. Unexpected working capital movements are a good example – sometimes they don’t make sense in the context of how the business is run, or don’t tally with what we expect. We also look at the size of the balance sheet, how fast it is growing and how much cash flow it generates.

Can you give examples of sectors or companies where you have seen “optimism bias”?Miners fit the bill. Over the last five-years they have been cheap on a number of traditional value-manager-type metrics. However, we start by looking at risk in the context of say a Rio Tinto or BHP Billiton. Post-2008, these firms were emboldened by the fact that commodity prices had collapsed and then bounced back very rapidly, in large part thanks to the Chinese stimulus. That triggered a huge overinvestment in infrastructure to support production.

Many investors meanwhile still viewed them as high quality businesses because they generated a lot of cash flow. So, on a traditional screen these stocks would have shown up as being good-value: cheap, generating lots of cash and growing. Plus there was a good

story to support the growth case (“story loving”).

However our view is that in aggregate they had taken too much risk and invested too much capital, factors that will probably depress the industry for years to come. That’s why we didn’t see any cheap, high quality stocks in this sector – instead we saw excess capital and oversupply.

The commodity price meltdown appears to have confirmed our view. Yet even now we see analysts anchored to historic higher prices and tipping a recovery. We disagree and have sidestepped the miners.

What about a sector where you have seen too much pessimism?Housebuilders are a good example. Management behaviour was very risky running up to the financial crisis. Then, after that, you had a large-scale capital exit as lots of the smaller players left the market.

However, the survivors then refreshed their land banks at very, very low prices and started to behave in a much more disciplined way. Yet investors remained traumatised (exhibiting “loss aversion” and “recency bias”) because share prices had been decimated. For us though this environment created the perfect opportunity – a shock, shake-up and flight of capital had completely overshadowed rapid consolidation and the return of capital discipline. Analyst and investor scepticism therefore persisted for too long.

Airlines have been a similar story recently, particularly in the US. A big recent capital shake-out reflected an

unusually traumatic moment of sharp consolidation – four players suddenly held 90% of the market. That had never happened before in an industry where powerful investors had always joked that “the fastest way to make $1m is to start with $1bn and then launch an airline” (Richard Branson).

We look for those moments when a trauma leads to a big shake-out yet analysts and investors stay wedded to the past (“anchoring”).

A good example of this at a specific stock level would be Rentokil. It’s been restructuring for years but now it is finally getting traction from its efforts. However, analysts had become completely exhausted by it because they’d been wrong about a recovery for so long. In such a depressed environment it’s very hard for investors to spot that management might finally have de-risked the business and cut away underperforming areas.

As a rule, we look for situations that we think will test analysts and investors. Analysts, for example, tend to frame everything around an industry average and then generate models that attempt to explain their world from it. This means they sometimes underreact, or only react slowly, to situations where they are being proved wrong persistently (see page 6).

What guidance would you give for 2016?Bias is everywhere in investing (see page 16) so always be aware of how easy it is to succumb to it and never assume that you won’t (“the big blind spot”).

C. 500 Stock Universe

Initial Deselection

Subjective Research

(look at market capitalisation, balance sheet and cashflow, forecast error, valuation)

(put the behaviour of companymanagement, analysts and

investors into context)

UK Equity Portfolioc. 30 - 50 longsc. 15 - 25 shorts

Building the UK equity portfolio


When it comes to technology and innovation, the West has sometimes dismissed the Chinese as somewhat second rate: they can mimic an iconic product such as the iPhone, but have never really been in the race when it comes to harnessing technology and innovation. The reality is rather different – the Chinese are not about to let the tech revolution pass them by.

The tech dragonsSomeone who understands this more than most is the journalist and much-lauded venture capitalist Sir Michael Moritz. Sir Michael joined the Silicon Valley venture capitalist Sequoia Capital in 1986 and was an early stage investor in Google, Yahoo and PayPal. He has also been an avid admirer of Chinese endeavour in the tech sector. In his own words “Few markets are as ferociously competitive as the technology business in China. People there simply work a lot harder. And when you ally that with talent, creativity and a hunger to succeed, it’s a formidable concoction”. He also believes that “in China these days, there are probably four Silicon Valleys. In the US, there’s one”. When it comes to technology, China is therefore simply too big and too important a market to ignore.

Much like the US tech sector, the Chinese market is dominated by a trio of giants known as the BATs – Baidu, Alibaba and Tencent. Whilst Baidu’s model is based in search (think Google) and Alibaba is an online market (like Amazon), it is Tencent, perhaps the lesser known of the three and something more akin to Facebook, that is arguably the most interesting.

Time to look at TencentFounded in 1998 by Ma Huateng (known as Pony Ma) with an investment of $120,000, Tencent (700-HK) is quoted on the HK exchange and is valued at $180bn, making it larger than HSBC. Today the firm has a near monopoly in social media, based around an instant messaging platform and online gaming. Through these it has created a diverse eco-system of more than 600 million active users – that’s more than Instagram and Twitter. Users of the platform can also upload photos, build their own profiles and engage in group conversations, much as they might on Facebook.

However, Tencent is much more than just a means of communication, as users are able to access a range of products and services. For example, the US fast food chain McDonalds offers coupons to be used against online purchases. Deals have also recently been linked with two Hollywood studios to distribute the catalogue of James Bond movies online in China, including the recently released Spectre.

Users of the platform can also link to the taxi booking service offered by China’s home grown Uber rival, Didi Kuaidi, in which Tencent is a key investor. Services such as this are available because

one in every five users has their bank account details stored within the system allowing them to send funds to friends and settle with merchants. This even puts Tencent in a strong position to become a challenger bank of the future.

Tapping into the Chinese consumerThis is in essence the attractiveness of Tencent. With control of a walled garden of a billion users – 60% of whom open their app more than 10 times a day, the firm has built a franchise that is fast becoming critical to a host of brands looking to access affluent Chinese consumers. As a result, online advertising, which currently accounts for just 17% of sales (compared with 55% for online gaming and 23% subscription services), is experiencing rapid growth.

It’s never easy to rationalise businesses such as this on valuation grounds, but market forecasts for the year ending 2016, have the shares trading on sub 30x earnings. Given the magnitude of the opportunity and Tencent’s almost monopolistic position at the heart of Chinese social media, this doesn’t feel expensive.

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T E N C E N T S H A R E P R IC E ( H KG)

E Q U I T Y R E V I E W

THE FIRMS DRIVING CHINA’S SOCIAL MEDIA REVOLUTION

SIMON MARSH

PARTNER, AND EXECUTIVE DIRECTOR OF THE BRANCH NETWORK

Name Market cap (m) P/E (x) Dividend Yield (%) Price* Risk rating CurrencyTencent Hldgs 182,889 (USD) 43 0.23 150 7** HKD

* As at 21 December 2015. ** stock not covered by Killik & Co research.

For details of the Killik risk rating system, please refer to page 15. Please speak to your Broker for further details. Expect to see more red buttons...


each. In this country, start-ups such as Zopa and Funding Circle are taking a growing chunk of the market. Thanks to a recent change you can now invest in them via your ISA.

It is not hard to understand why. The one thing the internet is really good at is taking out middle-men. It has done it in industries such as retailing, publishing, music, and many others. There is perhaps no business that has more of them than finance. Take retail banks – all they really do is collect cash from one group of people and parcel it out to another. The internet can cut

O P I N I O N

The banking revolution has begun. Peer-to-peer lenders offer far higher rates to savers than any kind of traditional bank. Small businesses now raise loans directly from ordinary people. Crowd-funding sites collect hundreds of millions for entrepreneurs. Tech giants, from Apple to Google to Facebook, pour billions into getting us all to use our mobiles as a cross between a bank account and a credit card. Little wonder that many of the giants of the financial industry are starting to feel threatened.

In November, Anthony Jenkins, the former chief executive of Barclays, described an ‘Uber moment’ for the industry, predicting that the number of bank branches could halve, and so could the number of staff employed. ‘Silicon Valley is coming’ warned the JP Morgan boss Jamie Dimon in his letter to shareholders earlier this year. Some fund managers are said to be reducing their holdings in the big UK banks.

