spring 2011 inside: market outlook and commentary clean car wars

Dialogue Inside:

Market Outlook and Commentary

Clean Car Wars – The Auto Industry’s Technology Race

Professor Kenneth Rogoff – The Inequality Wildcard

Spring 2011

Getting InvestmentsOff the Ground in an Infl ationary Market

Schroders Private Banking Dialogue – Spring 2011

Inside:

Welcome

Market Commentary and Outlook

Meet the Investment Team

Budget 2011: The Highlights

Aviation at Goodwood: The Sky’s the Limit

Inflation or Deflation: What Might the Future Hold for Investors?

The Inequality Wildcard

Clean Car Wars: The Auto Industry’s Technology Race

St Paul’s 300th Anniversary

PAM Awards 2011

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ContributorsRupert Robinson Chief Executive, UK Private Banking [email protected] +44 (0)20 7658 6880

Robert Farago Head of Asset Allocation Private Banking [email protected] +44 (0)20 7658 6545

Tim Gibbons Head of Investment Private Banking [email protected] +44 (0)20 7658 3583

Paula Higgleton Head of Private Client Services Deloitte [email protected] +44 (0)20 7007 5569

Rob Wildeboer Aviation Manager Goodwood [email protected] +44 (0)1243 755066

Nick Bence-Trower Client Director Schroders Charities [email protected] +44 (0)20 7658 6856

Keith Wade Chief Economist Schroders [email protected] +44 (0)20 7658 6296

Kenneth Rogoff Professor of Economics and Public Policy Harvard University [email protected]

Simon Webber Global Sector Specialist & Portfolio Manager (Global & International Equities) Schroders [email protected] +44 (0)20 7658 4169

Editorial Contacts

Alice Carter Editor Private Banking [email protected] +44 (0)20 7658 3786

Stephen Rothwell Head of Business Development, London Private Banking [email protected] +44 (0)20 7658 2377


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“ Our outlook remains for a muted recovery, with inflation becoming a key issue over the next year.”

The last few months have seen dramatic events unfold across the globe. The Japanese earthquake brought tragedy to the region. Not surprisingly many governments are now reviewing the reliance on nuclear power in their future energy plans, following the catastrophic damage to the Fukushima Daiichi plant.

Uprisings across the Middle East and North Africa (MENA) have resulted in the dissolution of Tunisian and Egyptian governments and unrest has spread through much of the region. Oil prices rose on supply concerns and NATO is currently enforcing a no-fly zone to protect the civilian population of Libya. Whilst to many of us in the democratic world, the unrest in MENA may seem a problem far from home, in this issue of Dialogue, Professor Kenneth Rogoff draws some surprising parallels in his article The Inequality Wildcard.

The coalition government is attempting to address inequality in British society in a number of ways, and the Budget presented by the Chancellor on 23rd March attempted to help those struggling on low incomes, without reducing the appeal of the UK for business and higher-rate tax payers. Paula Higgleton, Head of Private Client Services at Deloitte, discusses the major changes affecting individuals announced as part of the 2011 Budget.

Central banks are having to balance the cost of debt with the threat of higher inflation. Keith Wade, Schroders’ Chief Economist, recently addressed the Charity Investment Forum on this topic. Nick Bence-Trower of the Schroders Charities team reports on the investment opportunities in a market where inflation is twice the Bank of England’s target rate.

This quarter we introduce the recently expanded Investment Team, who give an insight into the investment process at Schroders Private Banking, and the attention to detail devoted to each client portfolio.

The Goodwood Estate, renowned for Glorious Goodwood and motorsport, also runs a busy working aerodrome. During the Second World War it was known as RAF Westhampnett, and in the article, The Sky’s the Limit, we hear about Goodwood’s fascinating history of aviation.

From planes to automobiles: the auto sector is having to adapt dramatically to meet the demand from governments and consumers to reduce or eliminate CO2 emissions. Concerns about global warming and rising oil prices are squeezing the dependence on old technology from two sides. Simon Webber, Fund Manager, Global Equities at Schroders describes some of the latest technologies and developments in the industry.

The Private Asset Managers (PAM) Awards saw Schroders Private Banking receive three awards, in the categories of Image & Reputation – Ultra High Net Worth; Client Service Quality – Ultra High Net Worth; and Client Service Quality – High Net Worth. We are proud of our continued success in the industry and believe that it is recognition of our strong client-focused and service-led culture.

Rupert Robinson

The first quarter of 2011 saw steady economic performance, with the exception of the beleaguered eurozone countries: Greece, Ireland, Portugal and Spain. Hedge funds and equities posted positive returns. Our outlook remains for a muted recovery, with inflation becoming a key issue over the next year. Robert Farago addresses these issues and a wider range of topics in his Market Commentary and Outlook.

WelcomeInside:

Welcome

Market Commentary and Outlook

Meet the Investment Team



Inflation or Deflation: What Might the Future Hold for Investors?


Clean Car Wars: The Auto Industry’s Technology Race


PAM Awards 2011


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Robert Farago Head of Asset Allocation

Market Commentaryand Outlook

Economic data remained robust across the world, with the only notable exceptions being the struggling economies on the periphery of Europe: Greece, Ireland, Portugal and Spain. In contrast, Germany is booming. The price of Brent oil rose 23%, initially on the back of growing demand, but more recently due to the fall in supply from Libya and concerns that other oil-producing countries will suffer similar unrest. The price of other commodities proved volatile, falling when the oil price soared, but recovering to finish the quarter in positive territory.

Global inflation rose, exceeding forecasts. Central bank rates remained on hold in the major developed economies, but the European Central Bank raised interest rates at its meeting on 7th April.

