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ISSUE 96 | WINTER 2018

ONE VISION
FORMER SOLDIER DEAN STOTT
IS GEARING UP FOR
A 14,000-MILE CHALLENGE
CHAIRMAN’S LETTER

welcome

A
 
year has passed since Donald Trump became
the 45th President of the United States.
Trump’s impact on American (and global)
politics has been immediate, but how has the
US economy reacted to one of the most divisive
leaders of modern times?
We also consider the impact of populist politics that swept Trump
to power and whether we can expect to see more of the same in the
upcoming Italian elections.
At home, we look ahead at what investors should be considering
as we move towards the tax year end. Elsewhere, our cover feature
focuses on the challenge that former soldier Dean Stott has set
himself as he undertakes a 14,000-mile cycle ride to raise money
for mental health charities.
And we focus on Estonia’s transformation and look at how this
small Baltic nation has become a world leader in digital technology.
Finally, we consider the future of cash – how much longer will
‘physical money’ be used to make purchases?
I do hope the articles will be of interest to you. As always, if you
have any queries, please do not hesitate to contact your St. James’s
Place Partner.

■ D AVID LAMB
Chairman, Investment Committee, St. James’s Place Wealth Management

FOR FURTHER INFORMATION ON ANY OF THE ARTICLES IN THIS ISSUE OF THE INVESTOR, PLEASE CONTACT YOUR ST. JAMES’S PLACE PARTNER

02 | THE INVESTOR
winter 2018 contents
04
Budget round-up
A review of Philip Hammond’s November Budget, which
06
included surprise boosts for investors in Enterprise Investment
Schemes and first-time home buyers

06
Back on track
After injury ended his army career, Dean Stott has found a new
challenge as he prepares to cycle 14,000 miles from South to North
America, supported by the St. James’s Place Charitable Foundation

10
Cash futures
As card transactions overtake those made in cash,
and contactless payments continue to grow in popularity, is
old-fashioned money on the way out?

12
All facts and statistics in this issue of The Investor are correct at the time of going to press. Cover photography by Robert Wilson. Grooming by Aga Dobosz/Carol Hayes Management

Altered states
Following an eventful first full year in office, Frederick Studemann
looks at the highs and lows of Donald Trump’s presidency so far,
and whether it can be judged a success or not

16
e-Estonia
Already one of the most digitally-progressive countries in Europe,
is Estonia moving towards an entirely digital state and, in doing so,
creating a template for other nations to follow?

18
Zeitgeist
As populist politics – from Bernie Sanders to Marine Le Pen – gathers 16 THE INVESTOR CENTRE

momentum around the world,Victor Smart looks at whether this


is the new norm, and the impact it is having on markets
26 The quarterly report

20
Get your ducks in a row
A review of market performance over the 
past three months
28 Portfolio overviews
As we approach the end of the tax year, we look at ways A report on our range of Growth and Income Portfolios
to make your money work harder by using the
34 Portfolio analysis
allowances available
All the latest fund and asset allocation data from across
our Portfolios
22
Three retirements
36 Viewpoint
Llewellyn Consulting’s Russell Jones on why central
Three clients of St. James’s Place share their personal stories bank tightening needs to be managed carefully
of retirement, discussing what life is like and how their finances 38 Insights
have fared during some choppy market conditions Why a sideways market should favour the stock-pickers,
provided they have patience

The information contained within this edition of The Investor does not constitute investment advice. It is not intended to state, indicate or imply that
current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of
any prospective fund or investment.The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected
and may fall as well as rise.You may get back less than the amount invested. Equities do not have the security of capital which is characteristic of a deposit
with a bank or building society.Where favourable tax treatments are shown, please note that these are subject to changes in legislation and dependent on
individual circumstances.Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
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THE INVESTOR | 03
BUDGET
ROUND-UP
By Faith Glasgow

T
he biggest headline to come out tweaking over recent years – though it had been
of Philip Hammond’s first autumn hoped that he would broaden automatic enrolment
Budget on 22 November was the to help the growing tranche of self-employed to
gloomy prognosis for the UK’s save into a pension.
economic growth, on the back of Nor was there much news for ISA investors.
Brexit uncertainty and a persistent inability to There will be no inflation-linked rise in the £20,000
improve productivity since the financial crisis. annual allowance for the coming tax year, although
GDP growth for 2017 was revised to 1.5%, the Junior ISA limit will rise in line with the
down from 2% in March, and is forecast to fall Consumer Price Index to £4,260.
further over the coming three years. It means the Although Hammond made no mention of it in his
economy will be £65 billion smaller by 2020 speech, the small print confirms that the £5,000
than was forecast in March – against a backdrop dividend allowance will be cut to £2,000 with
of current strong growth globally, that is a effect from April 2018, having been announced in
depressing prospect indeed. March but then shelved after the general election.
Otherwise, the Chancellor’s focus was primarily Meanwhile, the Capital Gains Tax exemption
on the housing market and small businesses, with allowance rises from £11,300 to £11,700,
little on offer for either savers or investors. enabling a married couple (who can transfer the
There was widespread speculation that he might ownership of assets freely between them) to
cut the £40,000 annual allowance for pension realise £23,400 of tax-free gains in 2018/19. That
His restraint contributions or somehow reduce the pension increase in scope to realise gains tax-efficiently,
was broadly contribution tax-relief limits for high earners, but alongside the slashing of tax-free dividends, flags
welcomed by no changes were announced to the pension system up the importance of considering the security and
the pensions beyond the fact that the £1 million lifetime shelter that ISAs or pensions offer for most equity-
industry, which allowance will rise in line with CPI inflation by based income investments.
has seen repeated £30,000 next tax year. That’s a tax break of £16,500 The Income Tax personal allowance rises from
tweaking over for people with very large pensions. £11,500 to £11,850 and the higher rate threshold
Getty Images

the years His restraint was broadly welcomed by the will increase from £45,000 to £46,350, easing the
pensions industry, which has seen repeated pressure for taxpayers around the threshold margins.

04 | THE INVESTOR
AUTUMN BUDGET 2017

The Chancellor
threw a surprise
sop to wealthy
investors, as part
of a wider focus
on boosting
investment
in small
high-growth
companies

There’s rather more interesting news for wealthy as ‘tax-motivated investments’, whereby the tax
investors. It had been anticipated that the relief provided in practice generates most of the
Chancellor might boost his coffers by attacking return and investors’ capital is less at risk (it needs
the generous 30% tax relief available on to be remembered that VCTs and EISs are only
investments into Venture Capital Trusts (VCTs) suitable for experienced, sophisticated or high net
and Enterprise Investment Schemes (EISs). Instead, worth investors who accept that they may get back
he threw a surprise sop to those investors as part significantly less than the original investment).
of a wider focus on boosting investment in small, The rabbit in the Chancellor’s hat, pulled out
high-growth companies. with a flourish at the end, was a Stamp Duty break
Thus, he outlined various measures to support designed to help people onto the property ladder.
research and development and technological The new rules mean that first-time buyers no
innovation, including an unexpected doubling of longer pay Stamp Duty on properties priced
the EIS investment limits for ‘knowledge- below £300,000. On properties costing between
intensive’ companies. In effect, the amount £300,000 and £500,000, 5% Stamp Duty is
investors can put into such businesses goes up now levied on the amount in excess of £300,000.
from £1 million to £2 million, provided any For example, £10,000 is payable on a £500,000
amount over £1 million is invested in knowledge- property; previously, it would have been £15,000.
intensive companies. A £2 million investment The government alleges that this now helps
would receive 30% tax relief of £600,000. 95% of first-time buyers, with 80% paying no
At the same time he stressed that the investment Stamp Duty at all. The measure means that first
focus of these schemes needs to be on the high-risk, time buyers can use more of their savings towards
potentially high-return end of the small business a deposit, which for many is the real stumbling
spectrum for which they were originally designed, block. However, a subsequent report from the
pledging to ensure ‘that EIS is not used as a shelter Office for Budget Responsibility said that, based
for low-risk capital preservation schemes’. on previous Stamp Duty ‘holidays’, property
In a similar vein, measures were announced to prices are likely to rise as a result of the cut.
limit the drift towards a relatively more risk-
averse approach by some VCTs and halt their use Faith Glasgow is Editor of Money Observer

THE INVESTOR | 05
IN YOUR INTEREST
CHARITY

BACK Dean Stott felt cast adrift


when he was invalided out
of the special forces. Now,

ON
though, he is riding across
continents for mental health
campaign HeadsTogether

TRACK By Victor Smart

T he story behind Dean Stott’s


Pan-American Highway
Cycling Challenge goes
back to a fateful parachute
jump, seven years ago. His Special Boat
Services (SBS) squadron was making
a training jump before a tour of duty
in Afghanistan. In a high-altitude,
high-opening manoeuvre designed to
‘insert’ soldiers into hostile territory,
Dean’s team had to open their chutes
immediately before making a
30-minute controlled descent,
navigating nearly 30 miles sideways to
land in the target zone.
For a special forces regular like Dean,
the manoeuvre should have been
routine. But as he jumped from the
plane his leg caught in the rigging line,
damaging his muscles and hamstrings
beyond repair. It was a life-changing
event: Dean was told he would never
be able to run again and was invalided
out of the service. From being at the
pinnacle of his career and among the
‘best of the best’, he found himself
stuck at home in Aberdeen with little to
keep him occupied.
This was when his entrepreneurial
wife Alana stepped in to change things.
Photography by Robert Wilson

She registered a new company from her


mobile and with that Dean became a
self-employed consultant in the world
of private security and close protection.
And he found he was good at it – he

THE INVESTOR | 07
single-handedly evacuated the entire
diplomatic staff of the Canadian
embassy in Libya.Yet beneath the
surface there were troubling signs.
When his father died, Dean showed
little emotion and returned to work the
day after the funeral. A baby arrived,
yet he toured the world and spent less
than one month a year at home with his
new family.
‘Looking back, I hadn’t adjusted to
civilian life,’ says Dean. I was still
looking for the adrenalin rush that
I had had in the military. There, I was
supported by friends. Now I was
taking similar risks, even though I was
on my own.’
He had come to live by the special
forces ethos of an ‘unrelenting pursuit
for excellence’. He and his wife agreed
that what he needed was a challenge.
Not just any challenge, but an
extraordinary physical feat that
matched the relentless demands of the
SBS – but without the risks that might
rob the family, by then with a second designated campaign, kicking off with a
child on the way, of their dad. promotional video shot with the prince at
Running, of course, was out – but Kensington Palace. Dean was irreversibly
Dean could learn to ride a bike. set on an initiative to raise awareness
Choosing a route was a decision that for mental health and £1 million for the PRUDHOE BAY
made itself once he heard about the campaign’s charity partners.
Pan-American Highway, the longest Dean hasn’t suffered post-traumatic
‘motorable’ route in the world. Dean stress himself, but he has seen plenty
would devote two years of his life in of colleagues who have. And his own
preparation for a 14,000-mile ride behaviour after quitting the special forces
northwards from Ushuaia in Argentina clearly showed he was perilously out of
to Prudhoe Bay, Alaska. touch with his feelings. ‘I was in pain
Guinness World Records agreed to every day,’ he says. ‘When you go from
let Dean challenge the record, which being at the top of your physical fitness
stood at 125 days. He phoned former to being unable to perform the most
comrade in arms Prince Harry, whom basic of tasks your mental health takes
he had met while serving in the army, a real hit.You lose your identity and you
for advice. The young royal had yet take it out on the people closest to you.
to launch the mental health campaign ‘But from the outset I was
Heads Together with the Duke and determined that this would not just
Duchess of Cambridge, but their plans be a “forces thing”. Mental health
were crystallising. issues exist everywhere, not only as
Harry was willing to lend his name to post-traumatic stress among soldiers USHUAIA
the Pan-American Highway Cycling but as post-natal depression among
Challenge with Heads Together as Dean’s mums,’ he says.