But is this a real threat, or just tech industry hype? The answer is that there is a genuine danger, but it is not what people usually think it is. The real problem the financial services industry faces is not technology but branding. Companies can adapt to survive a wave of innovation perfectly well. But, as in retailing or media, only those with great and loyal brands will make the transition – that’s the key issue that should be keeping people awake at night.

The growing Fintech armyThere is no questioning that serious money is going into financial technology and that consumers are starting to warm to it. Already around 50 fintech start-ups are valued at $1 billion or more. Lending Club, the main US peer-to-peer lender, is valued at around $10 billion, and it is writing $1 billion of loans every month. Automated money managers such as Wealthfront and Betterment are managing more than $3 billion in funds

WHY ONLY THE STRONGEST BRANDS WILL SURVIVE THE FINTECH REVOLUTION

them out of the chain, and save everyone a lot of money in the process. If there are fewer travel agents on the High Street, and not many book shops, do we need all those bank branches?

A tough industry to crackThat said, this won’t be an overnight revolution. Financial services firms are far more heavily regulated than most other industries and the minimum capital requirements are far higher. This is also a sector in which consumers often feel nervous about trusting new entrants.

However these are not insurmountable barriers. The government knows that more competition will make the economy more efficient, and wealthier, in the long-run. Consumers won’t stay suspicious forever either. Fifteen years ago, many of us bought nothing online – now over 11% of our shopping is done that way according to the government.

Who will be left standing? The one factor traditional banks have on their side is their brands. Take a look at other industries that have been disrupted by the internet. In retailing, John Lewis is still doing well, in books Waterstones endures and the better airlines continue to survive the low-cost onslaught alongside those newspapers that can lay claim to quality and accuracy.

Many banks, however, have not paid enough attention to their brands. A succession of mis-selling scandals, from PPI to small business loans, coupled with the introduction of remote call centres have created the perception that this is a hollowed-out business model driven by short-term profits. Strong branding might once have saved the traditional banks from the wave of fintech that is about to hit them. It will still save a few niche players who are quick enough to adapt. But many will soon realise that they have done too little, too late.

MATTHEW LYNN

FINANCIAL COLUMNIST AND AUTHOR

Are the banks ready to fight off Fintech?


T H E K I L L I K C U P

THE PUM AS OUTRUN THE BA A-BA AS THE BARBARIANS celebrated

their 125th anniversary in style, throwing a magnificent birthday party with a 38,101 strong crowd. In the end, the guests, Argentina, outscored their hosts by seven tries to five during a high octane Killik Cup match on a bitterly cold November afternoon at Twickenham. Killik & Co Broker David Fell reports.

The Barbarians squad, coached by Australian Michael Cheika, was jam-packed full of stars including New Zealand world cup winner Nehe Milner-Skudder, Fijian winger Nemani Nadolo and Victor Matfield who all scored as both sides looked to run the ball as much as possible.

The Barbarians started strongly as Tevita Kuridrani gathered Lima Sopoaga’s wonderfully placed kick and touched down to draw first blood in the opening minutes. However, the Pumas soon settled and started to show the level of skill and intent that got them to the World Cup semi-finals. A series of drives had the Barbarians in full retreat until the No8 Facundo Isa arrived to crash over.

The Barbarians’ bright start then became a distant memory as Santiago

Cordero skilfully side-stepped his way across the touchline, capitalising on some reluctant defending. Their third try was pure class, with Cordero turning defence into attack taking the ball inside his 22, darting forward and flicking a superb pass out the back of his hand to Moyano for the full-back to score.

Lacking in urgency and showing little intensity at the breakdown, the Barbarians were coming apart at the seams, but they still had the skill and class to conjure a try when Sopoago’s beautifully placed chip was cleanly taken by the All Blacks wing Naholo.

The first half nonetheless belonged to Argentina as scrum-half Landajo kicked into space allowing Cordero to outrun his opposite number and claim his second score.

Half-Time: Barbarians 12 – Argentina 28 The second half started slowly before replacement Senatore broke clear of the Baa-Baas backline to release Landajo for Argentina’s fourth try.

Play then swept from end to end with Nicolás Sánchez putting his body on the line executing a try-saving tackle on the formidable Nemani

Nadolo. That launched a dashing counter-attack that ended with Pumas centre Jerónimo de la Fuente touching down.

Replacement Joe Tomane gave the Barbarians a glimmer of hope as he broke away on the left for an easy score, with Nadolo converting to add gloss.

In a largely scrappy final 10 minutes, Nadolo thundered through the Argentinian backline to score on the left side and neatly convert with his fluorescent yellow right boot.

Argentina’s star man Sanchez kept the pressure on, capitalising on another Baa-Baas handling error to finish with poise, before calmly floating his sixth and final conversion between the posts.

It was the departing Matfield and Botha who had the final say. With seconds remaining, Matfield dived over in the far right corner before Botha was handed the conversion attempt. His kick fell woefully short but the crowd nonetheless roared their approval as one of the game’s legends left the field at the final whistle.

Final Score: Barbarians 31 – Argentina 49 Killik & Co Man of the Match: Santiago Cordero (Argentina).


W E A L T H P L A N N I N G

HOW TO COPE WITH THE R ISING COST OF PAR ENTHOOD

SARAH LORD

PARTNER, DIRECTOR OF WEALTH PLANNING

Having just returned from maternity leave, I know all too well the impact that full time childcare costs can have on a family’s finances. The first bill I received for two children at full time nursery was a stark reminder that I now pay more on a monthly basis for childcare than I do towards my mortgage! Furthermore, in the three years that our first daughter has been at nursery our fees have increased by a whopping 25%. That’s why in this edition of Confidant I want to address a growing challenge for many new parents.

GUESS AGAIN

The sheer joy of parenthood seemingly blinds us to its true costs. A recent study by Legal & General has shown that on average parents underestimate the cost of raising a child to the age of 18 by as much as £60,000. This same research has shown that the current average cost of raising a child is £184,392. For many parents with two children the figure is north of £350,000 and that’s before taking full account of the cost of childcare in the early years, such as a nursery and nannies. Then, for some parents, there is the bill for private education to consider – the Killik & Co Private Education Index 2015 estimates the cost of educating a child privately from age 5 through to completion of A-Levels at an average of £286,000 for a day pupil. If you want your child to board, you are signing up to a much higher bill. So what to do?

THE RISE OF THE “MUMPRENEUR”

The mounting cost of early years care is increasingly pricing many new parents out of their jobs, particularly after a second child. Based on the average full time nursery cost for London, estimated by the Family and Childcare Trust, of £284 per week per child you need to be earning a minimum of £60,000 per annum to cover the cost of two in full time childcare and still have enough left

over at the end of the month to make it financially sensible to return to work. No wonder recent figures from the Office for National Statistics highlight that the number of men balancing work life with family life has tripled since 1992, with more than a million now working part time specifically to spend time with their children. It is also no surprise that we have seen a rise in the last decade of ‘mumprenuers’ – mothers who have elected to stay at home to look after the children and at the same time set up a fledgling business. Grandparents are also being asked to play a greater role, whether as unpaid babysitters or helping with the cost of nursery or school fees. There are other, practical ways to reduce the cost of early years' childcare, most notably through the government’s childcare voucher scheme, which offers a capped amount of childcare from pre-tax salary. However, sensible though all of this is, none of it can replace the need for proper financial planning.

NEW PARENTS MUST PLAN

As the cost of raising children has spiralled, so proper planning has become vital. Our SecureLife service, provided by Killik Wealth Planners, can help you budget effectively by modelling the cost of raising children alongside your other big lifetime financial goals. Having just become a Mum myself for the second time, I firmly believe that finding ways to reduce the financial stress of raising young children is well worth the effort if it increases the time we spend enjoying them.

SEVEN NEW YEAR’S RESOLUTIONS

• Set an annual budget for the family and stick to it

• Review the family finances to identify savings

• Reduce outstanding debt, particularly expensive credit and store card balances

• Review your investment strategy to ensure it remains appropriate

• Try to save consistently on a regular basis

• Maximise your ISA and JISA contributions for 2015/16

• Maximise your pension contributions before new rules come into force in April 2016

FINANCIAL FITNESS AT 30+

To discuss any of our resolutions in more detail, or to obtain your free copy of our short guide to boosting your financial fitness, please contact your Broker.