This was a quarter with plenty of drama. Japan, the world’s third largest economy, suffered tragedy and devastation. Growing unrest across the Arab world culminated in international intervention in the conflict in Libya. The euro crisis spread to Portugal, with their bond yields hitting record highs. Yet, outside Japan, the major equity markets finished the quarter in positive territory. The gold price hit a new all-time high yet finished the quarter close to its starting level. A significant rise in oil prices was the key market move over the period.

Chart 1: S&P 500 Chart 2: Brent oil price Chart 3: Gold price

Past performance is not a guide to future performance.

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Inflation in the emerging world was already high and rose further. Policy was tightened but interest rates remain at or below the level of inflation in many countries and further increases are expected.

Bond yields edged higher, sending prices lower, in the UK, US, Germany and Japan. The increase in yields was greater across the emerging world. In contrast, corporate bonds outperformed as the yield premium over government bonds continued to shrink. The major equity markets gained as profits rose and leading indicators implied that economic expansion should remain on track. In contrast, fears of inflation led to declines for some emerging markets. The energy sector was the stand-out performer.

The US dollar fell against its trading partners as investors priced in interest rate increases in Europe and the emerging world while US rate rises remain some way off – December on our forecasts. The yen initially soared after the earthquake, mimicking its performance after the Kobe earthquake when repatriation pushed the yen 25% higher. Coordinated central bank intervention was successful in reversing this trend.

Broad measures of UK commercial property prices were stable. However, London offices posted healthy gains as rents edged up while a number of regional office and retail markets continued to suffer modest declines.

Hedge funds made modest gains on average. One notable exception was


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“How will the ongoing unrest in the Middle East, the devastation in Japan and the unresolved crisis in peripheral Europe alter the outlook for economies and markets?”

the systematic trend-following strategy that was caught out by the sharp falls and equally rapid rebound in the price of equities and commodities.

OutlookHow will the ongoing unrest in the Middle East, the devastation in Japan and the unresolved crisis in peripheral Europe alter the outlook for economies and markets? First we must consider what the prospects would look like without these events. The backdrop remains that we are in the aftermath of a global financial crisis. Government debt levels have increased towards or beyond historic extremes in many developed nations. Consumer debt is also moving towards historic highs.

We can draw on three studies by Professor Carmen Reinhart, Economics Professor at the Petersen Institute, whom we featured in the last quarterly edition of Dialogue after she presented at our Secular Market Forum. In a study with Kenneth Rogoff, she found that the decade after a financial crisis is typically a decade of slower growth and persistently high unemployment. Housing booms and busts are often involved and house prices fail to recapture their highs even a decade on. Historically, inflation has also been lower in the following decade, but the scale of quantitative easing in many countries makes this outcome significantly less likely, even before we talk about oil.

It is also likely that the economy will be more volatile than we have been used to. The last three recessions in the US led the Federal Reserve to cut rates by at least 5%. Right now we sit with rates at nearly zero. It is also not clear that fiscal stimulus would help much at a time when both markets and politicians are talking about the need for austerity. The combination of lower average growth and greater volatility in activity makes a recession more likely as illustrated in the following schematic (see chart 4).

A typical cycle will see the central bank raise rates at point A to ward off inflation and lower rates at point B to reverse the slowdown. With options limited to revive

activity if they tighten too soon, it seems likely that central banks will err on the side of caution and be slow to tighten. The European Central Bank seems to be the exception for now.

Chart 4: The next slowdown

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We arehere?

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Illustration of US GDP Growth (in % p.a.)

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Shorter economic cycles would not be a surprise. Indeed, the last three cycles have been amongst the longest in the last 150 years. Between 1982 and 2007, US economic expansions lasted 106 months on average and recessions were rare. In contrast, between 1854 and 1982 expansions lasted 33 months on average and the economy was in recession around a third of the time.

The labour market is the key reason for not expecting tight policy. While the job markets in most developed economies are recovering, full employment is years away. This is similar to the last two long cycles (see chart 5). So perhaps the slow recovery in the labour market can once again provide the backdrop to long expansion.

Chart 5: US labour market

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With rate rises not expected to end the cycle, what will? Carmen Reinhart and Vincent Reinhart studied 15 modern day financial crises and found that in seven cases the economy lapsed back into recession within three years. In each of these cases, an external shock was the trigger. This brings us back to our initial question on the impact of events in the Middle East and Japan.

Oil price shocks have led to recessions on five occasions since 1970 (see chart 6). We do not expect a repeat for two reasons. First, the percentage rise in price is, to date, less than any of these previous shocks. Second, there has been a drive to energy efficiency that should mean that the economy is less sensitive to oil prices. Still, it is clear that the world will have to live with ongoing tensions in the Middle East for the foreseeable future. Spare production capacity is limited and is mostly found in Saudi Arabia. The risk of further price spikes remains significant and would impact our global view.

Chart 6: Oil prices in nominal and real terms (2010)

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Japan has plunged into an instant recession. However, the rebuilding of homes, roads, power supply, ports and more will lead to a V-shaped recovery later in the year. There will be an ongoing disruption to the global supply chain and, in particular, Japan is a supplier of key components to the auto industry. However, we do not expect this to have a measurable impact on global activity.


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Soaring bond yields in Portugal failed to make an impact on the broader markets. More significantly, they did not put pressure on the Spanish market, which remains the true front line in this ongoing drama (see chart 7). We see more crises ahead. Indeed, a crisis is the backdrop for implementing necessary but unpopular structural reforms.

Chart 7: Portuguese and Spanish 10 year Government Bond Yields

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The US housing market has resumed its downtrend and is expected to weaken further (see chart 8). Mortgage rates have risen as bond yields have moved higher. This will impact household wealth and therefore weigh on consumer confidence. Still, the ability of US house price movements to shock the broader market is long gone.

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A number of emerging economies face the risk of overheating. The strong rebound from recession means that spare capacity has been filled. A tightening cycle has

begun but will need to be implemented with greater determination to avoid more problematic inflation. This leaves us cautious on emerging market bonds and equities. However, currency appreciation is expected to accelerate, as this would help offset the impact of rising dollar prices for oil and agricultural commodities.

