dawn of a new age 2014 absolute knowledge the best - TrustNet

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A N FE TRUS T N E T P U B L I C AT I O N

ISSUE 7 JANUARY 2013

DAWN OF A NEW AGEHAVE FINANCIAL SERVICES REALLY BECOME

MORE CONSUMER FRIENDLY?

2014THE YEAR OF THE DANCING BULL

ABSOLUTE KNOWLEDGE

WHAT EVERY ABSOLUTE RETURN

INVESTOR NEEDS TO KNOW

OUR HOW-TO GUIDE TO BUILDING AN ISA

THE BEST STOCKS OF 2013 REVEALED

SLY AND RETIRING

STEVE MCDOWELL ATTEMPTS TO MAKE SENSE OF PENSION

CHANGES

YOUR PREDICTIONS ANALYSED

CONTENTSEDITOR’S NOTEJenna Voigt introduces you to the seventh edition of FE Trustnet Investazine.

THE YEAR OF THE DANCING BULLPredicting the future is impossible to do, but Joshua Ausden reveals the asset classes the experts are backing for 2014.

THE BEST STOCKS OF 2013Jenna Voigt reveals the FTSE 100 stocks that led the market rally in 2013.

BREAKING THE ISAFE Trustnet Investazine’s step-by-step guide to building an ISA portfolio.

FIVE STEPS TO CUT YOUR COSTSDarius McDermott reveals five insider tips to make sure you’re not paying too much for your investments.

DÉJÀ REVIEWSaltyDog Investor’s Richard Webb warns about chopping and changing your portfolio at the start of the year.

THE MACRO CALENDARThe key dates to watch in 2014, from a markets perspective.

DAWN OF A NEW AGEOne year on from a major regulatory overhaul, Holly Thomas asks whether financial services are really more consumer friendly.

BREAKING THE MOULDThomas McMahon puts common investment myths under the microscope and exposes the ones 2013 shattered.

ABSOLUTE BEGINNERSInsight’s Sonja Uys tells Jenna Voigt what questions every investor needs to ask before buying an absolute return fund.

GEORGE SOROSSteve McDowell says there’s only one thing to learn from “the man who broke the Bank of England.”

A NEW DIMENSIONYou can have anything you want at the push of a button. Alex Paget explains how 3D printing will revolutionise the world.

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KNOWLEDGE IS POWERFund managers share their favourite investment books.

YOUR PREDICTIONS ANALYSEDYou told us your predictions for 2014. Here’s what the experts thought.

NEXT ISSUE: THE BIG INVESTMENT TRUST SPECIAL

OPTIMISM IS THE KEY FOR 2014Brian Tora explains why positive sentiment can carry the markets in the year ahead.

THROUGH THE LOOKING GLASSReviewing your portfolio at the start of the year is always a good idea. Brown Shipley’s Alex Brandreth tells you what to look for.

SLY AND RETIRINGLove them or hate them, pensions are here to stay. Steve McDowell tries to make sense of all the changes.

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One year ago I was more bearish than most, worried that sovereign nations were doing their best to thrive off stale air before their debt burdens plunged the sinking ships beneath a sea of red.

However, while meddlesome politicians and central bankers did their best to throw a spanner in the works – who can forget what happened to markets last summer when the US Federal Reserve (Fed) announced it would not in fact be tapering yet, as everyone expected – 2013 proved me wrong.

Markets are up across the board, apart from the fledgling emerging markets and nearly every area of fixed interest, which seems to have changed its tune entirely.

Investors were almost cheerful in the run-up to 2014, taking a more and more aggressive stance with their money and picking up holdings in areas they have been avoiding since the credit crunch, such as Europe and property.

The macro signs have been looking up as well. In the UK, economic growth figures have been positively revised and inflation’s voracious appetite seems to have been appeased, for the moment.

Call me a perma-bear if you will, but I can’t help but remain cautious in the short term in spite of all these signs of promise. There is still a sea of debt on the books of much of the developed world, the Fed has only just begun winding down its monetary easing measures, and there are a number of elections in Europe that could have unexpected and unintended consequences.

Perhaps most disturbing of all is the fact that the US will run up against the edge of its fiscal cliff yet again in early February, the results of which could see much of an early rally pared back to zero.

Even with my pessimistic view, there are certainly long-term gains to be had and it is well worth putting your money to work, particularly when things appear to have gone off the rails. However, we all need to be aware that there is volatility out there and we are not out of the woods yet.

The lessons of 2008 are good ones and I for one will not be forgetting them in the exuberance of the market rally any time soon.

Best of luck in the New Year. Til next time.

Jenna

FE TRUSTNET INVESTAZINEInvestazine is published by the team behind FE Trustnet in Soho, London.Website: www.trustnet.comEmail: [email protected]

CONTACTS

EditorialJenna Voigt, EditorDirect line: 0207 534 7661

Alex Paget, ReporterDirect line: 0207 534 7696

Thomas McMahon, Reporter Direct line: 0207 534 7697

GeneralPascal Dowling, Head of publishing contentDirect line: 0207 534 7657

AdvertisingRichard Fletcher, Head of publishing sales

Richard Casemore, Account managerDirect line: 0207 534 7669

Jack Elia, Account managerDirect line: 0207 534 7698

Tyrone Bester, Account managerDirect line: 0207 534 7668

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JENNA VOIGT

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JOSHUA AUSDEN

STOCKPICKING

Star charts, crystal balls, numbers. The chances are that whatever medium people use to try to predict the future, hindsight is still 20/20. But Joshua Ausden explains why there are some good reasons to be bullish about markets in 2014.

THE YEAR OF THE DANCING BULL

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Hands up who said Japan would be the best- performing equity market of 2013? I certainly didn’t, which I guess goes to show why I’m in jour-nalism rather than fund management…

An investment in the average IMA Japanese Smaller Com-panies fund would have bagged you almost 35 per cent in 2013*, with the very best – Invesco Perpetual Japanese Smaller Companies – returning a whopping 61.56 per cent*.

If you had gone for an investment trust, which is listed on the stock market and traded as an individual compa-ny share, you would probably have done even better. The Baillie Gifford Japan Trust, for example, is up more than 78 per cent*.

What does the future hold?So what about this year? Predictions for the best-perform-ing market over the 12-month period are as varied as ever, as shown by a recent FE Trustnet poll.

Talking to industry experts, there are a couple of poten-tial contenders, however.

You need to identify two clear attributes when look-ing for a market that will shoot the lights out over a calendar year, according to Darius McDermott, man-aging director of Chelsea Financial Services and AFI panellist.

“First of all, you need a market that is cheap and has room to re-rate, and then you need to identify a catalyst,” Mc-Dermott said.

He should know: he was one of the very few people who tipped Japan at the beginning of last year, and also predict-ed that Europe would top the tables in 2012. This year, how-ever, he isn’t so confident in his prediction.

“In Japan last year, the valuations were cheap and you then had the elections coming up, which were set to give Shinzo Abe a platform to promote real change. Similarly at the end of 2011, Europe had had a bad time and at the same time you had the long-term refinancing programme (LTRO) and Draghi put on the cards.”

“This year there’s nothing obvious screaming out at me.”

Like most industry commentators, McDermott thinks that after a strong run, the UK, US and Japanese equity markets are due a much quieter year.

However, Europe and emerging markets are the two stand-out areas for experts.

EuropeWhile European funds have had a strong run since the depths of the eurozone crisis in 2012, there are many man-agers who believe they have much further to go – espe-cially those with a bias towards peripheral countries such as Spain, Italy and Greece.

Eric Lonergan, manager of the M&G Episode Defensive fund, pinpoints Italy as a fallen star, adding that the best time to buy in to a market is usually during turmoil.

“By and large it’s a good time to buy an equity market when its economy is in recession – that’s pretty much a golden rule of investment, which has a lot of empirical evidence to support it,” Lonergan explained.

“The interesting thing about the periphery is that it’s been in a recession when most of the rest of the world hasn’t.”

“Countries like Italy went into the financial crisis with a rea-sonable price to earnings ratio (P/E) and then in 2008 saw a huge sell-off. After that came the eurozone crisis and so the market is very cheap.”

Performance of indices over 6yrs

Source: FE Analytics

Lonergan says the fact that the ECB is now easing mone-tary policy because it has a set macroeconomic objective in place, rather than purely out of desperation, is a very good sign for the periphery.

He thinks the Italian equity market has the potential to dou-ble in the space of two years. If this were to happen, it would certainly be in with a shout to be the best-performing re-gion in 2014.

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31 December 2007 – 31 December 2013 © Powered by data from FE 2013

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Price to earnings ratio (P/E):A valuation ratio of a company’s current share price

compared with its per-share earnings.

Calculated as:Market value per share

Earnings per share (EPS)

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Funds with a significant amount invested in periph-eral Europe include Cazenove European Income and Invesco Perpetual European Equity Income.

James Sym, manager of the Cazenove European Income fund, believes that Spain and Italy look fairly cheap at the moment, but points out that the whole of Europe remains cheap on a relative basis.

A pick-up in earnings, he says, could see European cyclical companies perform very strongly this year.

“When looking at the Schiller P/E ratio, we’re still almost as cheap as we were in 2009,” he said.

“Europe has started to recover but there hasn’t been a re-covery in earnings yet, which we have seen in the US. Ev-eryone 12 months ago was talking about escape velocity with the US and I think that’s what we could be getting from Europe now.”

Emerging marketsBuying stocks when they haven’t been doing as well as oth-er things out there, is regarded as a tried and trusted route to success – just ask Warren Buffett. This is why McDermott thinks 2014 could be a good time to buy in to emerging markets.

“From a valuations point of view, you’d have to say emerging markets, but is there a catalyst that will see the recent un-derperformance reverse? I’m not so sure,” said McDermott.

“This is very much a value play. There is a lot of negative sen-timent there at the moment and growth is slowing, but if that were to reverse, you could see some very good returns.”

“One market that is very, very cheap is Russia. According to September figures, Russia is four standard deviations cheap-er than its historic average, which is itself cheap.”

Tim Cockerill, investment director of Rowan Dartington, also thinks Russia could be in with a shout, but sees it as a very risky bet.

“It’s one of those markets that always seems to be cheap,” he said. “The Russian economy is actually doing OK, but it’s a market littered with problems. There is heavy political interference.”

“Something like the JPM Russian Securities fund is very vol-atile and does well when the world does well. If we con-tinue to see improvements this year, it could perform very strongly given where the valuations are, but it’s not for the faint-hearted.”

Cockerill thinks China has far more going for it, even though it isn’t as materially cheap as Russia.

“From a valuation point of view, China is somewhat cheap, but on top of that you’ve also got the Third Plenum – a set of reforms that will bring important change to China if they succeed.”

The reforms include an end to the one-child policy – which will go some way to rejuvenating China’s ageing work force – and a number of different measures to privatise the econ-omy.