4

All fitness regimes start with an assessment of your current health. The starting point for

any form of financial planning is also knowing what you are worth now. Here’s a summary

of what you need to do to put together a statement of your net worth (or “personal

balance sheet”).

Step 1

WHAT AM I WORTH?

WHAT DO YOU OWN?

Make a list of what you own and, roughly,

what you think it is all worth. I am not

talking about a penny-accurate calculation

that tries to price each of your stocks – you

just need a realistic estimate of the current

value of your major assets.

This list may include a property (if you are

lucky enough to have already stepped onto

the ladder), a car, investments (perhaps an

Individual Savings Account), bank accounts,

a pension plan (if you and/or your employer

have started one), jewellery, art and any

business ventures you have a stake in. Don’t

forget about “hidden” assets, such as cash

sitting in a mortgage offset account.

The value of these assets can, for the most

part, be gathered pretty quickly – you

should have recent valuation statements for

your investments and pensions, for example.

Refer to guides such as parkers.co.uk for

an estimate of the value of your car and

mouseprice.com for recent property sales

in your area. And don’t forget that you have

presumably already estimated the value

of many of your household belongings for

home contents insurance purposes.

On page 14 you’ll find an example of

a personal balance sheet that I would

encourage you to try to fill in – section

one deals with your assets. Once you have

completed it you are ready to turn to the

dark side and list your liabilities.

WHAT DO YOU OWE?

Now you’ll need to come up with a list of

the amounts you owe to other people. Start

with any mortgage debt you have and then

add in any personal loans and credit card

balances. Again, try not to miss out “hidden

debts” that are easily forgotten such as store

card debts, outstanding student loans and hire

purchase arrangements on cars and/or furniture.

YOUR “NET WORTH”

The final step is simple – deduct your

liabilities from your assets. The result is,

with luck, a positive number that represents

your current net worth. This will form the

bedrock for your future financial planning

and is a number that you should monitor at

regular intervals from now on.

KILLIK EXPLAINS

For a short video explaining why we save and how to go about it please go to

killikexplains.com and type Why Save? into the search bar.

5

Step 2

START BUDGETING

At this early stage in our lives, time is still on our side. For example, if you are able to save

£150 per month over the next twenty five years and you earn 5%* net per year, at the end

of that period you’ll have around £90,000. So, how do you find £150 per month?

BUDGETING BASICS

Budgeting is a bit boring but the benefits are

enormous. It can reveal;

• Where your money goes

• Whether you earn more than you spend

• How much more you could be saving

At the back of this guide you will find a

short example. List income first (your salary

from an employer, any rent you receive from

renting out a room, and any investment

income) followed by your outgoings (for

example your rent or mortgage, travel

expenses and day-to-day living costs). The

more detail you can include the better.

GOOD, OR BAD, NEWS?

If the gap between your income and

expenditure is negative, you are spending

more than you earn. Boosting your income

may be tricky until you get your next

promotion, so it’s often easier to cut back

on expenditure. If your budget throws up a

surplus, don’t get complacent – you should

still boost the amount you are saving. Here

is one approach.

NEED-TO-HAVES VERSUS NICE-TO-HAVES

There are certain things that we need

to spend money on – food, utilities

and travel to work. Then there are the

things that we choose to spend money

on – holidays, clothes, club memberships,

meals out (the nice-to-haves). Ask

yourself;

• Do you really use that expensive TV

Sports subscription?

• Could you use discount vouchers to

save money on meals out?

• Are you using your club memberships

often enough to justify the fee?

• Do you book holidays ahead to secure

the best deals?

• If you buy online regularly (food,

clothes, wine), do you hunt down the

best deals?

Next, your “need-to-haves”;

• Do you shop around for your gas and

electricity?

• When did you last remortgage/talk to

your landlord to get a better deal?

• Are you making the best use of travel

cards and/or car sharing?

• Have you checked your car/home

contents insurance on a comparison

site?

If you’ve never budgeted properly before,

get cracking!

*The FCA provides lower, middle and higher assumed growth rates to use in illustrations of what you might get back from an investment.

These are known as “standard” rates. The standard FCA middle growth rate is 5% a year when investing via an ISA. There is no guarantee

that your ISA value will grow by this rate. The value of your investments can fall as well as rise and this example is not a reliable indicator

of future performance.

FINANCIAL FITNESS

FOR THE OVER 30s

YOUR GUIDE TO


Ben BernankeBernanke’s grasp of economic reality left something to be desired. Here’s what he said about property prices in 2005, “We’ve never had a decline in house prices on a nationwide basis. So, what I think is more likely is that house prices will slow, maybe stabilise... and that might slow consumption spending a bit.” What we actually got was the first ever national decline in US house prices, a decline that played its part in a global financial crash.

So, if you want the recipe for a financial disaster, I have just named the six cooks. In summary, first misapply scientific principles (Walras) to a false science called economics. Then apply those principles aggressively on the basis of convention and groupthink (Greenspan, Bernanke) via an entity such as the US Federal Reserve. Meanwhile, force inappropriate principles on institutional fund managers (Markowitz). Finally, leave to simmer.

Tim Price is manager of the VT Price Value Portfolio.

O P I N I O N

FINANCIAL HISTORY’S UNWISE MONEY MEN

TIM PRICE

AUTHOR AND FINANCIAL COLUMNIST

is us. Keynesian (and now neo-Keynesian) stimulus during recession is all very well, but it also requires government to save during boom years. Neo-Keynesians tend to forget the latter.

Harry MarkowitzIn 1952, Markowitz, a mathematician with no practical experience of investing, wrote a landmark paper about risk. Peter L. Bernstein in ‘Against the Gods’ would even write that “Markowitz had put a number on risk”.

Except that he hadn’t. What Markowitz had done was to concentrate on volatility. But volatility and risk are not the same thing. Risk is the risk of a permanent capital loss. Volatility, by contrast, is simply the extent to which a price wobbles. Markowitz nonetheless set the scene for much of the pointless, noise-driven trading that occurs today.

Alan GreenspanThere was only ever one trick in the Greenspan playbook: if in doubt, cut rates. So rates were slashed in response to the 1987 stock market crash. And the Asian financial crisis of 1997. And the dotcom bust. On each occasion, overly easy monetary policy begat a new bubble – the last one, in the run up to 2007, was in property.

A one-trick Central Banker

Seven years after a near collapse in the banking system, interest rates hover near zero, deflation looms and financial markets are buoyed up by printed money. Who is ultimately responsible? Here is my shortlist of history’s guilty men.

Léon WalrasWalras (1834-1910) was a failure at everything he turned his hand to. That includes the creation of a “scientific theory of economics”. Walras stole principles from physics and happily misapplied them to the economy – a system far too complex to be reduced to simple models. Walras’ legacy and exuberant hubris is still alive and well at every modern central bank.

Nelson W. AldrichAldrich was the Republican ‘whip’ in the Senate and a business associate of JP Morgan. In November 1910, assisted by a handful of leading financiers, he cobbled together a business plan for a private banking cartel. Three years later, the Federal Reserve was born. Its mandate was seemingly to discourage banking competition, create ex-nihilo money to be lent out at profit, and to ensure that the taxpayer would pick up the losses that the cartel would inevitably incur from time to time.

John Maynard KeynesKeynes wrote, during the Depression, that “we have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand.”

While economists had clearly blundered, Keynes’ reference to the economy as a machine has it all wrong. The economy is too multifaceted to respond to the flick of a switch or the pull of a lever: ultimately the economy


G U E S T V I E W

THE R ISING POWER OF THE “PR E-NUP”

His, hers or theirs?

BRADLEY WILLIAMS & CHARLOTTE SYMES

Open and honest communication about money is one of the key’s to a successful marriage say Bradley Williams and Charlotte Symes at the Family Law in Partnership. However, pre-nuptial agreements can easily become an early stumbling block. Here’s their quick guide to how couples can avoid that trap.

