housereport

CHARITY FOCUS Active or passive?

Not an easy decision

MARKET VIEW From Guy Monson, CIO

THREE STRIKES AND YOU’RE IN

Celebrating the third anniversaryof our Fund of Funds range

Pinch pointsInvestment opportunities in a world of shortages and gluts

Quarter 3 2015

Editor’s Note

Melanie RobertsEditor

Welcome to the Q3 edition of our House Report.

Our theme this time is pinch points, where we look for the beneficiaries of bottlenecks that create both excess and famine across a disparate world economy. Yet the first few days of the quarter delivered more of a punch than a pinch to markets accustomed to climbing higher, fuelled by low interest rates and excess liquidity. For the complacent investor, Greece’s surprisingly strong No vote is a stark reminder that there is more than one direction to asset prices. It is not yet clear whether voting No means leaving the euro, but one thing is certain, financial markets will remain puzzled until the crisis resolves itself.

With equities retreating from all-time highs and volatility governing bond markets, Guy Monson’s Market View concentrates on the investable opportunities that today’s pinch points present. But how do these pinch points arise to begin with, and can

“ Whatever the summer holds, it is unlikely to be as quiet as we might hope. In the meantime, we continue to focus on the longer term, seeking out enduring global investment opportunities for our clients”

Contents04 Market View

Investing in pinch points – generating returns from bottlenecks and scarcity in the global economy

Guy Monson

08 Harnessing pinch points

The global reach of bottlenecks and gluts

Subitha Subramaniam

11 Pinch points in practice

Views from our Global Thematic Analysts

Driving the market

Uncovering investment opportunities in the used car industry

George Ullstein

12 Plumbing in the Cloud

Accessing networks and cloud computing infrastructure

Josh Sambrook-Smith

13 A journey through space and time

Understanding pinch points in global property markets

Geoffrey Armstrong

14 Liquid gold… or full of hot air?

Finding long-term investment opportunities in liquefied natural gas Max Burns

15 Three strikes and you’re in

Celebrating the third anniversary of our Fund of Funds range

Lucy Walker

18 To invest in our future, we must be active

Assessing the move into passively managed funds

Natasha Landell-Mills

20 Charity Focus

Active or passive? Not an easy decision

Richard Maitland & Robert Boddington

24 Events

25 Key votes & engagements

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market backdrop, and some of the key drivers that will determine her fund selection in the months ahead.

Rising asset prices often go hand in hand with fund inflows and it is perhaps no surprise to read that there has been a marked increase in passive investment over the past decade, especially given the attractive cost advantages on offer. Our Head of Environmental, Social and Governance Research, Natasha Landell-Mills, explains that ‘the larger the share of funds being invested passively, the more likely we are to experience bubbles or sharp reversals of direction in markets.’ But, she notes, it is not just the volatility that concerns us, but also the misallocation of capital as money is committed passively to industries that may not stand the test of time.

Finally, our Charity Focus elaborates on this ‘active versus passive’ debate, asking whether more charity trustees might choose the passive route for part

investors ever truly hope to harness them? Subitha Subramaniam helps us understand the inherent pressures in a world awash with gluts and shortages.

Pinch points crop up in unrelated industries, from commodities to real estate, technology to second hand cars – often the result of sudden shifts in demand, or distortions from regulation, or perhaps gluts exist because of economic convergence itself. Our analysts provide additional insight into a number of companies that stand to benefit from today’s gluts and bottlenecks.

We are proud to be celebrating the third anniversary of the launch of our Fund of Funds range, which has accumulated a compelling performance record along the way. Timing has been fortuitous with a financial backdrop of accommodative monetary policy helping to stimulate asset prices, and some equity funds that have delivered stellar returns. Fund Manager Lucy Walker gives us her thoughts on the

or all of their investments. Active managers feed on imperfect markets, yet the majority struggle to outperform their chosen indices. But passive investment is not always truly passive, and may involve additional services (and costs) you might not have considered, such as the administration and strategic advice that are generally included in an active manager’s fee.

Whatever the summer holds, it is unlikely to be as quiet as we might hope. In the meantime, we continue to focus on the longer term, seeking out enduring global investment opportunities for our clients. We hope you enjoy reading this edition and please continue to send us your suggestions to housereport@sarasin.co.uk.

Needing repair: Greece’s surprisingly strong No vote is a stark reminder that there is more than one direction to asset prices

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As the US (and now global) recovery accelerates, investors might normally expect bottlenecks and supply constraints to emerge across the global supply chain. Instead, it seems that as a rapid adoption of technology meets Asia’s extraordinary manufacturing capacity, many traditional pinch points have been ‘innovated’ away, allowing production costs to continue to fall. Prices certainly reflect this; of the 30 major commodities tracked by Bloomberg, 28 are showing negative one year returns, with input prices now falling in every major economy. In short, the world now appears to find itself with an abundance of ‘cheap product’ with few, if any, supply constraints.

Knowing where to look: uncovering investible pinch pointsEven serial pinch points – like world energy markets – appear to have structurally changed. The shale revolution has allowed the US to replace Saudi Arabia as the marginal supplier of oil and gas, almost a trillion dollars of mining ‘capex’ over the decade has opened up vast pools of metals and raw materials (increasingly mined by robots) while near grid parity (and battery storage technology) suggests a major leap in market share for solar power.

In manufacturing, the internet of things (IoT) coupled with robotics is driving down manufacturers’ unit costs, while 3D printing offers the tantalising concept of micro-factories across the globe. For consumers car pooling, the Uber phenomenon and autonomous driving and safety features will collapse the cost of car ownership, while streaming services for music and video offer unparalleled information access, delivered and priced on demand. And, for the present, courtesy of the world’s central bankers, the capital expenditure needed to achieve this can be funded at some of the lowest nominal rates in history…

So, for investors, where are the future bottlenecks and the new pinch points in the global economy?

They are sure to be obvious in hindsight, and in a slow growth, low inflation world investors will reward the companies that benefit from them with generous valuations. Finding them first is the challenge that we have set our equity analysts, managers, and even our currency and bond teams.

Finding pinch points in financial assetsIn a world awash with cheap central bank liquidity, yield and yielding assets have already become pinch points, as seen in the multi-year rallies in government, corporate and high yield bond markets. We are now focusing for our clients on infrastructure (rail and power), charities and not for profit organisations (among them universities and housing associations) issuing bonds and yielding instruments.

Market ViewInvesting in pinch points – generating returns from bottlenecks and scarcity in the global economy

Guy MonsonChief Investment Officer and Managing Partner

“ In a slow growth, low inflation world, investors will reward the companies that benefit them with generous valuations”

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In bond markets, the clearest pinch point is in the demand for the security of AAA assets, hence yields of just 0.06% for Swiss and 0.78% for German ten year bonds. We have deliberately retained some longer dated sovereign and high grade corporate bonds to protect against a further ‘squeeze’ (as we have seen once again over the Greek referendum). Similarly, there is ‘scarcity’ of reserve currencies – many are eligible but all bar the dollar have challenges. For the euro it is the instability of the funding for the periphery, for the yen it is very high levels of government debt and an ageing population, and for the Chinese renminbi it remains issues of convertibility and financial stability. We continue to hold strategic long-positions in the US dollar, but are increasingly interested in sterling where financial and political stability could (if BREXIT issues diminish) attract international reserve flows.

