TRUSTNETIssue 4 / February 2015

magazine

General electionWhat does it mean for your portfolio?

UK equities Star mangers at every turn

ISAsDoes everyone really benefit?

WHAT THE EXPERTS ARE BUYING THIS YEAR

IN THIS ISSUE

GENERAL CORRECTIONSam Shaw answers the question all fund managers are mulling over at the moment: how important is the impending general election for investment markets?P. 2-3

ARE ISAs FOR EVERYONE?ISAs are considered a no-brainer by most, but are the tax breaks really what they’re cracked up to be for the man on the street? Anthony Luzio investigates. P. 4-5

BREAKING THE ISAA fund manager, financial adviser and multi-manager put their neck on the line and tell Adam Lewis what they’ve been personally investing in this ISA season. P. 6-9

All the talk has been about pensions in recent months for obvious reasons, putting

the reforms in ISAs firmly in the shade. The benefits are certainly not as far-reaching, but the increase in the allowance and simplification of the

rules has given tax efficient investors a welcome boost. The dilemma, as always, is where to invest the

remainder of your tax free allowance – or in most cases whatever you can afford – before the April deadline. There’s plenty to consider at the moment: a looming UK general election, twitchy policy makers and an ailing oil price to name but a few. However, with rates on even the least flexible cash ISAs seldom over 2 per cent, those with any reasonable time horizon need to be taking some risk. It’s easy to get caught up in short-term worries, but waiting for the perfect buying opportunity seldom works.

Me? I use a monthly savings plan to drip feed into six experienced defensive equity managers à la Neil Woodford, using any spare cash to tap into value opportunities when or if they arise à la Russian equities. The second half of this plan has not worked as well as the first... yet anyway!

If you want some inspiration from some individuals who are far more qualified than me, flip straight to page 6, which highlights how a selection of professional investors have put their cash to work this year.

With any luck, the next few pages will help to shape some of your own ideas for the coming months and years.

Josh Ausden.Head of publishing content

FE Trustnet

EDITOR’S LETTER

CREDITS

ISSUE 4

TRUSTNETIssue 4 / February 2015

magazine

General electionWhat does it mean for your portfolio?

UK equities Star mangers at every turn

ISAsDoes everyone really benefit?

WHAT THE EXPERTS ARE BUYING THIS YEAR

TRUSTNET MAGAZINE (FORMERLY INVESTAZINE) IS PUBLISHED BY THE TEAM BEHIND FE TRUSTNET IN SOHO, LONDON.

WEBSITE: WWW.TRUSTNET.COMEMAIL: EDITORIAL@FINANCIALEXPRESS.NET

CONTACTS:

GeneralJosh Ausden, Head of publishing contentT: 0207 534 7661

Art Direction & DesignJavier OteroW: www.feedingcrows.co.uk

EditorialGary Jackson News editor (FE Trustnet)T: 0207 534 7680Alex PagetSenior reporterT: 0207 0207 534 7697Daniel LanyonReporterT: 0207 534 7640

SalesRichard FletcherHead of publishing salesT: 0207 0207 534 7662Richard CasemoreAccount managerT: 0207 534 7669Jack EliaAccount managerT: 0207 534 7698

Photos supplied by Thinkstock and Photoshot

Cover Illustration: Javier Otero

In association with:

IN FOCUSJupiter Strategic Bond, Edinburgh Investment Trust and Newton Real Return are all under the spotlight this week. P. 10-13

INVESTMENT STRATEGYSECTOR PROFILEThere is a natural bias towards UK equity managers, which is hardly surprising given the number of quality managers operating in IA UK Equity Income, UK All Companies and UK Smaller Companies. P. 14-19Franklin UK Equity Income (p. 15-16), Old Mutual UK Alpha (p. 16-17) and Marlborough UK Micro Cap Growth (p.17) give investors exposure to UK markets in very different ways.

RECOVERY FUNDSSchroders explains the benefits of investing in unloved companies.P.20-21

EASY DOES ITThis time of the year tends to be stressful for many investors, but it doesn’t need to be that way. John Blowers explains why.P.22-23

BARGAIN BASEMENT Miton’s Georgina Hamilton highlights three dirt-cheap stocks that she believes are due a turnaround. P. 24

WHAT I BOUGHT LASTThis month Brown Shipley’s Alex Brandreth explains why he’s steering clear of the big boys and investing in the Aviva Strategic Bond fund. IBC

THE BATTLE OF BRITAIN14

GENERAL CORRECTION2

2

ELECTIONS

Four months before the general election and only one thing is certain: few people would bet

the farm on the outcome. A hung parliament looks likely,

but as for who’s getting into bed with whom? The answer to that question remains anyone’s guess.

While the prospect of another coalition between the Conservatives and Liberal Democrats may be reassuring as the more familiar devils, suggestions ranging from a Lab/Lib partnership, the Tories joining forces with Nigel Farage’s UKIP or Labour hooking up with the Greens have all been mooted.

Adding to the uncertainty of the outcome, no party has been particularly forthcoming yet over the issues closest to their hearts.

Labour leader Ed Miliband is probably known for being less business-friendly than some of his forerunners while David Cameron’s plans to hold a referendum on the UK’s European Union membership are already overshadowing any other Tory issues.

So where should investors seek refuge in their portfolios given all the uncertainty?

GO WITH THE FLOWAudrey Ryan, a UK equity manager at Kames Capital, says while it is still unclear how a coalition may be structured, the market will move with the news flow.

MONEY

REFERENDUMWith echoes of the Scottish referendum over independence, the vote raises the most concerns over sterling weakness, although Hollands says the real “elephant in the room” is the potential referendum on Europe.

If he gets re-elected, Cameron has promised to renegotiate the UK’s position in the EU, with a referendum on the cards within

For those with a bearish outlook, they may want to revisit long-only UK equity exposure and look at long/short or absolute return funds more closely.

“It would cast doubt over the future of the EU in case more similarly minded countries, such as Finland, reconsider their position. But I think once the debate is on the agenda, the arguments for staying in will be made more sensibly,” says de Bunsen.

GENERAL Experts suggest that the upcoming general election could be the most influential event of the year for UK investors. Sam Shaw reports

She and the team are keeping a close eye on that movement because there are certain types of companies that will behave very differently depending on the outcome, such as gaming and betting companies, pub companies, utilities and tobacco.

Jason Hollands, managing director of business development and communications at Tilney Bestinvest, says utilities are the obvious sector candidate to be spooked by a Labour win.

However, collapsing gas and oil prices have alleviated that pressure, as many energy providers have already begun passing on the benefits to their customers.