“Greater investment in the private sector and less govern-ment interference has to be looked at as a good thing,” he said.

“These changes are very much for the long term, so it’s difficult to see when the markets will react. You’ve also got issues with the financial system, which is a potential prob-lem, but all things considered, 2014 could be a good year for China.”

Cockerill’s optimistic view is cham-pioned by industry legend Anthony Bolton, who runs the Fidelity China Special Situations trust.

“In its breadth and boldness, the [Third Plenum] represents probably the most significant reform package in China for about 30 years,” he said.

“The Chinese stock market has been one of the worst-performing world markets over the last three years or so and valuations re-main at a substantial discount to global and emerging mar-ket peers.”



“At last, with the publication of the reform pro-gramme, we could have a catalyst with the potential to reverse this underperformance.”

*As at 31 December 2013.

Anthony Bolton

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STOCKPICKING

Jenna Voigt reveals the FTSE 100 stocks that have blazed ahead over the past year. Can their stellar run continue?

THE BEST-PERFORMING STOCKS OF 2013

JENNA VOIGT

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International Consolidated Airlines Group Born of the merger between British Airways and Span-ish airline Iberia in January 2011, the multinational air-line holding company soared in 2013, outperforming the FTSE 100 by more than 80 percentage points.

IAG, as it is traded as, is the seventh-largest airline company in the world. The Share Centre currently rates the stock as a “buy”, due to its continued focus on cut-ting costs and boosting efficiency.

Performance of stock in 2013*


The stock was trading at 368.5p per share at the time of writing. It had a yield of 0.1 per cent for 2013, which is ex-pected to rise to 0.5 per cent by the end of 2014.

ITVAlthough ITV has had a dif ficult past, breakaway hits such as Downton Abbey, which is hugely popular in the lucrative US market, helped it to massively out-perform the FTSE 100 in 2013.

However, the firm has to fight for its audience share, and for this reason analysts think its growth will begin to slow down from here.



ITV was trading at 189.7p per share at the time of writing. It is yielding 1.8 per cent and is expected to increase its dividend payout to 2.1 per cent this year.

Hargreaves Lansdown Hargreaves Lansdown entered the FTSE 100 in March 2011 and its share price has continued to gather momentum ever since.

However, analysts say the stock is starting to look expensive and that ongoing changes to the regulation of financial ser-vices firms could present a setback for the business.

The Share Centre currently rates Hargreaves Lansdown as a “hold”.



The stock was trading at 1,208p per share at the time of writ-ing. It is currently yielding 2.3 per cent, which is expected to rise to 2.6 per cent this year.

GKNThe fourth best-performing FTSE 100 stock in 2013 was global engineering group GKN. The company is responsi-ble for the majority of automotive and aerospace compo-nents used around the world – essentially, it makes cars and planes move.

Analysts think that GKN will continue to reap the benefits as the global economy improves, particularly in the US. The recovery is expected to cause demand for cars to rise in both the West and emerging markets.

The Share Centre considers the stock a strong “buy” for 2014, pointing out it should receive a further boost from major air-line manufacturers Airbus and Boeing, which are expected to increase production for some time to come.


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The Redditch-based firm was trading at 375.7p at the time of writing. It has a dividend yield of 2 per cent, which is down from its 2012 payout, but is expected to rise to 2.3 per cent this year.

BT GroupTelecommunications behemoth BT Group was the fifth-best performer in the FTSE 100 last year and is expected to continue eating away at the market share of its competitors.

One of the big selling points for the stock, according to The Share Centre, is that it plans to increase its dividend by 10 to 15 per cent per year over the next three years, making it a strong play for income investors.

BT has also rolled out new sports channels and added more than 60,000 subscribers for on-demand video services.



The firm was trading at 368.3p at the time of writing. It paid out a 3.4 per cent dividend in March 2013, however this is expected to fall to 2.9 per cent this March.

*Data to 1 December 2013

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Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk Please quote G TNM 01

We explore further.Aberdeen Investment Trusts ISA and Share PlanAt Aberdeen, we believe there’s no substitute for getting to know your investments face-to-face. That’s why we make it our goal to visit companies – wherever they are – before we ever invest in their shares and again when we hold them.

With a wide range of investment companies investing around the world – that’s an awfully big commitment. But it’s just one of the ways we aim to seek out the best investment opportunities on your behalf.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan.

The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00 invtrusts.co.uk

1013 Trustnet G TNM 01.indd 1 29/10/2013 14:55

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ANNA LAWLOR

PORTFOLIO MANAGEMENT

BREAKING THE ISAOur how-to guide to building an ISA

Every little helps – Anna Lawlor explains in this step-by-step guide how ISAs can revolutionise your finances.

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Wouldn’t it be great to have a hassle-free way of saving or in-vesting that is tax-efficient, easy to use and that any UK adult can control themselves? It may not be the snappiest name, but the Individual Savings Account – bet-ter known as an ISA – is actually a revolutionary financial product, designed specifically to appeal to the broad British public.

Introduced on 6 April 1999, the ISA replaced earlier Per-sonal Equity Plans (PEPs) and Tax-Exempt Special Savings Accounts (TESSAs) in order to democratise access to sav-ing and investing – previously considered the preserve of the middle class – and to simplify the process. The scheme has succeeded: people with an annual income of £10,000 to £19,999 make up the largest proportion of ISA account holders, with most of the rest earning £50,000 per year or less.

There are currently 24.4 million people subscribed to an ISA and the amount of money saved or invested within this type of wrapper has continued to grow, reaching £443bn in April 2013.

There are two types of ISA, a cash ISA and a stocks and shares ISA, with subscriptions evenly divided between the two types, according to HMRC.

There is also the Junior ISA, which was introduced on 1 November 2011 to replace Child Trust Funds (CTFs). Like adult ISAs, Junior ISAs (often abbreviated to JISAs) are available in both cash and stocks and shares types and can be opened by a person with parental respon-sibility for the child at any time, or the child can open their own at age 16. However, the money in the JISA cannot be accessed until the child is 18 years old.

What’s so great about ISAs?With a standard instant access savings account, a basic-rate tax payer has to pay 20 per cent of the income accrued on that savings amount in tax. For high-er-rate tax payers, they lose 40 per cent of the interest gained to the government.

A cash ISA is exactly the same as a standard instant-access savings account – and available from the same sort of provider: banks, build-ing societies, the Post Office – but the ISA wrapper protects the savings account from the tax man.

Similarly, a range of investment products are allowed in an ISA wrapper too: unit trusts, investment

trusts and individual company shares. These receive a tri-ple-whammy of tax advantages as a result.

The trio of tax benefits:

• If you profit from an increase in the price of the shares you hold, they are free from capital gains tax if held within an ISA.

• The tax on any bond investments within an ISA can be reclaimed, scraped back from HMRC each year.

• Any dividend income you receive as part of an investment held in an ISA is taxed at the lower rate of just 10 per cent.

Depending on the rules applied to each financial product, many allow instant access to your money without penal-ty. While there is a limit to how much money can be put into ISA savings or investments (see below), if you allow the amount you have in an ISA to grow each year, you will reap the rewards of compound interest.

So what do you need to know?ISAs are a great way to gradually introduce investments to your personal portfolio of assets and income sources.

There are a range of stocks and shares ISA providers, each with dif-ferent rules and charges. A spot of internet research is called for to en-sure you get the right deal for you (website such as the Money Advice Service is a good starting point).

You can invest your ISA allowance in a single fund, either an index tracker or run by a fund manag-er. One thing you should keep in

Key facts about ISAs

Annual limit:£11,520

Annual cash limit: £5,760

ISA deadline:5 April

A cash ISA is exactly the same as a standard instant access

savings account… but the ISA wrapper protects the savings

account from the tax man.

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mind is that while index trackers are often cheaper than actively managed funds, they simply mirror the performance of a stock market, which means they can go up and down in line with the index. Active managers jus-tify higher charges by offering index-beating returns and the ability to rescue some of your money when markets tank.

Alternatively, split your ISA al-lowance into smaller portions and invest in several managed or tracker funds, or a combination.

The most expensive way to invest in a fund is (bizarrely) di-rectly from the fund house itself; a fund supermarket is cheapest. The initial fee is often reduced, sometimes to zero, because the supermarkets buy in bulk elec-tronically and discount brokers negotiate a reduced fee. The annual management charge, or part of it, may also be rebated (though not always).

You can also select and buy shares directly using a self-se-lect ISA. You can pick from a broad choice of investments including individual UK and in-ternational equities, gilts and bonds. You can also access in-vestment trusts, unit trusts, OE-ICs and exchange-traded funds if you want a mixture of funds and individual shares. Decisions about what to buy and sell are entirely yours and so tend to be for more experienced investors. However, dabbling with a few direct investments using a rela-tively small amount of money is a good way to test your appetite for direct investing.

When you buy and sell shares, there is a trading fee applied,

so check what these are before investing. Consider how much of a chunk this takes out of your capital (before any profit, and remember, a profit isn’t guaran-teed) and compare this with the overall cost of other stocks and shares ISAs.

Is an ISA just for retire-ment or can I use it for short-term goals?The tax advantages of cash ISAs mean it’s extremely unlikely that a non-ISA savings product will be able to compete on in-terest paid, making this an ideal short-term or long-term vehicle for pretty much any financial goal you may have.

Unlike other long-term savings products, such as pensions, HMRC does not stipulate what you can spend your ISA money on or how much you can take out or when. This flexibility, combined with the scope to hold cash savings alongside a similar range of invest-ments to those held in traditional pension funds, has made ISAs an attractive retirement option for people who don’t want to lock their money away.

ISAs also have the advantage that you don’t need to buy an annuity to get the money out, unlike traditional pensions, and if the ISA subscriber dies, the money in their ISA falls within their estate, to be passed on in inheritance.

Sounds great, but what’s the catch?Understandably given its tax ad-vantages, there are a few rules to abide by.

ISA perfection in six easy steps

Do you have a lump sum to save or invest, or a regular monthly amount?

What do you want to achieve with the money? Your appetite to risk will inform this decision: how much of it, if any, could you afford to lose? And what trade-off, in terms of profit, would make a potential for loss acceptable? If you can’t stand to lose any money, a cash ISA may be best because the amount you make is guaranteed, though the return on that capital is capped by the top interest rate available and has no poten-tial for a higher rate of return, which a stocks and shares ISA offers. A rule of thumb is that you should hold investments for at least five years.

Use a comparison website to find the best cash ISA rate available and the stocks and shares ISA provider that offers the best val-ue for money (not necessarily the cheapest) and access to the funds or direct shares you want.

Most offer simple online investment selec-tion, which you add to your ISA in the same way as an online shopping basket. A few clicks of the mouse and voilà!