Pinch points in global resources give way to squeezes further up the production chain…With poor pricing across traditional commodity suppliers, our focus continues to lie with specialist materials including industrial gases, flavours and fragrances and industrial enzymes (Givaudan and Novozymes are examples). Our favoured investments combine extensive research and development, patent protection, specialist distribution capabilities and technological leadership.

In the digital world, privacy and security seem to be the scarcest assets but offer limited investible opportunities. More easily accessible, media and content (either produced or controlled) are key pinch points as the ubiquitous streaming of services gathers momentum. Our holdings here include ITV, Netflix, and Disney with its control over huge franchises like Star Wars, Marvel and (through ESPN) the National Football League (NFL).

“ Our favoured investments combine extensive research and development, patent protection, specialist distribution capabilities and technological leadership”

Global commodity prices, while recovering, remain relatively weak

Jan2007

Jan2009

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Jan2010

Jan2011

Jan2012

Jan2013

Jan2014

Jan2015

Inde

x

300

250

200

150

100

50

0

Source: Macrobond

Metals index

Oil index

Energy Index

All commodities

Food Index

In the emerging world, clean energy remains a scarcity, and providers are well represented in our portfolios

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… while network effects are creating a new class of pinch pointAcross all types of businesses we value those with network effects, which by their nature cannot easily be replicated or disrupted. Auto Trader, Amazon, Apple, Tencent, and Telecity all exhibit these qualities, as well as non-tech companies like Air Products (gas pipeline networks that are local monopolies), Umicore (recycling of complex waste streams) or JP Morgan (fixed income trading). All of these provide superior services because they are the biggest players, and are the biggest players because they provide superior services. Network dynamics create a moat to reinforce their dominant positions. This is quite a change from more historical pinch points, which were dependent on unique technology, access to resources, or scale advantages.

In the emerging world, clean air, energy and water remain a scarcity, and providers are well represented in our portfolios. Much of this cleaner energy demand is being met by liquefied natural gas (LNG) imports from the vast, unconventional supplies in the US; this is itself producing pinch points in storage, transport and even labour in many of the ‘Shale’ regions and associated export terminals.

“ We will continue to test our companies for a reasonable level of tax paid relative to competitors alongside activist programmes to improve accounting and tax transparency”

The end of the supply chain still has pricing power, but ‘middle man’ margins are being eroded

PPP – Intermediate materials, supplied and components PPI – final demand

Source: Macrobond

15

10

5

0

-5

-10

Nov 10 May 12 Nov 13 May 15

Access to high quality, central and environmentally friendly office accommodation still remains a pinch point for businesses in Asia – these are key positions in our global real estate funds.

Rising concern over income inequality is clearly a key issue for politicians in both emerging and developing economies – key pinch points here are access to education and healthcare. We continue to research the former while our funds are strongly represented in private healthcare services and logistics (including blood supply and dialysis providers).

Can government pinch points damage market returns?Governments would probably concur that tax revenues are among their most alarming pinch points, with only four out of 42 countries surveyed by the Economist running budget surpluses (Germany, Norway, Switzerland and South Korea) after several years of economic recovery. Expect this to be reflected in rising corporate taxation globally, as cross-border initiatives gather momentum led by the OECD drive to limit Base Erosion and Profit Sharing (BEPS). Poor tax compliance remains, in our view, a particular risk for global corporations. We will continue to test our companies for a reasonable level of tax paid relative to competitors alongside activist programmes to improve accounting and tax transparency.

In summary, bottlenecks remain in the global economy, but not where investors might have traditionally found them. Pinch points in energy, materials and mining have broadly given way to supply constraints in sovereign quality, media, health, education, and the environment. We will continue to hunt for equity winners here, and as the world fixates on the daily drama of Greek default, we will use more volatile markets to accumulate positions steadily as long-term stores of shareholder value.

Imbalances act like global pinch points on the global supply chain

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Harnessing pinch pointsThe global reach of bottlenecks and gluts

As ubiquitous technologies, free flowing capital and trade stitch together a $75 trillion global economy, the world today resembles a patchwork quilt. At its core are companies feverishly crisscrossing national borders, bringing together diverse economies and synchronising markets.

Across this uneven terrain, markets are starting to rise and fall as one. Shifts in demand or supply in one part of the world are rippling across national borders, becoming magnified and amplified. And as they do so, idiosyncratic shocks in one local market have the potential to be augmented and develop into substantial imbalances.

In a converging world, large imbalances can create scarcity value, in turn awarding pricing power to suppliers. These imbalances act like pinch points on the global supply chain, and companies that place themselves at the epicentre of pinch points can enjoy substantial market power. While market forces will constantly seek to restore equilibrium, through the pricing mechanisms that encourage innovation and other supply solutions, pinch points can persist for extended periods.

So, how are pinch points created?

The China squeezePinch points often arise from shifts in demand that need long investment cycles to restore balance. Perhaps the simplest illustration of such a pinch point was the market squeeze that accompanied China’s rapid industrialisation in the early 2000s, when China’s infrastructure-led growth model created a surge in the demand for commodities. As China’s hunger for commodities fed the growth of commodity-producing economies, which themselves had commodity intensive growth models, the initial increase in demand from China magnified across the world economy.

Moreover, the sudden surge in demand led to widespread imbalances across multiple markets. Pinch points emerged – from grain silos to oil pipelines, to tankers to copper smelters – and endured for almost a decade. During this time, incumbents reaped massive rewards from the relative scarcity value for their products. In due course, as supply responses through investment and innovation eventually restored balance, the pinch points started to fade.

Gluts and bottlenecksPinch points can weaken rapidly, leaving a glut in their wake. The downshift in China’s growth model had a dramatic impact on commodity markets. Just as Chinese demand for commodities fuelled the same in other emerging economies, as the China-centric pinch point has faded, it has left behind a glut in many commodity markets. These markets are now suffering from substantial oversupply.

Subitha SubramaniamChief Economist

“ Idiosyncratic shocks in one local market have the potential to be augmented and develop into substantial imbalances”

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Though not intuitive, glut in itself can also be a source of bottlenecks. In the US, although the gas suppliers are straining under an abundance problem, there is an acute shortage of pipelines to move the gas around the country and out of the continent (see Max Burn’s article on page 14). Similar pinch points are emerging in other commodity markets, where storage and transportation of excess supply is emerging as a key bottleneck.

The big data pinchPinch points can also surface from big shifts in demand patterns. The best example here is the exponential growth in virtual consumption and data volumes. The ongoing shift in demand here is mind boggling – business data is doubling every 1.2 years; data production is expected to be 44 times greater in 2020 than it was in 2010, by which time more than a third of all data is expected to reside in or pass through the Cloud. Data is also changing shape. More than 70% of the digital universe is generated by individuals, with a growing proportion coming from unstructured sources such as videos, photos and social media.