08 | THE INVESTOR
CHARITY

From the outset, the Stotts Charitable Foundation has raised more
appreciated the need for robust project than £65 million, supporting hundreds
planning. Dean would spend a year
on achieving hyper-fitness, while
of charities.
The Charitable Foundation is
The St. James’s Place
Alana became campaign director. They committed to supporting mental health Charitable Foundation is
would need a support team and a
strategy, plus marketing materials,
causes, alongside the three existing
areas of support for disadvantaged
committed to supporting
logistics and finance. children and young people, combating mental health causes
The money aspect was solved by a cancer and the Hospice Movement.
chance encounter at a lunchtime talk ‘The challenge that Dean is set to
Dean gave in Aberdeen. Representatives take on is a once in a lifetime moment
from St. James’s Place were there and that will propel the mental health Dean’s challenge will begin on
they put Dean in contact with the conversation,’ says Mark Longbottom, 24 February 2018, when he will mount
St. James’s Place Charitable Foundation. Head of the St. James’s Place Charitable the saddle and begin the four-month
The charitable arm of St. James’s Foundation. ‘The Charitable trek northwards. Ahead of that he
Place was rebranded in 2017 to better Foundation is all about supporting will spend six weeks in an oxygen tent
reflect its role as a grant-making initiatives that are making a positive to increase his red blood cell count.
charity. Most of the funds raised are and lasting difference to people and Diving and parachuting in the military
from donations or fundraising from the those around them. has prepared his body for high-altitude
St. James’s Place community of clients, ‘We hope that supporting Dean will exertion – necessary for this as at some
Partners and employees, to which the help to continue the conversation and points in Colombia the Pan-American
company matches every pound raised. awareness among others, including Highway rises to 2,500m (8,000ft)
Since its formation in 1992, the other businesses across the UK.’ above sea level. But Dean’s stocky
physique, honed by special forces’
activities, is ill adapted to cycling while
the muscles of the leg he injured had
Failure is one suffered wastage. To offset this, he has
of those options already undergone gruelling sessions
that I don’t ever in an altitude chamber to improve his
think about muscle tone and endurance.
Supporting Dean on this journey
will be a team of 12 – seven on the
ground, three production and two back
in the UK. A soft-tissue therapist will
tackle saddle sores but, as Dean admits,
it is the mental challenge that will
prove the toughest to conquer.
Not everything can be planned for.
Since Guinness World Records first
accredited him, another eight days have
been shaved off the Pan-American
Highway record, meaning that Dean
must now pedal it in less than 117 days
to earn the laurels of victory.
True to the spirit of the unrelenting
pursuit for excellence, Dean is
undaunted. He comments, resolutely:
‘To be honest, failure is just one
of those options that I don’t ever
think about.’

THE INVESTOR | 09
CASH FUTURES
Does the rise in contactless payments spell the end
for coins and notes? Governments are keen but
consumers may not be ready In 2016, the
average card
spend in
By Rebecca Jones the UK was

£18.42

T
he year 2016 marked items quickly and easily. Gone are the
a watershed for the UK days when one had to adopt a pained
when the proportion expression and apologise for paying
of transactions paid for for a £2 latte using a debit card rather
using plastic overtook than cash. This is supported by BRC
In 2016, UK
debit, credit
cash payments for the figures, which show that as the volume
or charge cards
first time. According to the British of card payments increases, the average
accounted for

54%
Retail Consortium (BRC), debit, value of transactions falls. In 2016,
credit and charge cards accounted for the average card spend was £18.42,
Getty Images. Sources: 1,2,4, brc.org.uk, January 2017; 3 wikipedia.org, September 2007, June 2016; 5 creditcards.com, June 2016; 6 accaglobal.com,

54% of all transactions compared down from £18.63 a year earlier; of all
with 42% for cash. This represents while the average value of cash transactions
a 4.5% year-on-year increase for our transactions is rising. in the UK
flexible friends and a 5% decline for Does this mean cash is dead? The
banknotes and coins. 1 long-term trend seems to suggest as
The BRC attributed much of this much. Since the introduction of the
growth in card use to increased Barclaycard, the UK’s first credit card,
investment among UK retailers in in 19665, the use of debit and credit
payment technology – particularly cards has gone in only one direction.
contactless. This type of payment now Yet, while it has taken some 50 years 68%
accounts for a third of all card for cards to gain the upper hand
transactions in the UK2 – an astonishing over cash, many believe that further
Proportion of
July 2017; 7 truepublica.org.uk, August 2017; 8 blog.euromonitor.com, February 2017

statistic when you consider growth in non-cash payments


UK retailers
that contactless payment was won’t be as sluggish.
Governments in 2016
only introduced in the UK in Dom Giuliano, Deputy
across the globe that accept
2007 and only widely
3 Chief Investment Officer
have all but contactless
adopted in the past few years. at Magellan Financial payments
Ease of payment explains its declared war Group (which manages
popularity: the proportion of on cash as a the St. James’s Place
retailers that now accept way to end International Growth fund),
contactless has grown tax evasion believes that growth in card
significantly over the past payments is set to explode.
year – from 47% in 2015 to 68% in According to Giuliano card payments
2016, and the BRC forecast further throughout the world are growing fast.
investment in the area4. ‘Right now, card payments are growing
Contactless arguably provides the in significant multiples of GDP. In
missing link in the card payment story, Europe it’s around 10% – which is
as it enables payment of lower-value ahead of the US. But in Central Europe,

10 | THE INVESTOR
CASH AND DIGITAL PAYMENTS

the Middle East and Africa it’s 20%,’ he


says. At these rates, it can’t be long
before we see an end to cash altogether.
And this, Giuliano observes, would be
music to the ears of many. ‘Throughout
the world, public policy is fuelling
growth in card payments – a cashless
world means fewer people can evade
taxes or spend illicitly,’ he declares.
This is the second factor fuelling the
demise of cash – and perhaps the one
that could hammer the final nail in the
coffin for cash. Governments across
the globe have all but declared war on
cash as a way to end tax evasion. The
most radical action so far has been
taken by India, where in November
2016 Prime Minister Narendra Modi
banned the country’s highest
denomination notes overnight in an
attempt to eradicate the so-called
‘shadow economy’, which accounted for
just over 17% of Indian GDP in 2016.6
Meanwhile, in Australia, the one and
two cent coins are no more; while in
the UK it was recently revealed that
former Chancellor George Osborne
had planned to end all cash transactions
by 20207 in a bid to boost productivity
and cut tax evasion.
In all cases, however, governments
have been met with opposition. In
India, the mass upheaval caused by the
so-called ‘demonetisation initiative’ has
done little to curb the use of cash, with
reports suggesting 97% of the country’s
transactions are still cash-based.8 And
even in countries such as the UK,
where it is more usual for people to
have both a bank account and a debit
card, governments have found that
low denomination coins, laden as they
are with symbolism (especially for
the older generation), are hard to
actually withdraw from circulation. So
cash will inevitably survive a while
longer until all consumers find card
payments have become so easy that
there is no benefit to using coins and
notes any more.

THE INVESTOR | 11
IN YOUR INTEREST

ALTERED
STATES
T
US PRESIDENCY
A ‘self-inflicted wound’ is how

a Washington think tank has described

he first year of the Trump presidency


has certainly been eventful. A regular
stream of presidential announcements
Donald Trump’s first year of presidency. – many delivered by Twitter, often in
the wee hours – was the steady backbeat
of 2017. From a drastic strengthening
of immigration controls and loosening
of environmental protection laws at
home to tough talk overseas, the 45th
US President has used his first year in
office to make clear that, under his
leadership, America does not intend
‘business as usual’.
But from the markets’ standpoint, Ambitious border fortifications are
to be built, smokestack industries
revived and foreign miscreants cowed
as the US firmly puts its interests first.
The response from most quarters
around the world has been one of
despair and bewilderment, as many fear
that they are witnessing the unravelling
of the post-1945 world order which
things have never looked better saw the spread of democracy, opening
of economies and underpinning of
trade by a US security guarantee.
For all Trump’s rhetoric, actual
achievements were slow to
materialise. One clear win was at the
Federal Reserve, where the President
was able to exercise his executive
powers, refusing to reappoint Janet
Illustration by Andrew Wells

Yellen as Chair of the US central


By Frederick Studemann bank, opting instead for Jay Powell,
a well-respected Republican. But
hopes of repealing Obamacare –
the signature legislative act of his

THE INVESTOR | 13
optimism about pro-growth policies,
such as a promised splurge on
infrastructure spending, and