The risks for equity investors are rising. Economic growth is no longer surprising on the upside. Rising commodity prices will put some downward pressure on margins, which are already close to record highs, meaning there is little scope for further improvement. Quantitative easing in America has been a boost for equity markets over the last two years and is set to end in the summer (see chart 9). Elsewhere, interest rates are set to rise. Yet we expect further gains while the economic expansion remains on track. Valuations are fair at a time when both bonds and cash look unattractive. We maintain our current weights, which are biased towards value and quality.

Chart 9: S&P 500 compared to the Federal Reserve Balance Sheet

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The key issue for bond investors is the scale of government debt. This burden is set to rise over the coming years as growth will remain subpar, interest rates will eventually rise and aging populations in many nations will add to costs. The latest paper from Reinhart and Rogoff highlights the risk of increasing “financial repression”. These are regulations that act to create a captive domestic audience for government bonds, such as pension funds,

and simultaneously reduce the interest rate that the government needs to pay. For UK investors, this was a factor in explaining why the real interest rate received on public debt between 1945 and 1980 was negative for nearly half of the time. We are not forced buyers of government bonds and maintain minimal holdings, which are there to provide a hedge against the risks of recession.

UK commercial property values appear fair. The London office market is expected to remain strong as supply is limited. We remind ourselves that hosting the Olympics has sometimes signalled the end of a boom (Montreal 1976, Seoul 1988). The Shard will become the tallest building in Europe when it is completed next year. The world’s tallest building has proved to be a reliable contrarian indicator for over a hundred years. The Singer building in New York started construction just before the Panic of 1907, while the topping out of the Burg Khalifa in Dubai coincided with the topping out of that economy in equally spectacular style. Still, we do not see oversupply in the city of London bringing the cycle to an end until the middle of this decade.

Outside oil, metal prices will continue to be driven by China. Inventories are ample, which means that prices are vulnerable if the Chinese step up their tightening measures. Fundamentals for agricultural commodities are supportive but some prices are frothy. Gold will remain an appropriate investment until there is a fundamental shift towards putting government balance sheets onto a sustainable path.

To conclude, the balance of risks has deteriorated, primarily due to the rise in oil prices. However, we still see economies progressing this year. Inflation is an immediate concern in the emerging world. Government debt levels make it a concern everywhere on a longer-term basis. This makes bonds and cash unattractive investments. That leaves equities as the most attractive of the major asset classes, with balance in portfolios coming from positions in gold, selected hedge funds and emerging market currencies.

Past performance is not a guide to future performance.

“ Gold will remain an appropriate investment until there is a fundamental shift towards putting government balance sheets onto a sustainable path.”


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Tim GibbonsHead of Investment

Grant LockeInvestment Analyst


Lisa HauFund Management Assistant

1. How do the individual skills and experience of the members of the investment team complement each other?Tim Gibbons: At Schroders Private Banking everyone contributes to the investment process. The lead however is taken by the Investment Team. We provide the framework for the investment of client portfolios from start to fi nish. The team takes responsibility not only for asset allocation and investment selection, but also coordinates large or unusual investment changes and verifi es benchmark data and performance comparisons.

2. What are the main inputs into the asset allocation process?Robert Farago: Our quarterly Cyclical Market Forum is the cornerstone of the process. Our Chief Economist presents his baseline scenario and two alternatives. Specialist investors from across the Schroders Group forecast the outlook for their market under these three scenarios. Our Multi-Asset Strategy team analyses where we are in the economic cycle and provides analysis of which assets have

historically been favoured at this stage of the cycle. In addition, our annual Secular Market Forum explores longer-term trends. I spend a lot of time talking to our specialist investors. Recently that has meant plenty of conversations with our Commodities Team, with the picture for oil and food prices so key to the overall outlook. I am also in close contact with our Emerging Market Debt Team. Their experience of the various debt crises in Latin America and Asia over the last two decades is particularly valuable at a time when the developed world is facing similar challenges for the fi rst time in a generation. We also value dialogue with our fund managers, both internal and external. Understanding where they see opportunities helps us to identify them too.

3. How do you pick which funds to use in client portfolios?Stuart Derrick: Fund selection exercises begin with a detailed quantitative analysis of the particular investment universe. This allows us to analyse each fund’s returns under different market environments and identify persistent or structural risk factors or style biases. Funds that meet our strict

criteria are placed on a shortlist of 30 to 40 names, which are scrutinised on a qualitative basis to identify non-investment or other un-quantifi able risks. This narrows the search down to around ten names. The managers of those funds are then subjected to one-on-one interviews to examine several factors including investment process, resources, portfolio construction methodologies, risk guidelines and control procedures. We then make our fi nal decision, selecting one preferred fund together with two ‘substitutes’, just in case.

4. What are the most interesting aspects of dealing on private client portfolios?Will Stowell: The sheer diversity of asset classes that we are asked to deal across is perhaps the most interesting factor. On any given day we might trade in physical bullion, equities and bonds across the major world markets. We also deal in new issues, AIM listed stocks, hedge funds and unit trusts. By nature, private client work demands a keen eye for detail so the team gives utmost attention to every trade, ensuring correct execution.

Meet the Investment TeamOver the last year, our investment team has expanded. Here we speak to the new line-up about some of the ways in which they work together, and with the wider Schroders Group, to ensure that client portfolios are run with the utmost care, initiative and excellence.


Stuart DerrickInvestment AnalystStuart DerrickInvestment Analyst

Grant LockeInvestment Analyst

Will StowellPortfolio ManagerWill StowellPortfolio Manager

Lisa HauFund Management Assistant

Tim GibbonsHead of Investment


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The demise of the 50% income tax rate? The Chancellor has asked HMRC to quantify the amount of tax raised by the 50% income tax rate band when the first tax returns are filed in January 2012. There is a suspicion that it raises far less than Alistair Darling’s original £2 billion estimate, and it is helpful that the Chancellor confirmed that it is only considered to be a temporary measure.