Most online investment ISA providers facili-tate online dealing and provide a multitude of portfolio management tools and research data to help you make informed decisions about your investments. You can also track the performance of your investments – but remember not to sell an investment at the first sign of poor performance, or you risk always selling at a loss. Seek financial advice if you’re unsure what to do.

To change ISA providers, follow the same research steps above and look for providers that allow ISA transfers. Speak to the new provider and fill out a simple form – they will transfer your money for you.

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ISAs can’t be held jointly, but everyone aged 16 and over, has an annual ISA allowance; this is the amount of money per year that can be saved or invested in an ISA wrapper. The current limit is £11,520, up to £5,760 of which can be held in cash. The whole chunk can be used for shares if you wish. Since 2010, the ISA allowance amount has risen to keep pace with inflation.

The annual ISA allowance runs from 6 April to the following 5 April. If you do not use your full annual ISA allowance by 5 April, you lose it – it cannot be carried over to the next year or transferred to anyone else. This is why an ISA should be your first port of call for savings or investments, to reap the tax advantages. That said, the income on some corporate or government bonds is not taxed anyway, but for others, an ISA will shelter the income from tax duties.

If you want to transfer from one ISA provider to another, ensure this is done between the providers: never, ever withdraw the money to transfer to a new ISA, as this re-moves the tax benefits. Once you take money out of an ISA, that amount cannot be replaced in the same annual ISA allowance. Shopping around each year will ensure you get the best cash ISA rate (see tips below).

If you withdraw the funds from an ISA, you will also lose the ability to add any additional contributions for that tax year. For example, if you had £5,000 in an ISA and removed it from the structure as cash, you would then only be able to contribute an additional £760 in that tax year because the £5,000 you withdrew would count toward that tax year’s ISA contribution limit.

Transferring an ISA to a new provider is easy: get in touch with the new provider you would like to use, fill in their simple ISA transfer form and let them do the rest. You’ll be notified once your ISA has been transferred.

Anna Lawlor is a freelance financial journalist and director at Social i Media

For more information about ISAs and how to use them, visit the FE Trustnet education centre.

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FIVE ESSENTIAL STEPS TO KEEP YOUR COSTS IN CHECK

JENNA VOIGT

Like anything in life, you need to know what you’re getting for your money when investing. Use our handy five-step guide to avoid paying over the odds.

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Darius McDermott

“There is value to be had in every part of the chain and just because a platform is cheaper, it may not be good value for money.”

McDermott warns investors thinking about switching plat-forms that they need to evaluate whether there are exit or trading fees and that they should add up whether charges of just a few percentage points less would be enough to make up for what they will pay to leave their current provider.

Don’t just buy a passive because it’s cheap

Actively managed funds – those with a person at the helm making decisions on a day-to-day basis about which stocks, bonds, or asset classes to invest in – tend to be more expensive.

An easy option to take if you want to save a few quid is to opt for a passive fund, which tracks the performance of a relevant index.

But be warned, McDermott says, these funds are cheap-er but can easily go down with the market as well as up, so you need to think twice about whether they will allow you to meet your objectives.

Be wary of adviser feesWhile it is often a good idea to seek financial advice, Mc-Dermott says the cost of this can be prohibitory, particu-larly for people with less money to invest.

The RDR , a recent regulatory review of financial services, banned the use of adviser commission, where a fund house would kick back part of its fees to advisers, in an effort to cut back on painful mis-selling scandals and prevent investors from being pushed into unsuitable products just so someone further up the chain would get paid more.

McDermott says this has in fact increased the cost of ad-vice, since the qualification and regulatory burden has risen for advisers.

However, anyone who is unwilling or unable to pay for advice is in luck. With the rise of the self-directed investor comes a number of resources to help you make informed decisions about your investments – including our own FE Trustnet education centre and Trustnet Direct.

There are two sides to the argument – you either get what you pay for or paying too much can erode your total returns. Either way, you need to know where your money is going when you invest.

Chelsea Financial’s Darius McDer-mott says cost should never be the be-all and end-all when it comes to buying funds, but adds there are five simple rules that investors can follow to ensure they aren’t paying over the odds.

Don’t pay initial chargesAfter a new regulatory regime came into place at the start of 2013, McDer-mott says initial charges (an additional

fee when you put money into a fund for the first time) be-came a thing of the past. This is the first thing you should consider when counting costs.

“Make sure you’re not using a broker that asks you to pay initial charges,” he said.

Search for clean share classesAnother change that the City’s financial watchdog – then the Financial Services Authority (FSA) – instituted was the unbundling of charges. The idea was that in-vestors would be able to see where each part of their fee structure was going, whether to the asset manage-ment house, the platform or to the adviser (which is now banned).

“We still live in a 1.5 per cent (annual management charge) world, but that will come unbundled at the start of the new tax year,” he said.

“This should lead to charges across the board dropping a little.”

Know what your platform chargesMcDermott says conducting your own research into platform charges is especially important. While platform charges range from 0.25 per cent to 0.4 per cent, McDer-mott says what this actually pays for can vary wildly.

For some investors, a platform’s additional functionality may be worth the higher price-tag. But McDermott says even here there will be downward pressure on charges.

M&G Global Dividend FundUnlike most traditional equity1 funds, manager Stuart Rhodes seeks returns by selecting companies from across the globe that display different dividend characteristics. His approach combines quality companies delivering reliable dividend growth with companies more exposed to economic and structural growth, thereby creating a portfolio that has the potential to perform in a variety of market conditions.

Past performance is not a guide to future performance. The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. The level of any income earned by the fund will fluctuate.

Call: 0800 389 8600 Visit: www.mandg.co.uk/dividend

1Equities are shares of ownership in a company. This Financial Promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides investment products. The registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776. DEC 13 / 46518

A

on

global equity investing

M&G Global Dividend Fund

46518 GLOD SP Ad MOBS 297x210_02.indd 1 06/12/2013 14:13

RICHARD WEBB,IS THE MANAGING DIRECTOR OF SALTYDOG INVESTORS


Déjà review For market-beating performance, just follow the numbers.

As we head into the New Year, people often take stock of their financial situation and see if their in-vestments are on course to meet their aspirations. Fair enough, you might say, and the chances are that the leading sectors from the previous year didn’t do so well in this one, so perhaps it is indeed time to make a few changes before forgetting all about it for another 12 months.

But is once a year really enough?

Our current holdings are:Saltydog Group

Date Purchased

Fund Name% of

Portfolio

Slow Ahead 16/05/2013CF Odey UK Absolute Return

22.0

Slow Ahead 25/10/2013City Financial UK Equity

11.3

Steady 12/10/2012PFS Chelverton UK Equity Income

18.9

Steady 04/07/2013 Unicorn UK Income 19.0

Steady 12/07/2013Std Life UK Eq Inc Unconstrained

10.0

Steady 11/07/2013Baillie Gifford Global Discovery

5.2

Steady 17/10/2013Legg Mason Global Equity Income

7.8

Developed 16/08/2013Unicorn UK Smaller Companies

5.9

I have to confess that for a decade I didn’t even do my annual review properly. I was making monthly payments into ISAs and was fortunate to be part of a company pension scheme where my contributions were taken at source and added to by my employer.

In my mind I had “ticked the box”. Saving for my future was under control and I was busy furthering my career and starting a family. Every year I had a quick look at my annual statement and was delighted if things had gone up and disappointed if they had gone down. Either way I was paying commission to my adviser and management charges to the financial institutions.

To find out more about the service we provide, and the two-month free trial we offer to all new mem-bers, go to our website www.saltydoginvestor.com

21

I had very little understanding of how my investments worked and believed that the good folk in the personal finance industry were beavering away in the background trying to maximise my returns.

But during the financial crisis of 2007/2008 I was aware that my pension must have been suffering, but didn’t know what to do about it. When my next statements came through the post I took the time to have a good look at them and it wasn’t pretty reading. I was still in-vested in the same funds that were recommended to me many years earlier and as a result of the recent downturn my annualised return in the 10 years to 1 Jan 2009 had dropped to around 2 per cent.

Unsurprisingly, I now do things very differently. The world has moved on and there’s no need to wait for your annual review to find out how your investments are performing. Almost everything is online these days and that includes your investments – there’s no reason why you cannot check them every day.

How often should you review your portfolio? At the end of the day it’s up to you, but, like most things in life, the more effort you put in, the better you are likely to do. Think of it like backing horses: would you lay all your bets at the beginning of the season and then turn up at a bookies a year later, fingers crossed, to see how you’ve done? Or would you study form, follow the odds and work with the most accurate up-to-date information you can get your hands on to help give you an edge?

In November 2010 the founding members of Saltydog Investor put £40,000 in a fund supermarket and launched the cautious Tugboat portfolio. The objective was clear – to actively manage a portfolio of funds with the intention of avoiding market downturns, but also making reason-able gains when conditions were favourable.

The portfolio is reviewed every week. This is not a lengthy process and only involves answering two simple ques-tions.

• Are the sectors that we are invested in still perform-ing well?

• How do the funds that we are holding compare with other funds in the same sector?

If the answers to these two questions are favourable, then that’s the job done.

On the other hand, if there has been a shift in the markets and we find that we are no longer invested in the leading funds in the best-performing sectors, then some further analysis is required.

That is why Saltydog Investor provides up-to-date, unbi-ased, clearly presented fund performance data. By using our proprietary Saltydog groups it is also possible to con-trol the overall volatility of a portfolio and with the latest fund analysis we can ensure that we are only invested in the more volatile funds when the returns justify the in-creased risk.

So how have we done?Since setting off on this voyage we have experienced several wars in the Middle East, a tsunami in Japan, the downgrading of America’s credit rating, endless problems in the eurozone and more recently the partial shut-down of the US govern-ment followed by a stand-off that could have resulted in the world’s largest economy failing to honour its debts.

All of these events sent ripples through the world’s stock markets and so we have continually rebalanced our portfolio to suit the prevailing conditions.

There have been several drops in the market.

• In 2011 we saw the FTSE 100 drop by more than 17 per cent in three months – but our portfolio went up.

• In 2012 there was another correction when the market dropped by more than 9 per cent, but we went down less than 3 per cent.

• This year the FTSE 100 peaked near the end of May and by the beginning of October it was down by more than 5 per cent – but the Tugboat gained 2 per cent.

It is hard to say that we haven’t achieved our aim of protecting our savings when the markets have been falling. Once may have been lucky, twice a fluke, but three times...

When markets have recovered, we have also managed to reap the benefits and in the last year our portfolio has gone up by nearly 19 per cent – not shabby for a cautious portfolio.

We operate on a standard platform, trading readily available funds. In just under three years we have shown that with the right information and a little time and effort, it is pos-sible as private investors to actively manage a portfolio to generate returns in line with our objectives. Maybe this year, you should too.