Getty Images. Sources: 1 projects.fivethirtyeight.com, November 2017; 2 tradingeconomics.com, November 2017; 3 peoplespunditdaily.com, November 2017;
a business-friendly stance on
regulations and tax. The US
unemployment rate edged down to
4.1% in October – that is a fall of
0.7 percentage points since January.2
And economic confidence indicators
have risen: the Institute for Supply
Management manufacturing index
remained at elevated levels in October
A less welcome
as 16 out of 18 industries reported
development
continued growth and was described
for many
as ‘extraordinarily strong’.3
ordinary working
In the cheerleading words of one
Americans has
opinion writer, Jonathon Trugman of
been a slowing in
the NewYork Post: ‘While Trump is
wage growth
probably the most politically incorrect
president we have ever had, he’s
predecessor – have been stymied by big self-inflicted wound,’ says Elaine brutally honest. He promised to bring

4 cbsnews.com, October 2017; 5 reuters.com, August 2017


lawmakers in Congress. Kamarck of the Center for Effective economic growth, and that’s exactly
Executive orders to impose travel Public Management at the Brookings what we have.’
bans on individuals from a select group Institution, a prestigious liberal The 30th anniversary of the ‘Black
of nations initially ran into resistance in Washington think tank. Monday’ stock-market crash of 19
the courts, until the Supreme Court in Even conservatives were inclined to October 1987 saw the Dow Jones
December allowed it to take effect give the President a poor report card. Industrial Average touch a record
pending appeal. And it took a similar ‘The general pattern is a productive 23,157.4 One person was clear about
time for Trump’s tax-cutting changes first year and then a steady decline why this was so. ‘Highest stock market
to the US tax code to gain a fair wind toward exhaustion, incompetence, and in history,’ proclaimed the President,
from the Senate. scandal,’ Yuval Levin, the Editor of adding: ‘The reason the stock market
The overall reception from media National Affairs, a leading conservative is so successful is because of me.’
pundits and political analysts to the first policy journal, told Politico. ‘Trump’s
year of the Trump administration has first year has felt like the eighth year
often been withering, with many of recent presidents, but the beginning
highlighting the divisive ‘anger’ and was likely worse than the end.’
‘disruption’ that has exacerbated Trump’s approval rating among
divisions in an already polarised society. voters as a whole – around 39% at the
The White House is dogged by time of the anniversary of his election
allegations of inappropriate relations win1 – has reached a record low.
between Trump’s campaign and Russian And yet perhaps this is only one
entities, an often chaotic approach side of the story. The President did
to personnel management against start to make headway with his policies
a backdrop of warring factions, and later in the year and the political
a governing bureaucracy unable to turbulence was accompanied by
function properly due to a failure to improving economic performance
staff necessary positions in the State and rising stock markets.
Department and elsewhere. Business leaders and investors were
‘By and large, the first year of his quick to greet Trump’s surprise
presidency has been nothing but one election victory with a sense of

14 | THE INVESTOR
US PRESIDENCY

That said, a benign economic


outlook sets the stage nicely for the
President and the Republicans for
2018. Midterm elections towards the
end of the year will be the first major
national test for the President,
indicating whether his brand of
populist politics that so rocked the
system in 2016 has staying power.
Elections in Virginia and New Jersey
in November 2017 saw victories for
the opposition Democrats, bolstering
a party that has been floundering
in its attempts to mount a credible
response to Trump. But whether
these are evidence of a trend that
Making America First: could see the Democrats regain seats
Economic confidence
in manufacturing is at in the Republican-controlled Senate
its highest in a decade and House of Representatives is

Others offer a more nuanced view. Not everything has gone according
An improving international outlook, to expectations. In the immediate
rather than an unleashing of animal aftermath of the presidential election, The year since Trump’s
spirits by the White House, has been
positive for US growth. ‘Of all the
investors expected the dollar to
strengthen markedly, with some election saw markets
ways you can slice and dice the analysts forecasting parity with the experience their calmest
market, foreign exposure was the
best-performing attribute,’ Jill Carey
euro by the end of 2017. Such
bullishness, however, waned as it period in more than
Hall, US equities strategist at Merrill became clear that realising some of the half a century
Lynch, told CNBC. Other analysts also campaign promises will actually take
note that the President inherited an time and may not happen at all.
economy that was gaining momentum. Similarly, those who expected the
political turbulence to be matched by anything but clear. The opposition has
market volatility have, so far, been fallen short in other local votes
proved wrong. across the country. Trump’s overall
One less welcome economic approval ratings may be woeful, but
development for many ordinary support among his base remains
working Americans, including strong. For all the horrified reactions
a fair share of Trump voters, has of the liberal elites to his style of
been the slowing in wage growth, politics, it manifestly resonates with
despite a tightening labour market.5 a significant number of voters.
Divining the causes of this has been As George Shultz – Republican
one of the great debating points grandee, Trump critic, former Secretary
among policymakers and analysts. of State and Treasury Secretary – puts
Some have wondered whether a it: ‘Trump has figured out how to
Trading high:
The Dow Jones fundamental structural shift has communicate with people in an
reached a record occurred, driven perhaps by the unusual way and knows how to use it.’
23,1574 on the development of technology, which is
30th anniversary
of the ‘Black rendering many of the textbook Frederick Studemann is Comment and
Monday’ crash assumptions obsolete. Analysis Editor at the Financial Times

THE INVESTOR | 15
E-ESTONIA
Young and independent, the former Soviet
republic is looking to the future and driving its
citizens towards an all-digital state

By Victor Smart

16 | THE INVESTOR
DIGITAL STATE

N
owhere in the world has the state In 2017, during the rotating presidency of the
gone digital further and faster than Council of the European Union, Estonia had the
Visit Estonia. Sources: 1 wired.co.uk/magazine, July 2015; 2 csmonitor.com, July 2003; 3 e-resident.gov.ee, December 2014; 4 medium.com, September 2017; 5 medium.com, August 2017; 6 wikipedia.org, September 2017; 7 eu2017.ee, September 2017;

in Estonia.1 The small Baltic chance to extol the virtues of e-government to the
country, the first to declare EU’s 28 leaders. At a summit in Tallinn last September,
internet access to be a human they heard that more digital initiatives could increase
right and to hold a nationwide election online,2 has The seemingly the bloc’s GDP by €2.5 trillion by 2025.9
all but banished paperwork from citizens’ dealings old-fashioned Among the agenda items for Estonia are: creating
with government. And it is forging ahead with capital, Tallinn, a single EU market in data; pushing ahead with 5G
a clutch of bold new digital initiatives. One is to is abuzz with mobile phone networks it sees as crucial for the
8 doingbusiness.org, September 2017; 9 eu2017.ee, September 2017; 10 valitsus.ee, October 2017; 11 eu2017.ee, September 2017; 12 instituteforgovernment.org.uk, September 2017; 13 medium.com, September 2017

offer ‘e-Residency’, which allows individuals start-ups introduction of driverless cars; and sweeping aside
anywhere in the world to create virtual companies outdated tax rules which fail to cater for millennial
in Estonia without setting foot in the workers, who are both footloose and
country,3 while another is to lay down digitally savvy.10 Estonia’s President,
the rules on deployment of artificial Kersti Kaljulaid, explained the scale of
intelligence within the EU.4 There was action needed to cope with the new
even talk of creating a blockchain landscape of work, citizenship and tax
currency, the estcoin, to rival the and gave other EU leaders a flavour of
cryptocurrency bitcoin.5 the government’s immense openness to
Behind Estonia’s daring bound forward a ‘portable state’. ‘We collect tax from
is its recent history. It emerged from corporates globally, but soon our citizens
rule by the Soviet Union in 1991 as an will be global too.The tax flow from
independent but tiny state, short of the old industries will end and we will have
natural resources and with a population to be like bees flying from flower to
of just over a million.6 It had no desire to flower to gather taxes from people
retain anything in terms of bureaucratic working in France in the morning,
machinery from the Soviet era: its Britain in the evening – or spending
youthful government ministers junked one half of the year in Estonia and the
the old system and started afresh. other in Australia.’11
Each child becomes a digital citizen at Government delegations from around
birth, being given a digital ID by the the world now trek to Tallinn. But few
doctor – parents add the baby’s actual larger states are rushing to follow the
name later.7 Adult Estonians have been Estonian model. The UK got its fingers
issued with identity cards that include burnt by its ambitious identity cards
microchips containing personal scheme, initiated by the Blair
Government-issued
information, allowing access to government and e-Residency smart ID government and then scrapped in 2010.
commercial services; and they have the right to cards allow citizens Meanwhile, observers see Brexit as an opportunity
to sign documents
know precisely what information is held on them, digitally, access
for the UK to start afresh, especially on regulations.
who has seen it and when. There is a common government services But the abrupt nature of the separation will
digital infrastructure used by both government and and set up companies probably preclude this, according to the London-
in Estonia from
commerce. And the country has poured money into anywhere in the world
based Institute for Government.12 Ultimately, it
education and digital skills: Estonian engineers seems the UK hasn’t made the shift to drafting
devised Skype (now owned by Microsoft). The policies that can only be delivered digitally.
seemingly old-fashioned capital Tallinn is abuzz Estonia, however, is confident of its way ahead.
with start-ups – Estonia is proud that it is high in Marten Kaevats, National Digital Advisor, says: ‘We
the world rankings for ease of doing business.8 see Estonia as a pathfinder, constantly moving in
Critical to the uptake of these digital solutions uncharted territories. The practical experience and
is the fact that services are optimised for online knowhow from these experiments will be our
engagement. It is no good taking a paper-based contribution to the global discussion, so that
approach and simply uploading it. Estonia’s governments with a far bigger headcount can avoid
government services are designed to be online. strategic mistakes.’13

THE INVESTOR | 17
ZEITGEIST
Populist policies are winning
hearts and minds on both sides
of the Atlantic. How might this
impact the markets?