Entrepreneurs’ relief The Budget announced an increase in the lifetime limit on gains qualifying for Entrepreneurs’ Relief. The previous limit of £5 million was increased to £10 million from 6 April 2011. All gains that qualify for Entrepreneurs’ Relief up to this lifetime limit will be subject to a reduced CGT rate of 10%. Any gains in excess of this lifetime limit will normally be subject to the standard rate of CGT of 28%. This relief results in an effective saving of up to £1,800,000, an increase of £900,000 from the previous amount of relief available before 6 April 2011. In line with the previous rules, a number of conditions need to be met in order to qualify for this relief. These conditions remain unchanged by the Budget announcement. This increased lifetime limit is a welcome addition to the encouragement of business investment in the UK and should make the UK more attractive to serial entrepreneurs.

Extension of relief into Enterprise Investment Schemes and Venture Capital Trusts The rate of income tax relief for individuals investing into companies qualifying for the Enterprise Investment Scheme (EIS) will increase to 30% from the previous rate of 20%,

subject to EU state aid approval. For 2011/12 the maximum investment per year remains at £500,000. Venture Capital Trusts (VCT) income tax relief is unchanged at 30% of a maximum investment of £200,000 per year.

It was also announced that further legislation will be introduced in the 2012 Finance Bill, making the following changes from 6 April 2012 for investments into EIS and VCT as well as the qualification requirements for the companies themselves:

an increase in the annual amount that –an individual can invest through EIS to £1 million (previously £500,000): an increase in the threshold size for a –company to qualify for both EIS and VCTs to no more than £15 million of gross assets before the investment (previously £7 million before and £8 million after the investment); an increase in the threshold of the number –of employees a company can have to fewer than 250 employees (previously fewer than 50 employees); and an increase in the annual amount that –a qualifying company can raise from £2 million to £10 million.

The Government will also consult on further changes to the schemes including proposals to give additional support through the EIS for seed investment.

The increase in personal income tax relief over the next two years, combined with the proposed increased thresholds for companies qualifying for EIS and VCT investment, will be a boost for entrepreneurs setting up smaller companies and those who wish to invest in them.

Income tax rates, personal allowances and capital gains tax annual exempt amountIn the June 2010 Budget, the Government set a long-term objective to increase the personal allowance for those aged under 65 to £10,000 and began this process by announcing an increase of £1,000 to £7,475 from 6 April 2011. The Chancellor has continued with this commitment and confirmed that the personal allowance for those aged under 65 will increase by another £630 to £8,105 from 6 April 2012. Unlike the increase to £7,475, this additional increase will benefit both basic and higher rate taxpayers, but not those with income over £100,000, where the allowance continues to be withdrawn at a tapering rate.

Income tax personal allowances for those aged over 65 will continue to increase in line with the Retail Prices Index (RPI), although it appears that others will move to a Consumer Prices Index (CPI) increase.

The Chancellor also announced that the capital gains tax annual exempt amount will rise in line with the Consumer Prices Index instead of the Retail Prices Index from April 2012.

Individual Savings Account limits The Government has announced that from the 2012/13 tax year the annual Individual Savings Account (ISA) subscription limit will be increased by reference to the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). The annual ISA subscription limit for 2010/11 is £10,200 and for 2011/12 will increase to £10,680.


Paula Higgleton Head of Private Client Services, Deloitte

The 2011 Budget was eagerly awaited but did not contain many surprises for individuals. Some of the more far-reaching reforms, in particular the restriction of loss relief for furnished holiday lets and the provisions covering disguised remuneration, were already announced in December 2010. This article deals with the major changes announced as part of the 2011 Budget as they affect individuals.


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Inheritance tax allowance

In the June 2010 Budget, the Government announced that the inheritance tax nil rate band will be frozen at £325,000 until 2014/15. From 2015/16, the Consumer Prices Index will be used as the default indexation assumption.

The measure reflects the Government’s decision to move the underlying indexation assumption for all direct taxes to CPI.

CharitiesA measure is to be introduced whereby, for deaths on or after 6 April 2012, if 10% or more of a deceased individual’s net estate is left to charity a reduced inheritance tax rate of 36% (rather than the standard 40% rate) will apply. The government will be consulting on the specifics of this measure and a consultation document is expected before the summer.

Incentivising gifts to charity is a key theme of the Budget and the increase in benefit limits will no doubt be welcomed by taxpayers and charities alike.

Review of non-domicile taxation The Government announced in the Budget that it will issue a consultation document in June proposing changes to the taxation of non-domiciled individuals.

The Government intends to introduce the following reforms:

remove the tax charge which currently –applies when non-domiciles remit foreign income or capital gains to the UK, provided they are remitted for the purpose of making commercial investments in UK businesses; simplify some features of the –remittance basis rules to remove undue administrative burdens, provided they do not involve significant Exchequer cost or introduce risk of tax avoidance; and increase the existing £30,000 annual –charge to £50,000 for non-domiciles who have been UK resident for 12 or more years and who wish to retain access to the remittance basis. The current remittance basis charge of £30,000 will continue for non-domiciled individuals who have been resident in the UK for at least seven years but fewer than 12 years.

The Government has also announced that there will be no other substantive changes to the taxation of non-domiciles for the remainder of this Parliament.

The reforms balance the Government’s desire to ensure that non-domiciled individuals make a contribution whilst encouraging investment in the UK. We will have to wait for the detail as to what will qualify as a commercial investment into a UK business.

Statutory residence test The Government will consult in June on the introduction of a statutory definition of residence from 6 April 2012 to provide greater certainty for taxpayers.