22

Total return 32.9%

12 month returnAnnualised

return

32.9% 18.9% 10.0%

Tugboat performance to 13th November 2013

2014THE MACRO CALENDAR

JANUARY

APR I L

JU LY

O CTO BER

FEBRUARY

AUGUST

N OVEM BER

M ARCH

SEP TEM BER

DECEM BER

M AY JUN E

January – December

Indian general election due in 2014

1 January

Latvia joins the eurozone and adopts the euro currency

5 April

ISA deadline for UK investors

April – July

South African general election

5 October

Brazilian general election to elect the president, the national congress, state governors and state legislators

26 October

Uruguayan general election

Mid – July

Indonesian presidential election

23 July – 3 August

Commonwealth Games held in Glasgow

7 – 23 February

Winter Olympics to be held in Sochi, Russia

Early February

US national debt cap resets after the October 2013 extension from the previous cap of $16.7trn

22 – 25 May

Elections to the European Parliament held in all member states of the European Union

25 May

Belgian federal election and Colombian presidential election

4 November

United States Senate and House of Representatives elections

15 – 16 November

Ninth meeting of the G20 heads of government to be held in Brisbane, Australia

9 March

Columbian parliamentary election

4 – 5 June

40th G8 summit to be held in Russia at the Black Sea resort of Sochi

12 June – 13 July

2014 FIFA World Cup held in Brazil

31 December

United States and UK set to withdraw troops from Afghanistan

14 September

Swedish general election

18 September

Scottish referendum on the issue of independence from the United Kingdom

25

HOLLY THOMAS

COVER STORY

After the financial crisis, sweeping regulatory changes were introduced with the aim of protecting investors’ money. But has this helped or hindered the man on the street? Holly Thomas investigates.

DAWN OF A NEW AGE

26

A new era of how investors pay for financial advice and buy funds began at the very end of last year. Al-most 12 months into the new regime, the shake-up has resulted in countless column inches – and much criticism.

So what’s all the fuss about?

The overhaul was part of the City watchdog’s retail distribution review (RDR), which was responsible for changing the rules. It stated that all advisers should charge a separate fee, like solicitors and accountants, rather than take commission.

Banning commission was intended to stamp out mis-sell-ing scandals driven by unscrupulous, commission-hungry advisers recommending pensions and investments that earned them the most money. Almost every mis-selling scandal has been linked to the lure of incentives, including that of split caps and endowments. Advisers were also re-quired to attain a higher standard of qualification.

The rule changes also meant that the way people paid for their investments would become more transparent. One of the desired outcomes was to stop the cost of a fund being quoted as an overall figure.

A typical 1.5 per cent annual management charge (AMC) for an actively managed fund included a fund supermar-ket, or platform, fee and commission to the adviser.

But the proportions for each were not disclosed.

Typically, 0.75 per cent goes to the fund manager, 0.5 per cent to the adviser and 0.25 per cent to the platform that sells and manages the product. Under the new regime, investors pay an AMC of 0.75 per cent on average and any other charges are to be listed separately.

As part of the new charging rules, asset managers are no longer able to pay an ongoing portion of their fund charges to advisers for their decision to use a particular fund. Typically 0.5 per cent was used to pay commission – known as trail commission – to the ad-viser or broker.

This new transparent way of displaying charges brought about the term “clean share classes”. A clean share class ignores all extra costs that have nothing to do with the management of the fund.

But that’s not all. There is a “super clean” share class too, which refers to an even lower AMC than for a clean one. This is where some providers have nego-tiated rebates on a group of funds, which brings the

cost below that of a single clean fund. Individual in-vestors cannot negotiate these alone.

What’s next?There is a second part to the RDR rules that comes into force next April. Some brokers and platforms rebate all or part of the commission on funds, under the old pric-ing structure, to customers. From April 2014, instead of rebates, a single platform service charge that has been agreed with the investor will need to be disclosed.

While some services already operate this way, the FCA says current mixed rebate practices make it difficult to compare prices and products available on different platforms, with a risk that the payments could lead to product bias.

Earlier this year, HM Revenue & Customs placed taxes on these rebates where the funds are not held in an ISA or a personal pension.

The growing army of DIY investorsDeloitte last year predicted 55,000 people would be driv-en out of the advice market because they don’t want to pay fees to their adviser.

Some investors will still use a professional to recommend funds, or a wealth manager to make investment decisions on their behalf. Yet a growing number of people are mak-ing their own investment choices, with a marked decline in people taking professional advice.

According to a study that analyst firm The Platforum pub-lished in the summer, 31 per cent of respondents said they never took advice, compared with 26 per cent in 2011.

The switch from commission to new-style fee-based pricing by financial advisers has been widely reported as a contributing factor to the number of investors going solo. Plus, a decline in the number of financial advisers means it could get more difficult to access advice in the future, according to City watchdog the Financial Con-duct Authority.

With more than 2,500 funds available, choosing which one to invest your money in without the help of an adviser can seem like a minefield. According to unbiased.co.uk, would-be investors say the top-five most complicated aspects of investing are knowing when to buy and sell investments, how to buy and sell stocks and shares, which investments represent best value, knowing what products to invest in, and understanding the terminology around investing.

27

The good news is that there are numerous resources to help with such decisions – as well as matching at-titude to risk with the right funds.

There are countless websites offering research and guid-ance on what people should be investing in, whether it is for their stocks and shares ISA, self-invested personal pension or even an investment outside a tax wrapper.

Fund supermarkets and discount fund brokers offer access to a wide range of funds from many different managers. They don’t offer regulated financial ad-vice, but come with a wealth of knowledge about the investments available. Many offer risk ratings that en-able the investor to match their attitude to risk with a handful of funds.

The prices of platforms vary and so picking the right one is as important as picking the right fund, since high fees will dramatically erode your returns. But it’s not all about price – it’s also important to access quality research.

Has the RDR worked?The RDR was designed to allow easier comparison of charges between funds, but with the different share classes now available, some experts argue that the changes have made the industry even more confusing.

The launch of clean share classes was highlighted as the type of jargon that will put consumers off investing, ac-cording to a recent study. Some 96 per cent of respon-dents said they had not heard of the term “clean share classes”. Furthermore, there is evidence that the lack of understanding of clean share classes actively hinders would-be investors. Only a fifth of respondents to the study said that share classes were easy to understand.

Around 14 per cent of consumers said they had been put off investing due to a lack of understanding around these new share classes.

It has long been the case that the world of finance has been littered with far too much jargon. However, the complexity surrounding investing is not putting peo-ple off. It seems more and more are choosing to invest through platforms that serve consumers (rather than ad-visers on an investor’s behalf).

A study by The Platforum has concluded that di-rect-to-consumer platforms have been the real win-ners of the RDR, since assets under management are now estimated to stand at £140bn, up from £120bn the same time 2012 and £94bn in 2011.

While figures point to the fact that more people are head-ing down the DIY investment route, there are still more than 32,000 financial advisers in business in the UK.

Alistair Cunningham, an adviser at Wingate Financial Planning, said: “For those with affairs of above-average complexity, there will always be a need for advice. Our tax system is complex, and retirement options are a minefield for the unwary.”

For those that have stayed loyal to their adviser, there have been re-ports that fees are often deducted from the investment itself, which means the consumer may not see any real change from how they have dealt with their adviser before the changes brought by the RDR.

They are still not writing a cheque for the services they are receiving, as was thought to be the case.

The RDR has, however, brought a shift in what financial advisers are recommending. Commentators predicted that the removal of commission bias from advisers would open the doors to more investments that don’t carry commission, such as investment trusts.

Indeed, the Association of Investment Companies (AIC) reported a surge in the uptake of investment trusts over the last 12 months. It said there had been a 53 per cent increase in adviser and wealth manager investment company platform purchases in the first six months of 2013 compared with the same period in 2012.

Ian Sayers, director general of the AIC, said: “It’s encouraging to see such a strong increase in platform purchases by advisers, albeit from a low base.”

Overall, investors are looking close-ly at the cost of buying funds. Holly Mackay of The Platforum said: “It should be made clear to people what they are paying – and who’s getting what, especially after the changes coming in April. I think some invest-ments will be cheaper, but the cost of others may go up. Crucially, investors will be able to make informed deci-sions about what it is worth paying extra for.”

Alistair Cunningham

Ian Sayers

28

ANALYSIS

BREAKING THE MOULD

Don’t believe everything you hear, your mother always said. Thomas McMahon shines the spotlight on the offending investment clichés that 2013 blew the lid off.

THOMAS MCMAHON

The myths that 2013 shattered

29

It’s surprising how often common knowledge changes. It must have blown the minds of people hundreds of years ago when they realised the earth wasn’t flat.

Things that are cornerstone beliefs of investors, or at least rarely questioned clichés, are constantly being subverted by reality and the chaotic progression of the markets.

The financial crisis seems to have accelerated this pro-cess, with the stresses and strains that governments, cor-porates and households have had to cope with causing distortions in the way the pre-crisis markets behaved.

This past year has been one in which markets have fun-damentally shifted in a number of areas and asset classes, leaving the unprepared exposed and highlighting the importance of planning for every eventuality.

Here are some of the key things we learned aren’t true.

myth:Bonds are a safe havenNot last summer they weren’t. Returns were already being squeezed on anything with a heavy-duty credit rating, pushing investors into riskier assets in search of yield.

However, many investors were still hoping that fixed inter-est would cushion their portfolio in the case of a correction in the equity markets. No such luck.

Performance of bonds and equitiessince 22 May 2013


As soon as people started to believe the US Federal Reserve might start reducing the quantitative easing (QE) pro-gramme that has been supporting asset prices, the bottom fell out of the bond and equity markets.

It could well happen again this year: eventually QE must be withdrawn and experts warn that the same dynamic is likely to unfold.

Last year this resulted in growing interest among pro-fessional and retail investors in “alternatives” to diversify their equity exposure.

This typically means absolute return funds, but also in-cludes property and offshore hedge funds – two sectors that seemed to have been killed off by the financial crash in 2008. This just goes to show how quickly things can change.

myth:Gold protects in a downturnWrong again. Gold fell when the markets rose, fell when the markets fell, and then fell some more. This wasn’t supposed to happen, at least not if you believe that QE is storing up inflation and gold will protect against this eventuality.



There are many theories about gold and a lot of peo-ple with strong opinions on the metal. Gold’s recent fall brought into question some of the assumptions “experts” have made about its behaviour and highlighted that there isn’t as much evidence about its properties as some believe.

The US only came off the gold standard in the early 1970s and recent academic work questions whether it has real-ly been correlated with inflation since then, as has widely been assumed.

myth:Japan is lostBut now it is found, or at least making a serious fist of find-ing itself. A country that was said to have been “asleep” for two decades saw its market surge ahead on a wave of money-printing and economic reforms.

It was a running joke among money managers that next year was always going to be Japan’s year – but last year it was.

