magazine - Trustnet

TRUSTNET
magazine
Issue 4 / February 2015
WHAT THE EXPERTS ARE BUYING THIS YEAR
General election
UK equities
ISAs
What does it mean for
your portfolio?
Star mangers at
every turn
Does everyone
really benefit?
EDITOR’S LETTER
TRUSTNET
magazine
Issue 4 / February 2015
IN THIS ISSUE
IN FOCUS
Jupiter Strategic Bond, Edinburgh Investment Trust
and Newton Real Return are all under the spotlight
this week.
P. 10-13
WHAT THE EXPERTS ARE BUYING THIS YEAR
General election
UK equities
ISAs
What does it mean for
your portfolio?
Star mangers at
every turn
Does everyone
really benefit?
ISSUE 4
CREDITS
TRUSTNET MAGAZINE (FORMERLY
INVESTAZINE) IS PUBLISHED BY
THE TEAM BEHIND FE TRUSTNET IN
SOHO, LONDON.
WEBSITE: WWW.TRUSTNET.COM
EMAIL: EDITORIAL@FINANCIALEXPRESS.NET
CONTACTS:
General
Josh Ausden,
Head of publishing content
T: 0207 534 7661
Art Direction & Design
Javier Otero
W: www.feedingcrows.co.uk
Editorial
Gary Jackson
News editor (FE Trustnet)
T: 0207 534 7680
Alex Paget
Senior reporter
T: 0207 0207 534 7697
Daniel Lanyon
Reporter
T: 0207 534 7640
Sales
Richard Fletcher
Head of publishing sales
T: 0207 0207 534 7662
Richard Casemore
Account manager
T: 0207 534 7669
Jack Elia
Account manager
T: 0207 534 7698
Photos supplied by Thinkstock and
Photoshot
Cover Illustration: Javier Otero
INVESTMENT STRATEGY
A
ll 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
SECTOR PROFILE
There 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. 14-19
Franklin 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 FUNDS
Schroders explains the benefits of investing in
unloved companies.
P.20-21
EASY DOES IT
This 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
14
Miton’s Georgina Hamilton highlights three dirt-cheap
stocks that she believes are due a turnaround.
P. 24
THE BATTLE
OF BRITAIN
GENERAL CORRECTION
Sam 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?
In association with:
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 ISA
A 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
WHAT I BOUGHT LAST
This 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
2
GENERAL
CORRECTION
MONEY
ELECTIONS
GENERAL
CORRECTION
Experts suggest that the upcoming general election could be the most influential
event of the year for UK investors. Sam Shaw reports
F
our 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 FLOW
Audrey 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.
2
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.
REFERENDUM
With 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
“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.
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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 antiEU 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.
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.
“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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3
MONEY
ISAs
TAX ON DIVIDEND INCOME
ARE ISAs
FOR EVERYONE?
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
A
lthough 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
TAX ON INTEREST INCOME
For 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
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
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.
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?
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.
All 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
WHAT THE EXPERT SAYS
While 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
£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.
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 TAX
When 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.
CAPITAL GAINS TAX
Conclusion: Anyone who
earns more than £10,000 a year
should put their money in an
ISA.
Tax-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
4
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5
MONEY
ISA
BREAKING
THE ISA
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
I
n 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
6
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 IFA
Darius McDermott, managing
director of Chelsea Financial
Both 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
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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 geopolitical and
macro risks
that prevail
today.”
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THE PANIC THAT USED
TO ACCOMPANY THE
END OF A TAX YEAR HAS
SEEMINGLY TURNED TO A
SENSE OF CALM
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.”
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
THE FUND MANAGER
Stuart Mitchell, manager of the
SWMC European fund
Mitchell 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 forwardlooking growth stock, but it has
enormous potential. The last major
area of internet commerce yet to
7
ISA
HOW LOW CAN YOU GO?
MSCI AC World TR
in GB (45.19%)
60%
S&P GSCI Gold Spot in
GB (-22.77%)
40%
0%
-20%
-40%
Oct
Jun
Feb 14
Oct
Jun
Feb 13
Oct
Jun
-60%
Source: FE Analytics 31/01/2012 – 31/01/2015
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.