Fiscal tightening looks inevitable while both major parties have made noises about the housing shortage. Therefore housing and construction may be good bets for those who wish to remain loyal to the UK – regardless of May’s result.

HOUSING Stephen Bailey and Jan Luthman run the Liontrust Macro UK Growth and Macro Equity Income funds.

Bailey says both major parties believe the housing market to be important on an ongoing basis “and we can’t afford another bailout”. The pair are investing in “prudent” names across construction and property, ambivalent to the political outcome, he says.

“Governments from both sides are clearly aware of the importance of foreign direct investment. London has become a global centre of excellence and we see nothing happening that looks like it is going to change that.”

Despite the uncertain outlook, the FTSE’s reliance – more than 70 per cent – on overseas earnings should help, according to Henderson’s James de Bunsen.

The multi-manager says the main concern for retail investors should be their domestic versus overseas exposure.

While de Bunsen fails to see how sterling will strengthen against the dollar any time soon given the pre-election uncertainty, he says it puts large-cap international firms in a strong position.

While the currency threat may discourage international investors away from the UK, in many cases the UK economy has enjoyed a slew of good news with most companies and investors confident the recovery is well underway.

two years. Unless opinion polls begin to suggest a clear win is likely, Cameron may be forced to form a union with Farage.

While UKIP alone is unlikely win enough seats to form a coalition, it could help support a minority government. With his anti-EU stance, Farage is keen for a referendum this year and Hollands says it is “untenable not to deliver on that referendum”. Many voters are clearly fed up with how the UK is being run, but De Bunsen says there is often voter inclination to stick with the status quo.

He goes further, suggesting that if the UK moves forward with its anti-EU stance, others may follow suit.

“The effects and mechanics of an EU exit are unknown but if you are a macro asset allocator it would be an obvious thing to short UK assets due to that uncertainty,” he explained.

CORRECTION

“ADDING TO THE UNCERTAINTY OF THE

OUTCOME, NO PARTY HAS BEEN PARTICULARLY

FORTHCOMING YET OVER THE ISSUES CLOSEST TO

THEIR HEARTS”

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Investors are constantly reminded about the advantages of using an ISA – but do these products benefit everyone, or just higher-rate tax payers? Writes Anthony Luzio

Although the UK economy seems to be picking up at last, most people have found

spare cash hard to come by in the years since the financial crisis of

2008. Those that have the full ISA allowance spare to invest each year – which currently stands at £15,000 – are, needless to say, rarer still.

One of the first pieces of

advice that novice investors find themselves on the receiving end of is to use up their ISA allowance every year – but are the benefits of these products equal for everyone?

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ISAsMONEY

FOR EVERYONE?ARE ISAs

TAX ON INTEREST INCOMEFor cash held outside an ISA, your bank will deduct 20 per cent tax on interest at source. Most basic rate taxpayers will not have to take further action.

If you earn between £10,000 and £13,540 (not including savings interest), you may only have to pay tax on interest at 10 instead of 20 per cent, although you will have to claim the difference back from HMRC. To find out if you are eligible, work out your taxable income, excluding interest received from your savings. Any interest

above your personal allowance but below the £2,880 savings rate threshold is taxed at 10 per cent, while any earnings that fall in this band are taxed at 20 per cent.

Any interest received in the higher rate tax band (anything above £31,865 on top of the £10,000 personal allowance) is taxed at 40 per cent, rising to 45 per cent for additional rate taxpayers. To find out how much tax to pay, work out how much interest was paid before the original 20 per cent deduction. Non-savings income is taxed first.

For example, if you are a higher rate taxpayer and you receive £24,000, multiply this by 100/80, which gives you your original interest – £30,000. Multiply this by 0.4 to give a total tax bill of £12,000. Taking the amount you have already paid (£6,000) away from this figure leaves you with £6,000 still to pay.

Conclusion: Anyone who earns more than £10,000 a year should put their money in an ISA.

TAX ON DIVIDEND INCOMEAll dividends are subject to a 10 per cent tax at source, which is non-refundable, even if the income is received from a stock held in an ISA. No further tax is payable for basic rate taxpayers.

For higher or additional rate taxpayers, however, things are more tricky. Any dividends received on top of the first £31,865 of chargeable income are taxed at 32.5 per cent, rising to 42.5 per cent for anything above £150,000.

However, because 10 per cent is deducted at source, higher and additional rate taxpayers must first work out what the original dividend was before removing 32.5 or 42.5 per cent.For example, if you receive

£27,000 in dividends above the £31,865 threshold (on top of your £10,000 personal allowance), you would have to multiply £27,000 by 100/90, which would give you £30,000. You would then multiply this by 0.325 to give you a figure of £9,750. Taking the amount you have already paid (£3,000) away from this leaves you with £6,750 still to pay.

Conclusion: Only people earning dividends above the taxable income threshold of £31,865 will benefit from ISA investing. This is on top of the £10,000 personal allowance, which in effect means only those earning more than £41,865 will be affected.

CAPITAL GAINS TAXTax-free allowance £11,000

Below £31,865 of taxable income 18 per cent

Above £31,865 of taxable income 28 per cent

Income tax rate paid Dividend tax rate

Basic rate (20 per cent) 10 per cent

Higher rate (40 per cent) 32.5 per cent

Additional rate (45 per cent) for dividends paid after April 2013 37.5 per cent

Source: HMRC

WHAT THE EXPERT SAYSWhile the vast majority of savers benefit from opening a cash ISA, the advantages to stocks and shares investors are a lot less apparent if they are not higher rate tax payers.

However, John Blowers, head of Trustnet Direct, says investors need to look beyond short-term benefits.

“You never know what is just around the corner – if you inherit a large amount of money or a property, this can push you into the

CGT threshold, even if you remain a basic rate tax payer,” he said.

“People who may not earn loads of money, but who have the discipline to put money away every month, can find they can accrue a sizable pot of money faster than they may realise.”

He points out that for most platform providers, including Trustnet Direct, the charges are the same for both ISAs and standard trading accounts.

CAPITAL GAINS TAXWhen you sell out of a fund or equity, you are liable for capital gains tax (CGT) on any profits made. This currently stands at 18 per cent if any gains, combined with your taxable income, are lower than the basic rate tax band of £31,865 (on top of your £10,000 personal allowance); anything that exceeds this amount is taxed at 28 per cent. Higher rate tax payers will pay all CGT at 28 per cent.

However, the annual exempt amount for CGT for the 2014/2015 tax year stands at £11,000. In addition, any capital loss can be set off against the annual exempt amount and any loss that is greater than the amount needed to bring the gains within the annual exempt amount can be brought forward to the next tax year.