The current rules that determine tax residence for individuals are unclear and complex. This has been demonstrated in a number of recent high profile tax cases. A statutory residence test would provide clarity for individuals.

Tackling anti-avoidance The Government has confirmed that it intends to consult with a view to taking further measures to tackle tax avoidance as part of its overall strategy to tackle anti-avoidance. These include:

Regulations listing specific avoidance –schemes and ensuring users do not benefit from a cash flow advantage from

retaining the tax due through an additional charge for late payment of tax; Reviewing the legislation on reliefs for –income tax losses which can be set against other income in the same or previous years; The aim of the review will be to ensure it is effectively targeted at those intended to benefit and reduce its use for tax avoidance; Introducing an anti-avoidance measure to –prevent the benefit of double tax treaties being given where arrangements have been made in relation to the claim to avoid UK tax; Any legislation will not be introduced until –the 2012 Finance Act or the 2013 Finance Act in relation to income tax losses.

Note: This article has been written in general terms and therefore cannot be relied on to cover specific situations; application of the principles set out will depend upon the particular circumstances involved and we recommend that you obtain professional advice before acting or refraining from acting on any of the contents of this article. Deloitte PCS Limited would be pleased to advise readers on how to apply the principles set out in this article to their specific circumstances. Deloitte PCS Limited accepts no duty of care or liability for any loss occasioned to any person acting or refraining from action as a result of any material in this article.

The Budget announced an increase in the lifetime limit on gains qualifying for Entrepreneurs’ Relief

“ The increased lifetime limit for entrepreneurs is a welcome addition to the encouragement of business investment in the UK.”


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Over the next decade many aircraft flew from Goodwood, some designed and built by Freddie March himself.

During World War II Freddie March contributed a piece of his land to the war effort, which was named RAF Westhampnett. The station was active during the Battle of Britain, serving as a base for the Hurricanes, Mustangs and Spitfires of the British and American Air Forces and providing training for the new pilots.

One of the pilots operating from RAF Westhampnett was the Spitfire ace Douglas Bader. Bader had commissioned into the RAF in 1930, but crashed 18 months later, which resulted in the amputation of both his legs. At the outbreak of World War II, Bader persuaded the RAF to let him re-join and by 1941 he was one of the RAF’s top fighter pilots. It was from RAF Westhampnett that Bader left for his final combat mission. He was shot down over France in 1941, and became a prisoner of war. He made many escape attempts, and was finally sent to Colditz. His extraordinary achievements gained him respect and admiration from his German captors, and Adolf Galland, the German fighter pilot, became a lifelong friend. Today a life-size bronze statue commemorates Douglas Bader at Goodwood.

The American, Billy Fiske, was another famous pilot closely associated with Goodwood. Fiske was a double Olympic bobsleigh champion when war was declared in Europe. He joined the RAF immediately,

forging Canadian papers because America was still officially neutral. Flying from RAF Tangmere and its satellite station RAF Westhampnett, he proved himself to be an excellent pilot. In August 1940 Fiske’s


Rob Wildeboer Aviation Manager, Goodwood

Aviation is a passion stretching back over 75 years at Goodwood, located on the breathtaking Sussex Downs. Freddie March, the 9th Duke of Richmond and grandfather to the Earl of March – current custodian of the Goodwood Estate – received his Aviators Certificate from the Royal Aero Club in the early 1930s.

Taking a different view: one of the Goodwood fleet cruises above the Channel

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squadron was scrambled to intercept a group of Stukas. In the ensuing battle his plane was hit. Fiske managed to land at the airfield, but died the following day from his injuries. He was the first American to die in action in World War II. Billy Fiske was buried on the edge of the Goodwood Estate at Boxgrove Priory, where there is now a stained glass window in his memory. At the 2010 Goodwood Revival, Billy Fiske was honoured with a moving tribute on the grid, where ex-RAF colleagues stood alongside a Hurricane, and his beloved Bentley, while the Royal Horse Artillery gave a cannon salute.

After the war, Freddie March oversaw the transformation of RAF Westhampnett’s airfield into the world-famous Goodwood Motor Circuit which opened in 1948. Following the close of the Brooklands track

in 1939, the opening of the Goodwood circuit was received delightedly by the public and Goodwood came to embody the golden age of motorsport, until the circuit was closed in 1966. It was then re-opened in 1998 by the Earl of March, and hosts the Goodwood Revival each September, a world renowned race meeting which celebrates historic motorsport.

Today the Flying School is based at the Goodwood Aerodrome. It remains very active and has an enviable reputation as a centre of excellence, providing flight experiences and training. Goodwood’s fleet of five Cessnas is the youngest of any flying school in Europe.

From here, would-be pilots can follow a training course at Goodwood to attain their

Private Pilot Licence (PPL). The PPL is designed for recreational use and licences the pilot to take friends and family as passengers to destinations across the UK and Europe.

The PPL course consists of a minimum of 45 hours flying, including ten solo flights. The course concludes with a ‘skills’ flight test, with Goodwood’s reputable instructors always on hand to guide the student through all the regulatory requirements to become a qualified pilot with the freedom to take to the skies alone.

For more information or to book a training course or flight experience, call Goodwood Flying School on 01243 755066 or email [email protected]

World War II pilots prepare for take-off at RAF Westhampnett, now known as the Goodwood Motor Circuit and Aerodrome

“ After the war, Freddie March oversaw the transformation of RAF Westhampnett’s airfield into the world-famous Goodwood Motor Circuit.”


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Nick Bence-Trower Client Director, Schroders Charities

In August 1923 one US dollar was worth 620,000 Deutsche marks. Just three months later, the same US dollar could buy 630 billion Deutsche marks, largely due to the extent of the hyperinfl ation in Weimar Germany. Thankfully no one is predicting such an outcome across the developed world now, but it is a sobering reminder of the corrosive power of infl ation.