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BlackRock - Gold &
General A Acc in GB
(-52.00%)
20%
Feb 12
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.”
“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.”
9
IN FOCUS
FUNDS
TRUSTS
JUPITER STRATEGIC BOND
EDINBURGH
INVESTMENT TRUST
40%
20%
Jul
Nov
Mar 14
Jul
Nov
Mar 13
Nov
Jul
Mar 12
Nov
Jul
Mar 11
Nov
Jul
Nov
Mar 10
Jul
-20%
Nov
0%
Source: FE Analytics
10
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A GOOD START
14%
12%
Invesco Asset
ManagementEdinburgh
Investment Tst plc
TR in GB (12.05%)
10%
8%
6%
IT UK Equity
Income TR in GB
(2.99%)
FTSE All Share TR
in GB (1.18%)
4%
2%
0%
-2%
-4%
Dec
60%
MANAGER: Mark Barnett
FUND SIZE: £1.187bn
SECTOR: IT UK Equity Income
OCF: 0.68%
PERFORMANCE FEE: no
GEARING: 13 per cent
DISCOUNT: 2.4 per cent
LAUNCHED: 1889
Oct
IA Sterling Strategic
Bond TR in GB
(49.20%)
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.
Aug
80%
IBOXX STG NON-GILTS
ALL MATURITIES TR
in GB (64.19%)
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
Jun
Jupiter - Strategic
Bond Acc in GB
(85.83%)
100%
P
atience 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
Apr
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.”
POWERING AHEAD
Mar 09
MANAGER: Ariel Bezalel
FUND SIZE: £2.5bn
SECTOR: IA Sterling Strategic Bond
LAUNCHED: June 2008
OCF: 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
Jul 08
T
hat 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”
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.
Feb 14
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
Source: FE Analytics
11
PENSIONS
NEWTON REAL RETURN
Investors in retirement often have a lower risk appetite, so senior report Alex Paget
hunts for a fund offering capital protection and diversification
trustnet.com
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 Stewart
FUND SIZE: £9.5bn
SECTOR: IA Targeted Absolute
Return
LAUNCH DATE: September 1993
OCF: 0.79%
CROWN RATING:
A SMOOTHER RIDE
FTSE All Share TR
in GB (132.84%)
140%
Newton - Real
Return B Acc TR
in GB** (125.27%)
120%
100%
80%
60%
40%
20%
0%
Apr 14
Apr 13
Apr 12
Apr 11
Apr 10
Apr 09
Apr 08
Apr 07
Apr 06
Apr 05
-20%
Apr 04
T
here 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
Source: FE Analytics
13
INVESTMENT STRATEGY
UK EQUITIES
R
T
C
E
S
E
L
I
F
R
P
U
K 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 longterm 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.
BATTLE
F BRITAIN
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
14
trustnet.com
trustnet.com
“IT IS GOING TO BE
VERY ROCKY AND VERY
VOLATILE. ELECTORAL
UNCERTAINTY IS
CLEARLY NOT HELPFUL
TO CORPORATE
COMPETENCE,
INVESTMENT AND
PLANNING”
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 dividendpayers, 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 FIRST
Perhaps 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,
CONSISTENT OUTPERFORMANCE
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
15
INVESTMENT STRATEGY
UK EQUITIES
R
SECT ILE
PR F
trustnet.com
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
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 ENGINES
While 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,
NO STOPPING HARGREAVE
300%
250%
Marlborough - UK Micro Cap Growth A in GB (249.89%)
200%
IA UK Smaller Companies TR in GB (133.78%)
150%
FTSE All Share TR in GB (110.29%)
100%
50%
0%
Feb 14
Feb 13
Feb 12
Feb 11
Feb 10
Feb 09
Feb 08
Feb 07
Feb 06
-50%
Feb 05
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, largecap 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 midcaps. 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.
Source: FE Analytics 31/01/2005 – 30/01/2015
17
GOT AN
APPETITE FOR
INVESTMENT?