We all want a marriage to succeed, however many don’t last the course – 43% of them according to the government. American research involving 4,500 couples suggested that the strongest predictor of divorce is the number of big arguments over money. Enter the pre-nuptial agreement (“pre-nup”) whereby both parties agree the financial consequences of a split before taking their vows. UK courts have tended to ignore these pre-marital agreements in the past but are now increasingly likely to accept them unless they are unfair. So, how can couples who are planning to tie the knot navigate what may be a highly sensitive issue for one, or both, parties? Here are three tips.

1. Take the right approachFor many couples the mere prospect of talking about money and what could go wrong undermines the whole romance of marriage. However, both

parties should view this process as a respectful one that is fair to both sides. A professional adviser can help guide a couple through what could easily become an uncomfortable debate. Bear in mind that neither party is likely to be held to an agreement where either one was unclear at the outset about both its terms and consequences. A lawyer with sufficient experience, who has worked previously with your partner’s professional adviser, can be a big help here.

2. Get the timing rightThe courts are less likely to pay attention to agreements entered into within 28 days of the marriage, for fear that one of the parties was feeling coerced.

3. Agree the right termsPre-nups work best when they are part of an overall legal framework that may also involve; wills, trusts, banking arrangements and insurances policies. Good wealth management and investment advice may therefore be crucial to get these core elements right;

• Ring-fencingHere, a couple makes it clear which assets are outside the marriage contract and to be retained by either party. Examples include assets that were acquired before marrying and/or an anticipated inheritance.

• Common endeavourMarriage is ultimately a financial partnership so it would be unusual to have completely separate finances throughout – a home, or homes, are usually bought together and joint earnings need to be managed to provide for future joint needs and security.

• The safety netThis is usually the complicated bit: identifying the ring-fenced resources that might be needed by the less-financially-strong party in the event of separation in different circumstances. The courts will, for example, look unfavourably on pre-nups that fail to provide for the needs of children. That said, “needs” is an elastic concept and one that may be difficult to reduce to a formula that covers every eventuality. As a rule of thumb, the further your agreement departs from what is considered “ordinary” in the court’s eyes, the greater the risk that it may not be upheld.

In summary, a successful pre-nup agreement should be relatively straightforward, have the full buy-in of both parties at the outset and be crystal clear about not just “what is going to happen” in a worst case scenario, but also “why”. Couples who can communicate well enough to get a pre-nup right may, ironically, be the ones that never actually need it.


How long have you been with the firm?I’ve been with Killik & Co for 17 years. Prior to that I worked for a firm of Private Client Brokers, before joining Lloyds Private Banking. Such a large, corporate environment ultimately frustrated me so I was delighted when an opportunity came up at Killik & Co.

I joined in 1998, amidst the chaos of the Russian crisis and emerging markets downturn. On my second day the Dow Jones registered its second largest points fall to that date. For an aspiring broker, it was a steep learning curve but those years also taught me a lot about managing volatile markets.

Since I joined, I’ve been based more or less entirely within the Hampstead branch and have been a Partner since 2005.

Who is in your team?There are four brokers, including me, looking after clients. We are supported by two administrative staff – a third recently moved on to our highly rated Broker Training Programme. We’ve also added a full time Chartered Financial Planner to the branch to ensure that our clients’ assets are structured to meet their goals and that their tax planning is done efficiently.

What gives you the most job satisfaction?I enjoy leading clients through difficult markets over an extended period and seeing their financial goals come to fruition. For example, guiding a longstanding client to retirement and structuring their finances to accomplish all of their retirement plans gives me great pleasure.

I have a number of clients where now I look after four generations of the same family. So I also love to work on investment portfolios that might be held by the older individuals within a family but are being managed to also benefit younger generations. For example, many of my older clients want to be able to

B R O K E R I N T E R V I E W

PETER DAY

PARTNER AND BRANCH MANAGER

A DAY IN THE LIFEConfidant caught up with Peter Day, Branch Manager in Hampstead, to find out

what keeps him awake at night and how investors should approach 2016

help children and grandchildren onto the property ladder and I love being involved in facilitating that.

Do volatile markets make the role of an adviser more, or less, important?Volatile markets are certainly harder to navigate for many DIY investors. Over the last 12 months, we have seen a huge divergence in the performance of different sectors. Dependable companies are now at a premium so investors need to be clear about how to identify them, something we can help with.

Who do you meet coming through your branch door? Most of our new clients come to us by way of a referral from an existing client and many do so because they are tired of the one-size-fits-all approach adopted by much bigger firms. They

come to us because we genuinely tailor our advice to their needs. We have to be willing to spend a lot of time understanding and getting to know our clients and also be able to adapt to their changing needs over time.

Some new visitors to the branch are surprised to realise that I am as keen to take on a junior ISA saver, whom I hope will be a client of mine for the next 30 years, as a larger client. We don’t operate minimum portfolio sizes and we know that a small sum might be just as important to one individual as a larger sum is to another.

What concerns do clients bring to you? Pensions are a big issue. A lot of people have put their heads in the sand whilst knowing that they’ve got to save more for retirement. Sadly the sheer number of recent changes in the rules has put a lot of people off. Although the government touted this as a simplification process, it’s been anything but.

That’s a shame as there are some real opportunities now in inheritance tax planning. Inheritance Tax thresholds haven’t moved for years, and yet we’ve seen property prices increase in many areas, so it’s a real “stealth tax”. Pensions offer one potential solution now that they can be passed on to future generations.

Are you seeing a lot of clients cashing in their pensions?No. Most of our clients are prudent individuals who have tucked away money year after year for the long term. The recent rule changes have simply motivated more people to get on top of their pensions situation and take expert advice, which is a good thing. They are certainly not buying flash cars or luxury holidays as suggested in parts of the media!

What keeps you awake at night?The biggest challenge is the accelerating pace of activity within financial markets. For example, when I started here many years ago, a 500-point fall in the Dow Jones was reasonably rare. Nowadays we are seeing far greater volatility which can cause clients stress and anxiety. A key part of my role is therefore to weed out the noise and focus on the underlying fundamentals.


B R O K E R I N T E R V I E W

Fixed income securities have been popular with your clients. Why is that and do you foresee any risks?In an era of rock-bottom interest rates many investors have looked for ways to earn more than they can get in cash but without chasing risky assets. The bond market has provided a solution for a number of years, in that it has allowed people to make their money work harder without taking on huge levels of risk.

Inevitably as money has poured in, the “bond bubble” scare story has emerged. If interest rates suddenly jump back up again people are worried that bonds could provide the next Dotcom crash story.

However, whilst that is a scenario I do think about, I don’t see rapid rises in interest rates ahead – the bond markets predict that we’ll have roughly 2% interest rates by 2019, a level that I still see as being supportive.

There is, however, another risk – liquidity. The market for bonds is largely dominated by banks. After the financial crisis they had to shrink their balance sheets so that they could no longer take the same quantity of bonds from sellers. Over the medium term, that is a concern if a lack of liquidity causes a “rush for the exit”. However that is more of an issue for the bond funds that take investors’ money and pool it. A big demand for redemptions that can’t easily be met could start a very negative spiral.

That’s why we invest in individual bonds as it gives us the ability to hold them until maturity. An investor therefore has certainty over their return no matter what happens to the wider market, provided they continue to hold the bond.

In many cases we’re now looking to reduce the “duration” of a bond portfolio – its sensitivity to interest rate rises. As a result we might move money into higher coupon, or shorter dated, bonds, all the time looking to reduce the risk that our clients are exposed to. That’s not something bond funds can easily offer.

We know that we must continue to educate our clients about bonds, as it is a world full of jargon. Even the simple word “bond” can describe fixed interest deposits at banks, corporate bonds, insurance bonds, offshore bonds, retail bonds – you name it! Our Killik Explains video library (killikexplains.com) is a good starting point and has a whole section on bonds.

Looking ahead in 2016, what advice would you offer?