By Victor Smart

H
as the surge in a coalition government, then holds a that the election will result in a weak
populist politics, referendum on Italy’s euro membership governing coalition with the centre-left
from Bernie – and Italians vote to leave the eurozone. Democratic Party. That would spell
Sanders on the left Such a step would deliver a jolt across political gridlock in Rome but would
to Marine Le Pen Europe every bit as seismic as the Brexit not convulse the investment markets.
on the right, referendum result and pose an Meanwhile, the success of Silvio
established it as the new norm – and will existential crisis to the eurozone. Berlusconi’s Forza Italia party in
it deliver fresh shocks to investors? Greene points out that Italy is the only November’s Sicilian regional election has
In a bid to answer this question, country where support for the EU has further increased the range of national
experts are focusing on the likely impact fallen since the Brexit vote – and Five coalitions being talked of as feasible.
of the upcoming general election in Italy, Star has been ahead in opinion polls for Since the Brexit referendum, gauging
which is likely to be held between March about 18 months. The Italian populist voter sentiment has proved tricky. With
and May this year. party has been hostile to the euro, the presidential victory of the ardently
One well-informed observer is Megan although it has softened its line of late. pro-EU Emmanuel Macron in France,
Greene,1 Chief Economist at Manulife. However, in Greene’s view, rather the traditional centre parties seemed to
She describes one possible scenario: than winning a mandate and forcing a have snatched back the momentum. But
the populist Five Star Movement forms referendum, there is a higher probability the poor performance of Angela Merkel’s

18 | THE INVESTOR
POPULISM
Christian Democrats in September, on immigration and free trade, and
followed by right-wing successes in more state intervention in industry. And
Austria and the Czech Republic, has populist politicians typically press for
confounded those who felt populism increased investment in infrastructure
had run its course. and spending on defence, higher budget
The fortunes of populists The fortunes of populists often wax deficits and, often, capital controls; in
wax and wane with and wane with the economic cycle, short, a reversal of globalisation, which
the economic cycle, where downturns may fuel their is seen as benefiting multinational
with downturns fuelling successes. One view is that what is new corporations at the expense of the
their successes this time is that the rich economies are average citizen.

Getty Images. Sources: 1,6 Interview with the writer, The Investor – Autumn 2017; 2 businessinsider.com, June 2016; 3 jhinvestmentsblog.com, May 2017; 4 londonstockexchange.com, November 2017; 5 bing.com, June 2017
stuck in a period of slow economic So what does all this mean to the
growth. Central banks have pumped markets? To the extent that global
debt and liquidity into the economy, investors tend to fear fragmentation and
preventing a slump and pushing up asset higher inflation, populism and the
prices. But their actions have distorted instability it heralds translates into bad
the traditional business cycle and news for them.
extended its length – coupled with a glut The immediate consequences of the
of cheap labour globally, this has meant Brexit vote were a sharp fall in the pound
years of sluggish wage growth for and the decision of ratings agencies such
millions of voters. as Standard & Poor’s to cut the UK’s
Some mainstream politicians have credit rating.2 Similarly, Greene describes
been quick to accommodate populist an Italian exit from the eurozone as ‘very
sentiment. But it is important not to bad’ economically; whereas a hung
oversimplify the many cross-currents. As parliament would be ‘moderately bad’.3
well as the rise of the populist right, Populist successes, however, aren’t
there has been the unexpected resurgence necessarily disastrous in all respects;
of the populist left in the guise of Jeremy as President Trump has not been
Corbyn in the UK, Bernie Sanders in the slow to point out, US equity markets
US and Jean-Luc Mélenchon in France. have been booming under his presidency
An increase in separatist movements, despite his ‘America First’ message.
Sounding fanfares for the
common man: Bernie Sanders;
such as that in Catalonia, is perhaps also In the UK, the sharp post-Brexit fall
(below, left to right) Jean-Luc a symptom of this disquiet. in the pound has made international
Mélenchon; a supporter of Indeed, populist demands are typically stocks in the FTSE 100 look cheap and
Beppe Grillo
for the return of sovereignty, restrictions driven the index higher. Significantly,
even the more broadly based FTSE 250,
supposedly more vulnerable to a lack
of confidence in the home market,
has prospered.4
Sectors deemed especially sensitive to
Brexit, such as UK housebuilding,
tumbled after the referendum.Yet
several of the worst performers at the
time, such as the Berkeley Group, were
significantly higher a year after the poll
than before Britons voted.5
Some asset managers hope to
maximise returns by spotting flaws in
other investors’ strategies in order to
profit from big shocks such as Brexit.6
But as Greene counsels: ‘It is hard to
have a trade or hedging strategy around
populism that will work generally.’

THE INVESTOR | 19
IN YOUR INTEREST

GET YOUR
DUCKS IN A ROW
Make your money work even harder by
making sure you use all the allowances
available to you before the end of the tax year

By Faith Glasgow
FINANCIAL YEAR END

O
ver the £2,000 from April 2018, underlining
past the importance of holding most income-
couple paying assets in an ISA or pension. Spouses can use both
of years, Children have their own Junior ISA
investors allowance, amounting to £4,128 this partners’ allowances
have had tax year (£4,260 in 2018/19). Once and take profits of up to
to digest opened by a parent, others can
some contribute; it will grow free from £22,600 tax-free
mixed news. Despite the second-longest further tax liability until the child
bull market in history, the OECD reaches 18 and then roll over into
predicts a slowdown in the UK a standard ISA. It’s a great way to give ‘Although the introduction of
economy.1 Brexit uncertainties and younger family members a head start. the Residence Nil Rate Band in
geopolitical tensions persist, and inflation Pension contributions, which receive April 2017 means home-owning
is outstripping the rise in earnings.2 tax relief at your highest marginal rate couples are able to pass on up to
This makes it doubly important at (assuming that anything over the basic £850,000 free of tax to lineal
this time of the financial year to see rate of tax is reclaimed via your tax descendants, rising to £900,000 from
how you could best use the various tax return), are the most tax-efficient way April 2018, many people could still
Getty Images. Sources: 1 oecd.org, Nov 2017; 2 bbc.co.uk, May 2017; 3 savingschampion.co.uk, December 2017; 4 Moneyfacts.co.uk, November 2017; 5 gov.uk, August 2017

reliefs and allowances available. to save for retirement. You can leave a potential IHT bill for their
Despite November 2017’s 0.25% normally pay in up to £40,000, but families, and should therefore consider
base rate rise, Cash ISA rates there are restrictions for top earners whether they can afford to use their
remain derisory, trailing far behind (tapered annual allowance). These various gift allowances each year to
inflation; even the best account payments include contributions from reduce their estate,’ says Woodcock.
pays only 1.3% (as at the start of your employer, each tax year; if you use These include an annual exemption
December 2017).3 As Phil Woodcock all of the current year’s allowance, you of £3,000 per person. Since unused
of St. James’s Place says: ‘ISAs are can then make use of unused allowances allowance from the previous tax year
about long-term tax benefits, so it from the previous three years. can also be used, a couple could make
makes no sense to waste your tax Even people with no earnings – gifts of up to £12,000 in one year.
allowance on an asset that currently children, or non-working spouses, for Regular gifts out of income are also
generates a negative real return.’ example – have a tax-free pension permitted, as are any number of small
There is still a place for an allowance; a maximum £2,880 put gifts up to £250, provided you don’t
emergency cash fund, but the Personal into a pension in their name each year give recipients exempted gifts in the
Savings Allowance enables basic rate is topped up to £3,600 through basic same tax year. You can also make
and higher rate taxpayers to earn rate tax relief. wedding gifts of up to £5,000
interest of up to £1,000 and £500 HMRC took a record £4.8 billion in (depending on the donor’s relationship
respectively, free of tax. The current Inheritance Tax (IHT) receipts last tax to the happy couple).
average easy access account pays year on the back of years of rising Capital gains are taxed at 10% for
0.39%,4 which means a basic-rate house prices,5 highlighting the basic rate and 20% for higher rate
taxpayer could hold around £256,000 continuing need for IHT planning. taxpayers. But everyone has a Capital
and still receive all interest tax-free. Gains Tax (CGT) allowance, currently
For a higher-rate taxpayer, the figure is £11,300 (£11,700 in 2018/19), so limit
around £128,000. the gains you realise each year to below
Your ISA allowance – £20,000 Even people with no that threshold and you need never pay
across all ISA types in the 2017/18 earnings – children, CGT. Spouses can freely transfer
tax year, and unchanged for 2018/19 ownership of assets between them. This
– should therefore be considered for or non-working spouses means that by transferring assets before
longer term investment needs and
invested in assets that have the scope
– have a tax-free selling them, they can use both partners’
allowances and take profits of up to
to maximise the tax breaks provided. pension allowance £22,600 entirely tax-free this year.
The £5,000 Dividend Allowance
introduced in April 2016 will be cut to Faith Glasgow is Editor of Money Observer

THE INVESTOR | 21
THREE Three clients of St. James’s Place discuss
their differing experiences of retirement

RETIREMENTS
NIGEL JONES
Retired in 2009,
aged 57

I had a rude awakening when my


retirement preceded a worldwide financial
crash but the markets recovered well, as my
St. James’s Place Partner said they would

I hadn’t really thought about retirement but


grasped an opportunity to leave three years
earlier than planned. In fact, retirement has
been wonderful – touch wood, to date my
health has been good; so I am able to pursue
hobbies like sailing, golf and cycling.
I share a catamaran with friends which we have
Most of that was used to buy investment bonds
in my wife’s name. The rest went straight into my
St. James’s Place pension fund.
Still, I had a rude awakening when my
retirement preceded a worldwide financial crash
by a few months! That said, seven years on
and the markets have recovered well, as my
sailed across the Bay of Biscay and on to Mallorca St. James’s Place Partner said they would.
where she is berthed. And I also write novels, Buoyed by the mantra ‘You are investing for the
including The Lake, published on Amazon under the long term’, my present pension fund is as good
name NG Jones. That fills wet and damp winter as, if not better than, it would have been in
days while sitting by the fire. my company scheme. And the flexibility of how
In all honesty, I hadn’t really thought about I can utilise my fund is far greater, not only
retirement. I did sit down with my wife and discuss for inheritance reasons but on a monthly and
how my time would be filled, but it was soon annual basis.
apparent that it would not be a problem. Part of the tax-free money went to buy a boat
Finances are fine. Under the arrangements I have and a small holiday home on the Isle of Wight.
chosen, when my wife and I die, my pension pot can And like so many other people with kids struggling
be passed on to my son, minus any taxes. I cashed in to buy their first homes, I am helping my son and
the percentage of the pot that was allowed tax-free. his family buy an apartment.