Then tuck into trustnet.com – the most
powerful free-to-use investment research
website in the UK today.
FE Trustnet is the award winning free website for researching
funds and other investments. It covers all major investment
areas and is constantly updated with prices, news and other
information.
INVESTMENT STRATEGY
UK EQUITIES
R
SECT ILE
PR F
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 longterm 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.
WHILE THIS STYLE
OF INVESTING HAS
LED TO SHORT-TERM
BOUTS OF SIGNIFICANT
UNDERPERFORMANCE
BUXTON’S LONG-TERM
PERFORMANCE HAS
BEEN STRONG
THE POCKET ROCKET
Giles 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.
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.
• 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
www.trustnet.com
trustnet.com
19
INVESTMENT STRATEGY
SCHRODERS
WHY SCHRODER
RECOVERY GOES
WHERE OTHERS
FEAR TO TREAD
Schroders’ 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
V
alue 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.
20
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 longterm 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.
trustnet.com
EVEN IN THE MOST
CHALLENGING OF
ECONOMIC TIMES,
INSOLVENCY IS RARE
AND MANY OF THE
WORST AFFECTED
COMPANIES WILL
BOUNCE BACK
AS CONDITIONS
IMPROVE
INVESTOR PROFILE
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 equitybased investment
• With a short-term investment horizon
• Who are unwilling to tolerate shortterm volatility (or fluctuations in the
value of an investment).
PERFORMANCE
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.
Q4 2013Q4 2014
Q4 2012Q4 2013
Q4 2011Q4 2012
Q4 2010Q4 2011
Q4 2009Q4 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
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.
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.
trustnet.com
21
IN THE BACK
PLATFORMS
ISAs in general are a lot simpler to
understand than many people give
them credit for. Here’s why:
GUIDANCE
EASY DOES IT
Recent reforms and better support from platforms mean investors needn’t panic
about ISAs anymore, says Trustnet Direct’s John Blowers
W
e’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
22
(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
1400
1200
1000
Net ISA Sales Jan - May 2014 (£million)
There 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 preselected 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/helpmechoose-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
800
600
400
200
0
-200
Jan 14
Feb 14
Mar 14
Apr 14
May 14
Source: The Investment Association (unit trust & OEIC sales only)
trustnet.com
each month and many investment
TO HELP PEOPLE
platforms allow you to set up regular
A NUMBER OF
investments into a portfolio of
holdings, rather like a direct debit:
INVESTMENT
https://www.trustnetdirect.com/
PLATFORMS OFFER PRE- regular-investing
SELECTED PORTFOLIOS
COSTS
OF FUNDS THAT OFFER
Fund costs have also reduced
DIVERSIFICATION
in the last 12 months. New
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 INVESTING
Spreading 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
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.
23
IN THE BACK
STOCKS
These are the growth figures you
don’t want to see in your next ISA
GET MORE THAN YOU
BARGAINED FOR
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
I
nvestors 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.
Annual Platform Fees over 10 years*
£1,000
0.45%
£900
0.40%
£800
0.35%
£700
£600
0.25%
£500
£400
£300
Trustnet Direct
£200
£100
0
1yr
2yrs
3yrs
4yrs
5yrs
6yrs
7yrs
8yrs
9yrs
10yrs
*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.
TSB BANKING GROUP PLC
TSB, 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.
36
24
NORCROS PLC
Norcros 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.
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.
RPC GROUP PLC
RPC 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.
trustnet.com
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.
Set your account up now at:
www.trustnetdirect.com
Trustnet Direct is a trading style of Trustnet Limited, Authorised and Regulated by the Financial Conduct Authority.
IN THE BACK
AVIVA
WHAT I BOUGHT LAST
STRATEGIC BOND
The IA Strategic Bond sector is dominated by a handful of multibillion pound funds, but deputy fund manager at Brown Shipley Alex
Brandreth likes the much more nimble Aviva Strategic Bond portfolio
B
rown 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.
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.
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.
TRUSTNET
magazine
MARCH PREVIEW
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.