That is not to say that the outlook for infl ation is clear. The global economy is currently facing differing pressures. Whilst the developed world is considered to be in the recovery stage of the economic cycle, China and other emerging countries have already entered the “expansionary” phase. Infl ation in these countries is already a concern, driven largely by increasing demand.

This is spilling over into the developed markets through higher commodity prices. The oil price is surging, exacerbated by events in the Middle East. Agricultural prices also continue to climb, which is part of the cause of the recent friction, as 30% of personal expenditure in emerging countries is on food, which compares

to just 10% in the developed world. In the short term however, evidence suggests that infl ation in the developed world should remain under control. One indicator of this is that the “output gap”, the difference between actual and possible industrial capacity utilisation, shows that there is still room for growth without sustained increases in wages and other costs.

This view is further reinforced by the fact that public perceptions of infl ation remain relatively subdued. Whilst it would be reasonable to speculate that the oil shock would lead to price increases, with the subsequent infl ation meaning real wages were being eroded, expectations remain fairly well contained. The one major dissenter from this more benign interpretation however is the ECB, whose sole target is the control of infl ation. Its President, Jean Claude Trichet, has stated his concern about “second round effects” and has raised interest rates accordingly.

The outlook for the medium term contains more imponderables. Much depends upon the central banks and how they unwind the

vast amounts of quantitative easing currently swamping the system. Much of this excess cash is being hoarded by the banks, rather than being circulated into the wider system, in an effort to repair their balance sheets in this new age of austerity. However, the scale of money pumped into the system by QE2 cannot be ignored. These funds need to be withdrawn from the market. In order to avoid infl ation, the Fed and other central banks with QE programmes need to sell the bonds they have bought. Questions remain about how practical that plan is at a time when there may be little appetite for these assets.

If the current policies do prove incorrect, central banks consider the perils of defl ation to be worse than infl ation. This is why – apart from the ECB – other central banks are currently prepared to maintain low interest rate policies. Although the Bank of England has consistently missed its infl ation target over recent times, it is interesting to note that whilst the MPC has a 2% infl ation target, it is forward looking. As such it does not necessarily have to address the current overshooting of the target. This is probably just as well if the May 2009 infl ation forecast is considered. Despite a forecast with

Inflation or Deflation: What Might the Future Hold for Investors?At the recent Charity Investment Forum, held in Marlow by Civil Society, Keith Wade, our Chief Economist spoke on the outlook for inflation. He looked at both the short- and long-term effects on expenditure and investments. He also examined the most effective way to protect investment assets against inflation and illustrated its potential corrosiveness for long-term investors. Nick Bence-Trower outlines the conclusions from this workshop below.

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Keith Wade Chief Economist

90% probability of inflation being reported somewhere within the Bank’s projections, it has remained stubbornly above the top end of the range due to the falling pound, the rise in VAT and the oil price sending inflation far higher than the Bank anticipated. In the US, the Fed has a twin target of inflation and employment, with their current focus seemingly very much on the latter. A conspiracy theorist might also suggest that some inflation would also help to erode the significant debt burden that has and continues to be accumulated across the developed world.

Inflation is also on the rise across many of the emerging markets. This mismatch in the speed of economic growth in comparison to the developed world is raising issues. Many of the emerging economies avoided the damaging effects of the financial crisis

and are now ahead of the developed markets in their economic cycle. Indeed, it is interesting to note that as a result of the recent downturn, global energy consumption is now greater in the emerging economies than in OECD countries. The contrasts are also highlighted in the fact that the US has a current account deficit of approximately USD450 billion while emerging markets boast a surplus of just over USD300 billion. Remedying these imbalances however, could create its own problems. Whilst the US might like to see the Chinese allow their currency to strengthen, such a move could have inflationary implications for Mr. Bernanke, the Chairman of the Federal Reserve, as it raises the cost of imports from China.

At the margin we therefore believe that inflation remains the greater risk in the medium term. But what do we consider

the best options for protecting assets against inflation? In general it is advisable to be invested in “real” assets or those that participate in the growth of the underlying economy and so capture the effects of inflation – equities being the best example.

However, a sharp increase in inflation would raise premia and cause short-term equity weakness. In this scenario portfolios will need some assets that offer potential downside protection and the ability to switch between these two types of assets as economic circumstances and valuations dictate.

In the unlikely event of a Weimar-type scenario, general commodities have merit and gold has always been popular. Diversification into “hard currencies” such as Swiss francs and Chinese reminbi may also offer some protection.

Recent oil price rises – a reaction to tensions in the Middle East and North Africa (MENA) – have only added to inflation concerns, unnerving markets. If we look back over history and in particular the last five oil price shocks, recessions have been triggered. Is history about to repeat itself?

We have clearly had quite a spike in oil prices recently but it is not as big a move as the other increases we have seen in the past that went on to trigger recessions. Although they have risen by 60% since July 2010, oil prices are some way off the 92% rise during the 2007/2008 episode when Brent crude reached $150 per barrel. If you go back to other shocks, in the 1970s the price trebled and in the 1990s it doubled.

More importantly, this shock is not purely about supply problems, but strong demand from Asia and the US has also played a role. Demand shocks tend to have less overall effect on the world economy than supply shocks.

The intensity of oil consumption has fallen a lot compared to the 1970s and 1980s. After those shocks, capacity was wiped out and industry moved away from oil, forcing firms and consumers to become more energy efficient.

The key will be Saudi Arabia which has the capacity to offset the loss of Libyan supply. Should the problems in Bahrain spill over into Saudi then the current shock will be on a par with those that have triggered recessions in the past.

How are central banks responding?

Central banks are currently monitoring the pick up in inflation very closely but recognise that it is unlikely to be sustained as commodity prices stabilise.