With such explosive growth in data, and particularly unstructured data, the notion of Big Data has become integral to almost every business. This is the idea that society can extract value from large data sets to improve outcomes in industries as diverse as astrophysics and genomics, retailing and human resources. Businesses today are racing to harness this data, and as they rush to do so, pinch points are emerging across the data complex – from storage and privacy, to security and analytics. While supply solutions are rapidly emerging to meet growth in data volumes, it is unlikely they will bring the market into balance in the near and foreseeable future.

The government deluge Pinch points sometimes arise as a result of government distortions or regulation. Perhaps, the best illustration of this is the scarcity of ‘safe yield’ in today’s world. Financial repression, which has seen central banks purchase some US$8 trillion of bonds and cut policy rates to negative levels, has pushed yields far below fair value, leading to an overwhelming shortage of liquid, safe assets. This scarcity has been exacerbated by persistent downgradings of sovereign debt. The result is an acute shortage of liquid, yielding AAA-graded assets.

Responding to this scarcity, yields for ten year Swiss bonds have fallen to zero and German bunds are struggling to find a natural resting-point. Further afield, quasi-AAA assets are also feeling the pinch. London’s prime real estate market is emerging as a liquid, safe-haven in a world hungry for safety, hungry for yield. More broadly, real estate in some key global cities is now considered a safe alternative.

Government regulations can also create pinch points. This is particularly true in the markets for utilities and infrastructure, where scale economics require consolidated market structures. Across the world, these markets are becoming

more oligopolistic in nature. In some extreme cases, such as the provision of the grid network for electricity and water supply in the UK, the market is monopolistic. In such markets, regulators often need to guarantee ‘abnormal returns’ to encourage business to undertake the needed investment for the future. Some governments, like the US states, provide lucrative subsidies to solar companies to encourage the installation of a residential solar power network. Across the world, suppliers to such markets are starting to have demonstrable market power, enjoying lucrative government incentives.

The emerging thirstCritical bottlenecks are developing in emerging markets. In large part, this is because the pace of convergence of emerging markets towards developed country levels appears to be picking up. No doubt, this is being driven by technological change that is enabling poorer countries to leapfrog inefficient and expensive business models. But even as business models and consumer demand patterns converge to developed country levels, infrastructure development has been woefully inadequate. Across the emerging world, roads, bridges, highways, power plants, grids, communication systems, ports, railways airports, schools, healthcare, housing water and sewage are emerging as key bottlenecks. As living standards rise, not only does the demand for such services rise rapidly, but it is also relatively inelastic. These markets are likely to be key pinch points for decades to come.

Today, as economies increasingly rise and fall as one, the potential for markets to become unbalanced has increased. As the world economy continues to converge, the potential for pinch points to award market power to suppliers will emerge as a unique advantage. Pinch points can materialise as a result of dramatic shifts in demand, long investment cycles, gluts, government distortions and regulation and economic convergence itself.

In the articles ahead, our global thematic analysts uncover some of the investible opportunities of pinch points across the globe, from the infrastructure surrounding liquid natural gas, to demand in global real estate, and from market strength in the used car market to the inner workings of the Cloud.

“ Critical bottlenecks are developing in emerging markets. In large part, this is because the pace of convergence of emerging markets towards developed country levels appears to be picking up”

Every savvy consumer knows the value of buying a used car. The moment a new vehicle leaves the showroom, its value can fall by as much as 30%. Consumers willing to forego the prestige of the latest number plate are often able to pick up a bargain. By the same token, nimble investors can also uncover significant value in the used car market.

Follow my leader: early entrants have the advantageUsed auto sales companies can benefit hugely from ‘network effects’: the effect that one user of a good/service has on its value to other people. This is particularly evident in vehicle marketing, whereby consumers or dealers looking to buy a vehicle are most attracted by those companies offering the largest inventory/range of options. Similarly, those looking to sell a vehicle are drawn to businesses able to supply a superior number of potential buyers.

Taken together, these two factors create a virtuous, ever-strengthening cycle and one which is tough for any competitor to break. Furthermore, as the used car market is unregulated, this offers an obvious advantage to those firms making up the industry’s ‘first movers’. Put simply, these early entrants to the market can gain an unassailable advantage, resulting in monopolistic levels of market share.

Such a dominant market position in a key part of this value chain creates a ‘pinch point’ within the sector, with dominant companies able to take advantage through consistent pricing power, superior market data and volumes growing in line with the market.

Pinch points in practiceViews from our Global Thematic Analysts

Finding the winners: where should global investors search?Auto Trader is a compelling investment in this sector, as the UK’s largest classified car advertising website. From its 1975 magazine origins, the company has transitioned to dominate the UK’s online classified car advertising market. Its website commands four times the internet traffic and twice the listings of its nearest competitor. This market dominance has allowed Auto Trader to increase its listing prices continually (currently twice that of the competition), and gather significant unique and valuable market data which it uses to strengthen its position.

Crucially, Auto Trader does not own or sell vehicles, it simply acts as an advertising platform for the 9,905 vehicle dealers in the UK. As the main beneficiary of higher industry volumes (as a large number of vehicle finance contracts end) Auto Trader is largely the ‘only show in town’ for dealers listing higher levels of inventory.

Global investors generally have a number of ways to access a trend. In this instance, though, we believe one of the best options is closer to home.

Driving the marketUncovering investment opportunities in the used car industry

George UllsteinGlobal Thematic Analyst

Internet traffic and stock levels

Stock or cars listed (000s)

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Auto Trader

PistonHeads

eBay Motors

Motors.co.uk

Gumtree

RAC

Exchange & Mart

12 | House Report

Plumbing in the CloudAccessing networks and cloud computing infrastructure

The technology sector is currently witnessing acute supply/demand imbalances in the internet infrastructure space. In particular, this is impacting markets for colocation data centre capacity and cloud computing access.

Data centre dominance: TelecityOver 90% of UK internet traffic passes through the docklands in east London via a handful of ‘network hub’ data centres, venues where network operators from BT to Verizon connect to one another and provide the ‘connectivity’ that quite literally creates the internet. Whenever one sends an email, watches a video or downloads an app over the internet, the traffic is more than likely being routed through East London as your device requests the information from servers across the world.

This is an industry characterised by tightly constrained supply. Building a network hub from scratch is something of a chicken and egg problem: the attraction to customers is the presence of a well-developed eco-system with hundreds of other networks to connect with; having customers creates a virtuous circle of more customers. Once they have plugged into 30 other networks high switching costs make it hard for customers to leave and multiple secular demand drivers i.e. video, mobile data, cloud computing, and big data continue to increase the demand for connectivity. Taken together, you have an unusually strong pricing power dynamic, marked by abundant demand funnelled through constrained supply. One of our current thematic holdings is UK-listed Telecity, an operator of ‘network hub’ data centres across Europe and a key beneficiary of this trend.

AWS: Amazon’s hidden gemIn the cloud computing sector, significant imbalances exist in the infrastructure space (Infrastructure-as-a-service Space – IaaS, for short). These imbalances are re-defining the way corporations use their IT equipment.

In the past, enterprise would purchase onsite IT solutions, buying hundreds of millions of dollars of computers with gigantic pre-installed software packages providing for every business function. Customers were locked into long-term, expensive contracts – lucrative for the companies selling the services like IBM, HP and Cisco, but costly for the customer.