Investors need to understand the polarisation of returns that we have seen this year from different sectors and stocks – that’s likely to continue. They should also be aware of the extent to which technology is disrupting sectors such as banking. For example, traditionally customers would have put their money into a bank only to have it lent it out to companies at a nice profit for the bank. Now we can all lend directly to companies, on better terms for them and us, via peer to peer lending. This represents a huge threat to a once seemingly invincible industry.

What do you do to relax outside the office?I throw myself into everything that life with a young family has to offer – not exactly relaxing but huge fun! Once my young twins are a little older I also plan to renew my enthusiastic support for Liverpool Football Club.

KILLIK SECURITY RISK RATINGS

All Killik & Co Research recommendations are issued with a security specific risk rating, represented by a number between 1 and 9. Assessing the relative risk of any security (specific risk) is highly subjective and may change over time. The Killik & Co Risk Rating system uses categories which are intended as guidelines to the specific risks involved, as follows:

Restricted Lower Risk

Securities in this category are what we believe to be lower risk investments such as cash, cash equivalents and short dated gilts, and the collective investment vehicles that invest in those instruments.

Restricted Medium Risk

Securities in this category are what we believe to be medium and lower risk investments including medium and long-dated gilts, investment grade bonds and certain collective investment vehicles investing predominantly in these securities.

Unrestricted

Securities in this category are what we believe to be higher risk and are drawn from across the United Kingdom and international markets. These are normally direct equity investment and collective investment vehicles which predominantly hold securities other than investment grade bonds and money market instruments.

The vast majority of the Killik & Co Research recommendations are likely to fall in the unrestricted/higher risk category (4-9) above.

For further details on the Killik & Co Risk Rating system please see the Killik & Co terms and conditions.

1

2-3

4-9

RISK RATINGS

Branch staff in order from left to right, Toby Scott, Kasha Reed, Peter Day, James Stell, Ed Dobell, Jodie Colledge, Charles Lucas, Timothy Hodgson.



Here are ten common behavioural traits that can stop us becoming successful investors. For more on these please see our main interview on page 6.

• Optimism bias. We all believe that we are better than average at everything, be it our job, driving, parenting or joke-telling. For example, a National Ethics survey in the US found that 92% of students claimed to be of good character yet 60% also admitted to cheating within the same year. As investors we therefore often confuse good luck with good judgement.

• Loss aversion. Some studies suggest that we fear losses twice as strongly as we enjoy gains. For investors this can lead to either complete inaction in the face of good opportunities, or a portfolio dominated by poorly performing stocks that we are hanging onto just to avoid taking a loss.

• The Planning Fallacy. Identified by Nobel laureate Daniel Kahneman, this is our overconfidence in our ability to shape the future and our inability to see how long something will really take to achieve, the risks involved and the potential costs. As investors it can make us prone to short-termism and a tendency to panic when markets don’t behave as we expect. We may also give up on an opportunity too easily, or too early, if it doesn’t immediately generate the returns we predicted.

• The Tyranny of Choice. Studies have shown that the greater the number of funds offered to bamboozled pension investors, the less likely they are to invest at all. Sometimes less is more: for example, modern portfolio theory suggests that 20-25 well-chosen shares will capture most of the benefits of diversification in a portfolio.

• Herding. Most of us are crowd-followers and seek the safety of large numbers. When we lived on the savannah this made sense as outliers could be easily picked off by predators. However as investors we need, as US fund manager Warren Buffett once put it, to be “greedy when others are fearful” and “fearful when others are greedy”. A study by JP Morgan has shown that between 1993 and 2013, investors who sold S&P 500 stocks when the market was most fearful and missed just ten of the market’s best investing days (which often follow immediately afterwards) halved their real returns.

• We are story-lovers. “Never confuse me with the facts” was the quip of an ex-colleague. In particular we will often look backwards and fit facts around an earlier investment decision to justify it, rather than accepting that we made a mistake: we will sometimes swap a good story for hard analysis to save face even if it costs us money.

• Recency bias. We are too easily swayed by the latest facts and opinions and this can lead us to miss

vital changes in an underlying trend. For example, I deferred my first property purchase in the late 1990s simply because I had seen people lose money a few years earlier. Similarly we may be tempted to follow hot stocks, lured in by their recent performance and price momentum, even if they have become dangerously expensive.

• Self-serving. As humans we all-too-easily take credit for the good things that happen to us and blame other people (whether parents, friends, colleagues or advisers) for the bad ones. For example, some people will only claim that they have been wrongly sold an investment once it starts losing money but happily take full credit for the decision to buy it while it is profitable.

• Confirmation bias. This is our weakness for acting before thinking and retrospectively justifying a poor, or under-researched, decision. We are also prone to “data-mining” – looking for evidence that supports a previous decision and ignoring inconvenient facts that do not.

• The big blind-spot. Having read this, many of you will remain quietly confident that you do not infact suffer from the same silly behavioural biases as everyone else. However in investing as in poker, as Buffett once quipped, “if you don’t know who the patsy is, you’re the patsy”

K I L L I K E X P L A I N S

AR E YOU YOUR OWN WORST INVESTING ENEMY?

To access our comprehensive library of over 120 short, educational

videos on a whole range of topics, including this one, please go to

killikexplains.com.

KILLIKEXPLAINS

Don’t behave like them

TIM BENNETT

EDITOR, CONFIDANT



Stephen Timoney is Killik & Co’s Portfolio Manager specialising in mid-cap income stocks. Confidant caught up with him for an update on the Mid Cap with Yield service, which launched in October 2014.

What does your service aim to offer?My main aim is to give clients seeking UK dividends an alternative to the traditional dividend-paying stocks in the FTSE 100. I focus on picking stocks from the FTSE 250 – the mid-cap index – and target a dividend yield that is higher than that of the index itself.

Why mid-caps?Mid-caps benefit from the sort of growth attributes normally associated with smaller companies but offer a much higher level of liquidity than stocks in the small-cap index, or on AIM. Many also offer attractive, sustainable yields. A combination of earnings and dividend growth allows these stocks to offer sustained or improving dividend cover and strong total returns. One of our holdings, for example, has achieved a total return nearly six times that of the FTSE 250 Index, and more than 13 times that of the FTSE 100, since it came to the market in 1994.

What specific skills do you need?Experience in analysing mid-cap stocks is vital, as are discipline and patience. You need to be able to spot value in

companies that often aren’t particularly exciting and do detailed research, while resisting the temptation to buy the “next big thing”. Recently, for example, I was discussing soap dispensers and toilet brushes with a great business that is consistently cash-generative. That’s precisely the sort of company I like.

One advantage of my investment approach is that even if I miss something at the individual stock level, I know that the overall portfolio is well-diversified and built around a strict investment process.

Can you describe how that investment process works? The three key elements of the process are dividend yield, free cash flow yield and share price volatility.

I’m primarily aiming to achieve a higher yield than the FTSE 250, although income isn’t the whole picture – management teams that show discipline when it comes to dividends tend to also put shareholder value at the forefront of their thinking, in my experience.

The power of being able to consistently generate high levels of free cash flow shouldn’t be underestimated either. It gives a firm so many options, whether they choose to return cash to shareholders, reduce debt, invest in organic growth or make self-funded acquisitions. Ultimately I want firms that will pay dividends rather than reinvesting all of the cash that they generate into growth – it’s the old ‘bird in the hand’ philosophy.

Why do you look at share price volatility?Mainly to reduce overall portfolio volatility. I am also interested by the growing body of academic evidence that suggests low volatility stocks can outperform their higher volatility counterparts over time – the ‘low volatility anomaly’. Cash generative mid-cap companies that make consistent returns to shareholders tend to show relatively low share price volatility but I sometimes come across stocks that may not be an obvious choice on the basis of free cash and dividend yield but warrant further investigation on the basis of their low volatility.

How often do you meet with company management? Regularly. In some cases, I meet individual management teams several times a year. Where that’s not possible, I try to meet investor relations representatives instead.

What kind of a year was 2015 for you and how is the portfolio positioned for 2016?2015 was a pretty good year. The composite portfolio is up 13.6% versus 8.1% for the FTSE 250 year to date, net of all fees and expenses. Since inception, we’re up around 25% compared to 13% for the FTSE 250. Right now, the portfolio is yielding a prospective 3.8% and we’re invested in some of Britain’s best businesses – I look ahead to 2016 with confidence.