Conclusion: From a CGT point of view, only the very small number of people who expect to make more than £11,000 profit in a year from the sale of equities or funds will benefit from holding their assets in a stocks and shares ISA.

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ISAMONEY

BREAKINGTHE ISA special situations arise. For example,

the last lump sum into an Indian fund was before the election because I thought markets would rise after and they did.”

On a monthly basis McDermott has been contributing money into the BlackRock Gold & General and Jupiter European funds this current ISA season.

“At the turn of the tax year I felt the price of gold, traditionally a safe haven, did not correctly reflect the great number of geo-political risks that were prevailing at the time so I invested in BlackRock Gold & General,” he explained.

“My investment proved timely as the price of gold has rebounded,

rising 8 per cent over the year. I continue

to invest in the fund as I believe the price of gold still does not correctly reflect the many geo-

political and macro risks

that prevail today.”

THE PANIC THAT USED TO ACCOMPANY THE END OF A TAX YEAR HAS SEEMINGLY TURNED TO A SENSE OF CALM

McDermott describes Jupiter European’s Alexander Darwall as one of the standout fund managers in European equities, noting that his fund has consistently placed in the top quartile of its peer group.

“Prior to the beginning of the tax year my portfolio had been underweight Europe and, despite disappointing growth in the region, I felt there were a number of potential tailwinds forming,” he said.

“Europe offered compelling value relative to other markets and with easing credit conditions and signs of a nascent recovery in the periphery, especially in Spain and Ireland, I decided to increase my weighting.”

“During the year, earnings per share continued to be surprisingly resilient, the recapitalisation of the banks gathered pace and companies

on the whole appeared to be in good shape – certainly at a domestic level. Despite these positives the negative macro picture somewhat overshadowed the positive corporate data. I have very much the same opinion today on Europe and I remain a firm backer of the Jupiter European fund.”

THE FUND MANAGERStuart Mitchell, manager of the SWMC European fundMitchell treats his ISA as an extension of his SWMC European fund and as such uses his allowance to invest lump sums into some of his highest conviction positions.

“I may be accused of being biased but I am more optimistic than most about the growth prospects in Europe, which is coming from the company meetings I am having on the ground,” he said.

The first company he picks out and which is in his ISA is the UK-listed Ocado - a somewhat controversial pick.

“It certainly is a more forward-looking growth stock, but it has enormous potential. The last major area of internet commerce yet to

more business done on the fund platforms, the panic that used to accompany the end of a tax year has seemingly turned to a sense of calm.

In his Budget of March 2014, chancellor George Osborne announced sweeping changes to the ISA which lead to the creation of the New ISA – or NISA for short.

Gone were the old boundaries between the cash ISA and the stocks and shares ISA, with the two being merged into one and the annual allowance which can be put in jumping from £11,250 in the 2013/14 tax year to £15,000 in 2014/15. So how is the investing community adapting to the changes? Here’s what three industry professionals have been doing this ISA season.

THE IFADarius McDermott, managing director of Chelsea FinancialBoth in the old days of the £7,000 limit and the modern times of the £15,000 maximum, McDermott says – cash flows permitting – he has always tried to maximise his ISA allowance owing to the tax breaks that accompany it.

As such he always contributes into funds on a monthly basis, to take advantage of pound cost averaging, but also leaves himself the flexibility to add lump sums into funds when opportunities arise.

He said: “Within the new rules the limit you can put in a month is about £1,200, so I will do half of this and then top up when

In days gone by the approaching end of the ISA season brought with it a sense of investor panic.

Despite having the whole year to decide where to invest their then £7,000 limit, simple human nature and a flood of enticing offers from fund management groups proffering tempting discounts meant many savers left it until the very last minute to use up their allowance.

Indeed, groups set up ‘ISA cafes’ on the last day of the tax year, offering investors a coffee, a bacon buttie and a slashed initial charge on their most popular funds in an effort to mop up any unallocated money.

But flash forward to today and the cafes have closed. With ISA allowance limits rising steadily since 2008/09, and with more and

A lot has changed since ISAs were first introduced but investing remains as strong as ever. Adam Lewis talks to the experts about how they use their ISAs

really penetrate the economy is the grocery market.”

Next up is Italian media company Mediaset, which Mitchell says excites him because it arguably has the strongest television franchise in the world.

“I am very impressed how dramatically the company was able to cut back costs and how it continued to generate cash in the most horrible operating environment imaginable,” he said.

“While its share price has bounced back quite strongly since the bottom, its share price is nowhere near what it was at back in 2006/07. If Mediaset is able to get back even half of what it lost, its shares are trading at a very low multiple.”

Mitchell also has three telecom stocks in his ISA: Orange, Telecom Italia and Deutsche Telekom.

He explained: “I think the market shares and revenues of the large telecoms will begin to stabilise now the companies can offer a competitive broadband product. If that is the case, I believe there is no reason why these share prices cannot double from where they are right now.”

THE MULTI-MANAGER John Husselbee, head

of multi-asset at Liontrust Another pound cost averager, Husselbee takes a very

different investment approach in his ISA

than he adopts in his personal

pension.

ISA

“My pension is much more aggressive than my ISA,” he said. “As such while the pension is invested in emerging markets and Asia funds, the ISA is more domestic orientated and focused on the real stock picking managers.”

The reason that his pension is higher risk and more volatile than the ISA is because Husselbee says there will be times when he dips into the ISA, whereas he won’t touch the pension for a long time.

Meanwhile he adds that it is unlikely he will use the full £15,000 allowance afforded to him as he prefers to channel the majority of the money into his pension.

“Because of my day job I don’t have all the hours in the day to do loads of research on my ISA, but I realise I do have to save,” he says. “I want to put my money into my ISA and forget about it and as result I only probably think of changing the funds within it once or twice a year.”

“I only ever invest in funds, not stocks, and the names within

it will be familiar to most. It is a very low maintenance

portfolio.”

HOW LOW CAN YOU GO?

Feb

12 Jun

Oct

Feb

13 Jun

Oct

Feb

14 Jun

Oct

-60%

-40%

-20%

0%

20%

40%

60%MSCI AC World TR in GB (45.19%)

S&P GSCI Gold Spot in GB (-22.77%)

BlackRock - Gold & General A Acc in GB (-52.00%)

Source: FE Analytics 31/01/2012 – 31/01/2015

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That bond markets have an uncertain future is no secret. Yields have been pushed down

by years of unconventional monetary policy, but with tightening on the horizon in some parts of the globe, many fear that yields will start to rise and bring turmoil to bond holders.

But that being said, it’s almost impossible to conceive of a well-diversified portfolio that somehow avoids exposure to the bond market. This has boosted the demand for bond funds with flexible mandates and helps to explain the popularity of the IA Sterling Strategic Bond sector.