This is changing. IaaS means companies do not need to buy any equipment – they let someone else buy the hardware, then connect to it remotely via the internet. With up to an 80% reduction in the total cost of ownership, hundreds of millions of dollars of capital expenditure becomes single-digit millions of operating expenditure.

Cloud infrastructure is clearly a scale game (it has to be, to deliver such compelling economics) and Amazon Web Services (AWS) is the largest player in town. With 5x the capacity of the rest of the infrastructure market combined, AWS is well positioned to supply the avalanche of demand, as $600bn of enterprise IT spend shifts away from traditional IT vendors to the Cloud. AWS $5bn revenues can credibly hit $40bn within ten years, potentially outgrowing the $85bn retail business over time.

While the drivers of supply/demand imbalances in the internet infrastructure place are many, there is a clear common denominator: enormous demand for a service in an industry with high barriers to entry. Companies exhibiting these dynamics – like Telecity and Amazon – could represent convincing long-term opportunities for thematic investors.

Josh Sambrook-SmithGlobal Thematic Analyst

“ While the drivers of supply/demand imbalances in the internet infrastructure place are many, there is a clear common denominator: enormous demand for a service in an industry with high barriers to entry”

Building a network hub from scratch is something of a chicken and egg problem

A journey through space and timeUnderstanding pinch points in global property markets

How does the concept of a pinch point relate to real estate? A pinch point – in its simplest form – can relate to an inventory level dynamic, coupled with a major shift of pricing power somewhere along the supply chain. In the case of real estate, available space and the time delay in creating new property are the main sources of pinch points.

Anybody home? Tipping points in supply and demandLocal vacancy levels are crucial in measuring the supply and demand for real estate. Although the precise level varies by city, each locality will have its own vacancy level tipping point. If the vacancy level is above this point, tenants hold the stronger position; if it falls below, rents rise and the balance of power shifts to the landlord. Tokyo’s tipping point, for example, is typically viewed to be 5% in the official overall numbers, which implies an even lower vacancy level in modern Grade A space. Indeed, central Tokyo’s vacancy rate is currently very close to this figure, and declining, which is good news for the local office market.

London, meanwhile, seems to have a wider range of tipping points, but the principle still applies. The chart shows the link in London between vacancy levels and rental growth, and the trend for low vacancy periods linked to rising rents is evident. We find in most markets that there is a lag between vacancy rates changing direction from rising to falling, before rents start to rise.

Time is of the essence: lengthening the property cycle Time (and lack of it) forms another crucial pinch point for real estate. In most markets, it typically takes several years to acquire a site, obtain planning permission, and commence and carry out construction. As a result, it could take upwards of 3-4 years to bring a new asset to the market.

This time lag allows a significant divergence between supply and demand to develop. Furthermore, potential government policy restrictions (such as zoning or green belts) further contribute to the emergence of a very inefficient market place.

With a lull in activity caused by the financial crisis, only now are we getting to the stage in most markets where companies are comfortable undertaking speculative constructions. Even then this is generally only in prime locations. This has a created a slower than expected supply pipeline in most markets which could lengthen the current property cycle.

Put simply, pinch points in property are inevitable on the road ahead. Savvy investors could also look beyond the property sector at construction and transport bottlenecks for compelling ways to take advantage of this global opportunity.

Geoffrey ArmstrongReal Estate Analyst

London City rents versus vacancies 1984-2015

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2015Q1

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Source: CBRE and Boaml

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Liquid gold… or full of hot air?Finding long-term investment opportunities in liquefied natural gas

Much of the energy discussion over the past year has focused on the wave of unconventional or ‘fracked’ oil coming out of North America. However, liquefied natural gas (LNG) is also developing into a burgeoning thematic issue, with many potential pinch points.

Since 2010, improved fracking techniques have driven markedly higher gas reserve estimates in the US. As a result, upwards of around $50 billion of capital has been committed to constructing LNG terminals to export this gas globally to customers in Asia. The US is not the only source of gas – current forecasts call for global LNG exports to more than double from around 250 million tons (MT) per annum to more than 500 MT per annum by 2020. This massive uptick in supply will create significant pinch points around the globe, with long-term opportunities as well as risks for investors.

A budding sector with a growing infrastructureWith such a massive amount of gas coming to the market, more LNG tankers will be required to transport gas to their customers. We currently own Gaztransport Et Technigas (GTT), which receives royalties from the preferred liner technology for tankers. GTT maintains a dominant market share (90%) and has multi-year revenue visibility. Moreover, over the coming years, LNG will likely be used as a bunker

fuel to power ships, which represents a significant long-term opportunity for GTT, as these LNG-powered ships would require on-board storage using GTT tank liners.

Furthermore, the LNG market is nascent – the vast majority of contracts are long-term in nature and there is very little spot (real time market price) activity. With LNG volumes growing dramatically, though, the emergence of a spot market for LNG will generate significant trading opportunities as well as the need for more tankers to ship the fuel to disparate customers/storage.

We are also looking at pipeline or ‘midstream’ energy companies in North America as potential thematic investment candidates. One such example is Kinder Morgan, which alone has identified nearly $25 billion of growth opportunities over the next five years, driven by the burgeoning gas supply in North America.

Pricing pressures and an elusive workforce The primary risk from our perspective is to the underlying commodity price itself – excess supply later in the decade may put downward pressure on prices. With the potential for large volumes of non-contracted gas available later this decade, LNG prices may decline.

Another pinch point relates to labour costs to build out the LNG infrastructure. Many of these LNG terminals are being constructed in less populated areas of the US and Canada, where the labour pool is lacking. This in turn could drive up costs for the facilities at a time when the underlying LNG price could decline. Many facilities built in Australia a few years back suffered severe cost overruns partly because of high labour costs, and we fear that this labour pinch point could crimp future terminal development in North America.

We continue to view LNG as a cleaner option to coal-fired power, but one not without its risks. The recent advances in drilling techniques in North America have clearly raised the risk of a supply-driven pinch point that could negatively impact long-term prices for the underlying commodity. However, looking out beyond the ten year horizon, the sheer scale of supply should drive the adoption of LNG as a preferred fuel.

Max BurnsGlobal Thematic Analyst

Three year hiatus in growth in LNG

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E

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Source: BP Statistical Review, Redburn

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Three strikes and you’re inCelebrating the third anniversary of our Fund of Funds range

Lucy WalkerFund Manager

Since the financial crisis, investors have witnessed an extended period of zero interest rates, as well as liquidity injections around the globe.

It is perhaps not surprising, then, that over the three years since the launch of the Sarasin Fund of Funds range, equities have been the asset class of choice. This is the ultimate consequence of the financial repression agenda: investors are forced into ever riskier assets to reinvigorate the economy. Our Fund of Funds have benefited from this environment, with the Global Equity Fund of Funds returning over 50% since launch.

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“ The central bank’s Federal Open Market Committee is forecasting a median interest rate of 3.75%, albeit with a wide range”

Further UK/US and Europe/Japan divergence will be interesting, and the path is unlikely to be smooth. Having said that, cognisant of the inescapable support for risk assets in a world of financial repression, we retain a modest overweight to equities, along with higher levels of cash. This is reflective of current valuations, and allows us to be nimble as and when we see the environment changing.

Where are the investment opportunities ahead?