The Fed believes inflation is under control and is talking about a lack of second round effects or pick up in wages. The European Central Bank (ECB) on the other hand is far more concerned about potential second round effects and on 7th April raised the rate to 1.25%. The ECB’s greater focus on inflation has exposed a difference with the Fed. Such a divergence would be exacerbated if the oil price continues to rise and risks of second round effects build.

Update: Inflation, Oil Prices and Central Bank DivergenceKeith Wade



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Within countries, inequality of income, wealth, and opportunity is arguably greater than at any time in the last century. Across Europe, Asia, and the Americas, corporations are bulging with cash as their relentless drive for effi ciency continues to yield huge profi ts. Yet workers’ share of the pie is falling, thanks to high unemployment, shortened working hours, and stagnant wages.

Paradoxically, cross-country measures of income and wealth inequality are actually falling, thanks to continuing robust growth in emerging markets. But most people care far more about how well they are doing relative to their neighbours than to citizens of distant lands.

The rich are mostly doing well. Global stock markets are back. Many countries are seeing vigorous growth in prices for housing, commercial real estate, or both. Resurgent prices for commodities are creating huge revenues for owners of mines and oil fi elds, even as price spikes for basic staples are sparking food riots, if not wholesale revolutions, in the developing world. The internet and the fi nancial sector continue to spawn new multi-millionaires and even billionaires at a staggering pace.

Yet high and protracted unemployment plagues many less-skilled workers. For example, in fi nancially distressed Spain,

unemployment now exceeds 20%. It cannot help that the government is simultaneously being forced to absorb new austerity measures to deal with the country’s precarious debt burden.

Indeed, given record-high public-debt levels in many countries, few governments have substantial scope to address inequality through further income redistribution. Countries such as Brazil already have such high levels of transfer payments from rich to poor that further moves would undermine fi scal stability and anti-infl ation credibility.

Countries such as China and Russia, with similarly high inequality, have more scope for increasing redistribution. But leaders in both countries have been reluctant to move boldly for fear of destabilising growth. Germany must worry not only about its own vulnerable citizens, but also about how to fi nd the resources to bail out its southern neighbours in Europe.

The causes of growing inequality within countries are well understood, and it is not necessary to belabour them here. We live in an era in which globalisation expands the market for ultra-talented individuals but competes away the income of ordinary employees. Competition among countries for skilled individuals and profi table

industries, in turn, constrains governments’ abilities to maintain high tax rates on the wealthy. Social mobility is further impeded as the rich shower their children with private education and after-school help, while the poorest in many countries cannot afford even to let their children stay in school.

Writing in the nineteenth century, Karl Marx famously observed inequality trends in his day and concluded that capitalism could not indefi nitely sustain itself politically.

Eventually, workers would rise up and overthrow the system.

Outside Cuba, North Korea, and a few left-wing universities around the world, no one takes Marx seriously anymore. Contrary to his predictions, capitalism spawned ever-higher standards of living for more than a century, while attempts to implement radically different systems have fallen spectacularly short.

Yet, with inequality reaching levels similar to 100 years ago, the status quo has to be vulnerable. Instability can express itself anywhere. It was just over four decades ago that urban riots and mass demonstrations rocked the developed world, ultimately catalysing far-reaching social and political reforms.


Kenneth Rogoff Professor of Economics and Public Policy, Harvard University

DAVOS – As the dramatic events in North Africa continue to unfold, many observers outside the Arab world smugly tell themselves that it is all about corruption and political repression. But high unemployment, glaring inequality, and soaring prices for basic commodities are also a huge factor. So observers should not just be asking how far similar events will spread across the region; they should be asking themselves what kind of changes might be coming at home in the face of similar, if not quite so extreme, economic pressures.

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Yes, the problems facing Egypt and Tunisia today are far more profound than in many other countries. Corruption and failure to embrace meaningful political reform have become acute shortcomings. Yet it would be very wrong to suppose that gaping inequality is stable as long as it arises through innovation and growth.

How, exactly, will change unfold, and what form will a new social compact ultimately assume? It is difficult to speculate, though in most countries, the process will be peaceful and democratic.

What is clear is that inequality is not just a long-term issue. Concerns about the impact of income inequality are already constraining fiscal and monetary policy in developed and developing countries alike as they attempt to extricate themselves from the hyper-stimulative policies adopted during the financial crisis.

More importantly, it is very likely that countries’ abilities to navigate the rising social tensions generated by gaping inequality could separate the winners and losers in the next round of globalisation. Inequality is the big wildcard in the next decade of global growth, and not just in North Africa.

Note: Kenneth Rogoff is Professor of Economics and Public Policy at Harvard University, and was formerly Chief Economist at the IMF.

Copyright: Project Syndicate, 2011.www.project-syndicate.org

For a podcast of this commentary in English, please use this link: http://media.blubrry.com/ps/media.libsyn.com/media/ps/rogoff77.mp3

April 1, 2011 – tens of thousands of Egyptians gathered in Tahrir Square, issuing calls to ‘save the revolution’ that ousted president Hosni Mubarak AFP/Getty Images


“ It is very likely that countries’ abilities to navigate the rising social tensions generated by gaping inequality could separate the winners and losers in the next round of globalisation.”


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The changing landscape of the auto industry

Regulatory drivers US: In 2009, President Obama proposed a new national fuel economy program to regulate both fuel economy and greenhouse gas emissions. Incentives for EVs are focused on direct subsidy of up to $7,500 per vehicle (with a cap of 250,000 vehicles sold per manufacturer).

Europe: Emission regulations have been set out to 2015, targeting a higher level of fuel efficiency than the US. Despite being the most stringent fuel efficiency standards globally, even without EVs, most automakers are well on track to meet these targets with combustion engine technology.

In addition to national subsidy schemes, under EU regulation, CO2 emissions of EVs are counted as zero (even though they are clearly not), providing a powerful supply-side subsidy to EV sales. Despite lower available direct government subsidies, EVs are more competitive in Europe at this point.