22 | THE INVESTOR
CASE HISTORIES

PETER RAE
Retired in 2010,
aged 57

With our children, we are now


playing the ‘Bank of Mum and
Dad’ game and helping them to
get on to the property ladder as
tax-efficiently as possible

F or 33 years, I was a pilot for


a major airline. They offered
us senior captains an attractive
retirement package but gave
us only 10 days to consider the offer.
I rejected it as I felt I was not ready to
retire. Given time to think it all over, I
it proved to be a good time to invest.
It was one of the biggest financial
decisions of my life. But the options
were well explained to us and we have
been mostly happy with the outcome so
far. Initially, we checked how the fund
was performing on a weekly basis. Now
regretted that decision – and when they I check it about twice a year.
offered the same package six months Our St. James’s Place Partner keeps
later, I was at the front of the queue! In us updated on our financial affairs. And
fact I spent the last two years flying part our annual meeting with selected fund
time, which prepared me for retirement. managers goes a long way to reassure us
Financially we are OK, and with that our investments are in safe hands.
the support and guidance from our With our children, we are now playing
St. James’s Place Partner, we certainly the ‘Bank of Mum and Dad’ game and
feel like we have control of our finances. helping them to get on to the property
I took the tax-free sum allowed from ladder. Our Partner advised us on setting
my pension pot. Some was used to buy up a deed of variation on a recently
bonds and the balance of the pot went acquired inheritance, which will benefit
straight into my St. James’s Place pension them in the future. Our eldest daughter
fund. At the time I chose to drip-feed the lives in New South Wales and I think
money in, as the stock market was they will be seriously house-hunting in
recovering from a turbulent period. As 2018 and we will be making trips to
my St. James’s Place Partner predicted, Australia to join in the fun!

THE INVESTOR | 23
CASE HISTORIES

JOHN MARTIN
Retired in 2004,
aged 58

We live in the real world and have to


remember that, when you are older, you
have less time to undo any disastrous
decisions you have taken. So, for me,
it is important to keep to professional
advisers you are sure you can trust

W hile I cannot claim


to be a financial
whizz kid, I do have
a pretty good grasp
of financial affairs and have always
tried to be financially cautious – not
always successfully.
the age of 56. Although it was initially
not aggressive, she deteriorated and
spent the last four years being cared for at
home until she died just over a year ago.
The difficult choices I have had to
make relate to caring issues and taking
on a live-in carer. As many people are
If you have had a busy and responsible aware, caring is a very expensive issue.
job, it’s a bit of a relief to hand over the I am sure that seeking professional
work problems to someone else. Still, advice was the right course of action for
you do miss your former colleagues, me. Apart from not having a great deal
and for me it was important to keep in of time when I was working, I thought
touch with friends and contacts gained it was a good idea for my pension pot
over a lifetime. to be managed at arm’s length and
I have been very lucky financially. My independently from me. I do like to run
financial retirement plan was to try to my own share portfolio, which isn’t
live on my company pension, augmented large, but when it comes to my pension
by some private investments, until such pot then I think objectivity is important.
time as I needed to dip into my pension We live in the real world and have to
pot, which is invested with St. James’s remember that when you are older you
Place. I have not had to face too many have less time to undo any disastrous
difficult financial choices. But about 18 decisions you have taken. So, for me,
months after my retirement, my wife it is important to keep to professional
was diagnosed with a brain tumour at advisers you are sure you can trust.

24 | THE INVESTOR
THE INVESTOR CENTRE

WELCOME
TO THE
INVESTOR
CENTRE
T
he final quarter of 2017
delivered more growth across
global markets and, as our
Chief Investment Officer Chris Ralph
discusses in his quarterly update,
brought an end to what had been a
profitable year for many investors.
2017 was also notable for a change
in monetary policy in the UK as the
Bank of England followed the US
Federal Reserve by raising interest
rates. In our ‘Viewpoint’ article,
Llewellyn Consulting’s Russell Jones
explains why he believes any further
central bank tightening will need to be
managed carefully.
Finally, our ‘Insights’ article explains
why stock-pickers should benefit from
a sideways market.
IN THIS SECTION

26 The quarterly report


28 Portfolio overviews
34 Portfolio analysis
36 Viewpoint
Russell Jones
Llewellyn Consulting
38 Insights

Fund manager quarterly commentaries are now


available in the ‘Insights’ section of your Partner’s
website or at www.sjpinsights.co.uk

The Investor is a publication distributed on a global basis


to St. James’s Place clients. Certain funds referred to in ‘The
Investor Centre’ section may not be available for public sale in all
jurisdictions in which St. James’s Place operates. The discussion of
these funds is for information purposes only and is not intended
Getty Images

as an invitation or offer to invest in any of the funds. You should


contact your St. James’s Place Partner for further information on
the funds available for public sale in your jurisdiction.

THE INVESTOR | 25
THE INVESTOR CENTRE

The quarterly report


End of Q4 2017

Eurofirst 300
rose by
7%
Chris Ralph
Japanese
Chief Investment Officer, St. James’s Place
Nikkei 225

On all cylinders
rose by
12%
Stocks surged in the fourth quarter, concluding a strong year
for growth and markets alike, reports CIO Chris Ralph

L
ast year the S&P 500, for the first indicating its own confidence in the trajectory of US
time in its history, rose in every growth – official figures released in the fourth
month of the year, a symptom of both quarter showed annualised GDP growth at 3.2%.
investor confidence and the absence Yet if the US led the way, it was far from alone.
of major shocks.The fourth quarter The MSCI World index rose by more than 20%
made an outsized contribution to performance in in 2017 and, by the fourth quarter, all major
what was already a strong year.The world’s leading economies were growing at a healthy pace.2 The
index, the S&P 500, rose by 19.4% over the eurozone recovery was particularly noticeable,
12-month period. Early in the year, the Dow Jones and was aided by the election of centrist leaders
Industrial Average broke through 20,000 for the in the Netherlands, France and Germany.The
first time, only to then break through 25,000 in the election of Emmanuel Macron in France was
first week of 2018.1 warmly welcomed by markets, as were his moves
Corporate earnings made a strong showing in the to reduce the wealth tax and change labour
US, not least among technology companies, while bargaining rules. Despite a more muted fourth
President Trump’s end-of-year success in securing quarter, the Eurofirst 300 rose by 7% in 2017.
his tax cuts plan further contributed to optimism in After months of reversals, Prime Minister
the markets. December also saw the US Federal Theresa May achieved her aim of winning EU
Reserve raise rates for the third time in 2017, approval to move UK exit negotiations to phase

26 | THE INVESTOR
THE QUARTERLY REPORT

two, albeit having acceded to EU demands over Technology stocks were notable outperformers
negotiation sequencing, the exit bill and Northern through the year. In the US, the technology majors
Ireland.The approval followed a fraught year in far outperformed the market, buoyed by both
which she triggered Article 50; lost her majority in earnings and sentiment.Their impact on broader
a snap general election; delivered a well-received indices is significant – the five largest listed stocks
keynote speech on Brexit in Florence; delivered in the world are all technology stocks.They were
a disastrous speech at the Party conference; lost two outdone, however, by China’s top three internet
cabinet ministers in the space of eight days, and lost stocks. Last year the ‘BATs’ (Baidu, Alibaba and
her first parliamentary vote. She also presided over Tencent) rose by more than 80%.
indicators that saw UK growth fall mid-year to the In recent years, global growth has often been
lowest of any EU28 or G7 country. patchy and corporate earnings fitful, but growth in
By the late autumn, however, growth 2017 was notably broad-based, while corporate
projections had improved, and the final quarter earnings improved materially. Investors can never
marked the 20th consecutive quarter of UK afford to let optimism compromise their approach,
growth.The FTSE 100 rose by 7.6% over the year, but they do at least start 2018 with the best
posting more than half of the increase in the final economic backdrop seen for several years.
quarter of the year.3 Perhaps the most notable shift
in the UK economy came in the form of inflation, 1 ©S&P Dow Jones LLC 20[16]. All rights reserved. 2 MSCI. MSCI makes no express

which tracked upwards over the course of the year, The fourth or implied warranties or representations and shall have no liability whatsoever
with respect to any MSCI data contained herein. The MSCI data may not be further
and in December struck 3.1%, breaching its target quarter made redistributed or used as a basis for other indices or any securities or financial products.
band.Yet wage growth failed to follow suit and an outsized This report is not approved, endorsed, reviewed or produced by MSCI. None of the

savings rates fell to a 50-year low. contribution to MSCI data is intended to constitute investment advice or a recommendation to make
(or refrain from making) any kind of investment decision and may not be relied on as
Sluggish wage growth figures marred the Autumn performance such. 3 FTSE International Limited (‘FTSE’) © FTSE 2016. ‘FTSE®’ is a trademark of the
Budget.The Office for Budget Responsibility in what was London Stock Exchange Group companies and is used by FTSE International Limited

downgraded its growth projections on the basis that already a under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its

the UK would complete two decades without wage strong year 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
growth.The revised growth figures implied there FTSE data is permitted without FTSE’s express written consent.
would still be a sizeable budget deficit in 2022 and
that UK debt wouldn’t fall to pre-crisis levels until
the 2060s.The Chancellor of the Exchequer adopted
a relatively light touch, raising two of the Income Tax
thresholds, targeting housebuilding, and leaving
pensions largely alone.
Growth in Asia and emerging markets played a
major part in the improving global outlook. China
and India both continued to grow at a reasonable
pace, and Hong Kong’s Hang Seng index (which
includes many mainland Chinese companies) rose
Illustration: Masao Yamazaki. Photo: Getty Images

by 36% over the year. Japan’s growth rate increased


significantly during 2017. Shinzo Abe won a
‘supermajority’ in elections in Japan, adding
momentum to his push for corporate reforms and
to rising stock prices.The Nikkei 225 rose by
almost 12% in the final quarter of the year, and by
more than 19% over 2017 as a whole.
Despite the rate at which stock indices
progressed, differentiation was significant.