1. Japan’s Shareholder Spring For the past three years, the Japanese economy has been dominated by a weakening yen, with the currency depreciating over 50% against the dollar since Prime Minister Shinzo Abe’s election. However, we believe Japan remains exciting for another reason: its improving corporate governance. This so called ‘third arrow’ of Abenomics has been slower to come to fruition, but there is no doubt that Japanese companies are starting to make changes for the better. The past few months have borne witness to a number of interesting developments, such as the creation of an index focusing only on companies with a high return on equity, which has proved a trigger to encourage companies to change. In May, an insurance company holding over $30 billion in Japanese equities announced that the companies in which it invests must have outside directors as well as shareholder return targets.

These are all steps in the right direction, giving us conviction that much-needed change is coming to Japan. Our Fund of Funds invest in Third Point Offshore, an event-driven hedge fund currently leveraging these opportunities, particularly via activist positions in Japanese companies such as Fanuc and IHI.

2. India’s ongoing reform agenda When Narendra Modi was elected as India’s Prime Minister in May last year, markets were exuberant. 12 months on his halo is fading, but we still believe substantial opportunities remain. By 2030, India is set to become the world’s third largest economy and so cannot be ignored. Perhaps the burgeoning economy’s most favourable aspect is its demographic outlook – in 2020 the average age in India will be just 26, compared to 36 in China and 46 in Japan.

Three years in, what can we expect of the next three?We expect global growth to remain in the sub-4% range, with the IMF forecasting 3.8% in 2016. Much of this, though, depends on the continuation of accommodative monetary policy in advanced economies, and of course inflation expectations, which have so far remained stubbornly low. Pre-crisis, US interest rates peaked at 5.25%, but today expectations of long-term rates are very different. The central bank’s Federal Open Market Committee (FOMC) is forecasting a median rate of 3.75%, albeit with a wide range. Even those who set the interest rates, are not particularly confident as to where they will end up.

We cannot discuss our outlook for the years ahead without mentioning geopolitics, with the threat of ISIS always looming and the conflict between Russia and Ukraine rumbling on. In Greece, the announcement of a surprise referendum has created further uncertainty, and while a so-called Grexit is not our base case, the risk remains. This would have enormous ramifications for the euro zone, as a Greek exit would almost certainly result in a break-up of the currency union. Spanish elections in December will also be one to watch, giving voters the opportunity to follow Greece in electing an extremist party. Outside of Europe there are other elections to watch, with Hilary Clinton a potential presidential candidate in the US.

What does this global backdrop mean for fund of fund investors?At a time when equities across the world are trading at or close to all-time highs, and against a backdrop of ever-present geopolitical risks, it would be a sensible conclusion to avoid the asset class altogether. But we must remember the D-word: deflation. Central bankers are terrified of it, and a lack of inflation in advanced economies means they are continuing with loose monetary policy unabashed, almost seven years after the start of the financial crisis.

It has been a surprise over the past few years to see unemployment in the UK and US fall further and further, without any sign of the usual accompanying tick up in inflation. Having said that, May offered the strongest growth in average weekly pay in the UK since 2009, and retail sales growth has also been improving. The same story holds true for the US, suggesting that both the US Federal Reserve and the Bank of England will have to act soon.

House Report | 17

A family of funds to meet a range of client preferences

Some of our most compelling Fund of Funds investments so far

Invesco Perpetual Japan Sterling Hedged

For decades Japan, has been plagued by exactly the sort of deflation the Western world wants to avoid and the consensus has been that Japanese companies do not care about their shareholders. We became increasingly positive on the outlook for Japan prior to the election of Prime Minister Shinzo Abe (late 2012) owing to his strong reflationary rhetoric, which would ultimately mean a weakening of the yen. To date he has already been the longest serving Prime Minister for a decade, proving that his widely publicised ‘Abenomics’ has ultimately been a success. At the time, Invesco was invested in a number of Japanese exporters, set to benefit from the depreciating yen, a position we compounded by hedging the currency back to sterling.

Ardevora UK Equity

Besides adding value, Ardevora also offers diversification through its relatively low correlation to other funds in our portfolios. The team at Ardevora believes investor anxiety plays an important role in moving stock prices, and that the anticipation of a negative event often upset markets more than the event itself. This view, ultimately stemming from behavioural finance, has resulted in a rather different portfolio to their competitors in the UK equity universe. The fund is also structured differently, with a long/short ratio of 150/50, meaning it can benefit from the team’s expertise through exposure to short positions.

Low correlation

Third Point Offshore

This investment trust has been owned since the Fund of Funds range launched over three years ago, and at that point it traded on a very attractive discount of 18%. Since then, the portfolio has returned almost 50%, but we have also seen the discount narrow, resulting in total returns of closer to 100%. Whilst the discount is less attractive today, it remains the only way to access Third Point’s unique investment style, as the US fund is closed to new investment. The team has a talent for identifying opportunities and – even better – many of these are often not reflected elsewhere within our portfolios.

Unique style

Appreciating depreciation

Modi’s key aim is to make India an easier place to do business. This cannot be achieved overnight, but he is gradually making the changes required. The recent market correction was a healthy one, and for investors with a long-term view, India remains a fantastic opportunity. The Sarasin Fund of Funds invest in Ocean Dial Gateway to India, a concentrated fund managed in Mumbai focusing on companies set to benefit from the expected structural reform.

3. Taking a considered approach to risk and opportunity Investing in an uncertain environment makes it all the more important to remain nimble, but also to understand properly the risks embedded in portfolios. We prefer to spend our ‘risk budget’ on specific opportunities such as those mentioned above, where we believe structural change will improve both company earnings and market perceptions.

40%Sarasin Fund of Funds –

Global Strategic Growth

60%Sarasin Fund of Funds –

Global Diversified Growth

80%Sarasin Fund of Funds –

Global Growth

100%Sarasin Fund of Funds –

Global Equity

Pote

ntia

l Ret

urn

Risk

18 | House Report

To invest in our future, we must be activeAssessing the move into passively managed funds

Natasha Landell-MillsHead of Environmental, Social and Governance (ESG) Research

Passive investment is unthinking, rear-view mirror investing

House Report | 19

Vanguard – one of the world’s largest passive investment managers – announced recently that it had received new inflows into its US funds in 2014 of $216bn, a remarkable 61% more than in 2013. A decade ago passive funds made up just 6% of global assets invested in public equity. In 2014 the figure was 26%. The shift out of actively managed funds into passive investment strategies is unprecedented, and – faced with this ownership transformation – it is vital we stand back and ask whether the public interest is being served.

What is the social purpose of investment management?To answer this critical question, first we must be clear about what the social purpose of investment management is. The primary function of investment is to allocate capital amongst competing uses. Done properly, economic growth will be enhanced as those activities that generate the highest returns attract the most investment. This is, in essence, Adam Smith’s invisible hand at work.

But passive managers do not perform this core function. They allocate capital according to companies’ weights in a market index, not based on companies’ outlooks for value creation. Consequently, passive investment is unthinking, rear-view mirror investing. In the most common index tracking strategies, the largest companies in the index are awarded the largest share of new capital flows. Smaller companies that may have the potential to create more value for customers, shareholders and society receive less.