M I D C A P W I T H Y I E L D

FIVE OF MY FAVOUR ITE INCOME STOCKS

STEPHEN TIMONEY

PORTFOLIO MANAGER

Name Market Cap (£'m)

P/E (x) Dividend Yield (%)

Share Price (p)

Risk rating Currency

Cobham 3,205 N/A 3.84 280 7 GBp

ICAP 3,319 25 4.32 512 7 GBp

Jupiter Fund Management 2,048 13 3.02 446 7 GBp

Marston's 940 40 4.27 164 7 GBp

Kier Group 1,299 35 3.73 1,350 7 GBp

Five of my favourite yielders

For details of the Killik risk rating system, please refer to page 15. Please speak to your Broker for further details.

*As at 21 December 2015


“The Auto industry is poised for more change in the next 5 to 10 years than it’s seen in the past 50” according to the CEO of General Motors. The reason is one of our biggest investment themes – we call it technological disruption. We expect the main drivers to be not just technological advances but also new regulations, specifically around emissions and safety. These will force incumbents to radically change their business models. Here’s a summary of how technology is impacting the Autos sector and the opportunity that this creates for investors.

Disruptor one – lower emissionsNew emissions regulations are forcing manufacturers to change the powertrains they use to newer, more efficient types such as hybrid electric, pure electric and gasoline direct injection. The challenge for many manufacturers is that they do not have the technical expertise to make a quick transition. In addition, with huge investments already made in the existing powertrain technologies, they are reluctant to make a big switch to new technologies unless forced to. This inbuilt inertia shifts value to the nimblest, large suppliers who can fill this growing gap.

Disruptor two – increased safetyHowever, it is new safety regulations in particular that are likely to drive the biggest changes to the car over the next decade as we move towards autonomous driving. The adoption of automated emergency braking, lane departure warnings and highway cruise control is likely to be global. The components needed to enable fully autonomous driving are similar to those required to meet many of the new safety regulations – for example, camera modules, radar, lidar (distance sensing technology) as well as the computing power needed to control them and process the data that they generate. But just as important as

E Q U I T Y T H E M E

NICOLAS ZIEGELASCH

HEAD OF EQUITY RESEARCH

Key data

Name Market cap (m) P/E (x) Dividend Yield (%) Share Price* Risk rating Currency

Continental 44,181 17 1.47 222 6 EURLloyds Bank 51,054 23 1.17 71 7 GBpStarbucks 88,627 36 1.14 60 6 USDAstraZeneca 56,141 46 4.3 4,392 5 GBpTaylor Wimpey 6,419 16 0.91 195 7 GBp

HOW TECHNOLOGY IS DISRUPTING GLOBAL CAR M ANUFACTUR ING

* As at 21 December 2015

Five of our current “Best Idea” stocks

Continental is one of the world’s largest auto components suppliers with leading positions in interiors, powertrains and safety, as well as rubber products and tyres. While it is still over 50% weighted to Europe, in recent years it has been growing sales in North America and Asia at a faster rate. It now supplies almost all of the world’s auto manufacturers. In summary;• We believe that Continental is well

positioned to play the technological disruption that we expect in the auto industry and should benefit regardless of whether the traditional manufacturers or new technology entrants ultimately emerge as the future winners

• Continental is one of the leaders in advanced driver assistance systems (ADAS), which will provide the path to autonomous driving. We expect significant growth from ADAS over the next 5-10 years

• The firm also has a wide product spectrum spanning technologies to reduce emissions, with leading positions in hybrid electric powertrains and gasoline direct injection – the recent diesel emission scandal is likely to accelerate this shift

• A strong tyre business benefits from three themes – increased car usage globally, moves to lower rolling resistance tyres and more stringent safety requirements

Continental – on a roll

Continental share price (EUR)

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these hardware components will be the software that is needed to enable many autonomous driving features. Overall therefore we expect the adoption of these new features to raise manufacturing costs significantly with few manufacturers having either the expertise or scale to develop in-house solutions.

A changing landscape What is becoming clear from these big shifts, is that the engineering expertise, manufacturing ability and brand names built up in the auto industry over decades could be in danger of losing their competitive advantage, as more of the value shifts towards new technologies and software expertise. We believe that this will result in the emergence of new competitors, unencumbered by legacy investments in traditional technologies. One example is Tesla, which only produces electric vehicles and was featured in the last issue of Confidant. Suppliers that possess the new technologies that the auto manufactures will need in order to compete will benefit too.

As a result, we are shifting our investment focus away from the traditional manufacturers towards those components suppliers that have the strongest exposure to these emerging trends. One of the stocks that we think is best placed to benefit from this shift is Continental AG – we include it as the first of our five Best Ideas for this issue. For a full copy of the related Research Note please speak to your Broker.

For details of the Killik risk rating system, please refer to page 15. Please speak to your Broker for further details.


E Q U I T Y T H E M E

All chart data source: Bloomberg

Taylor Wimpey is the UK’s third-largest housebuilder by number of completions. The business suffered the worst downturn of any of the listed housebuilders in 2007-2008. That triggered the adoption of a risk-averse strategy focused on through-the-cycle, sustainable returns, rather than volume growth. In 2014, a major cash return programme was announced – £300m has already been returned to shareholders. In summary;• Taylor Wimpey’s defensive, long-term

strategy acknowledges the inherent cyclicality of the housebuilding industry and prioritises margin performance ahead of volume growth – a 14,000 unit ‘soft cap’ on volumes is likely to be hit by 2017

• The group’s high-quality short-term land bank has already reached management’s optimal size (about 77,000 plots) and is supported by the largest strategic land bank (i.e. land without planning consent) in the sector, at around 107,000 plots

• Strategic land can deliver significant (i.e. 3-15 percentage points) margin enhancement over short-term sites, and the group has been very successful at promoting these sites through the planning process. In the first half of 2015, 46% of completions were sourced from the strategic pipeline, well in excess of the group’s stated 40% target

• As the group transitions from a strong investment phase over the past four years, to the current focus on delivery, cash generation is inevitably increasing

• The group can therefore expect to make large cash returns to shareholders, in accordance with its long-term strategy

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Taylor Wimpey – strong foundations Taylor Wimpey share price (GBp)

AstraZeneca is a global biopharmaceutical group with four therapy divisions: Cardiovascular and Metabolic Diseases; Oncology; Respiratory, Inflammation and Autoimmunity; and Infection, Neuroscience and Gastrointestinal. Its long term performance will be driven by the increased incidence of diabetes and asthma globally through its existing franchises, as well as new drug launches in exciting areas of treatment such as immuno-oncology. In summary;

• Following increased research and development efforts, AstraZeneca has an attractive pipeline with a number of potential products across a range of therapies

• The cost-cutting programme, announced in 2013, has been successful – selling, general and administrative spending has been reduced and is expected to stay near this lower level

• AstraZeneca trades broadly in line with the comparable European large-cap pharma peer group and offers an attractive dividend yield

• Given the potential for earnings and dividend growth, AstraZeneca is therefore our preferred way to gain exposure to the UK pharmaceuticals sector

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AstraZeneca – successful therapy AstraZeneca share price (GBp)

Starbucks is the premier roaster, marketer and retailer of specialty coffee worldwide, operating in 65 countries. It sells through both company-owned stores and licensed outlets as well as grocery stores and national foodservice accounts. In summary;• Starbucks is a classic consumer company

that sells a large volume of low-ticket items every day

• It has managed to position itself as more than just a coffee shop; it provides an extra living room for Millennials and

temporary office space for many business people

• We believe it still has good growth potential in the US via expansion into new store formats, increased footfall later in the day, greater penetration of the food market and increased sales of packaged goods via retail channels

• Internationally, there is strong potential driven both by store footprint expansion, especially in China, and increased transaction levels

• We believe that it is one of the few large consumer companies capable of doubling earnings over the next five years

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Starbucks – serving up US growth Starbucks share price (USD)