A persistent favourite with investors is Ariel Bezalel’s Jupiter Strategic Bond fund. At £2.5bn, it’s one of the largest funds in the sector, although it is dwarfed by the £24.4bn M&G Optimal Income portfolio, which is headed by fellow FE Alpha Manager Richard Woolnough.

Bezalel’s four crown-rated fund launched in June 2008, giving the manager an unconstrained mandate across bond markets. His approach combines macroeconomic analysis with company research, tends to favour firms that are improving their financial health and pays attention to “out of the box”

IN FOCUS

JUPITER STRATEGIC BOND EDINBURGH INVESTMENT TRUST

FUNDS

With many investors unsure of where the bond market is heading, FE Trustnet news editor Gary Jackson takes a look at a fund for those wanting to outsource responsibility to an experienced fixed income manager Reporter Daniel Lanyon highlights an investment trust that, while one of the oldest in

existence, has a manager with a relatively short track record – but that doesn’t stop nearly all the experts backing it.

MANAGER: Ariel BezalelFUND SIZE: £2.5bnSECTOR: IA Sterling Strategic BondLAUNCHED: June 2008OCF: 0.74%CROWN RATING:

niche ideas that are not covered by mainstream funds.

Between launch and 23 January 2015, the fund returned 86.23 per cent against the average peer’s gain of 49.21 per cent, making it the sector’s third best performer over this time frame. It also outperformed the sector in every full calendar year apart from 2014, making first quartile returns in 2009, 2010, 2011 and 2013.

Since launch, the fund has been slightly more volatile than its average peer but its maximum drawdown - which shows how much investors would have lost if they bought and sold at the worst possible times - is lower. It also has one of the highest Sharpe ratios, which measures risk-adjusted returns, of the sector.

Last year proved more difficult for the fund, with a return of 3.78

A GOOD START

per cent placing it in the third quartile. One contributor to this underperformance was the portfolio’s 60 per cent weighting to high yield, which had a lacklustre year.

The fund remains highly regarded by the investment community, however. FE’s AFI panel of leading financial advisers deems it to be an option for aggressive, balanced and cautious investors, while it appears on the FE Research team’s Select 100 list of preferred funds.

The FE Research team said: “Bezalel has a great deal of experience investing in bond markets and his absolute return mindset gives him an edge over many of his competitors. The fund is a good choice for an investor with no strong feelings about bonds and who wishes to outsource responsibility for this asset class entirely.”

TRUSTS

Patience is normally the virtue attributed to holding investment trusts in your

portfolio. While most experienced investors will advise taking a long-term approach, managers of trusts arguably find this easier than their open-ended peers as closed-ended funds don’t need to worry about outflows and are not motivated by inflows.

But with just under a year to the day that FE Alpha Manager Mark Barnett took over the Edinburgh Investment Trust from the departing Neil Woodford, performance has been solid in an asset class that has been flat at best.

The trust has returned 18.25 per cent over one year to 23 January, giving it the best total return in its sector where the average trust made just 4.22 per cent. The FTSE All Share Index gained 4.55 per cent over this time.

However, part of this is due to the narrowing of its discount, which is currently 2.4 per cent having been around 6 per cent when Barnett took over.

Stripping out the movements in its discount/premium, the trust is still ahead of its closest rival, the Troy Income & Growth trust, with a growth in net asset value of 12.37 per cent compared with 10.98 per cent.

Ewan Lovett-Turner, trust analyst at Numis Securities, rates Barnett’s short tenure on the fund

and believes he is well placed to continue to outperform.

“He is a manager we rate very highly and has a similar approach to Woodford, so you get that stock picking approach but with a macro framework which gives you the big sector biases that are likely to drive performance, as they have done over the past year,” he said.

Edinburgh IT is always likely to be biased to more defensive sectors such as tobacco, pharmaceuticals and consumer goods, according to Lovett-Turner. Current top holdings include BAT, Roche, Reynolds American and Imperial Tobacco.

“However, since Barnett took over the major change and difference has been increasing

the mid and small cap exposure, at the expense of the FTSE 100,” Lovett-Turner added.

“The management fee was also reduced and the performance fee was got rid of after Barnett took over, which is good as it makes things simpler to understand.”

Edinburgh IT’s yield was 3.5 per cent as of 23 January.

MANAGER: Mark BarnettFUND SIZE: £1.187bnSECTOR: IT UK Equity Income OCF: 0.68%PERFORMANCE FEE: noGEARING: 13 per centDISCOUNT: 2.4 per centLAUNCHED: 1889

Source: FE Analytics Source: FE Analytics

POWERING AHEAD

Jupiter - Strategic Bond Acc in GB (85.83%)

IBOXX STG NON-GILTS ALL MATURITIES TR in GB (64.19%)

IA Sterling Strategic Bond TR in GB (49.20%)

Feb

14

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2%

4%6%

8%

10%

12%

14%

Apr

Jun

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Dec

Invesco Asset Management- Edinburgh Investment Tst plc TR in GB (12.05%)

IT UK Equity Income TR in GB (2.99%)

FTSE All Share TR in GB (1.18%)

Jul 0

8

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20%

40%

60%

80%

100%

Nov

Mar

09

Jul

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Mar

10

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Mar

11

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Nov

Mar

12

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Mar

13

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NEWTON REAL RETURNInvestors in retirement often have a lower risk appetite, so senior report Alex Paget hunts for a fund offering capital protection and diversification

A SMOOTHER RIDE

There is little doubt that investors need to approach their retirement portfolios very

differently to how they might have done in the past, given that people are generally living longer and interest rates aren’t likely to rocket up any time soon from their lows.

It means that the age-old retirement plan of holding just cash and low-risk bonds is unlikely to suffice anymore as even when savers stop working, they will still need a degree of capital growth on top of a reliable earnings stream.

However, investors in retirement aren’t going to want to take too much risk and therefore FE Research’s Amandine Thierree says they may want to build their portfolios around the £9.5bn Newton Real Return fund as it offers diversification and capital protection.

“The fund’s main features make it suitable as a core holding in any portfolio: it invests in the main asset classes, regardless of location, and it aims to beat cash once inflation is taken into account,” she said.

Newton Real Return, which sits in the IA Targeted Absolute Return sector, is headed up by the FE Alpha Manager Iain Stewart.

The reason why it may be suitable for a retirement portfolio is because the fund invests across various global financial markets, prioritises downside protection and pays out a dividend twice a year.

It is one of the higher risk offerings in the sector, but our data shows the fund has delivered equity-like returns over the long

term, without giving its investors too many sleepless nights.