THE INVESTOR | 27
THE INVESTOR CENTRE

THE PORTFOLIO REVIEW

Portfolio overviews
Winter 2018

Growth crude rose from just above $55 to above


$66 across the three months.
short-term yields (which move
inversely to prices) remained subdued,

Portfolios
Commodity price momentum benefited reflecting expectations that interest
the Alternative Assets fund over the rates are unlikely to increase rapidly in
period, compensating for a more the near term.
lacklustre year over the previous three The Diversified Bond fund ended a
quarters.The fund also has significant strong year more quietly.The fund’s
holdings in corporate bonds in both the European credit mandate, which is run
US and emerging markets, which acted by TwentyFour Asset Management,
as a further boost to performance. performed especially strongly. Bond
DEFENSIVE Although it slipped marginally against prices rose over the course of the year,
the euro, the value of sterling rose aided by supportive central bank

O
versus the dollar over the course of the policies – the rally was only arrested in
ver the final quarter of year. Gilt yields, however, remained the final two months of the year. In
2017, the Defensive stubbornly low through 2017 in October, the European Central Bank
Portfolio posted healthy contrast to the US and Germany, where announced it was tapering its monthly
returns. yields rose as rising confidence led asset purchases by €30 billion, but also
Stock markets performed strongly investors to seek out riskier assets. A extending its programme to at least
over the course of 2017 while volatility combination of political uncertainty and September 2018.
struck new lows.The VIX, used as an unspectacular growth in the UK held
indicator of volatility on the S&P 500, investors back from exiting the safe
has a long-term average of 20.0, but in haven asset of government bonds.The CONSERVATIVE
2017 the average daily close was 11.1 Gilts fund, which invests largely in

T
– the lowest of any recorded year (since shorter-dated government bonds,
VIX’s founding in 1986) by more than ended the year essentially flat, as he Conservative Portfolio
1.5 points. Improvements in global posted a positive return
growth and corporate earnings played across the quarter.
their part in holding down volatility, as It was an exceptional
did a series of European electoral wins It was a good year year for global equities, led by the
for centrist candidates. Low volatility S&P 500 in the US, which rose some
provided a tailwind for the Schroders- for emerging market 20% over the course of 2017. It was
run mandate within the Multi Asset
fund, enabling it to participate in the
equities, as improving also a good year for emerging market
equities, as improving growth and
broader stock market rally. growth and corporate corporate earnings buoyed confidence
Both commodities and corporate
bonds picked up in value in the fourth
earnings buoyed in markets. The Global Equity fund was
a major contributor to performance
quarter.The price of a barrel of Brent confidence over the course of the year, and

28 | THE INVESTOR
PORTFOLIO OVERVIEWS

especially in the fourth quarter. The phase two of EU exit negotiations.


equally weighted core of the fund, Meanwhile, economic indicators
which is managed by BlackRock,
benefited from its exposure to
delivered underwhelming news until
late in the year. Demand for fixed
In the US, internet majors
emerging markets. income assets remained relatively far outperformed the
The International Equity fund was
also a strong performer, improving on
constant through the year, only slipping
slightly late in the year as economic broader market, aided
its 2016 performance thanks to the confidence rose. Although the Bank by several quarters
changing fortunes of IT stocks. In the of England raised rates in November,
US, internet majors far outperformed it was not expected to mark the of strong corporate
the broader market, aided by several
quarters of strong corporate earnings.
beginning of a rapid hiking cycle. earnings
Magellan, which manages the fund,
holds around 25% exposure to some BALANCED earnings and rising business confidence
of the biggest IT names, such as Apple, in the US. In a low-income world, many

A
and Alphabet, the parent company fixed income investors will move further
of Google. The fund also benefited cross the fourth quarter up the risk spectrum in their hunt for
from holdings in payment providers and the year as a whole, yield. Although it was essentially flat
MasterCard, PayPal and Visa, although the Balanced Portfolio over the final quarter, the International
it sold PayPal in the final quarter due performed strongly. Corporate Bond, which is managed
to the company’s high valuation. The In the immediate aftermath of the by Capital Four and Oaktree, made a
fund posted its strongest quarterly UK’s EU membership referendum, significant contribution to performance
performance for the year between the domestic commercial property across the year.The Alternative Assets
October and December. market suffered a significant dip in fund, which performed especially well
It was also a good final quarter for investor confidence. It has been quick to in the final quarter, likewise benefited
the Multi Asset fund. Payden & Rygel, recover since, however, and commercial from the credit rally – its investments
co-manager on the fund, invests property yields tightened materially in index-linked gilts contributed
thematically across a global universe in 2017.The Property fund, which is meaningfully to returns.
of government and corporate bonds, managed by Orchard Street, enjoyed It was a strong year for equities on
and benefited particularly from its both reasonable income returns and both sides of the Pacific, as the S&P 500
high exposure to US mortgage-backed a rise in capital values over the course rose by close to 20% and the MSCI
securities. of 2017.The fourth quarter was Emerging Markets index surged more
In the UK, politics remained particularly strong for the fund. than 30%. Stocks listed in China, South
significant on markets, as Prime The Portfolio benefited from strong Korea and Taiwan account for more
Minister Theresa May lost her fixed income performance across the than half of the MSCI Emerging
Commons majority but succeeded year.The high-yield market, in particular, Markets index, and all three economies
in winning EU approval to move to benefited from improved corporate enjoyed strong growth rates in 2017.

THE INVESTOR | 29
THE INVESTOR CENTRE

THE PORTFOLIO REVIEW

Portfolio overviews
Winter 2018

The Emerging Markets Equity and MANAGED FUNDS which is managed by Schroders, but
Global Equity funds performed strongly still made a positive contribution

T
in the final quarter.The former benefited to Portfolio performance.The fund
from exposure to consumer staples and he Managed Funds Portfolio reduced its allocation to equities and
increasing exposure to China.Wasatch delivered a positive return cash in favour of high-yield credit. It
Advisors, which manages the fund, over the quarter. benefited from an underweight to the
added both Tencent, the Chinese Stocks in the US enjoyed materials sector and, specifically, its
technology major, and Alibaba to their an exceptionally strong year, as the holding in SCA, a Swedish timber, pulp
holdings in 2017. Among other S&P 500 rose by 19%, but performance and paper manufacturer; while holdings
tailwinds, the Global Equity fund was in parts of the emerging world was in Centrica, Pearson and Debenhams
aided by the IT exposure held by Sands better still. Hong Kong’s Hang Seng detracted over the quarter.
Capital, one of the satellite managers for index, which hosts a number of listings Despite the significant rise in the
the fund. Internet and technology stocks of large mainland Chinese companies, oil price over the course of the year,
enjoyed an exceptionally strong year in rose by more than 35% in 2017. energy stocks struggled – the S&P 500
both the US and China, as corporate BlackRock, core manager on the Energy index finished 2017 marginally
earnings reached new highs and Global Equity fund, benefited from down. The Strategic Managed fund,
confidence rallied. Sands Capital the significant emerging market which is managed by Threadneedle,
benefited from holdings in Alphabet, exposure within its equally weighted benefited from its low exposure to
Baidu, Facebook, Netflix and Amazon. mandate. Sands Capital, a satellite energy and materials stocks, but
The Worldwide Opportunities fund manager on the fund, also benefited returns were held in check by lack of
also contributed to Portfolio performance, from emerging markets exposure, exposure to IT stocks.
in part for similar reasons.Tencent and notably in India. Maruti Suzuki, an Gains in emerging markets were
Nintendo, the Japanese gaming giant, automobile manufacturer;Titan, a not restricted to equities – bonds
were significant contributors. luxury goods company; and Eicher also performed well. BlueBay, which
Motors, a motorbike manufacturer, all co-manages the Strategic Income fund,
provided major contributions to fund saw its credit holdings benefit from
performance over the course of the year. the broader rise in credit prices, the
Internet and The International Equity fund also
posted high returns across 2017,
growing normalisation of the
US Federal Reserve interest-rate
technology stocks reflecting its heavy overweight in IT policy, sustained global growth and
enjoyed an stocks and to consumer discretionary
stocks. Magellan, which manages the
rising inflation expectations.

exceptionally strong fund, benefited from holdings in Lowe’s,


year in both the US a US home improvement and appliance
chain, and Amazon, the e-retailer.
and China Returns were more subdued in
2017 for the Managed Growth fund,

30 | THE INVESTOR
PORTFOLIO OVERVIEWS

As equity markets gained


momentum, investors looked
beyond global names

ADVENTUROUS in part to exposure to the industrial


sector. Disappointing revenues Income
Portfolios
T
weighed on the price of Astronics, a
he Adventurous Portfolio US aerospace electronics company,
delivered a positive return over the summer; but the stock surged
over the quarter. thereafter, rising around 40% in the
Over the course of fourth quarter.
2017, global economic growth became In the US, indices were supported
increasingly coordinated. In the third by strong performance in the financial
quarter, the growth rate in the eurozone sector. President Trump’s success in
was above that of the US and UK, which winning passage of his tax-cuts bill IMMEDIATE INCOME
had been unthinkable through most of through Congress also precipitated

T
the recovery after the global financial a last surge on markets in the final
crisis, although initial signals suggested trading days of the year. The North he Immediate Income
it slipped slightly in the fourth quarter. American fund delivered healthy Portfolio achieved positive
The Greater European fund returns in the final three months of growth across the year,
performed strongly over the course the year, playing a significant part in rising in every quarter.
of the year. S.W. Mitchell Capital, the Portfolio’s performance. Home- The Strategic Income fund was a
co-manager of the fund, achieved builder Lennar saw a high number of major contributor to Portfolio growth,
strong growth over 2017, largely new orders mid-year after hurricanes and returns were driven in part by
due to positive stock selection in struck Texas, Florida, Georgia and the fund’s high exposure to emerging
the consumer discretionary and IT South Carolina – the four states market debt. BlueBay, which manages
sectors. Among the best performers account for 40% of the company’s the emerging market debt element of
were STMicroelectronics, a French annual home-building revenues. the fund, benefited from this trend over
semiconductor manufacturer – and The FTSE 100 delivered much lower the course of the year. In part, these
Volkswagen, whose stock price rose returns than the S&P 500 through the price rises were the result of declining
significantly during the second half of last three months of the year, and this concerns over the impact of US Federal
the year as the market fallout from the was partly reflected in the more muted Reserve rate hikes on emerging market
emissions scandal began to clear. returns posted by the UK & General fixed income markets. Broad-based
As equity markets gained Progressive fund. Although the fund growth across emerging markets was
momentum, investors looked still posted a positive return, it was also a significant contributing factor.
beyond the largest global names, held back by allocations to Merlin, As ever, one of the key metrics was
offering increasing support to smaller Auto Trader and two UK energy corporate default rates and, on this
companies.The Global Smaller companies, Centrica and SSE.These last score, the environment was much
Companies fund, which is managed two suffered price falls following the improved. ‘In the final quarter, it
by Paradice Investment Management, government’s October announcement was positive to see the [corporate]
recorded a strong final quarter, thanks of a price cap on energy bills. deleveraging theme continue to play