The gains were trimmed back slightly in the second part of 2013, but with more reforms on the agenda, a sizeable portion of commentators are urging investors to bet on its continued success.

-12%

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-8%

-6%

-4%

-2%

0%

2%

B

A

22 May 2013 – 22 November 2013 © Powered by data from FE 2013

May 13 Nov 13

A – iBoxx Sterling Gilts All Maturities (-2.7%)B – FTSE All Share (0.2%)

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-5%

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22 May 2010 – 22 November 2013 © Powered by data from FE 2013

A – iBoxx Sterling Gilts All Maturities (21.0%)B – S&P GSCI Gold Spot (-5.7%)

30

Performance of indices over 1yr


Japan is engaged in a massive monetary experiment, and the outcome is unsure. However, the same is true of much of the rest of the world.

One of the fears about the consequences of all this QE is that it will result in high inflation and erode the value of cash.

One traditional way of protecting yourself against this trend has been to hold gold, but the effectiveness of this strategy has also been brought into question.

myth:Emerging markets grow fasterThis is true, but only up to a point. Their economies are growing faster but their markets have trailed.

Last year was the year that the three-year numbers for the emerging market indices turned negative and a lot of investors re-examined their reasons for holding funds in this sector.



The idea that was really subverted was the notion of de-cou-pling – that emerging market economies had moved to a stage whereby they could prosper under their own steam rather than being dragged along on the strength of the western world.

The sell-off in the summer alerted the markets to how much of the money invested in developing regions was “hot”, and so liable to be withdrawn as soon as condi-tions improved back home.

There is much less confidence around the prospects of emerging markets seeing index growth of the sort that makes their 10-year figures look so good. The consen-sus now is that investors need to be highly selective in the stocks and sectors they buy in developing regions.

Consumer demand is the new theme, meaning investing in stocks that are geared towards middle-class aspiration rather than industry and manufacturing.

myth:You shouldn’t buy propertyProperty collapsed in the wake of the 2007 and 2008 crash, with IMA Property among the worst-hit sectors.

It lost 40.32 per cent compared with 30.7 per cent for the average UK equity growth fund. Property investment trusts did even worse, losing 63.16 per cent.

Performance of sectors in 2007 and 2008


Few people wanted to hear about the asset class at the start of the year, but it has ended 2013 as one of the most popular areas to invest in.

Most closed-ended funds are trading on premiums while the open-ended funds have started to appear at the top of the fund inflow tables for the first time since 2007.

The yield was the first thing to attract investors: the tight-ening of spreads on bonds has left little joy there for in-come-seekers.

However, government attempts to support the housing market have opened up the possibility that capital gains could once again be possible in the asset class, something that seemed a long way off at the start of 2013.

So is this a “new normal”? Is property back for good or could it collapse once again once the stimulus packages wear off?

We don’t know, any more than we know which myths will be shattered in 2014 and which ones skewered in this list will start to look like common knowledge once again. Preparing for all eventualities has to be the name of the game.

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Jan 13 Nov

D

B

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22 November 2012 – 22 November 2013 © Powered by data from FE 2013

A – FTSE All Share (21.5%)B – S&P 500 (29.7%)C – MSCI Emerging Markets (3.4%)D – TSE Topix (60.8%)

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A – FTSE All World Developed (29.3%)B – FTSE All World Emerging (-12.5%)

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1 January 2007 – 31 December 2008 © Powered by data from FE 2013

A – IT UK Growth (-45.0%)B – IT Property Direct UK (-63.2%)C – IMA Property (-40.3%)D – IMA UK All Companies (-30.7%)

www.bnymellonam.co.uk 0800 614 330

TRACKING DOWN EQUITY INCOME JUST GOT EASIER.

* Dividends are a share of the profits made by a company to shareholders. This is a financial promotion for Retail Clients and should not be taken as investment advice. You should read the Prospectus and Key Investor Information Document (KIID) for each fund in which you want to invest. The Prospectus and KIID can be found at www.bnymellonam.co.uk. If you are unsure about any investment please speak to an authorised financial adviser. All information prepared within has been prepared by BNY Mellon Asset Management International Limited (BNYMAMI). Any views and opinions contained in this document are those of BNYMAMI as at the date of issue; are subject to change and should not be taken as investment advice. BNYMAMI and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This document may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. To help us continually improve our service and in the interest of security, we may monitor and/or record your telephone calls with us. Issued in the UK by BNY Mellon Asset Management International Limited, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. BNYMAMI, Newton Investment Management Limited and any other BNY Mellon entity mentioned are all ultimately owned by The Bank of New York Mellon Corporation. Newton is a member of the IMA. CP11731-13-03-2014(3M) 22120 12/13

It’s not easy to generate income surrounded by low interest rates and high inflation. But equity income could offer one way to rise above a low growth world. Invest in well run, growing companies and you might earn an income from dividend* payments. Reinvest those dividends and you could really start to elevate long-term returns (this is not guaranteed).

The trick is spotting the right opportunities. At BNY Mellon we have a comprehensive selection of funds piloted by equity income specialist: Newton. Using their established technique, they pick shares based on a sharp analysis of global trends. We believe that Newton is ideally positioned to help you navigate even the most challenging investment conditions.

Our funds:Newton Asian Income FundNewton Global Higher Income FundNewton Managed Income FundNewton Emerging Income Fund

Past performance is not a guide to future performance. The value of investments and the income from them isn’t guaranteed and can fall as well as rise. When you sell your investment you may get back less than you originally invested. Investors in these funds should understand that capital growth may not be achieved. If you are unsure about the suitability of an investment, please contact your financial adviser.

ANALYSIS

ABSOLUTE BEGINNERS

Insight’s Sonja Uys speaks to Jenna Voigt about what investors need to find out before they buy into an absolute return fund.

JENNA VOIGT

Five questions every absolute return investor should be asking...

33

Q

Q

Q

Q

Q

A

A

A

A

A

How do you define absolute return?

“So if you think about it, absolute return is the opposite of relative return, which means you’re not trying to track the market or go up and down with the market relative to some index, but you’re measuring yourself in absolute terms, in percentage terms of change of value.”

“So that’s the starting point that everyone would agree with.”

“But then the next question you should ask is, ‘what is the timeframe that you measure yourself over?’ In the case of relative return, for example, you would say, ‘well I measure myself over a market cycle’.”

“But in the case of absolute return, the horizon is typical-ly much shorter. Is that one year? Is that three years? Is it five years? Because the shorter the time horizon, gener-ally speaking, you’d expect a lower appetite for risk. So I think that’s a good starting point when you speak to a manager.”

What are the characteristics of the returns you try to achieve?

“Here I’m thinking that if you speak to a fund manager and say: ‘OK, what are you trying to give it?’ Firstly, it allows you to much better judge him afterwards. Is he actually delivering the characteristics of return that he claims he’s targeting?”

“Now, for example, the things to cover there would be volatility of returns, capital preservation, what does he think the worst possible loss will be? But also the pos-itive questions, like, ‘what do you think you’ll make if markets go up?’”

“It’s trying to understand from the fund manager’s point of view what range of returns he is targeting. Is it 0 to 5 per cent? Is it minus 10 to plus 30 per cent? Again, all of that gives you a much better indication of what you should be expecting and therefore when it comes to judging the performance, it gives you the right criteria to judge it on.”

How do you achieve those returns?

“I think here it has more to do with whether returns come from alpha or from beta. By alpha we mean the active decision-making by the fund manager and beta is the general direction of the market.”

“In the absolute return space, we like to say that if our funds go up then it is alpha and when they go down we

blame it on the market, but again trying to understand what the fund manager aims to achieve and how he will be using alpha and how he will be using beta gives a good indication of what to expect.”

“Then there’s this other concept of dynamic beta, where it is saying you might be absolute return in the sense that you start with a blank sheet of paper. So therefore if I’m al-locating to the market it’s an active allocation, or dynamic beta, so I’m making an allocation to the beta.”

What flexibility do you have and to what extent have you used this flexibility?

“Flexibility, what I’m thinking here is the controls around the fund. If you think about the layers of limits or targets that there are, you start with the regulatory limits.”

“In the case of UCITs funds, these would be the UCITs lim-its, then there would be a fund prospectus. This outlines the maximum limits, generally speaking, risk-wise that the fund will take.”

“Some funds will have an additional set of internal limits which are even tighter than the prospects. But then again there’s a fourth layer, which is if you’re speaking face-to-face with a fund manager, she might say, ‘well, the ex-pected range is actually even tighter than what is set out in the prospectus’.”

“So again, adding that qualitative element allows you to judge the fund manager and the fund’s performance, not just on what’s allowed in the prospectus, which to be honest could be very wide, but more to have a better understanding of how they intend to use that.”

How do you expect to perform in different markets?

“If different managers have very different mandates, they have different appetites to risk and therefore some man-agers will say, ‘I’m going to try to outperform the market when it goes up’, and I might say therefore, ‘I’m taking some risk, so if the market falls I’m hoping to just halve the losses’. That’s one approach.”

“Another manager might say, ‘I’m taking a very strictly market-neutral approach and therefore I’m completely indifferent whether the market goes up or the market goes down, I’ll always give you a consistent return’.”

“Again, these are all measured by understanding the atti-tude of the fund manager. It allows you to know what to expect from the fund through different markets.”

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QA

What does the Insight Absolute Insight fund set out to do?

“What the Absolute Insight fund does is it invests in differ-ent absolute return strategies which are all complemen-tary and all managed internally by Insight.”

“These strategies are all uncorrelated. So in the first in-stance we’re hoping that there’s always a time when one

or a few of the strategies will do well and therefore diver-sify the fund’s returns. We look at returns on a 12-month horizon and for each of the strategies in which we invest, we look at their own returns on a 12-month horizon.”

“Therefore our approach of combining this all into one fund really means true depth and diversification embed-ded into the fund.”

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MY HERO

STEVE MCDOWELL

GEORGE SOROSThe man who broke the Bank of England

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To say that George Soros is his own man is as much of an under-statement as saying that Hurri-cane Katrina was a bit of a blow.

Hungarian-American, British ed-ucated, philosopher, self-made multi-billionaire, ultra-contrarian investor and massive currency speculator, controversial author, Nazi-fleeing Jewish emigrant, philanthropist, pro-democracy campaigner, convicted insider trader (albeit in France where that kind of thing has been fashionable for a while) outspoken atheist, pro-marijuana campaigner and Esperanto speaker.

In fact his legend is so acute and his currency trades so vast, that to many, he has become a one-man fiscal tsunami that has given birth to the kind of nomenclature normally de-voted to entire nations, races or political movements. It is called Anti-Sorosism.

Like many extremely wealthy people given to operat-ing covertly, he divides opinion – he was after all once dubbed ‘the man who broke the Bank of England’ after personally making more than $1.1bn from a gigantic short position on sterling as the UK government threw money at the failing Exchange Rate Mechanism on Black Wednesday in 1992.