It has gained 125.27 per cent since Stewart took charge in March 2004 and, while the FTSE All Share has returned 10 percentage points more over that time, the fund’s annualised volatility and maximum drawdown – which measures the most an investor would have lost if they had bought and sold at the worst possible times – has been half that of the index.

Newton Real Return has also made a positive return in all but one of the last 10 calendar years – including a 3 per cent gain in the crash year of 2008.

Also, as the fund is 60 per cent invested in defensive mega-cap dividend-paying equities as well as certain bond holdings, it is highly rated for its income characteristics.

Though the fund yields less than 3 per cent, it is one of FE’s best rated absolute return funds for income – scoring particularly well for its dividend growth.

The major risk associated with the fund, according to Thierree, is its use of derivatives. However, Stewart only uses these complicated financial instruments as a way to hedge out equity market risk.

MANAGER: Iain StewartFUND SIZE: £9.5bnSECTOR: IA Targeted Absolute ReturnLAUNCH DATE: September 1993OCF: 0.79%CROWN RATING:

PENSIONS

Source: FE Analytics

Apr

04

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140%

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11

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12

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13

Apr

14

FTSE All Share TR in GB (132.84%)

Newton - Real Return B Acc TR in GB** (125.27%)

13

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UK investors have been accused of depending too much on domestically focused funds,

and with good reason. Many simply choose a FTSE All Share tracker or default UK equity fund for their pension or ISA, meaning they miss out on not only other developed markets such as the US and Europe, but high-growth emerging markets as well.

Completely ignoring asset classes there is no excuse for, but a slight bias towards UK managers? I think that can be forgiven, for the simple reason that there are far more quality options out there than in any other area. And that’s not only because there are more of them; there is a higher proportion of star managers across the IA UK All Companies, UK Equity Income and UK Smaller companies than the vast majority of sectors.

Asset allocation is of course very important, but trying to time the market is far harder than identifying experienced managers with a proven process and long-term record of adding value. Most experts recommend investors remain diversified across all major asset classes at any one time, but with the likes of Neil Woodford, Mark Barnett, Adrian Frost, Nigel Thomas, Richard Buxton, Paul Spencer, Giles Hargreaves and Gervais Williams all up for grabs, it’s hardly surprising that the vast majority of even professional investors allocate more than the MSCI AC World’s 7.11 per cent allocation to the UK. The international focus of UK companies makes the trend even more acceptable.

First for a little bit of context. Long-term investors needn’t worry too much about short-term moves in markets, but I’ve noticed that fund managers are more wary in their outlook now than they have been for some time.

Valuations are on the expensive side of fair in light of strong gains, which has seen the FTSE All Share index rise by more than 60 per cent since mid-2011. Combine this with the most open general election for a generation and the threat of both deflation and rising interest rates on the horizon, and it’s little wonder even naturally bullish investors are more muted than usual. Buxton,

who runs the Old Mutual UK Alpha fund, sums it up quite nicely:

“It is going to be very rocky and very volatile [for several more months.] Volumes in the markets are still low and there is a lot of pencil sucking among the major institutions with no one doing very much at the moment. Electoral uncertainty is clearly not helpful to corporate competence, investment and planning.”

It’s for this reason that investing in a portfolio of UK funds doing very different things is the best policy. This ensures that investors don’t have all their eggs in one basket if disaster or euphoria strikes. The UK Equity Income sector, for example, gives investors access to the UK’s largest and most stable dividend-payers, while small cap funds tap into the companies of the future. Some managers target unloved stocks that they believe could rebound, while others prefer sector leaders with high barriers to entry.

SAFETY FIRSTPerhaps even more than the other two UK sectors, UK Equity Income has a wealth of resources. Sixteen of the 89 funds in the sector are headed up by at least one FE Alpha Manager,

“IT IS GOING TO BE VERY ROCKY AND VERY VOLATILE. ELECTORAL UNCERTAINTY IS CLEARLY NOT HELPFUL TO CORPORATE COMPETENCE, INVESTMENT AND PLANNING”

CONSISTENT OUTPERFORMANCE

UK EQUITIES INVESTMENT STRATEGY

SECT RPR FILE

IA UK All Companies, UK Equity Income and UK Smaller Companies are home to some of the most respected investors on the planet, all vying for your hard-earned cash. Josh Ausden takes a closer look

BATTLE F BRITAIN

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NAME 1yr 3yr 5yr 10yr

Franklin UK Equity Income 14.83% 50.08% 80.86% 117.63%

IA UK Equity Income 8.17% 45.57% 70.04% 100.74%

FTSE All Share 7.59% 34.89% 59.21% 108.51%

Source: FE Analytics

INVESTMENT STRATEGY UK EQUITIES

and if you include income-focused funds in the UK All Companies sector this rises to 23. This compares with seven of 113 in IA North America, for example.

There has been a recent rise in multi-cap and even small-cap income funds, but defensive, large-cap focused dividend-payers remain the most popular area. These funds give an equity focused portfolio a solid core, helping to protect against the downside when market takes a turn for the worse, and participate on the upside. Dividends help to smooth out the ride, and mean the products can be used by investors who rely on a regular income as well – in retirement, for example.

There is an abundance of high profile options, but one that’s a little more off the beaten track is the £163m Franklin UK Equity Income fund, run by the trio of Colin Morton, Ben Russon and Mark Hall. Lead manager Morton has been on the team since 1995, with his deputies joining in 2013.

The fund prioritises delivering a growing income in excess of the FTSE All Share, as well as capital growth on a three to five year view. It’s focus on quality businesses capable of generating a high return on capital and free cash-flow means it is invested predominantly in large caps, but Morton does have the flexibility to invest in small and mid-caps. While quality is important to the team, they refuse to overpay for stocks, targeting those that are historically cheap on a relative and absolute basis.

Top-10 holdings include tobacco giants BAT and Imperial Tobacco as well as healthcare multinationals AstraZeneca and GlaxoSmithKline. These companies are also popular with star managers Woodford and Barnett, and indeed Morton and his team have a similar risk/return profile.

Franklin UK Equity Income has a strong track record, beating its peer group and benchmark over one, three, five and 10 year periods, with less volatility. Its tendency to avoid cyclicals means it lags fast rising markets, though has consistently outperformed when they have fallen. The fund’s losses

were 6 percentage points less than the index in 2008, for example, and it actually made money in 2011.

Boasting ongoing charges of 0.85 per cent, the fund is attractively priced, and has a healthy 3.43 per cent yield.

START YOUR ENGINESWhile Richard Buxton also tends to invest predominantly in large caps, his highly concentrated Old Mutual UK Alpha portfolio is very different to Morton’s.