THE INVESTOR | 31
THE INVESTOR CENTRE

THE PORTFOLIO REVIEW

Portfolio overviews
Winter 2018

out, and hence we witnessed a big avoidance of the strongly performing caution about the outlook.‘Our analysis
year-on-year decline in default rates,’ home-builder sector. Looking ahead, shows that leverage levels have risen,
said Polina Kurdyavko of BlueBay Asset the potential for higher interest rates, even as profit margins appear to be
Management. ‘The emerging market and President’s Trump’s policies, could near peak levels,’ said Paul Boyne, who
high-yield default rate ended the year at create volatility; but growth and stable manages the fund.‘The biggest risks we
2%, which was significantly lower than credit fundamentals are positives.’ see result from high global valuations and
the 2016 rate of 5.1% and lower than high debt levels.We view US financials
market expectations.’ and sustainable quality franchises within
The Corporate Bond and Diversified BALANCED INCOME the consumer staples sector positively.’
Bond funds also benefited from rising The Strategic Income fund was a

S
prices in fixed income markets in the major contributor to performance over
final quarter.The Corporate Bond upported by its exposure to the year as a whole. Schroders, which
fund’s allocation to high-yield bonds equity markets, the Balanced manages the high-dividend equity
provided further positive momentum, Income Portfolio performed portion of the fund, benefited from its
while subdued long-term inflation well in the fourth quarter. quality bias, outperforming the wider
expectations served to reassure The MSCI World Index rose by market. But, gains were held in check
investors about potential downside for more than 20% over the course of by a lack of exposure to the IT sector.
fixed interest assets. 2017, reflecting a significant Rising global confidence was reflected
Yet it was equities that stole the improvement in global growth rates and in fixed interest markets, as bond
show in the last three months of the corporate earnings.The FTSE 100 rose investors pushed out beyond investment
year, bolstered in part by the improved by a more subdued 7.6%, although it grade bonds and into the high-yield
economic outlook, not least in the US posted most of its returns in the final segment of the market. Figures released
and Japan.The Global Equity Income quarter. A combination of global by Bank of America Merrill Lynch show
and Worldwide Income funds both tailwinds and good stock selection that the US high-yield market returned
profited from these trends, as well as ensured a good end to the year for the 0.41% over the final quarter of the
from positive stock selection. Manulife, UK & International Income fund, year, although performance varied
manager of the Global Equity Income which is managed by Artemis.The significantly between sectors.
fund, benefited from an underweight manager added positions in Anglo The Diversified Bond fund performed
position in the utilities sector and American, a mining major, and Vivendi, strongly in the final quarter. Brigade,
from holding financial names, such as the French media conglomerate, in the which manages the US high-yield
Wells Fargo. final quarter. segment of the fund, benefited from its
‘We benefited from credit selection The Global Equity Income fund, position in New Albertson’s, a grocery
in retail, such as food and drugs,’ said which is managed by Manulife, delivered and drug stores company. Comments
Sheldon Stone of Oaktree Capital, healthy returns over the quarter. New made by President Donald Trump about
which manages the US element of the names added over the period included wiping out Puerto Rico’s debt weighed
International Corporate Bond fund. Airbus, Direct Line and Michelin. on the manager’s holdings of Puerto
‘However, we suffered due to our Nevertheless, the manager expressed Rico General Obligation bonds.

32 | THE INVESTOR
PORTFOLIO OVERVIEWS

DEFERRED INCOME December. ‘We initiated several new


positions in November,’ said Jim Wiant
Global tailwinds and

T
of MidOcean. ‘One of the names
he Deferred Income was Envision, a leading provider of
Portfolio benefited from good stock selection outsourced physician staffing and an
exposure to equities, and
posted a positive return
ensured a good end operator of ambulatory [outpatient]
surgery centres.The bonds have traded
over the quarter. to the year for the up since we bought them.’
After a mixed year, the FTSE 100
gained more than 4% in the final UK & International
quarter, spurred on by improving Income fund The price of funds and the income from
them may go down as well as up. You
growth figures, as well as by political
developments.The UK & International may get back less than the amount
Income fund was a major contributor than 10% over the period, buoyed by a invested.
to the Portfolio’s performance. ‘Part of positive property leasing report.
the equity rise in the final quarter was The Worldwide Income fund likewise Portfolio fund allocations are not
down to progress in Brexit and chimed rebounded from a weak third quarter, rebalanced automatically. The overviews
with our view that it would only take a in which it had been hit by overweight provided are based on the fund
little good news to help the UK market exposure to consumer staples (notably managers currently in the relevant
out of its relative malaise,’ said Adrian tobacco), to finish the year well. In Portfolios. Client Portfolios may have
Frost of Artemis. ‘Predicting sunnier part, this was due to a turnaround different fund allocations and, therefore,
times for Brexit and politics would take for the consumer staples sector, but some of the fund managers referred to
courage; nevertheless, it wouldn’t take performance was also helped by its may not apply to their holdings.
much for UK equities to extend the holding in 20th Century Fox, Microsoft
outperformance seen in December.’ and Nike.
One of the turnaround stories of the It was a good period for high-yield
year was the UK High Income fund, bonds as investors sought out new
which made a significant contribution opportunities and were willing to take
to returns in the final three months on risk.The Strategic Income fund
of the year, following a tough third made a significant contribution to
quarter.The fund was hit earlier in returns. MidOcean, which runs the US
the year due to stock-specific issues, high-yield bond segment of the fund,
but benefited late in the year from its benefited from the broader market
overweight to real estate. British Land rally that accompanied passage of the
Company, one of the UK’s biggest tax-reform bill through Congress
property developers, is a significant and the Federal Reserve decision
holding within the fund, and rose more to raise interest rates by 0.25% in

THE INVESTOR | 33
THE INVESTOR CENTRE

Unit Trust Portfolios


Asset allocation as at 31 December 2017

DEFENSIVE PORTFOLIO BALANCED PORTFOLIO


Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 33.0% ALTERNATIVES 6.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 1.9% EQUITIES 12.0%
BONDS 48.7% BONDS 28.1%
CASH 1.2% CASH 5.6%
EUROPEAN EUROPEAN
EQUITIES 2.6% EQUITIES 5.6%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 9.8% EQUITIES 19.6%
OTHER EQUITIES 1.1% OTHER EQUITIES 2.6%
PROPERTY 0.8% PROPERTY 9.1%
UK EQUITIES 0.9% UK EQUITIES 11.2%

FUND ALLOCATION FUND ALLOCATION


1 MULTI ASSET 40.0% 1 ALTERNATIVE ASSETS 10.0%
2 UK ABSOLUTE RETURN 15.0% 2 GLOBAL EQUITY 10.0%
3 ALTERNATIVE ASSETS 10.0% 3 INTERNATIONAL CORPORATE BOND 10.0%
4 DIVERSIFIED BOND 10.0% 4 INTERNATIONAL EQUITY 10.0%
5 GILTS 10.0% 5 INVESTMENT GRADE CORPORATE BOND 10.0%
6 INVESTMENT GRADE CORPORATE BOND 10.0% 6 MULTI ASSET 10.0%
7 WORLDWIDE OPPORTUNITIES 5.0% 7 PROPERTY 10.0%
8 UK & GENERAL PROGRESSIVE 10.0%
9 WORLDWIDE OPPORTUNITIES 10.0%
10 EMERGING MARKETS EQUITY 5.0%
11 ASIA PACIFIC 5.0%

CONSERVATIVE PORTFOLIO MANAGED FUNDS PORTFOLIO


Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 18.0% ALTERNATIVES 6.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 6.0% EQUITIES 8.0%
BONDS 44.4% BONDS 26.2%
CASH 3.3% CASH 5.5%
EUROPEAN EUROPEAN
EQUITIES 6.1% EQUITIES 9.9%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 17.6% EQUITIES 25.6%
OTHER EQUITIES 2.0% OTHER EQUITIES 2.2%
PROPERTY 0.8% PROPERTY 0.0%
UK EQUITIES 1.7% UK EQUITIES 16.6%

FUND ALLOCATION FUND ALLOCATION


1 GLOBAL EQUITY 15.0% 1 BALANCED MANAGED 15.0%
2 MULTI ASSET 15.0% 2 GLOBAL EQUITY 15.0%
3 ALTERNATIVE ASSETS 10.0% 3 MANAGED GROWTH 15.0%
4 INDEX LINKED GILTS 10.0% 4 MULTI ASSET 15.0%
5 INTERNATIONAL CORPORATE BOND 10.0% 5 STRATEGIC INCOME 15.0%
6 INVESTMENT GRADE CORPORATE BOND 10.0% 6 STRATEGIC MANAGED 15.0%
7 UK ABSOLUTE RETURN 10.0% 7 INTERNATIONAL EQUITY 10.0%
8 WORLDWIDE OPPORTUNITIES 10.0%
9 CORPORATE BOND 5.0%
10 INTERNATIONAL EQUITY 5.0%

34 | THE INVESTOR
THE INVESTOR CENTRE

ADVENTUROUS PORTFOLIO BALANCED INCOME PORTFOLIO


Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 0.0% ALTERNATIVES 0.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 35.1% EQUITIES 2.6%
BONDS 0.0% BONDS 38.5%
CASH 5.4% CASH 4.4%
EUROPEAN EUROPEAN
EQUITIES 14.7% EQUITIES 8.0%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 20.0% EQUITIES 13.1%
OTHER EQUITIES 4.9% OTHER EQUITIES 0.9%
PROPERTY 0.0% PROPERTY 12.5%
UK EQUITIES 19.8% UK EQUITIES 19.9%

FUND ALLOCATION FUND ALLOCATION


1 EMERGING MARKETS EQUITY 15.0% 1 STRATEGIC INCOME 20.0%
2 ASIA PACIFIC 15.0% 2 DIVERSIFIED BOND 15.0%
3 GREATER EUROPEAN PROGRESSIVE 15.0% 3 PROPERTY 15.0%
4 GLOBAL SMALLER COMPANIES 15.0% 4 GLOBAL EQUITY INCOME 10.0%
5 NORTH AMERICAN 15.0% 5 INVESTMENT GRADE CORPORATE BOND 10.0%
6 UK & GENERAL PROGRESSIVE 15.0% 6 UK & INTERNATIONAL INCOME 10.0%
7 JAPAN 10.0% 7 WORLDWIDE INCOME 10.0%
8 EQUITY INCOME 5.0%
9 UK HIGH INCOME 5.0%