Lloyds Banking Group is the UK’s leading domestic bank, having been created from the merger of Lloyds TSB and HBOS in 2008. It is a market leader in almost all categories of retail banking. In summary;• Since the financial crisis, Lloyds has

been significantly restructured into a relatively pure play UK retail bank, with limited international and investment banking exposure

• This reduces its risk profile, both in terms of financial risk and regulatory risk,

which in turn lowers the Group’s cost of funding

• Lloyds aims to drive earnings growth through improved customer service, strong credit risk control and improved efficiency

• It is also positively geared to the steady interest rates rises that may come through in the UK

• The group is well capitalised, and should generate significant amounts of excess capital annually to support an attractive

dividend policy alongside regular returns of additional excess capital via special dividends or share buybacks

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Lloyds – chasing the retail pound Lloyds share price (GBp)


With the US Fed having finally moved on interest rates in December, with a 25bp (0.25%) increase, the focus now shifts to the pace and trajectory of future interest rate increases in the US and to which Central Bank might be the next to withdraw some monetary stimulus. This focus will intensify if concerns over global growth fade and inflation expectations, which are currently subdued, start to rise. The Bank of England could be the next major central bank to raise rates, however, following the relatively ‘dovish’ tone of the Bank’s latest quarterly Inflation Report, released in November, market expectations of an interest rate hike in the UK have been pushed back to the second half of 2016.

At the time of writing, the US dollar was the best performing of the major currencies during 2015 as the US economy continued to make steady progress and the Fed sought to adopt a slightly less accommodative monetary policy stance compared to other major central banks. Meanwhile, the euro weakened over the year as the ECB embarked on a programme of quantitative easing (QE) and interest rate cuts. Sterling was one of the stronger currencies over the past year. However, it looks susceptible to potential weakness in 2016 given the UK’s current account deficit, possible delays to the Bank of England raising rates and uncertainty over the outcome of the EU in/out referendum.

As we move into 2016, here are five charts that sum up some of the key macroeconomic trends from 2015 and help to set the scene for the coming year.

T H E B I G P I C T U R E

THE STORY OF 2015 IN FIVE CHARTS

Charts data source: Bloomberg

4. UK Rate Rise expectations slipped back

5. USD strength, euro weakness; is sterling now vulnerable?

Chart 4 – Probability of UK Interest Rate Rise

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Chart 5 – Deutsche Bank Trade-Weighted US Dollar, Euro & Sterling Indices

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PATRICK GORDON

SENIOR STRATEGIST AND HEAD OF RESEARCH

The divergence in the policies of the US Federal Reserve and European Central Bank (ECB) led to contrasting movements in the yields of US and German government bonds. Yields on shorter-dated government bonds, which are influenced most by central bank interest rate policy, have risen in the US as the Fed has embarked on its process of ‘normalisation’. By contrast, the ECB continues to adopt a highly accommodative monetary policy stance, and the yield curve steepened reflecting the decline in shorter-dated government bond yields. The chart below depicts this widening spread between two-year yields on US and German government bonds.

3. The US yield curve flattened while Europe’s steepened

Chart 3 – US and German 2-year yield spread

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One of the casualties of the sell-off in commodities has been the US high yield bond market, home to a number of highly-leveraged energy companies. US high-yield spreads – that is the difference in yield between a corporate bond and a government bond of similar maturity – widened further during the latter part of 2015, as investors demanded a higher premium for accepting the risk of potential default. Many oil producers have been able to protect their revenues, to some extent, by hedging. However, with prices in the futures market significantly lower than they were a few years ago, this may no longer be a viable solution, particularly for higher cost producers. Therefore, without a sustained recovery in the oil price, the number of defaults in the high yield space could increase.

2. US high-yield bonds weakened

Chart 2 – Barclays US Corporate High Yield Index, Average Option Adjusted Spread, basis points

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Persistently low commodity prices were a key feature of markets in 2015. West Texas Intermediate crude, for example, was down 34% over the year, at the time of writing, while copper had dropped 28%. A combination of US dollar strength, elevated supply and slowing global growth kept prices under pressure. In response to the lower price environment, companies in the oil & gas and mining sectors have cut back on capital expenditure projects in an effort to preserve their balance sheets. Meanwhile, OPEC has so far decided against cutting its oil output targets so oil stockpiles have grown. With Iran set to add to production when western sanctions are lifted, and demand for viable alternative sources of energy gaining momentum, the oil price looks set to struggle to recover to anywhere near the $80 to $110 price range seen during much of the 2011-2014 period. A strong rebound in global economic growth or a major disruption to supply could, however, change the picture.

1. Commodity prices remained under pressure

Chart 1 – Department of Energy Cushing Oil Stocks vs West Texas Intermediate Crude Oil Price

DOE Cushing Oil Stocks (LHS) WTI Crude Price (RHS)

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Despite starting on a stronger note, with the 10-year Gilt yield recording an all-time low in January, bond markets have experienced a challenging 2015. At the time of writing, UK Gilts are slightly weaker year-to-date, providing a negative backdrop for corporate bonds. Although default rates remain low, they are expected to rise, and investors have already started demanding higher compensation for the risk of holding corporate debt so credit spreads have widened.

Volatility has also been on the rise both in the government and corporate bond markets, where price moves may have been exacerbated by lower liquidity. Year-to-date there were 20 days in which the 10-year Gilt yield saw moves of 10 basis points or more, compared to seven during 2014. Corporate bond returns have varied

significantly, with the Oil & Gas, Metals & Mining and Automotive sectors amongst the underperformers in 2015. Additionally, we have seen individual credit risk picking up with some issuers being fiercely punished by the market.

In the Retail Bond market, new issuance remains subdued – five new bonds listed on the ORB platform in 2015, raising £394.5m, the lowest figure since 2010. Worse, three of these came from repeat issuers and the remaining two averaged only £32m in size. We remain hopeful, however, that the proposed overhaul of the

prospectus rules announced by the European Commission on 30 November will eventually lead to increased corporate bond issuance in retail-friendly denominations.

As we enter 2016, we remain cautious. With the Bank of England contemplating the first rate hike in almost nine years, we prefer shorter-duration, higher-yielding bonds where the additional credit spread might act as a buffer in the event of interest rates moving higher. Nevertheless, corporate bond yields are, on average, higher than they were at the beginning of 2015, providing a more positive outlook for future returns. We believe that carefully selected corporate bonds should continue to generate positive total returns helped by tightening credit spreads and attractive income yields. We also see appealing valuations in some corporate inflation-linked bonds, which offer the potential for market outperformance if headline inflation picks-up.

B O N D S R E S E A R C H

CAR EFUL SELECTION R EM AINS KEY FOR BOND INVESTORS

Risk warning: Note that as with all investments there are risks involved in investing in corporate bonds. This includes the risk that the issuer may default. As a consequence you may get back less than you invest or lose your initial investment. Other factors which may affect the price of the bonds include, but are not limited to, the level of inflation, length of time until maturity, issuer’s financial position, demand for the bonds, and interest rates. Note that if interest rates start to rise then the amount of interest due to be paid on the bonds might become less attractive and as a consequence the price of the bonds could fall. Bonds are negotiable and consequently prices will fluctuate from issue until redemption at par (100). For some bonds the secondary market liquidity may be quite thin and the spread between the buying (offer) and selling (bid) price may be quite wide. Note that, unlike a bank deposit, a corporate bond is not covered by the Financial Services Compensation Scheme (FSCS).

Three retail bonds we currently like

Beazley 5.375% 2019Beazley is a global specialist insurance and reinsurance group, with underwriting platforms in Lloyd’s of London and in the US. The group focuses on a range of well-diversified, specialist niche areas.

Provident Financial 7% 2017This market leading ‘non-standard’ lender is a member of the FTSE 100 Index. The company offers a wide range of products including credit cards (Vanquis Bank), home credit (Consumer Credit Division), online loans (Satsuma) and car finance (Moneybarn).

Tesco Bank 5% 2020Tesco Personal Finance (trading as Tesco Bank) is a wholly owned indirect subsidiary of Tesco PLC. Serving approximately 7.2m accounts for customers predominantly located in the UK, the company provides a wide range of financial service products in retail banking and insurance.