Anti-Sorosism was first coined after the Quantum hedge fund, of which he is chairman, was partially blamed by the then prime minister of Malaysia, Ma-hathir bin Mohamad, for the economic collapse of east Asian markets in 1997. At the first sign of devaluation after the Thai baht was unpegged from the US dollar in that year, Soros pulled out all his short-term invest-ments in stocks and property, with understandably devastating consequences.

Result, Mahathir – known for numerous unsavoury anti-Semitic remarks in the past – pressed the J’ac-cuse button on Soros, who countered with “don’t blame me for your mistakes”. The pair finally made peace in 2006.

By now, there are so many players in the Anti-Soros conspiracy that they might well have us believe he is the fiscal equivalent of the Grassy Knoll. The 83-year-old has been variously accused of collaborating with Nazis, attempting to undermine the US economy, be-

ing a deliberate political subver-sive and even leading the interna-tional drug trade.

Efficient investorThink what you like, George Soros is an influential and devastatingly efficient investor.

Since 1981 when he was dubbed the world’s greatest money manager by Institutional Investor magazine,

George Soros has been right in the public crosshairs.

A $1,000 investment with him in 1969 would now be worth more than $4m – not surprising then that the flagship Quantum fund is as revered by his investors as he is.

His background is no less atypical. Schwartz György was born in Budapest in August 1930 to a secular Jewish family. His mother’s side owned a silk shop and his father, Tividar, was a lawyer and a keen linguist who taught his young son the international language Esperanto from birth. When he was 13, the Nazis, tiring of non-compliance from the Hun-garian government, invaded and the deportation of the Jews began.

Soros took a job with the Jewish Council who in turn, according to the writer Michael Lewis, asked the kids to hand out slips of paper to key citizens, asking them to report to the rabbi seminary. His father warned him to tell the recipients that if they did report, they would be deported. He survived the war posing as the godson of a wealthy Hungarian official. The family name was changed in 1936 in a bid to avoid anti-semitism, so it is ironic that he was also later accused of being a Nazi collaborator.

An impoverished young Soros arrived in England in 1947 to live with his uncle. He attended the London School of Economics, learning from the legendary philosopher Karl Popper, and worked as a railway porter and waiter in his spare time. Following graduation and a handwrit-ten letter to every merchant bank in the City, he began an entry-level job at Singer & Friedlander. Though So-ros left in 1956 to work as an arbitrage trader and later an analyst in New York City, the 100-year-old Singer & Friedlander ironically breathed its last in the banking collapse of 2008, from which the former office boy prof-ited enormously.

I’m only rich because I know when I’m wrong...

I have basically survived by recognising my mistakes.

George Soros

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He began to deploy Popper’s theory of reflexivity, which postulated that the valuation of any market pro-duces a pro-cyclical – that is to say virtuous or vicious – circle, which further affects the market.

The Soros modus operandi is to look in-depth at a country and attempt to spot errors in valuation and political policies in particular draw his interest, but he will apply the same principles to the fundamentals of almost any global market.

In practice, this manifests itself as short-term speculating by making massive, highly leveraged bets on the direction of financial markets based on a global macro-strategy. He will bet on almost any asset class and his theory comes into play with a bet on house prices.

This is how it works: Lenders make it easy to get loans, so more people bor-row and buy houses, which results in a rise in demand and consequential rising prices. Then higher prices encourage lenders to lend more, so more money gets borrowed. This results in rising demand for houses and so on until house prices are way past where economic fundamentals would suggest is reasonable. The market itself has had a direct influence on the price of the com-modity.

Bust equals boomA classic Soros bet ensues. Short-sell the shares of luxury home builders or the shares of major housing lenders and hey presto, bust equals boom.

A 10-year period as vice-president of investment bank Arnhold and S. Bleichroeder left him with a desire to assert himself and reflexivity. The offshore hedge funds under the First Eagle banner were born.

In 1973 he tired of regulatory parameters and set up the Quantum fund with fellow legend Jim Rogers. Originally, it is said, he wanted to raise $500,000 to fund a life as an au-thor, philanthropist and philosopher. Given that by 2011 he

had written numerous books, given away more than $8bn to causes as diverse as drug policy reform, euthanasia and political openness, and invested his family funds of more than $24.5bn, one can safely assume it went quite well.

While he correctly predicted and profited massively from his investment philosophy on numerous famous occasions, he did now and again get it hugely wrong. For example, he took a $2bn hit during the Russian debt crisis of 1998 and lost $700m in 1999 during the tech bubble when he bet too early on a decline.

In 2009 he wrote: “I have a record of crying wolf... I did it first in The Alchemy of Finance (in 1987), then in The Crisis of Global Capitalism (in 1998) and now in this book. So it’s three books predicting disaster. (After) the boy cried wolf three times... the wolf really came.”

He refers to his own book The New Paradigm for Financial Markets (May 2008), in which he described a super bubble that had built up over the past 25 years and was ready to collapse.

On being wrong, he said: “I’m only rich because I know when I’m wrong... I have basically survived by recognising my mistakes. I very often used to get backaches due to the fact that I was wrong. Whenever you are wrong, you have to fight or [take] flight. When [I] make the decision, the backache goes away.”

The economic commentator Paul Krugman sums up the Soros effect brilliantly: “Nobody who has read a business magazine in the last few years can be unaware that these days there really are investors who not only move money in anticipation of a currency crisis, but actually do their best to trigger that crisis for fun and profit. These new actors on the scene do not yet have a standard name: my proposed term is ‘Soroi’.”

What investors can learn from George Soros is star-tlingly simple and very, very useful – if you can’t afford to take the loss, don’t make the bet.

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COMMENTARY

A NEW DIMENSIONCreating something from nothing sounds like the stuff of fairy tales and sci-fi novels, but Alex Paget explains why this very real possibility could change everything.

ALEX PAGET

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Just think – you have punctured a tyre and you’re miles from home. You have a spare in the boot of the car, but for some reason can’t find the jack to fit it or the number for the AA to come out and rescue you.

Thankfully, however, you have your trusty mobile 3D printer on the back seat. One press of a button and hey presto, you have made yourself a replacement jack and you’re on your way.

It sounds like witchcraft and is almost frightening to me, but unbelievably the potential is very much there.

3D printing has the ability to revolutionise our daily lives and industry. Apart from the more mundane objectives, experts are now able to create bio-printers that could forever change the pharmaceutical and healthcare in-dustry. On a trial basis these devices have even printed human tissue.

Architecture is another area that could be flipped on its head. While 3D printing has already cut out the intricate and time-consuming process of building detailed mod-els, some experts say there could soon be the technology to print entire buildings.

Obviously, 3D printing is very much in its infancy. Never-theless, the sky is the limit both figuratively and literally.

The many managers and investment experts I have spo-ken to on the subject put it in the “disruptive technology” category.

There is a vast catalogue of examples in the past where disruptive technology has forever changed the market. The internet is probably the best example – just think how in little over a decade it has changed our lives and the way businesses operate.

Some companies have won in a big way, others have failed to keep up with the times and have subsequently gone out of business.

The more I think about 3D printing and speak to others about it, the more mindboggling it gets. There is no rea-son why it couldn’t have the same ef-fect as the now indispensable internet.

Simon Moon, manager of the Uni-corn UK Smaller Companies fund, says that 3D printing certainly has the potential to change the way compa-nies operate.

“The most obvious way in which additive manufacturing could be disruptive is that it enables a new level of design freedom through rapid prototyping and offers significant cost savings through a reduction in raw-material use,” he said.

“Its share of final product manufacturing remains very small but is rising fast as shortfalls (low-speed, high-print-er costs) are addressed; if successful, it will change the shape of global manufacturing.”

“Negative impacts on low-cost labour manufacturing and global shipping are foreseeable,” he added.

So how does it work? At the moment, 3D printers are the size of a dishwasher. Within the printer, there are lasers moving very quickly from side-to-side, building the object slice by slice, with each one eventually moulding together to create a sold object.

How can I make money from it? With better and more innovative technology needed to keep the 3D printing revolution going, which companies are leading the way in terms of development?

Thankfully, Moon says that investors can gain access to the 3D printing revolution via a number of companies listed in the UK. Renishaw, which sits in the FTSE 250 index, is one.

“Renishaw is an expert in measurement, motion control and precision machining,” Moon explained.

“Their products improve manufacturing efficiencies and raise product quality. Although it only represents a relative-ly small part of their business, since their acquisition of MTT in 2011, Renishaw is the sole UK company making additive manufacturing machines.”

Moon says that Xaar and Delcam are two of the other com-panies that could benefit from the disruptive technology.

“Xaar is a leading developer of industrial inkjet printheads and is benefiting from the digitisation of industrial print-ing,” he said.

“On top of this, Xaar is considered an expert in 3D printing development and has recently received funding from the Technology Strategy Board to develop and deliver special-ist printheads for additive manufacturing.”

“Delcam is a developer and supplier of CADCAM software; in the simplest of terms, its software enables the automated manufacture of incredibly complex items. The company has

Simon Moon

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recently been the subject of an all-cash offer from US 3D manufacturing software developer Autodesk,” he added.

It all sounds very exciting, however there are a number of reasons why 3D printing hasn’t already revolutionised our lives and industry.

Unfortunately, we can’t get carried awayThe problem with 3D printing is that you can quickly move into the realms of fantasy. Except for certain areas, most of

the technology is a pipe-dream at this point in time.

From an investment point of view, buying into a company early is sometimes the right thing to do. However, Miton’s Gervais Williams says you could be waiting a long time if you buy shares in companies that focus on its development.

“A lot of companies are getting excited about 3D printing, but when it comes to the history of disruptive technology,

it usually doesn’t come as soon as you would expect,” Wil-liams said.

He points out that no matter how incredible it may seem, there will be forces at work to make sure that 3D printing doesn’t get out of hand.

Manufacturers, logistics, retailers and a whole heap of sec-tors would be opposed to individuals simply printing their own goods. On top of that, just think of the copyright issues.

Sebastian Radcliffe, who manages the Jupiter North Amer-ican Income fund, says that all the hype surrounding 3D printing has led to many companies in the sectors that develop the technology becoming prematurely expensive.

“If you look at what is happening, in many senses, it is very revolutionary. However, the price you have to pay in the market, well let’s put it another way, it hasn’t gone unno-ticed,” he said.

He says that it is too easy to get carried away with the tech-nology, pointing out that investors in the US are paying huge prices for companies on the basis that they may see massive earnings growth in the future.

He says the prices of stocks such as DDD, which is one of the market leaders in 3D printing, and Organovo, which is developing the technology to print human tissue, are ap-proaching bubble territory.