IMMEDIATE INCOME PORTFOLIO DEFERRED INCOME PORTFOLIO


Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 0.0% ALTERNATIVES 0.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 2.0% EQUITIES 3.6%
BONDS 68.6% BONDS 18.6%
CASH 3.7% CASH 4.5%
EUROPEAN EUROPEAN
EQUITIES 5.3% EQUITIES 12.0%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 9.6% EQUITIES 17.8%
OTHER EQUITIES 0.6% OTHER EQUITIES 1.2%
PROPERTY 8.3% PROPERTY 0.0%
UK EQUITIES 1.9% UK EQUITIES 42.4%

FUND ALLOCATION FUND ALLOCATION


1 DIVERSIFIED BOND 20.0% 1 STRATEGIC INCOME 20.0%
2 STRATEGIC INCOME 15.0% 2 EQUITY INCOME 15.0%
3 CORPORATE BOND 10.0% 3 GLOBAL EQUITY INCOME 15.0%
4 GILTS 10.0% 4 UK & INTERNATIONAL INCOME 15.0%
5 GLOBAL EQUITY INCOME 10.0% 5 UK HIGH INCOME 15.0%
6 INTERNATIONAL CORPORATE BOND 10.0% 6 WORLDWIDE INCOME 15.0%
7 INVESTMENT GRADE CORPORATE BOND 10.0% 7 CORPORATE BOND 5.0%
8 PROPERTY 10.0%
9 WORLDWIDE INCOME 5.0%

Some of the products and investment structures documented within this publication will not be available
to our clients in Asia. For information on the funds that are available, please speak with your Partner. THE INVESTOR | 35
THE INVESTOR CENTRE

VIEWPOINT

Viewpoint
Russell Jones, Partner at Llewellyn Consulting

Russell Jones, economist and Partner at Llewellyn Consulting, believes


that further progress by investment markets requires central bank
tightening to be carefully managed

C
entral banks arguably happened, nominal interest rates would balance sheet, allowing some of the
had little choice but follow in sympathy. bonds purchased during successive
to cut interest rates to That said, the extent to which bouts of ‘quantitative easing’ to simply
historic lows, and central banks had to resort to super- expire on maturity.
resort to other low interest rates, and buttress them Other major central banks are
unorthodox measures with unconventional initiatives, less advanced in this process of
such as ‘quantitative easing’ following was compounded by shortcomings monetary normalisation. But, if
the Global Financial Crisis (GFC). in most countries’ fiscal and structural, economic growth remains robust and
‘Neutral’ interest rates – those or supply-side, policies.Widespread inflation continues to rise back towards
necessary to keep economies growing fiscal stimulus, which provided target, they too are likely to gradually
steadily while keeping inflation stable significant support to world output in unwind the various unorthodox
– had been falling for several decades, 2009 and 2010, was abandoned too measures employed during the GFC
under the influence of ageing soon. Regulatory and other reform, and its aftermath.
populations, sluggish investment and meanwhile, has stalled in the face of Monetary normalisation involves
productivity growth, and massive political opposition. Central banks have significant challenges for policymakers
Chinese savings. But the GFC therefore had to shoulder a and investors alike.
exacerbated matters, to the extent that, disproportionate burden in the Central bankers find themselves in
in some cases, neutral interest rates post-crisis quest for recovery. new and uncharted waters. There is no
actually became negative in real, or The monetary policy environment is modern-day template for what they
inflation-adjusted, terms. now changing, however. Ten years wish to achieve. It is difficult enough to
For monetary policy to stimulate on from the crisis, the upswing has calibrate monetary policy with the
a depressed economy, central bankers finally gathered momentum, and business cycle in even the most tranquil
must reduce the real policy rate below neutral interest rates, although still low and familiar periods. But the task is
the real neutral rate, however low the by post-war standards, have begun to harder still when those making policy
latter has fallen. To attempt to suspend edge upwards. are unsure of the potency of the
policy rates significantly above the real Over the past 12 months or so, the instruments they are fine-tuning;
neutral rate for any length of time US Federal Reserve has begun when their economies are in the
would be self-defeating: the high gradually to nudge its main policy rate throes of major technology-induced
inflation-adjusted cost of borrowing away from the zero bound, rendering it structural change; and when fiscal and
would merely encourage output and less negative in real terms. It has also structural policies are insufficiently
inflation to fall further; and once this tentatively started to shrink its inflated co-ordinated and still shouldering

36 | THE INVESTOR
INTERVIEW

Historically, rising US interest


rates have caused problems
for emerging markets

markets, an air of complacency has


descended on many investors.
Yet, as central banks begin to revert
to more orthodox policies, this benign
environment is at risk.
Periods of rising interest rates
invariably generate turbulence in
markets. Even if central bankers
can avoid acute policy errors, the
super-low interest rates for risk assets
are likely soon to become a thing
of the past. Monetary tightening
seems certain to result in at least
some drop in sovereign bond prices,
which is likely to spill over into
corporate credit too – especially if
policy normalisation proceeds quicker
than expected.
Historically, periods of rising US
interest rates, and especially rapidly
too little of the responsibility for rising US interest rates, have caused
managing aggregate demand. problems for the emerging market
Just as was the case when central economies. Today, not only do these
bankers began the journey towards Monetary normalisation economies account for some 60% of
unconventional policy, so too will this
new phase unavoidably involve
involves challenges for global GDP but many, not least China,
have for an extended period been
significant trial and error. And with the policymakers and overly dependent on credit, much of it
risk of policy miscalculation comes the
threat of renewed macroeconomic
investors alike dollar-denominated, to sustain their
economic growth.
instability, and the possible need to The extent to which good investment
switch course. growth has accelerated, and resource performance continues this year and
Markets so far have not been utilisation rates have picked up. In this beyond will depend to a large degree
troubled. Indeed, latterly they have environment, numerous troubling on whether central banks proceed in a
been in something of a sweet spot. political and geopolitical developments careful and non-doctrinaire fashion,
While inflation and interest rates have have been shrugged off, and the telegraphing their intentions clearly;
Getty Images

remained historically low, corporate volatility of certain asset prices has and on there not being any major
profitability has been high, economic collapsed. As so often in such bull geopolitical or national shocks.

THE INVESTOR | 37
THE INVESTOR CENTRE

INSIGHTS

Sideways glance
When markets shuffle sideways, stock-pickers should come to
the fore – if they can avoid buying and selling too quickly

S
ince the mid-1990s, global like to follow the herd – generally stocks tend to rise – in other words,
equity markets have been through some form of passive investing. stocks increasingly move in sync. In
nothing if not dramatic.The But he found that they are not sideways markets, however, correlations
S&P 500 has witnessed two necessarily a problem for stock-pickers. are often quite low, meaning that the
large market bubbles and So what average annual returns did prices of individual stocks head in
two major crashes during the period – Warren Buffett, the consummate different directions – yet the net result is
the latter came in 2000-02 and 2008- stock-picker, generate in the zombie a sideways crawl for the index itself.This
09. Since then, the world’s leading market of 1975 to 1984, during which kind of market provides stock-pickers
index has more than trebled in value. the S&P 500 made no overall gain? with exceptional opportunities to profit
As a result, many investors have The answer is no less than 34%.Yet from identifying undervalued stocks.
forgotten (if indeed they ever knew) Buffett is no day trader. His success has When Hagstrom dug deeper into the
that there is a third kind of market – the come as a stock-picker who buys the stocks themselves, it only strengthened
sideways market. In fact, sideways best companies he can and holds them his case. In any individual year during
markets were common through much the period under scrutiny, Hagstrom
of the 20th century, as Robert found that just 3% of the stocks on the
Hagstrom, author of the bestselling S&P 500 were able to provide a return
biography TheWarren BuffettWay,
recounted in a paper published in 2010.
Sideways markets of 100% (ie double in value). But push
that up to three years, and the figure
On 1 October 1975, the Dow Jones provide stock-pickers was 18.6%. For long-term investors
Industrial Average sat at 784. On 6
August 1984, it again closed at 784.
with exceptional able to avoid selling for five years, the
figure was higher still – 38% of the
That’s a period of almost nine years opportunities stocks listed on the S&P 500 doubled
with, ultimately, no capital growth. in value. At that point, the average
At first glance, such statistics look increase in the broader market matters
disheartening. Moreover, there has even less – what matters far more is
been a great deal of speculation in for the long term – thus his well- choosing the right stocks.
recent weeks that the current US bull rehearsed line: ‘It’s far better to buy a New research published in 2017 by
run – the second-longest in history – wonderful company at a fair price than a Fidelity showed similar trends in the
may run out of puff, resulting in a fair company at a wonderful price.’ US, Japan, Europe and UK during four
sideways market in the coming months; In his research, Hagstrom discovered different periods of sideways markets.
the FTSE 100 rose 7.6% in 2017, which that the apparent flatness of the broader In short, if stock-pickers do their
is hardly to be sniffed at, but pales index tends to mask considerable price homework on the companies they are
beside the 16% capital return achieved movements in the constituent stocks. investing in, then they need not fear
the previous year. ‘What we first thought to be a trend-less sideways markets. Instead, they should
In such circumstances, some fear may sideways market was in fact a market focus on sticking to the script –
in fact be appropriate, but only for full of variation,’ the report concluded. investing for the long term in those
certain types of investor. Hagstrom’s This is especially significant for stock- companies that offer real opportunities.
research demonstrated that sideways pickers.When markets rally or decline Too many sideways glances can prove
markets are a problem for those who sharply, correlations between individual costly in the end.

38 | THE INVESTOR
First-time buyers need to put down an average £33,000
deposit to get on the property ladder*.

Saving is a very fine thing, especially


when your parents have done it for you.
S I R W I N S TO N C H U R C H I L L

Contact your St. James’s Place Partner for more


information about investing for children.

*
Halifax First-Time Buyer Review, 2017.
The value of an investment with St. James’s Place will be directly linked to the performance of the
funds selected and may fall as well as rise.You may get back less than you invested.
In control of the detail
Making the most of your tax-saving allowances and reliefs before
the end of the tax year is one way to put yourself in control of your
financial future. At St. James’s Place, we bring together your goals and
our expertise to help create financial security for you and your family.

DON’T MISS OUT. ACT BY 5 APRIL.

Contact your St. James’s Place Partner for more information.

The value of an investment with St. James’s Place will be directly linked to the performance of the
funds selected and may fall as well as rise.You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation,
can change at any time and are dependent on individual circumstances.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority.
St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.
Registered in England Number 4113955.

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