Understanding the risks of passive dominanceFinancial history is littered with examples of market-leading companies taking a wrong turn and thereby ensuring their own demise. Kodak, once the unquestioned leader in film-based photography, was decimated by advances in digital photography. Their market capitalisation went from $30bn in 1997 to less than $145mn in 2012, when they filed for Chapter 11 bankruptcy. They simply failed to react nimbly enough to the digital revolution. But even as the share price declined, passive managers continued to buy the shares. Today, legitimate questions are being asked as to whether further investment in fossil fuels could end up being ‘stranded’, as clean energy replaces coal, oil and eventually gas as the world’s primary source of energy.

“ Taken to the extreme, if all new funds were passively invested and outflows negligible, then share prices would just keep rising without differentiation, reflecting the steady flow of funds”

Not only do passive funds not form a view of the future, they keep buying, even where valuations are totally disconnected from underlying fundamentals. Taken to the extreme, if all new funds were passively invested and outflows negligible, then share prices would just keep rising without differentiation, reflecting the steady flow of funds. In this scenario markets would systematically misprice risks and opportunities, with no correction mechanism.

Tackling the inefficient allocation of capitalFortunately, we are not in this extreme world. But there is already a problem of ‘momentum’ in stock markets, where upward or downward movements persist for long periods, and well beyond what underlying value implies is reasonable. The larger the share of funds being invested according to passive strategies, the more likely we are to experience bubbles and sharp reversals in markets.

This matters to all of us. Inefficient capital allocation results in waste, impinges on economic growth, and – ultimately – lowers living standards versus what could otherwise be achieved. Market instability can feed risk aversion in the real economy and lower long-term investment.

These macroeconomic implications of a wholesale move to passive management are not obviously being considered by savers and large asset owners. The focus is instead on excessive fees charged by active managers.

Are active managers partly responsible?Here the active management industry has a case to answer. Not only are high fees corrosive for savers, they are often undeserved. Too frequently active managers fail to deliver sustained returns that cover their own costs and beat the market index (which itself reflects the mean performance). To make matters worse, too many in the active industry are guilty of short-termism, benchmark hugging and momentum investing, thereby exacerbating the problem of inefficient capital allocation highlighted above. Finally, the widespread failure of active managers to fulfil their ownership responsibilities (monitoring company performance and holding executives to account) has been rightly identified as a key faultline behind the financial crisis. Far more needs to be done to instil a long-term fundamentals-focused investment and stewardship mind-set.

But the failings of some active managers today should not blind us to a critical question that needs to be addressed: at what point does the societal cost from a large-scale shift towards low-cost passive strategies – in the form of more volatile and less efficient system of capital allocation – outweigh the gains? This too demands a proper debate.

20 | House Report

Charity FocusActive or passive? Not an easy decision

Decision time: the active versus passive debate has resurfaced after a period of underperformance

House Report | 21

Richard MaitlandHead of Charities

The majority of charity portfolios are actively managed. Why is this, and should more trustees adopt a passive approach? As our Head of ESG Research Natasha Landell- Mills noted in the previous article, the ‘active versus passive’ debate has re-surfaced after a period of under-performance from many active equity managers.

The decision is not as simple as it first appears. We have broken down the investment services required by a charity into three parts: strategy, implementation and administration. We consider each from both an ‘active’ and ‘passive’ point of view, explaining why the theoretical appeal of index-tracking has not proved as attractive in practice for charities.

Strategy This is probably the most important arrow in an active manager’s quiver, as most active ‘full service’ managers will help trustees turn a charity’s objectives into a plausible investment policy and strategic asset allocation. All investors have risks to mitigate. Are they trying to preserve capital in absolute or ‘real’ terms? Do they need to produce a specified level of income or invest in an ethically sensitive way? Perhaps capital disbursements need to be planned over multiple years.

The strategic skills that an experienced charity investment manager brings to a trustee board are extremely valuable: weighing up assets and liabilities; considering a wide range of individual asset classes; assessing plausible risk and return expectations based on historic return trends and current markets. The aim is to design a robust investment policy that matches the charity’s particular requirements, is robust under a wide range of scenarios and finds the most appropriate combination of asset classes to maximise the risk-adjusted return.

Strategy is not to be looked at every 5-7 years when a manager is reviewed. A good manager will be proactive, regularly monitoring a charity’s strategic asset allocation and whether this needs to change. One only has to look at the WM Charity Survey to see how asset

“ The strategic skills that an experienced charity investment manager brings to a trustee board are extremely valuable”

Robert BoddingtonChief Client Officer

Absolute and real returns of quartile managers in WM universe

29 Years (1986–2014)

20 Years (1995–2014)

10 Years (2005–2014)

5 Years (2010–2014)

25th 11.8 10.0 10.1 10.4Median 10.0 8.4 8.6 9.375th 7.8 6.4 6.6 7.9

Inflation (RPI) 3.5 2.7 2.9 2.4

25th 8.4 7.1 7.0 7.0Median 6.5 5.5 5.6 5.975th 4.3 3.5 3.5 4.5

Absolute Total Returns p.a.

Real Total Returns p.a.

Source: WM Company

allocation has evolved over time. New asset classes have been introduced and the balance between some of the core asset classes has altered appreciably. A passive approach to asset allocation can mean long-term strategy is ‘cast in stone’, which does not easily accommodate the evolution required.

Conclusions: There are few (if any) passive investment managers who offer a comprehensive strategic service for charities. On that basis, trustees who choose the passive route will probably employ an independent investment consultant. From a strategic perspective, the benefits of appointing an active charity specialist can hold significant value. The costs one pays are typically not just covering the costs of active day-to-day investment management.

ImplementationActive investment managers try to add value in a multitude of ways, which can broadly be split between tactical asset allocation decisions and active stock selection. In this article, we will primarily focus on stock selection.

Although the results of active investment can be quite significant in individual years (over or under performance of an index or benchmark by perhaps 3-5%), over periods of five years or longer, it would be typical to target outperformance of 1-2%. Sadly, the data would suggest this is an aspiration! The majority of fund managers do not outperform after fees and certainly not by more than 1% per annum, a level of skill that is perhaps possessed by less than 15% of the market.

This is why index-tracking funds appeal: achieving performance in-line with a benchmark or index is quite an achievement.

That said, there are moments when active fund managers do perform: whilst the majority of UK equity managers under-performed the FTSE All Share index over the last 12 months, the majority out-performed over the last three years.* Moreover, charities generally pay lower fees than retail investors, so charities adopting an active approach to stock selection have a better chance of achieving the premium returns they seek.

At this point, the case for passive management is powerful. However, there are four further problems that those seeking passive investment need to consider.

1. Some asset classes and sub-sectors are easier to track than others: most equity and bond markets can be tracked easily and cheaply. However, achieving exposure to property and alternative assets through trackers is much harder. This can present trustees with problems given that allocations to these asset classes are often recommended to be between 10% and 25% of long-term endowment funds.

2. There are two areas specific to charities that can make a passive approach difficult to implement: income targets and ethical restrictions. Although recent legislation means that most charities can adopt a total return approach, many charities’ budgets rely on higher levels of income than naturally flows from their investments. This income tilt can, in part, be achieved through asset allocation, but often a portfolio’s equities need to be structured to produce a higher level of income than an index naturally provides.