The manager has no commitment to paying dividends, which means he can keep his eyes firmly on companies with the potential to grow. He is more prepared to consider cyclical companies of a lesser quality as a result, prioritising valuation above all else.

Buxton believes markets get too focused on the short term issues,

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SECT RPR FILE

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NO STOPPING HARGREAVE

Marlborough - UK Micro Cap Growth A in GB (249.89%)

IA UK Smaller Companies TR in GB (133.78%)

FTSE All Share TR in GB (110.29%)

THE UK EQUITY INCOME SECTOR GIVES INVESTORS ACCESS TO THE UK’S LARGEST AND MOST STABLE DIVIDEND-PAYERS, WHILE SMALL CAP FUNDS TAP INTO THE COMPANIES OF THE FUTURE

INVESTMENT STRATEGY UK EQUITIES

19trustnet.com

He is best known for running Marlborough Special Situations, though in 2004 launched the Marlborough UK Micro Cap Growth fund, which as its name suggests focuses on even smaller companies. While vast inflows have resulted in Special Sits to moving into mid-caps, the newer fund has retained its small cap focus, investing initially in companies less than £250m in size.

It recently celebrated its 10 year anniversary in style, and remains top of its IA UK Smaller Companies sector over the past decade with returns of almost 250 per cent. This compares with 133.78 per cent for the sector and 216.76 per cent for Marlborough Special Sits.

Hargreaves is a veteran investor, but the consensus is that he’s showing no signs of slowing down and in all likelihood will be running money for many years to come. His UK Micro Cap Growth fund has ongoing charges of 0.81 per cent.

and tends to target companies that have suffered a recent bout of weakness. His decision to start buying UK retail banks in 2011 and 2012, which have since rebounded, is a good example. Current top-10 positions include Rio Tinto and Glencore, which have suffered big problems of their own of late.

While this style of investing has led to short-term bouts of significant underperformance – particularly on the downside – Buxton’s long-term performance has been strong. FE data shows the manager has returned almost 150 per cent since the beginning of 2000, beating his peer group composite by over 40 percentage points.

Especially impressive is the fact that he’s outperformed by investing almost exclusively in large caps. Many of his peers have benefited from their natural bias to small and mid-caps, but Buxton is one of the few who has consistently added value by sticking to the FTSE 100.

Old Mutual UK Alpha has ongoing charges of 0.72 per cent, making it one of the cheapest in the IA UK All Companies sector. Prior to joining Old Mutual in 2013, Buxton ran the Schroder UK Alpha Plus fund.

THE POCKET ROCKETGiles Hargreave is arguably the most respected UK small cap investor going, and certainly the most experienced. A manager who made 168.9 per cent in 1999 alone, he has consistently outperformed his peers and the wider market for over 40 years.

The manager has an insurmountable knowledge of micro, small and mid-cap companies, holding up to 300 companies in a single fund. Few fund managers can add value holding so many stocks, but Hargreave has managed to do in both rising and falling markets.

WHILE THIS STYLE OF INVESTING HAS LED TO SHORT-TERM BOUTS OF SIGNIFICANT UNDERPERFORMANCE BUXTON’S LONG-TERM PERFORMANCE HAS BEEN STRONG

SECT RPR FILE

www.trustnet.com

FE Trustnet is the award winning free website for researching funds and other investments. It covers all major investmentareas and is constantly updated with prices, news and otherinformation.

• Access thousands of detailed fund factsheets• Keep track of the latest prices and performance figures• Use Fundswire to receive bespoke alerts on changes to funds you hold• Make decisions using FE Crown Fund and FE Alpha Manager Ratings• Use FE Risk Scores to compare funds, equities or indices to the FTSE 100• Access investment news and analysis from the FE Trustnet team• Watch interviews with leading fund managers• Use powerful charting and asset allocation tools

GOT AN APPETITE FORINVESTMENT?Then tuck into trustnet.com – the most powerful free-to-use investment research website in the UK today.

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SCHRODERSINVESTMENT STRATEGY

WHY SCHRODER RECOVERY GOES WHERE OTHERS FEAR TO TREADSchroders’ Nick Kirrage and Kevin Murphy take a different approach to most UK equity managers, investing for the long term in companies with very depressed valuations today

EVEN IN THE MOST CHALLENGING OF ECONOMIC TIMES, INSOLVENCY IS RARE AND MANY OF THE WORST AFFECTED COMPANIES WILL BOUNCE BACK AS CONDITIONS IMPROVE

Important information: The most up to date Key Investor Information Document (KIID) and Prospectus can be viewed on the UK investor website via www.schroders.co.uk/investor. For further explanation of any financial terms, visit http://www.schroders.co.uk/glossary. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. FTSE International Limited (“FTSE”) © FTSE. “FTSE®” is a trade mark of London Stock Exchange Plc and The Financial Times Limited and is used by FTSE International Limited under licence. All rights in the FTSE indices and / or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and / or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent. Issued in February 2015 by Schroder Unit Trusts Limited, 31 Gresham Street, London EC2V 7QA. Registered No: 4191730 England. Authorised and regulated by the Financial Conduct Authority.

Value holds centre court in Nick Kirrage and Kevin Murphy’s investment

strategy for the Schroder Recovery fund. They aim for the value sweet spot, seeking out companies which appear to be significantly under-priced, having suffered a set-back.

It’s an approach that Kirrage and Murphy believe is genuinely different. Most investors don’t invest this way despite the potential benefits because stocks with recovery potential tend to be less predictable and there will inevitably be some companies that perform disappointingly. However, although a true ‘recovery’ strategy can be volatile over short periods, they are confident about its potential to deliver consistently strong returns over the long term in light of the fund’s proven track record stretching back more than 40 years.

Kirrage and Murphy have worked together as co-fund managers of the Schroder Recovery fund since July 2006. In 2014 they were winners of the Morningstar Rising Talent Award and were made FE Alpha Managers in 2015.

WHAT IS VALUE INVESTING? The simple explanation…Value investing is the art of buying stocks which trade at a significant discount to their intrinsic value. Value investors aim to achieve this by focusing on companies on depressed valuations, typically trading at a low multiple of their profits or assets, and investing when they assess longer-term prospects are significantly better than is suggested by the price. This approach requires a contrarian mindset and a long-term investment horizon. Over the last 100 years, a value investment strategy has a consistent history of outperforming index returns across multiple equity markets.

WHAT’S DIFFERENT ABOUT A TRUE “RECOVERY” APPROACH?Nick Kirrage and Kevin Murphy explain…Even in the most challenging of economic times, insolvency is rare and many of the worst affected companies will bounce back as conditions improve. This provides a real and enduring recovery opportunity which we aim to exploit.