He feels some people are investing in hope rather than re-ality, as current share prices are not discounting for any po-tential problems in the future. Because of that, he is avoiding the 3D printing theme in his fund.

Nevertheless, and though it may seem a long way off, Radcliffe thinks that 3D printing will eventually change the game. I have to agree with him.

I think it is only a matter of when, not if.

Gervais Williams

BRIAN TORA IS AN ASSOCIATE WITH INVESTMENT MANAGERS JM FINN & CO

COMMENTARY

Optimism is the key for 2014As we enter 2014, it is tempting to look back and try to determine if there are any lessons to be learned. By doing so, what we are really attempting to do is predict the future, so looking forward to 2014 should be the real priority for investors.

Nonetheless, it will do no harm to reflect briefly on how the year just ended played out for markets.

We started on a tide of rising optimism, with shares continuing a recovery that had only really got underway at the death of 2012. Bolstered by better than expected company results and continuing accommodation in the European single currency zone, the UK and US markets made progress for much of the first half of the year. Then, in May, investors received a reality check in the form of a warning from the Federal Reserve Bank (Fed) of the US that they would be cutting back on monetary easing.

Markets then made up the ground lost over the summer, with our own FTSE 100 returning to May levels by the autumn and US indices actually hitting record highs at around the same time. It was emerging markets that were hardest-hit by news of potential tapering – the cutting back of monthly bond purchases by the Fed – though in the event, nothing that was expected to happen actually did.

More recent minutes from the Federal Open Market Committee, America’s version of our own Monetary Policy Committee, suggested such action was still very much on the table. Similarly, the Bank of England has announced that economic progress is such that a rise in interest rates may be contemplated earlier than was previously thought. So we entered the New Year with an apparently improving economic backdrop and the prospect of less monetary easing and higher interest rates on both sides of the Atlantic.

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Don’t bet the farmI wouldn’t bet the farm on much happening too early. Analysts have been encouraged by the good performance of listed companies over the period since the financial crisis bit and maintain a bullish stance for the year ahead. Such an approach could lead to disappointment if, as is quite possible, the economic recovery turns out to be anaemic. True, the most recent forecast from the Organisation for Economic Co-operation and Development saw an increase in expectations for UK growth, but overall this think-tank reined back on expectations for the global economy.

Certainly, emerging markets do seem to have run a little ahead of the game, with countries such as Brazil, Russia and India facing tougher conditions. The pullback in these markets owes as much to valuation levels becoming stretched as to a real belief that tapering will make a huge difference. While investors may rightly be concerned over the extent to which cheap money has found its way into financial assets, the reality is that quantitative easing must end eventually, but that policy makers will only allow this to happen if they are sure the economic recovery is sustainable.

Investor optimismIn America, the return of investor optimism – and the resurgence of an appetite for risk, as evidenced by the Twitter IPO – is founded as much on cheaper energy costs, higher house prices and improving consumer confidence as anything. But this has led to something of a divergence in valuation levels, with small- and mid-cap stocks now looking expensive when compared with the mega-cap companies that dominate the market. This year we should, perhaps, look for some rebalancing over there.

There remains the potential fly in the ointment of the debt ceiling, though. Last autumn’s debacle showed just how entrenched political opinion has become. As it happens, Obamacare has hardly got off to a flying start, but a repeat of the earlier impasse could weigh on confidence. The good news is that these new health proposals are unlikely to have much impact during 2014, but politicians remain capable of upsetting the applecart.

China, which continued to disappoint, has proved more resilient of late. Much of this can be put down to the positive noises emanating from the recent congress, at which future economic progress was discussed. This remains a difficult market to call, but it is not unreasonable to expect growth there to continue to moderate, maybe to around 5 per cent per annum – still an impressive achievement when compared with the developed world. Certainly, the ending of the single-child policy got investors quite excited as they speculated on all those extra consumers coming on stream.

As for Europe, the German elections aside, the best that can be said for the continent is that it avoided catastrophe during 2013. Indeed, frail green shoots of recovery appear to be emerging in those areas hardest hit by austerity. Fears of what falling inflation could mean for the economic future has led to the European Central Bank cutting rates and catching markets by surprise. All in all, this appears to be a positive move, but failure to reach agreement on such crucial areas as banking reform demonstrates how difficult it is to guide 17 demographic countries along a single path. Europe could prove to be interesting in 2014, but needs to be watched closely.

With the Scottish referendum due this year and the approach of the next general election leading to a breakdown in political accord, the UK looks to be set for an uncertain year. But shares still remain below the heights scaled some 14 years ago, even if smaller cap companies have delivered in a rather more positive fashion. As for the US, 2014 could be the year of the bigger market capitalisation concerns, but nothing is certain in markets. Cautious optimism seems the best description to apply.

If there is one region that could create influences that could be for better or worse, it is the Middle East. The Arab Spring has descended into disarray, with the civil war continuing in Syria, Libya proving barely governable and issues in Egypt that many thought had been swept away by the removal of the old regime. But in Iran there are signs that a rapprochement with the West could be achieved. If so, this could help keep the price of oil down and add to the upward impetus on economic growth.

Overall, I think 2014 could be kinder to investors than many people fear.

AFI INVESTORS’ DILEMMA

THROUGH THE LOOKING GLASS

Brown Shipley’s Alex Brandreth reveals the questions you need to ask when analysing your own portfolio.

ALEX BRANDRETH DEPUTY FUND MANAGER, BROWN SHIPLEY

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The review process is different for every portfolio because each one has different characteristics and objectives.

How often should you review your portfolio?We believe monthly is an appropriate timescale. The monthly appraisal is conducted by Brown Shipley on both asset allocation and fund selection.

What questions do you need to ask?We start reviewing a portfolio by analysing its objective: where in the risk spectrum does the portfolio sit? Are the investors interested in a return of their capital or re-turn on their capital and what level of risk are they will-ing to accept to deliver these returns? This leads to two potential risks that need to be considered – absolute risk and relative risk.

If the portfolio’s aim is to deliver positive returns and not deliver an absolute loss, absolute risk is the main consid-eration. Therefore, we spend more time thinking of invest-ments that are unlikely to fall in value, so are more likely to deliver a consistently positive return.

A cash benchmark would be appropriate in this instance.

Relative risk should be considered when a portfolio objec-tive is to deliver strong, positive returns and will therefore tend to have a greater weighting towards equities. Clearly a cash benchmark is not an appropriate comparison and we must analyse the performance of the portfolio relative to a comparable benchmark.

Risk targeting is a growing trend in the UK financial services industry and we manage the Brown Shipley model portfo-lios with one eye on historic volatility.

When we are analysing a portfolio for the first time, we always consider the volatility/risk of the portfolio. Risk is mainly thought about in historical terms, but it is also important to think about potential risks in the future.

For example, the headline volatility and perception of government bond risk is low, but with yields close to all-time low levels and potential monetary tightening in the future, are these assets truly “low risk”?

We manage our portfolios using an “active-active” ap-proach. We combine active asset-allocation calls with active fund managers to drive the returns of our model portfolios.

We meet monthly to discuss asset allocation and any changes to our view on an asset class or region that could have a knock-on effect on the model portfolios we manage.

We also meet with all the fund managers on our approved list on a bi-annual basis. However, we review both perfor-mance and management on a weekly and monthly basis.

We also always meet fund managers that we don’t invest in, to ensure that we have the strongest approved list of collective funds. Therefore, if we make any changes to our approved list, this will be reflected in the model portfolios we manage.

For example, we have recently removed the Neptune In-come fund from our Novia Model Portfolios because per-formance has disappointed and we believe future perfor-mance is likely to be below average. We have replaced this fund with a UK Equity Income fund we know well and that has demonstrated consistent performance – Threadneedle UK Monthly Income.

The investment world is constantly changing and it is im-portant to have a thorough process, which allows you to evaluate a portfolio consistently. We believe by actively managing asset allocation and selecting active fund man-agers on a monthly basis we can consistently outperform and deliver superior returns for our clients.

Key Questions:

1) Is my asset allocation appropriate?

2) Am I picking the best funds to translate that view?

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COMMENTARY

STEVE MCDOWELL

SLY AND RETIRINGNo one would argue that saving for your old age isn’t very, very important – even the government thinks that post-automatic enrolment, 12 million people are still underfunded for their retirement – but is the personal pension still the best way forward? As usual, says Steve McDowell, it is down to you.

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For a long time, a personal pension was a great idea, but after a £13bn mis-selling scandal, at least £100bn worth of government interference (or rob-bery, depending on who you ask) and no fewer than three stock market collapses in recent years, many people are asking if they are still worthwhile, or in-deed if they ever were?

The government just can’t seem to stop fiddling with people’s nest eggs. After all, it makes the rules by which they are governed, so essentially there is nothing to stop a renegade politician attacking – as Gordon Brown did in 1997, nicking £5bn of growth out of people’s pension funds by abolishing so-called advanced corporation tax. An easy £5bn then, but now a funding gap well in excess of £100bn.

There are constant changes to the rules for forms of personal pensions, such as the self-invested personal pension (SIPP), the imposition of funding caps, and that’s even before you get to whether or not you should be con-tracted in or out of the state system.

But the single biggest problem with personal pensions is that they were invented by actuaries, who can’t stop fiddling with them either.

Actuaries, for anyone who doesn’t know, are people who gave up accountancy because they found it too exciting.

These are people to whom integrating at a function means trying to absorb all the implications of f(x)=8x+3.

So it follows that those people who digest complex mathematical conundra for a hobby will naturally make the simple complicated – after all, actuaries are integral to the insurance industry, which in turn gave birth to the personal pension.

Simply, imagine a personal pension as a folder marked “not to be opened before age 55” that gradually gets filled with financial assets – bonds, shares, funds, cash and paper property investments – of up to £50,000 a year. Because you agree not to open until age 55, the Govern-ment gives you tax relief on your contributions, which are added at source, helping to build your pot.

Gordian KnotBut of course it isn’t that simple and in these few words it would be imprudent even to attempt to unpick this Gordian Knot.

There are only two reasons why the personal pension is difficult to understand: one, tax rules and regulations as above, and two, because it makes them easier to mis-sell.

The same goes for many of the mis-selling scandals of fi-nancial products, such as payment protection insurance and split-capital investment trusts, to name but two, and the next one on the list – according to the view of many – annuities. The simple matter of fact is that no-one without some sort of actuarial qualification understands them and that includes some of those whose job it is to sell them.

Many do, happily, and anyone out there can be grateful for very highly qualified IFAs and specialist pension ad-visers, but mistakes still get made because it is ultimately down to you – the one signing on the bottom line – that you understand the very basics of how these important products work.

Bear in mind that we are discussing individual schemes here, rather than your employer’s scheme, which will get topped up with contributions from them as well as the government, and in any case are compulsory for both sides since auto-enrolment came into force in Oc-tober 2012. Even this move has attracted a great deal of criticism, since it is widely accepted that many of those employees are now being forced into poor investments.