3. For those charities whose ethical policy demands the avoidance of specific sectors or companies, index trackers will tend to fail the levels of transparency and adherence now expected of UK charities. Interestingly, whilst it is perfectly feasible to construct passive funds to incorporate ethical requirements, in reality, the choice is limited.

4. There is the often forgotten issue of which index to track. In investment, risk is typically transferred, rather than erased. The trick is to know both the risks you are erasing and which new ones you will add. Picking indices is an ‘active’ decision. For example, the difference in performance between two global equity indices, the MSCI World Index and the FTSE All World Index was 16.7% over the ten years to 30th June 2015. Which will perform in the future?

Conclusion: At first glance, the performance after costs of many active fund managers makes index-tracking appealing. In practice, the decision is less simple. If it were just about stock selection, then we would expect to see more charities investing passively, but in the real world, the decision is not so clear-cut.

AdministrationWhile reasonably straightforward, reporting and administration is critical and, in our experience, many charity executives and trustees come to rely heavily on the supporting services provided by their investment manager. Active management normally includes the safe custody of the charity’s assets together with the preparation of regular reports to monitor progress as well as a number of meetings throughout the year.

“ While reasonably straightforward, reporting and administration is critical and, in our experience, many charity executives and trustees come to rely heavily on the supporting services provided by their investment manager”

22 | House Report

The costs of passive management are very appealing. They are lower than active management because of the simplicity. However, by taking a passive route, much of the onus switches to the trustees and executive, which can be burdensome. For smaller charities, where there are multiple trustees and signatories for example, signing up to a trading platform can be as challenging as opening a bank account.

Moreover, the low revenues earned by passive managers mean that they are typically unable to provide other services such as trustee training, investment seminars, market commentary, income modelling and return projections. Perhaps most importantly, with active managers, trustees have a human contact with whom they can discuss the charity’s investments and wider issues within the charity sector. First class administration and service is a must and without it, the burden placed on trustees increases considerably.

Conclusions: Low costs typically come with low levels of client service.

Has active management worked for charities?Using the WM Charity Survey as a proxy, it is clear that the average actively managed charity has achieved excellent absolute returns over the last 30 years or so. The annualised weighted average return is 6.5% per annum above inflation.** The return is before most costs but, even adjusting for these, the return is likely to have met most trustees’ aspirations.

Interestingly, the 75th percentile charity achieved a real return of 4.3% per annum: even those with sub-par returns have achieved very reasonable results. For those lucky enough to have achieved a better than average result, the 25th percentile fund in the survey achieved 8.4% after inflation per annum – so the value added by the better active managers has been considerable and the aspiration that one’s own charity can achieve results like this are clearly why so many investors try to find the best active managers.

The conundrum for those considering the passive approach is working out how much of these good and bad returns was the result of the different strategic asset allocations of the portfolios, as opposed to the tactical asset allocation and active stock selection decisions? Where would a passive approach have appeared? One cannot assume it would have produced the average return. A fund manager who adopted a good strategy could still have produced top quartile results even if their active stock selection was weak. Alternatively, a charity with passive stock selection could perform poorly if the asset classes were inadequately mixed together.

On balance (and we probably would say this as we are unashamedly active managers with strong strategic underpinnings!) we think the overall and comprehensive package that can be provided by a ‘full service’ active manager remains the best option for most charities.

However, it would be wrong to dismiss the passive approach. What’s more, active managers who consistently deliver poor returns and fail to deliver any strategic or administrative value will find it hard to compete with cheap, passive alternatives.

One final thought: active doesn’t have to be wildly active. Whether it be at the stock selection or asset allocation level, trustees can dictate the level of active risk assumed within the portfolio by applying operational risk controls such as asset allocation operating ranges or restrictions on the ‘active money’ both of which control the potential deviation from the index. Maybe that is the best of both worlds…

Which global equity market should you track?10-Year Index Total Returns to 30th June 2015

MSCI All Countries World ex-UK FTSE All World ex-UK Index

75

50

25

0

150

125

100

%

114.4

131.1

MSCI All Countries World ex-UK Index FTSE All World ex-UK Index

Source: MSCI and FTSE

House Report | 23

Sources: * Morningstar – IA UK Companies Sector – 1 and 3 year performance to 31st March 2015 versus FTSE All Share. ** Sarasin & Partners LLP

24 | House Report

London Charity Investment Training by CFG and Sarasin & Partners

Foundation Investment Training – Understanding your investment responsibilities

3 S E P T E M B E R 8 D E C E M B E R

In conjunction with the Charity Finance Group (CFG) we offer an intensive half-day seminar designed to give participants a thorough understanding of the fundamental principles of charity investment, as well as their responsibilities as a trustee or charity manager.

Advanced Investment Training –Understanding your investment responsibilities

5 N O V E M B E R

Events

Conferences and EventsSarasin & Partners’ Charities team are sponsoring and are involved in the conferences and events listed below. We hope to see you there, so please do contact John Handford should you wish to attend or require further information: E: john.handford@sarasin.co.uk T: 020 7038 7268

1 5 J U LY ACEVO Senior Leaders Event – Juxon House, London

3 S E P T E M B E R Denville Hall Reception – Juxon House, London

8 S E P T E M B E R Intermediaries Garden Party – Juxon House, London

L AT E S E P T E M B E R Charity Times ESG Round Table – London, location TBC

A natural progression from the Foundation Seminar, this session aims to provide finance staff with a deeper understanding of fund management so they can confidently take responsibility for investments.

Pricing and BookingDelegates attending the courses will be provided with a CPD Certificate of Attendance for 2.5 hours and can record their attendance towards their annual CPD requirements for their professional body, institute, organisation or employer.

Prices for the CFG London Courses:• CFG Member: £51• CFG Member Colleague: £61• Non CFG Member: £102

Sarasin & Partners’ clients will be fully subsidised for these courses.

If you would like to book or for more information please contact CFG on 0845 345 3192 or visit www.cfg.org.uk/events

Charity autumn events in Juxon House, Dates to be confirmed

Themed Charity Forum LunchesLikely topics:• Fossil Fuels• Social Impact, where are we now?

Themed Training EveningsTraining topics may include:• The Active Management of

Alternatives with a Hedge Fund guest speaker

• Permanently Endowed Total Return

1 O C T O B E R Charity Investors Group Meeting – Juxon House, London

6 - 7 O C T O B E R Association of Provincial Bursars Conference – Hoddesdon, Herts

7 O C T O B E R Charity Times Awards – Park Plaza Westminster Bridge, London

8 O C T O B E R Charity Finance Conference – 155 Bishopsgate, London

2 0 O C T O B E R Alpha Annual Review – Royal College of Physicians, London

2 6 - 3 0 O C T O B E R RCRI – Orlando, USA

3 N O V E M B E R Institutional Conference – Royal College of Surgeons, London

4 N O V E M B E R Association of Charitable Foundations Conference – BMA House, Tavistock Square, London

4 N O V E M B E R Event – National Gallery, London

1 2 N O V E M B E R Charity Finance Group Annual Dinner – London

1 9 N O V E M B E R Association of Chief Executives Voluntary Organisations Annual Conference – London

House Report | 25

Key votes & engagements

Investors in companies have an important shared responsibility in holding the board to account for the management of the business. On behalf of our clients we are active in voting on matters put to shareholders, and we closely monitor investee companies and engage with companies on issues of concern relating to corporate governance, capital structure and strategy.