We look for ideas among unloved

businesses and industries, aiming to buy when most others are keen to sell and sell when they want to buy.

We focus on individual businesses rather than broad macro themes. This means that even in a part of the economy which has not been doing so well, for example high street retail, we have the potential to unearth good opportunities.

WHAT ARE THE RISKS?Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested.

Funds that invest predominantly in the companies of one country or region can carry more risk than funds spread over a number of countries or regions.

Investments in smaller companies can be less liquid than investments in larger companies and price swings may therefore be greater than in larger company funds.

The fund can use derivatives for investment purposes. These instruments can be more volatile than investment in equities or bonds.

The fund is not tied to replicating a benchmark and holdings can therefore vary from those in the index quoted. For this reason the comparison index should be used for reference only.

The fund holds investments denominated in currencies other than sterling. Changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall.

May be suitable for investors: • Who are looking for exposure to

large UK companies• Who are comfortable with the risks

associated with an equity-based investment

• Who have a medium to long-term investment horizon of between 3-5 years.

May not be suitable for investors: • Who are seeking a lower risk fund• Who are not prepared to have their

capital at risk• Who are uncomfortable with the

level of risk associated with equity-based investment

• With a short-term investment horizon• Who are unwilling to tolerate short-

term volatility (or fluctuations in the value of an investment).

INVESTOR PROFILE

Source: FE Analytics, bid to bid with net income reinvested to 31 December 2014, A acc unit class, net of fees in GBP. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. The fund holds investments denominated in currencies other than sterling, changes in exchange rates will cause the value of these investments, and the income from them, to rise or fall.

Speak to your financial adviser today about how Schroders could serve your long-term aims or find out more at Schroder.co.uk/recovery

For more information on value investing visit www.thevalueperspective.co.uk run by the value team at Schroders.

PERFORMANCEQ4 2013- Q4 2014

Q4 2012- Q4 2013

Q4 2011- Q4 2012

Q4 2010- Q4 2011

Q4 2009- Q4 2010

Schroder Recovery Fund % 1.5 45.3 34.1 -14.1 15.7

FTSE All Share % 1.2 20.8 12.3 -3.5 14.5

Recent reforms and better support from platforms mean investors needn’t panic about ISAs anymore, says Trustnet Direct’s John Blowers

We’re now fully immersed in the rather silly season the investment industry

creates each year. Just as we groan when we see our first Christmas ads at the end of October, ISA advertising follows a similar pattern.

And it has been like this for many years now: “Act by 5 April”; “Use it or lose it!”; “ISA this, ISA that!”

We’re all grown-ups and we know not to leave anything until the last minute, but amazingly net fund inflows still suggest most people actually do leave their ISA investment decisions until the first five days of April. This suggests people are habit buying but maybe we need to take a little more time to consider our ISA this year as there have been a series of changes.

Without wishing to labour a point, there were a series of radical changes in the way we can save, most notably with our pensions, but also the ISA – or NISA limit

23trustnet.com

EASY DOES IT

IN THE BACK

(Yuk! They’re not really that new any more; can we go back to calling them ISAs please?). The limit we can save or invest has soared to a gargantuan £15,000 per year.

And none of this cash ISA or stocks & shares ISA business, with

different limits and other tricks to confuse us. No! It’s £15,000 in cash and stocks and shares and funds. In another first, the financial services industry has colluded with the Government to create something simpler.

LAST MINUTE INVESTING

Source: The Investment Association (unit trust & OEIC sales only)

Net ISA Sales Jan - May 2014 (£million)

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ISAs in general are a lot simpler to understand than many people give them credit for. Here’s why:

GUIDANCEThere have been some big strides in the last year or two to help people pick investments from the multitude of funds and shares on offer. For most people who do not have access to an adviser, the fear of choosing an inappropriate investment has prevented many from even trying. Nine out of 10 ISAs opened last year were cash ISAs, which is astonishing given the low levels of interest on offer at present.

To help people a number of investment platforms offer pre-selected portfolios of funds that give diversification, so all your eggs aren’t in one basket.

On Trustnet Direct, we offer four goal-based selections (e.g. Mortgage Buster, School Fees Funder) and three core portfolios (the Accumulator, the Consolidator and Income Generator) designed to deliver consistent performance over defined periods or with differing levels of risk.

These portfolios have performed well over the last 12 months and are straightforward to buy in a single process. More information is available at https://www.trustnetdirect.com/fund/helpme-choose-map

If you like to choose investments yourself there are some helpful tools new to the market at Trustnet Direct. The Fund Filter will help sift some 4,500 funds, investment trusts and ETFs down to manageable shortlists - https://www.trustnetdirect.com/fund/filter

In addition, there is a new service called the Fund Health Check, which will rate your unit trust or OEIC from ‘A’ to ‘E’ against a series of quantitative measures, such as performance, popularity and fund manager ratings.

Should the fund you rate score a ‘C’ or lower, better rated funds will be displayed if available. This tool is available on the home page of Trustnet Direct (www.trustnetdirect.com) or integrated into your portfolio if you have an account.

REGULAR INVESTINGSpreading the cost of investing your ISA is a smart thing to do, given the high limit of £15,000 per annum. It means that you can put up to £1,250

each month and many investment platforms allow you to set up regular investments into a portfolio of holdings, rather like a direct debit: https://www.trustnetdirect.com/regular-investing

COSTSFund costs have also reduced in the last 12 months. New regulations came into force banning commissions on funds, so the annual management charge has typically halved and commissions have been replaced by explicit platform fees. These new commission free funds are referred to as ‘clean share classes’.

For example, whereas a platform would charge around 0.75 per cent a year on your investments carved out of the 1.5 per cent annual management charge, they now charge less than this (in almost all instances). Trustnet Direct charges just 0.25 per cent a year in platform fees and cap this annual cost at £200.

In most instances, the cost of investing has reduced by around one third, which is great news for investors.

It is worth looking at what you are being charged because a few fractions of percentage points each year in charges can make a big difference to your investments over the longer term.

In summary, the ‘new’ ISA is a powerful weapon in the arsenal of the saver and investor and with a £15,000 limit now in force can be used for a variety of purposes in a tax efficient manner.

TO HELP PEOPLE A NUMBER OF INVESTMENT PLATFORMS OFFER PRE-SELECTED PORTFOLIOS OF FUNDS THAT OFFER DIVERSIFICATION

22

PLATFORMS

trustnet.com36

STOCKSIN THE BACK

Looking for undervalued stocks in unfashionable areas of the market can prove to be a lucrative endeavour, writes Georgina Hamilton, co-manager of the CF Miton UK Value Opportunities fund

Investors typically prefer a company with a narrative about the future rather than one with a beaten down price. It is more inspiring to buy

growth shares centred on exciting industries and revolutionary products than it is to buy value ones.

