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From the category archives: Market Views

Market Views

Chinese Evolution

The strength of emerging market economic growth this century has been well documented, as has the shift, broadly speaking, from commodity and manufacturing based economies to ones more supported by shifting demographics and the burgeoning middle class, which has been central to supporting domestic change. The current MSCI EM index is heavily skewed towards China and its immediate Asian neighbours, representing a combined weight of 56%, and one would be hard placed to argue against their importance to the global economy.

In more recent years, Chinese growth has been driven by increased domestic wealth, technological innovation, entrepreneurship and, of course, infrastructure spending. This has all been further supported by financial reform and involvement at the highest political levels. A more recent structural reform is the opening up of China's A-share market to foreign investors via the Hong Kong - Shanghai and Hong Kong - Shenzhen 'Connect' initiatives. This 3,000 plus stock universe was previously unavailable to the majority of international investors and could prove to be a rich hunting ground for investors seeking access to successful domestic-based companies.

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Growing a Culture of Social Impact Investing in the UK

In December 2016, the Minister for Civil Society and Economic Secretary to the Treasury appointed Elizabeth Corley, vice chair of Allianz Global Investors, to chair an Advisory Group looking at how we can create a culture of social impact investment and savings in the UK.

Senior representatives from 50 firms across the financial services industry have been seeing how they can make it easier for people to invest and are exploring what the industry can do to encourage greater social impact investment.

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Active & Passive

The current view, held by a number of investors, is that active and passive are polarised. Investors need to "pick a team" and go entirely active or entirely passive. At Square Mile, we believe that a portfolio should consist of a combination of the best funds to meet the clients' objectives, at a cost that represents value for money. That may be active, passive or a blend of both

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The Evolution Of Multi-Asset

In the beginning, investors wanting a diversified portfolio of assets had two main choices. With profits funds were often chosen by investors who wanted greater security through perceived guarantees. Alternatively, managed funds were selected by those who preferred more transparency and control over their investments. Broadly speaking, both of these approaches unfortunately left investors disappointed. With profits funds ultimately failed to deliver the returns investors expected when they discovered they were exposed to market risk and the imposition of Market Value Adjustments (MVAs) to reflect the underlying performance of the assets in the fund. Managed funds typically had more equity risk than many had appreciated. Indeed, funds labelled as "balanced" often had up to 85% exposure to equities and "cautious" funds often held in the region of 60%. This led the Investment Association to rename their managed sector classifications to better reflect the equity risk funds could take and introduced the Mixed Investment sectors alongside the Flexible Investment sector.

Today, the multi-asset sector is a diverse, vibrant and strongly growing area of the market. The global financial crisis reinforced the importance of diversification and clear and transparent communication to investors. Changes in the regulatory environment, particularly post RDR, and the continued demise of defined benefit pensions schemes have contributed to the increased demand for multi-asset funds and their popularity has soared. Furthermore, an increasing number of advisers have turned to multi-asset specialists to support their investment advice process as an outsourced solution.

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Fund Selector Chat with Richard Romer-Lee and Jake Moeller at Thomson Reuters Lipper

In this podcast Richard Romer-Lee talks to Jake Moeller at Thomson Reuters Lipper about key influences affecting the evolution of the industry as the dynamics of the financial planning industry change and outlines what makes a good mutual fund. He also examines some of the key issues faced by the fund selectors in light of recent key regulatory initiatives.

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Q&A Session with Neil Woodford at the Cofunds Conference

This video features Richard Romer-Lee's Q&A session with Neil Woodford, Woodford Investment Management at the Cofunds Investment Conference on 20 June 2017. They discuss reasons to be positive post-election, the risks to the global economy, strategies for a total return outcome and is small cap investing a missed opportunity?

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A Guide to Style

This is the first in a series of articles about investment style. Managers and funds are being increasingly categorised by their underlying investment approaches and the arrival of smart beta strategies will only serve to accelerate the process. The Morningstar style box was very formative early in my career as I am sure it has been to many fund analysts. After all there is little point in comparing a large cap value fund with a small cap growth fund. Of course, over time the limitations of this became apparent. Can managers be pigeon holed so neatly? Is it really impossible to find growth stocks trading on below average valuations? How can low beta equities produce market or even excess returns? These are questions that I am sure that many of you will have grappled with.

Over time I have refined the way that I look at funds and I tend now to only loosely classify them into one or more styles. These are: value, quality, growth/momentum and size. As none of these are mutually exclusive and the relationship can be best illustrated using the schools boy's favourite chart, the Venn diagram. For the sake of clarity, small/large caps have been omitted.

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2016 Income Review

Recently Square Mile updated their income graphs to reflect the distributions paid out by funds in 2016 on our website. Square Mile shows income graphs for every Square Mile rated fund that has an income outcome and where our data provider FE can provide us with three full calendar years of distributions for the appropriate share class.

When considering a fund from an income perspective, most investors will consider the fund's yield. A fund's yield is calculated as the distribution per share over a given period divided by the share price at the start of the period considered. This is a useful measure for investors and shows how much income an investor could potentially receive. However, what it does not show is whether the fund's distributions have risen or fallen over time. Many funds have provided a constant yield over time, but the income that an investor would have actually received has varied. As you can see from the graph below, the example fund has provided a fairly constant yield, but the actual monetary income which investors have received has fluctuated. The moral of the story is that constant yield does not equal constant income.

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IA UK Equity Income Sector Lowers Yield Hurdle

At Square Mile we take time to ensure that we have clear and measurable performance objectives for all funds that we review. These vary depending on the what outcome is being sought but clearly for equity income funds it is yield, distribution consistency, dividend growth and capital accumulation that are the important considerations. However, satisfying all of these areas all of the time is not easy and this has meant that within the sector there are a range of different approaches that emphasise different objectives. Therefore, we are not particularly concerned as to which sector a fund falls into, as long as it is meeting, or we believe that it can meet, its longer-term performance objectives. An obvious point of contention nonetheless, can be funds that are highlighted, and potentially marketed, as one thing, but in practice managed to a different set of objectives. As such, time must be taken to evaluate and understand each fund on its own merits.

Nevertheless, regarding these changes specifically we would perhaps question whether just meeting the market yield (albeit with the 90% annual limit) makes enough of a distinction between funds that are managed on a true income basis and those to a capital and/or total return outcome. This is especially pertinent in a world where the industry should arguably be, now more than ever, trying to highlight the particular merits of active investing over passive.

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Retail Versus Institutional Portfolio Management Fees

The opening words of the FCA's Asset Management Market Study stress that the 'asset management industry plays a vital role in the UK's economy'. On first reading there follows 200 pages of what seems like well-aimed broadsides at the industry raising concerns about excessive fees, disappointing performance, hidden costs, high profit margins, weak price competition, poor cost control, weak fund governance bodies, etc. However, on closer reading, I interpret the review a being little more measured, very well thought out and at this stage, relatively targeted in the reforms that the FCA is considering putting through.

The study acknowledges the importance of the asset management industry to the UK, which generates around £17bn in revenues or about 1% of national GDP. We should also remember that when the FCA was set up in 2013, it was tasked with wider objectives than the FSA and these objectives now include 'promote effective competition in the interests of consumers'. This new obligation on the FCA is something that should be recognised when reading the report. That said, we hope that the FCA will also recognise the vulnerability of the industry at a time when the UK is extricating itself from the EU. The coming years will be trying ones for the economy and especially for financial services. Taking combative swipes at an industry that manages £2.7 trillion of assets on behalf of overseas investors and a major earner of foreign exchange could be counterproductive to the nation as a whole.

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