However, regulators on both sides of the Atlantic are now working on the next phase of emissions reduction, from 2015 – 2025. The average emission targets currently being touted are at levels that combustion engine technology will find extremely difficult, if not impossible, to meet – ushering in even more powerful incentives for the electrification of the vehicle in that timeframe.

The cost competitiveness of emission-reduction technologies With current technology, there remains considerable scope for improvement in the fuel efficiency of the combustion engine. There are many that require very little incremental cost, and result in considerable savings for the consumer in lower fuel bills. In order to meet the tightening of US Corporate Average Fuel Economy (CAFE) regulations by 2016, we are likely to see a very aggressive rollout of these technologies over the next five years.

For most automakers, these technologies represent a major challenge – not so much on the engineering side, but how to position and market these technologies in order to recover incremental cost through pricing.

Clean Car Wars The Auto Industry’s Technology Race

Simon Webber Fund Manager and Global Sector Specialist, Global Equities

Increasingly aggressive regulation of vehicle emissions and fuel consumption will drive a very rapid deployment of new car technologies. New components and systems for improving combustion engine efficiency will be a major growth market in the next five years, driven by mid-decade regulations in the EU and US.

Electrification will then be necessary to meet the next phase of emission reduction targets from 2015 to 2025. With a combination of the hidden and explicit regulatory subsidies, and high fuel prices, electric vehicle (EV) economics are beginning to look very attractive in Europe. This leaves softer barriers such as reliability, servicing, brand and infrastructure as key factors determining future volumes. Plug-in hybrid electric vehicles (PHEVs) are better placed than pure EVs to meet the demands of consumers and the emission reduction challenge simultaneously. Although PHEVs will be more viable in the short term, strong pure EV strategies represent higher risk programs, with corresponding high potential rewards, if the corporate or public consumer is receptive to pure EVs sooner than we currently expect.

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The clear upside will be to technology suppliers from rapid technology penetration growth.

As PHEV and EVs offer such high fuel savings to the customer, it becomes much more relevant to quantify these savings and to consider total cost of ownership. Although numerous studies have shown that consumers often do not think in this way, leasing programmes from automakers can capture fuel savings in their models and marketing programs.

While PHEV technology costs need to come down as government subsidies are volume-limited and will reduce over time – and although there remain other barriers to the adoption of EVs, including the lack of a good servicing network, charging infrastructure limitations and brand image – we believe that, if the product quality and features are compelling for consumers, then these models could offer a surprisingly good consumer proposition – and, therefore, sell better than many expect.

Rising oil prices, rising carbon taxes, declining battery costs, and rising production economies of scale, all point to the economics shifting in favour of electric vehicles over the next few years. As PHEVs and EVs take off, several key areas should experience major growth:

Lithium Ion battery makers, and suppliers –to battery companies High performance motor manufacturers –The electric motor in the EV will be a high performance component and should command good profitability when volumes ramp upElectric power-train suppliers –

A roadmap for the deployment of low emission technologiesIn July 2008, MIT published a report entitled “On the Road in 2035”, a comprehensive study looking at the timeframe for commercialisation of different auto technologies. Although it is a little dated already, it supports our expectations of the rapid deployment of new technology components to reduce emissions from the combustion engine in the next

few years, and that PHEVs will be the breakthrough electric vehicle segment over the 5+ year timeframe.

The industry implications and relative positioning of auto companiesThere is likely to be a clear divergence of success and failure according to company strategy – first mover versus fast follower in EVs, plug-in versus full battery electric, new EV brands versus electric versions of existing model – these all represent important investment decisions to be made by companies. The risks and costs involved in all these different technology options are already resulting in an increase in alliances and joint development programs among automakers. M&A is therefore likely to continue as a theme in the sector, despite its poor industry record of value creation.

The views and opinions contained herein are those of Simon Webber, Fund Manager and Global Sector Specialist, Global Equities, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds.

Rising oil prices, rising carbon taxes and declining battery costs all point to the economics shifting in favour of electric vehicles


“ These technologies represent a major challenge – not so much on the engineering side, but how to position and market these technologies in order to recover incremental cost through pricing.”


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The current cathedral – the fourth to occupy this site since 604AD – was designed by the court architect Sir Christopher Wren and was built between 1675 and 1710 after the previous building was destroyed in the Great Fire of London.

Since the first service was held there in 1697, numerous events of national significance have been held at the cathedral: thanksgiving services for the Golden Jubilee and the 80th birthday of Her Majesty The Queen, the jubilee of Queen Victoria, the funerals of Lord Nelson, the Duke of Wellington and Sir Winston Churchill, the wedding of His Royal Highness The Prince of Wales, to Lady Diana Spencer, the service of Remembrance for victims of the September 11th terrorist attacks and peace services following the First and Second World Wars. To mark the cathedral’s 300th Anniversary a £40 million renovation project is being carried out. Once the extensive cleaning and repair work has taken place, the two million visitors who come to St Paul’s each year will be transported back to 1710, experiencing Wren’s masterpiece in its original glory.

Schroders Private Banking was nominated for seven awards (the highest number in PAM history), three of which we won, more than any other asset manager this year. We were awarded: Image & Reputation – Ultra High Net Worth; Client Service Quality – Ultra High Net Worth; and Client Service Quality – High Net Worth.

Our success at the Awards reflects the strong reputation and integrity of our people, our focus on providing the best quality of service to our clients and the stability of our organisation.


PAM Awards 2011

Schroders Private Banking is delighted to have been supporting St Paul’s Cathedral, a stone’s throw from our London office, as it celebrates its 300th anniversary.

We were delighted to build on our successes of 2009 and 2010 at the Private Asset Managers (PAM) Awards this year, held on the 3rd March.

Rupert Robinson, CEO, Schroders Private Banking, UK (centre) receiving one of our awards

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spring 2011 inside: market outlook and commentary clean car wars

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