Status Unsecured Senior, unsecured Senior, unsecuredOffer Price 104.05 105.30 102.10Income Yield 5.2% 6.7% 4.9%Gross Redemption Yield 4.3% 3.9% 4.6%Net Redemption Yield (40% tax) 2.1% 1.2% 2.6%Modified Duration 3.3 1.7 4.3Minimum Size 100 100 100Credit Rating n/a BBB n/aKillik & Co Risk Rating 4 4 4NISA/SIPP Yes / Yes Yes / Yes Yes / Yes

* As at 21 December 2015 For details of the Killik risk rating system, please refer to page 15. Please speak to your broker for further details.

MATEUSZ MALEK

HEAD OF BOND RESEARCH


At the start of a New Year, we cast our eye forward and look at four themes and associated funds that we think could be amongst this year’s best plays.

1. Emerging markets remain cheapAlthough the badge “emerging markets” covers economies with highly divergent macro drivers and differing prospects, the region as a whole has suffered from multiple headwinds in recent years. These include the much-anticipated start of a US rate tightening cycle. Sentiment towards the region is extensively bearish with pessimism notably strong during the summer months of 2015. Many EM economies have also undergone a painful fiscal and monetary rebalancing in recent years, magnified in an environment of weak global growth. Nonetheless the gloom may have been overdone.

Emerging markets (EMs) have now suffered six consecutive years of declining GDP growth so any stabilisation in this trend could signal a significant turning point. Meanwhile, following the significant depreciation seen in many EM currencies compared to developed markets we expect the gradual US rate hikes to be well anticipated and therefore should largely be absorbed by the markets.

Better macro fundamentals and a stabilisation of growth are both required to support a broad-based equity market recovery in the emerging markets but valuations have fallen to a level which already adds support. On a cyclically

adjusted price/earnings basis the region trades at levels comparable to those seen during the global financial crisis (see chart).

Given this outlook we believe allocations to emerging markets should be reviewed within portfolios. Our favoured active fund offering broad exposure to the region is the Lazard Emerging Markets Fund* (Buy).

2. Japan shows promiseThe Topix Index has been one of the best performing markets in 2015. However, unlike many other developed markets, returns have been driven largely by strong underlying earnings growth (see chart) rather than price multiple expansion.

We continue to see good progress within the Japanese market. One of the most notable features has been a trend of improving corporate governance and greater focus on shareholder value. The introduction of the Stewardship Code and Corporate Governance Code in recent years has sought to tackle long-standing bugbears such as capital policy, cross-shareholdings and board diversity. The JPX-Nikkei 400, a new index that scores constituents on factors such as

F U N D S I N F O C U S

GORDON SMITH

FUND ANALYST, RESEARCH

FOUR FUNDS FOR 2016

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C YCL IC A L LY A DJ U S T E D PR ICE E A R N I N G S R AT IO (C A PE) : M S CI E M I N DE X

Source: Bloomberg

TOPI X I N DE X , E A R N I N G S PE R S H A R E ( J P Y )

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return on equity, has also continued to gain traction as a benchmark for investors. Moreover, we are seeing some early signs of a changing mindset from Japanese corporate management – the deployment of idle cash has resulted in a record level of dividends and share buybacks this year.

The implementation of the ‘third arrow’ of the government’s “Abenomics” continues to be met with some scepticism. However, whilst structural reform is likely to be a slow process we have noted some encouraging developments. As an example, the easing of visa restrictions has led to more low cost airlines flying to Japan, increasing inbound tourism, particularly from Asia. Targets for 20m foreign tourists by 2020 could comfortably be met next year on current estimates.

We believe the Morant Wright Japan Fund* (Buy) is well placed to benefit specifically from the above trends and capture a continuing improvement in corporate earnings and sentiment.

3. Disruption is deliveringTechnological innovation built on the twin themes of globalisation and digitalisation is having a transformational impact on almost all industries and significantly changing the competitive landscape. For example;• Social Networking has changed the

way consumers interact with each other and with businesses

• Mobile Technology has had a significant impact on how people consume content, search for information, and interact with society

• Analytics has allowed companies to make better use of the large amounts of data that are available, improving their products and giving them a competitive advantage


Growth

Lazard Emerging Markets

Fund Type UK OEICManager James Donald &

teamFund Size* £680mOngoing Charges 1.07%Historical Yield 2.3%Risk Rating 5

Growth

CF Morant Wright Japan

Fund Type UK OEICManager Morant Wright

TeamFund Size* £518mOngoing Charges 1.15%Historical Yield 0.5%Risk Rating 6

Growth

Aviva Investors Multi-Strategy Target Income

Fund Type UK OEICManager AIMS TeamFund Size* £435mOngoing Charges 0.85%Target Yield 4% above Base

RateRisk Rating 4

Growth

Scottish Mortgage Investment Trust SMT-LON

Fund Type Investment TrustManager J Anderson, T

SlaterMarket Capitalisation* £3,565mOngoing Charges 0.48%Historical Yield 1.1%Risk Rating 5

F U N D S R O U N D U P

Total Return, S Class Acc, Indexed, Last 5 Years

Total Return, Indexed, Class 2, Since LaunchNet Asset Value and Share Price, Indexed, Last 5 Years

Total Return, B Shares Acc, Last 5 Years

All chart data source: Bloomberg

* As at 21 December 2015 For details of the Killik risk rating system, please refer to page 15. Please speak to your broker for further details.

To view our popular ‘Meet-the-Manager’ video Interviews, please go to killik.com/insights/blog

MEET THE MANAGER

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• Cloud Computing has reduced the amount of capital investment needed, allowing businesses to pay only for what they use

The investment approach followed by the Baillie Gifford management team that is behind the Scottish Mortgage Investment Trust* (SMT-LON, Buy) is a highly differentiated play on disruption. Specifically they focus on companies benefitting from the transformative change occurring in areas such as E-Commerce, Social Media, Healthcare, Transportation and Energy. James Anderson and Tom Slater, the lead managers, believe the majority of the value created by these innovative shifts will be concentrated in the hands of a few extraordinary companies. Their dominance will be reinforced by scale and network effects, providing the potential for greater longevity of growth.

The underlying portfolio does trade on a high valuation multiple, however, the team remains confidant in their forecasts of the potential scale of each underlying business and the dramatic impact this can have on future returns. We believe this trust offers access to an attractive basket of companies, spanning a wide array of business areas, with significant structural growth potential driven by disruptive technological developments.

4. Diversified income should deliver2016 looks set to become a year in which monetary policy across global regions becomes ever more divergent. Further interest rate hikes by the US Federal Reserve could well be coupled with continued easing by the European Central Bank, Bank of Japan and Peoples Bank of China. The coming year is sure to be characterised by uncertainty surrounding the likely scale and trajectory of such policy moves and any subsequent market reaction.

In this environment, the importance of diversification within portfolios is amplified. Diversification is one of the most fundamental concepts in investment management – allocating to a variety of asset classes which exhibit low correlations can help to manage the level of variability (or risk) of the overall portfolio. A well-diversified portfolio can therefore reduce risk without sacrificing return.

We therefore like the well-considered investment process used by the Aviva Investors Multi-Strategy (AIMS) Target Income Fund* (Buy) and believe this fund

would provide a useful diversifier within income portfolios.

The fund targets an annual income of 4% above the Bank of England base rate whilst looking to preserve investors’ capital and achieve these objectives with an annualised volatility of less than half that displayed by the MSCI AC World Index over rolling three-year periods.

The unconstrained approach followed by the Aviva AIMS team means that they can invest globally and source income from a variety of areas such that no single income source, or risk factor, dominates.


http://killik.com/insights/blog

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We also won:

Best Wealth Manager for Inheritance Tax and Succession PlanningKillik & Co

Investment and Wealth Management Awards 2015Winner

Best Full Sipp ProviderKillik & Co


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Wealth Manager of the YearKillik & Co


Killik & Co votedBest Wealth Manager

2014 and 2015

Past performance is not a guide to future performance. The value of your investments can go down as well as up and you may not get back the initial sum invested.

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confidant - winter issue 2016

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