Legally, you can pay into a personal or stakeholder pen-sion if you are a UK taxpayer under 75, whether you are employed, self-employed or not working at all, as long as you can afford the contributions. You can also take out a stakeholder on behalf of a child (though maybe only an actuary would). You can also do so if you are paying into an occupational scheme.

Potentially damagingBut does that mean it is a good idea? After all, personal pensions are no different from any other financial ser-vices product in that they come with fees and charges – in some cases obscure, difficult to understand and potentially damaging to the growth of your long-term investment.

Every financial product has a key features document that you, the client, has to sign to signify that you have read it. But this does not necessarily mean you understood it; you just say you have. The document explains the aim, your commitments, charges and the risks. So let’s pick

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out a few industry phrases that you will find common in key features documents on personal pension products (which, incidentally, are also called money purchase or defined contribution schemes – one contemplates the profession that came up with those names).

If you know what these bits of jargon that commonly appear on key features documents mean – for example market value reduction, with profits (unitised or not), with profits guarantee charges, protected (and non-protected) rights, ESG, allocation rates – then you are doing quite well. If you don’t, I recommend a visit to the A to Z on Steve Bee’s website as well as FE Trustnet’s Learning Centre before you get started.

There are plenty of alternatives to a personal pension to invest in for your future – that is the whole point of In-vestazine for a start, and very often if you don’t have one, a personal pension scheme is top of the list. But whatever you do, don’t sign up without consulting someone who knows what they are talking about.

Pensions can be very inflexible in terms of accessing your investment if you should ever need it back before you are 55.

The seven key questions every pension investor should ask

• What income will my pension fund provide me on retirement?

• How much flexibility to manage my investment do I have as I get older?

• What investment choices are available in my pension?

• What are the charges? These may include: annual management charges, portfolio charges, pension contribution insurance, switching fees and transfer charges.

• Are loyalty bonuses available?

• Can I transfer out (to a better-performing provider) for free?

• Is there an above-average fund reduction for costs?

Your own circumstances, goals and desires are likely to be unique and so the best thing you can be is armed with some great questions.

COMMENTARY

JOSHUA AUSDEN

KNOWLEDGE IS POWER

Investment experts reveal the books that inspired their fund management style.

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Fund managers are typically self-assured individ-uals with a great deal of confidence in their own ability, but even the very best need a helping hand now and again.

Warren Buffett, the greatest investor of modern times, stresses that all fund managers should read the works of other investors to help perfect their process.

He has said on many occasions that Benjamin Graham’s The Intelligent Investor is the best book on investing ever writ-ten (incidentally, I’m reading it at the moment and would thoroughly recommend it).

Here are the choices of some of the UK’s leading fund managers.

Competition Demystified: A Radically Simplified Approach to Business Strategy

by Bruce Greenwald

“Bruce Greenwald is a professor at Columbia University’s Graduate School of Business. In this book he expounds the doctrine of Benjamin Graham – widely accepted as being the father of value-investing,” said Stick, who runs the five crown-rated Rathbone Income fund.

“Professor Greenwald examines company strategies in a bid to determine why certain businesses suc-ceed and why others fail. The book also discusses the concept of ‘economic moats’ and why some businesses are able to sustain earnings growth in a competitive environment.”

“Professor Greenwald’s text uses diverse case studies to analyse this phenomenon, including behe-moths such as Intel and niche businesses like Kiwi International Airlines – a former low-cost carrier in the US. In both cases, the progressive thinking or failures of management is apparent.”

“It has taught me to find what makes or breaks a business; the fact that businesses evolve and the impact this might have, and the importance of asking ‘why?’ of management teams. This text has proved invaluable.”

Carl Stick

Antifragile

by Nassim Taleb

“I think that The Intelligent Investor by Ben Graham has huge relevance currently – it was written at a time of austerity and therefore its investment thesis is particularly appropriate,” said Williams, who heads up the recently soft-closed Miton Multi-Cap Income fund.

“For something a little less conventional, I have just very much enjoyed reading Antifragile by Nassim Taleb.”

“This book highlights the scale of the vulnerabilities of so many investment factors that we take for granted. Although many find this book indulgent, I think it is really insightful and again is really relevant to a post-credit boom world given that austerity is likely to be with us for years.”

“I still feel Slow Finance is very relevant too, but then I am biased on that one,” he joked, referring to his own book.

Gervais Williams

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Common Stocks and Uncommon Profits

by Philip Fisher

“As well as Charlie Munger, Philip Fisher was also highly influential in transitioning Warren Buffett’s approach away from pure or historical value, towards future value – that is to say growth,” said Lam, who heads up the popular five crown-rated Somerset Emerging Markets Dividend Growth fund.

“The key with Fisher is to take away the emphasis on accounting or statistical value and to focus on what is ‘real’.”

“It is the perfect antidote to the pure dividend investor who can often be too focused on the nominal yield to see what is actually creating it.”

Ed Lam

Contrarian Investment Strategies

by David Dreman

“This is a bible on how and why value investing works – and why other strategies do not,” explained Murphy, who runs the top-performing Schroder Income and Schroder Recovery funds.

“With empirical evidence and common sense explanations, it is worth every penny.”

Kevin Murphy

Margin of Safety

by Seth Klarman

“Klarman is founder, chairman and chief executive officer of Baupost Group and is one of the world’s most successful investors still operating,” said Lowry, the manager of the Schroder ISF European Equity Alpha fund.

“This book expands on the ideas in The Intelligent Investor, with new areas and more up-to-date examples.”

Jamie Lowry

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Hedgehogging

by Barton Biggs

Karunathilake, manager of the Fidelity UK Select fund, commented: “This book is written by Barton Biggs who is best known as a long-standing investment strategist at Morgan Stanley.”

“It is written in a semi-autobiographical style, from the time he first started investing in the 1950s through his time at Morgan Stanley and ending with him starting his own investment company.”

“I enjoyed reading it as it gave some insight into what the market was like through the 1960s and 70s through recounting Biggs’ interactions with some of the best investors of that time in an informal way.”

“It’s an easy and enjoyable read that teaches you a few things about investment along the way.”

“Personally, I enjoy reading autobiographies about investors who were active in the past, as it makes you realise that many of the things we see in the world and markets today are similar to previous epi-sodes, which can give us insight into what the implications may be.”

Value Investing: From Graham to Buffett and Beyond

by Bruce C N Greenwald, Judd Kahn, Paul D Sonkin and Michael van Biema

“While Ben Graham’s classics The Intelligent Investor and Security Analysis are brilliant books, from a practical perspective they are now somewhat dated,” explained Tillett, who runs the Allianz UK Unconstrained portfolio.

“What this book does is bring the Ben Graham framework into the 21st century investment world, incorporating areas such as barriers to entry and intangible assets. It has had an enormous influence on my approach to fundamental analysis and company valuation.”

“Essential reading for any investor wishing to employ the value approach,” he finished.

Aruna Karunathilake

Matthew Tillett



You told us what you thought would happen in 2014. We put your views to the experts. Whitechurch Securities’ Ben Willis analyses your predictions for the year ahead.

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Cambion said:Emerging market debt (Investec Local Currency Debt): After taking a battering, I think there is money to be made here. However, the battering is still ongoing, so I’d drip slowly over six months or so, even when it goes weird with whatever the US does over tapering.

The expert view:2013 was certainly a difficult year for emerging mar-ket debt, which suffered mainly from the high levels of capital inflows and outflows, correlated to investor concerns over the tapering of US quantitative easing (QE).

While the long-term investment argument for the asset class remains intact, the short-term triggers for capital losses in the asset class remain – namely, the tapering of US QE and risk aversion. It is better to buy into the market when it sells off. Drip feeding cash into emerg-ing market debt is probably the most sensible method if you really want exposure to the asset class but I would be cautious and expect another year of volatility for this area of global bond markets.

Robert said:A big vote for the anti-European parties in the May elections could trigger a sell off for the UK and Europe. Property and Tech stocks (wisely or foolishly) to power on. Oil and Gas stocks to make steady gains.

The expert view:

If we witness a big sell-off in European and UK equities, then the property, tech, oil & gas equity sectors are unlikely not to follow – although there is the possibility that they may not fall as far as other sectors. However, I’m not so sure that the outcome of the forthcoming elections will have that sig-nificant an effect on stock markets. I readily admit that the European authorities and policymakers have had a distinct influence on European markets, but this has been driven at policy level.

Markets do not like uncertainty so the potential un-known outcome of the elections may cause some short-term jitters. However, I think company profitabil-ity will be the key drivers of UK and European stock

markets throughout this year. Looking at Europe in particular, it is home to some of the world’s leading companies, which have been through stringent cost cutting and restructuring exercises and are now far more efficient, competitive businesses. Overall, I be-lieve that stock markets will depend on whether UK and European corporates can deliver earnings growth.

Robert said:I am happy to hold some cash just now – inflation-ary pressures are easing, and I think the ultimate endgame of very high inflation remains some way off (and will likely come via an initial deflationary supply shock). More of my capital is in long/short funds, gold miners, and a small proportion each to Latin America and Africa. All long positions I hold (gold, Latin America, Africa) are very long-term views that I expect to hold for at least circa five years – if there is significant weakness in these, I will likely add. Luckily I have some gains built in as a cushion against any correction just now. More reactive parts of my holdings, likely to be changed in the next 12 months, are in the long/short strategies and cash.

The expert view:

I personally would only hold cash tactically within an invest-ment portfolio at present. For example, to protect a portfo-lio if I believed we were entering into a period of stock mar-ket volatility or to ‘keep my powder dry’ and wait for prices to fall in order to time my entry into a specific market or asset class, as you refer to with topping up your long positions upon any weakness in these areas.

However, apart from these reasons mentioned I would not be comfortable holding cash, even in the short term. I agree with you regarding inflation, in that in the near term, infla-tionary pressures are easing and that the store of inflation that is building up is some way down the line. However, with cash rates at such meagre levels – and likely to remain that way throughout 2014 – and with core inflation still running at over 2 per cent, you are still not generating real returns.

As you mention, I would utilise my cash positions within long/short funds, particularly those that are market neutral and are just looking to grind out cash plus (and most impor-tantly – inflation plus) returns over the medium term.

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NEXT ISSUE

Investing in actively managed, open-ended funds is the most popular route to take for the majority of UK savers. While these investment vehicles can net you massive returns over the long term, there is a lesser known way to beat the market, and often hand over fist more than a unit trust or OEIC.

Investment trusts not only often outperform open-ended funds, they also tend to be cheaper and more stable, yet most investors don’t know much about them.

This is why we’ve dedicated the next issue of Investazine to investment trusts. We’ll reveal some of the best ones out there and how you can use them in your portfolio.

Stay tuned.

Jenna

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