Poor governance can adversely affect the returns for investors and, equally, good stewardship can lead to better returns over the long term. The table below shows how we voted on four company resolutions during the period under review. It also explains the way we voted, and whether the resolution was approved by the shareholders or not.

Key votes and engagements for 2nd Quarter 2015

Company Date Resolution How we voted for you Result

Lloyds Banking Group Plc 14 May 2015 Reappoint Pricewaterhouse Coopers LLP as Auditors

Against Approved

Rationale: We voted AGAINST the resolution to reappoint PWC as auditor because PWC has been Lloyds’ audit firm for more than 19 years. In our view, auditor independence may be impaired if the same audit firm has audited the company for a long time. New European regulations require that audit firms are changed at least every 20 years, with a tender after ten years. Lloyds has thus announced its intention to change its auditor, but we would have preferred the Board to have acted more proactively to defend auditor independence.

(Percentage of votes cast: 98.32% for, 1.42% against, 0.26% abstain)

BP Plc 16 April 2015 To direct the company to provide further information on the low

carbon transition

For Approved

Rationale: We voted FOR the shareholder resolution concerning strategic climate change resilience for 2035 and beyond. Sarasin & Partners, along with the Church Investors Group and other shareholders, co-filed this resolution for BP’s AGM. The resolution calls for more disclosure on climate change strategy, including: emissions management, asset portfolio resilience to the International Energy Agency’s climate scenarios, low carbon energy research and development, relevant executive incentives, and the company’s public policy positions on climate change. The Board recommended that shareholders support the proposal. In our view, prudent management includes addressing material risks associated with environmental issues, and the company’s support for this resolution is a positive step toward better management of climate change risk.

(Percentage of votes cast: 95.84% for, 1.68% against, 2.48% abstain)

A similar resolution was co-filed at Royal Dutch Shell Plc whose AGM was on the 19th May 2015. For that meeting the percentage of votes cast were:

(Percentage of votes cast: 95.69% for, 1.05% against, 3.26% abstain)

Man Group Plc 8 May 2015 Re-elect Remuneration Committee Chair as Director

Against Approved

Rationale: We voted AGAINST the reappointment of the Remuneration Committee Chair because of concerns over his independence and ability to ensure shareholder interests are protected against an assertive executive team. Our primary concern is that the proposed changes to the Remuneration Policy (which had only just received approval at the 2014 AGM) would materially increase the maximum possible pay out for the CEO, despite his pay already being in the upper quartile for FTSE 250 companies. Moreover, we were disappointed by the Remuneration Committee’s decision to pay out the maximum bonus in 2014 despite the CEO not meeting all his targets. Overall, we believe the Remuneration Committee has failed to adequately defend shareholders from excessive pay demands. We voted AGAINST the re-election of the chair.

(Percentage of votes cast: 98.49% for, 1.32% against, 0.19% abstain)

Fuji Media Holdings Inc – Amend Articles to manage who can Attend Shareholder Meetings Properly

For Not Known

Rationale: Japanese activist investor Mitsutaka Yamaguchi, who is known for protesting against undervalued buyouts and for participating in the governance clean-up following the scandal at Olympus Corporation, filed a number of resolutions at Fuji Media’s annual general meeting this year. Corporate governance standards in Japan are currently undergoing a number of positive changes, but relative to UK standards, there is much room for improvement. Mr Yamaguchi’s resolutions were aimed at improving various aspects of governance. We decided to support a number of these resolutions. For example, we voted FOR a resolution to Amend articles to manage shareholder meetings properly, requiring that employee shareholders and former employee shareholders shall not be appointed to ask questions at the AGM, and if they are then they must identify themselves (affiliation and position).

26 | House Report

Important InformationThis document has been issued by Sarasin & Partners LLP which is a limited liability partnership registered in England and Wales with registered number OC329859 and is authorised and regulated by the UK Financial Conduct Authority and passported under MiFID to provide investment services in the Republic of Ireland. It has been prepared solely for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice.

Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and also of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.

For the Fund of Funds range there is no minimum investment period, though we would recommend that you view your investment as a medium to long term one (i.e. five to ten years). Frequent political and social unrest in Emerging Markets, and the high inflation and interest rates this tends to encourage, may lead to sharp swings in foreign currency markets and stock markets. There is also an inherent risk in the smaller size of many Emerging Markets, especially since this means restricted liquidity. Further risks to bear in mind are restrictions on foreigners making currency transactions or investments. For efficient portfolio management the Fund may invest in derivatives. The value of these investments may fluctuate significantly, but the overall intention of the use of derivative techniques is to reduce volatility of returns. The Fund will invest in other collective investment schemes, including both regulated and unregulated collective investment schemes. Investment in unregulated collective investment schemes carries additional risks as such schemes may not be under the regulation of a competent regulatory authority, may use leverage and may carry increased liquidity risks.

All details in this document are provided for marketing and information purposes only and should not be misinterpreted as investment advice or taxation advice. This document is not an offer or recommendation to buy or sell shares in the fund. You should not act or rely on this document but should seek independent advice and verification in relation to its contents. This document does not explain all the risks involved in investing in the fund and therefore you should ensure that you read the prospectus and the Key Investor Information document which contain further information including the applicable risk warnings. The prospectus, the Key Investor Information document as well as the annual and semi-annual reports are available free of charge from www.sarasinandpartners.com or from Sarasin & Partners LLP, Juxon House, 100 St Paul’s Churchyard, London, EC4M 8BU, Telephone +44 (0)20 7038 7000, Telefax +44 (0)20 7038 6850. Telephone calls may be recorded.

Neither Sarasin & Partners LLP nor any other member of Bank J. Safra Sarasin Ltd. accepts any liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. The use of this document should not be regarded as a substitute for the exercise by the recipient of his or her own judgment. Sarasin & Partners LLP and/or any person connected with it may act upon or make use of the material referred to herein and/or any of the information upon which it is based, prior to publication of this document. If you are a private investor you should not rely on this document but should contact your professional adviser.

Additional Information for persons located in South Africa Collective Investment Schemes are generally medium to long term investments. The value of participatory interests may go down as well as up and past performance is not necessarily a guide to the future. Fluctuations or movements in exchange rates may cause the value of underlying international investments to go up or down. Collective Investment Schemes are traded at ruling prices and can engage in borrowing and script lending. A schedule of fees and charges and maximum commissions is available on request from the scheme. Commission and incentives may be paid and if so, would be included in the overall costs. Daily forward pricing is used. A prospectus is available from Prescient Management Company Limited, T: +27 21 700 3600.

House Report | 27

The Sarasin House Report The Sarasin House Report is a quarterly publication providing informed analysis and advice on topics of interest for the private client, charity sector and institutional investor. If you are not on our regular mailing list and would like to receive a copy, please contact marketing on 020 7038 7005, or email: housereport@sarasin.co.uk

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