The CF Miton UK Value Opportunities fund aims to capitalise on these overlooked stocks with cheaper valuations. We look for companies whose current worth is high relative to the share price rather than

those that require a bet on performance potential that may or may not materialise in the future.

In our view, it is important to marry a value strategy with a keen focus on financial backing. In every case, each company must have a sufficiently robust balance sheet to afford the time horizon to realise the value that we see.

Here are three examples of stocks that fit our value criteria.

TSB BANKING GROUP PLCTSB, the challenger bank, trades on a 20 per cent discount to its estimated net asset value of 330p. Given the valuation story is predicated on the net asset base, we need to be happy with both sides of the equation – the assets and liabilities. On the asset side, unlike many of the listed UK banks, it does not have large derivative books and trading arms – the asset base is primarily vanilla UK mortgage lending. On the liabilities side, it is not subject to continual fines against legacy business which has plagued many other UK banks as a result of a conduct indemnity between TSB and Lloyds. Critically, this undervaluation is married with a strong financial position – TSB has a core tier 1 ratio of 17 per cent.

NORCROS PLCNorcros is a UK and South African tile and shower manufacturer that trades on a P/E of just 8 times. The UK repair, maintenance and improvement (RMI) market had a brutal time during the recession, with some lines falling by more than 50 per cent. It is still a long way away from a full recovery, with RMI spend well off its peak. In 2013 only £661 per property was spent maintaining privately owned UK houses, where more than 50 per cent of bathrooms are estimated to be10 years old-plus. Despite a backdrop of unsustainably low RMI however, expectations are very conservative and the company continues to trade at an extraordinarily low valuation.

RPC GROUP PLCRPC manufactures rigid plastic packaging for a range of products, including food and cosmetics. Its significant exposure to Europe is the most likely cause of its cheap valuation of 11 times P/E. Despite this, RPC’s core market is growing at about 4 per cent on a like-for-like basis as a result of impressive innovation. Beyond the organic story, RPC has a track record of impressive returns accretion from consolidation of the European market and international expansion. The latest acquisition, Promeans, was bought on a cheap valuation and we believe guidance underestimates the benefits of scale from an increased share in polymer buying and site rationalisation.

GET MORE THAN YOU BARGAINED FOR

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Trustnet Direct

0.45%

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0.35%

0.25%

Annual Platform Fees over 10 years*

*The graph displays platform fees plus the cost of 5 transactions per annum with Trustnet Direct compared with platforms charging 0.45%, 0.40%, 0.35% and 0.25% per annum in platform fees. Assumes £15,000 new ISA limit

invested each year for 10 years and assumes 5% growth net of charges.

The good news is that if you invest the new ISA limit of £15,000 per annum over the next 10 years and it grows at 5% per annum net of charges, you’ll have built a nest egg of over £198,000 tax-free.

The bad news is that platform fees can seriously damage your wealth, as the chart above shows.

At Trustnet Direct, we charge 0.25% in platform fees but cap it at just £250 max per annum (£200 + 5 trades at £10 per trade).

We may not be the cheapest on day one, but when your investments grow, your charges don’t. So, if you want a premium platform, without the premium price tag, open your next ISA with Trustnet Direct.

Trustnet Direct does not provide advice on the suitability of investments. It is an execution-only service. If you are unsure about the suitability of investments, seek independent financial advice.

The price and value of investments and their income fluctuates: you may get back less than the amount you invested. Past performance is no guarantee of future performance.

Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.

These are the growth f igures you don’t want to see in your next ISA

www.trustnetdirect.comSet your account up now at:

Trustnet Direct is a trading style of Trustnet Limited, Authorised and Regulated by the Financial Conduct Authority.

IN THE BACK

Brown Shipley has been actively investing in strategic bond funds because they have the ability to allocate

to different areas of the credit market at opportunistic times to deliver superior returns for our clients.

In a world where fixed income markets are changing dramatically due to quantitative easing by central banks, currency movements and valuations change on a daily basis due to fluctuations in fixed income yields. This means finding a fund manager that can add value is important for a client’s fixed income exposure.

Strategic bond funds have the ability to deliver positive absolute returns for clients in all market environments – something all investors crave. It is because of this that strategic bond funds have seen significant growth in assets over the last five years since the birth of UCITS and, according to FE Analytics, there are now 77 funds in the IA Sterling Strategic Bond sector.

Brown Shipley added the Aviva Strategic Bond fund, which has been managed by Chris Higham since inception in 2009, to its approved list in 2014. We had been following the fund for a number of years and had it on our ‘radar’ list because of its impressive track record.

Following the removal of a similar fund from our approved list in 2014 we were on the lookout for a new strategic bond fund. Chris’ management of his fund had impressed us because of the consistency of risk-adjusted performance – both in absolute terms and relative to the IA Sterling Strategic Bond sector – was impressive last year and over the longer term.

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The IA Strategic Bond sector is dominated by a handful of multi-billion pound funds, but deputy fund manager at Brown Shipley Alex

Brandreth likes the much more nimble Aviva Strategic Bond portfolio

The fund is an asset allocation vehicle, total return, with all overseas exposure hedged back to sterling. Currently, about 60 per cent of the fund is in UK assets. This fund won’t go negative on duration, takes no naked short CDS positions and has actually close to zero derivative use – it’s a plain vanilla strategic bond fund which will add most of its value at the stock level.

The addition of the fund also complements the existing holdings on the Brown Shipley approved list. The duration position was one of the reasons performance was strong in the final quarter of the year, as gilt yields fell back to low levels.

The fund is not one of the goliaths in the sector, making it more nimble and meaning we believe it can still add significant returns for our clients from bottom-up stock selection – which we like.

Looking forward we have faith in this fund manager’s ability to allocate to different areas of credit markets to deliver returns for our clients.

TRUSTNETmagazine

INVESTMENT TRUSTS VS FUNDS: ALL YOU NEED TO KNOW

Investment trusts were once considered too niche and too complicated for private investors, but recent reforms have made

them more accessible to all. In next month’s Trustnet Magazine, we talk you through the considerations that need to be made when

choosing between funds and trusts, including comment from experts sitting on both sides

of the fence.

We’ll also be highlighting the various ways that investors get can one-stop-shop exposure to global equities via trusts, including an in-depth

look at one of the most consistent collective vehicles of the last 10 years: Bruce Stout’s Murray

International Trust.

MARCH PREVIEW

Chris Higham has returned 91.71 per cent since he launched the Aviva Strategic Bond fund. This compares to 74.68 per cent from the IA Strategic Bond sector average.

STRATEGIC BOND