From the category archives: Market Views

Market Views

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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Proposed Merger of Standard Life Investments and Aberdeen Asset Management

On Saturday 4th March 2017 Standard Life Investments and Aberdeen Asset Management announced a proposal to merge. With a number of funds of both companies featuring in the Square Mile Academy of Funds, we wanted to briefly outline our thinking on this potential merger and what effect we believe it will have for investors.

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The Role of Risk Tools

It is becoming increasingly clear that suitability sits at the heart of the regulatory focus on the customer. The FCA is there to guide the industry through the regulatory minefield, but exists primarily and quite rightly to protect the consumer.

The industry has sought to comply with this drive whilst maintaining efficiency around the provision of investment advice and the resultant software and related processes have ensured that sound financial advice is not the preserve of the super-rich.

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Improving Clarity on Costs

The recently published FCA interim report of its market study into the asset management industry has placed a flag into the sand that it believes that investors should be increasingly discerning about the level of fees they pay for services. As early as the fifth point in the study's executive summary, a chart details the potential impact of high active fees over a passive alternative to savers' wealth.

Indeed, advisers have had the obligation to consider fees for many years. In COBS 6, the FCA states that 'in order to meet its responsibilities under the client's best interests rule and Principle 6 (Customers' interests), a firm should consider whether the personal recommendation or any other related service is likely to be of value to the retail client when the total charges the retail client is likely to be required to pay are taken into account'. The market study has thrown the gauntlet down to the industry to come clean about the full costs that investors incur and to justify them. Declining prospective returns from investments are merely compounding the issue.

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Investment Process: Is it More than just Marketing?

One of the pleasures of working in a rapidly growing organisation is passing on my experiences to the newer members of the team. Recently, I was discussing the the types of investment processes often used within the industry with one young analyst, only to be taken a little aback by her retort 'isn't investment process more about marketing than investment'? What a great question. This article will consider this and what role investment process plays in the asset management business.

A certain cynicism is certainly warranted when considering funds. Fund buyers are confronted by an enormous choice and fund managers are eager to differentiate themselves from their competitors. I too shared similar scepticism on the value of process during my early career, despite its prominence as one of the five key 'P's. Admittedly, my views on the matter were coloured somewhat by my then Investment Director, who had set about devising a fund selection approach based around 3 month relative performance on the basis that "something is required". It didn't take much knowledge to recognise the flaws and limitations of a momentum approach such as this. I busied myself in the subsequent few years devising a more robust alternative approach that was not so fixated on short term performance trends.

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Investment Trusts or Open Ended Funds?

Investment trusts are sometimes put forward as a superior investment structure since they can provide stronger performances over open ended funds. I am far from sure that this is always the case. This article looks at whether trusts are better than open ended funds by considering the importance of the underlying investment strategy, the impact of costs, how investors can misapprehend the apparent advantages of gearing and stable income generation offered by trusts, and how exposure to illiquid investments can give trusts an advantage over funds.

It is scarcely a profound notion that fund returns are determined by the choice of investment strategy rather than the fund structure, though reading some commentary written about funds and you often wonder. To put this in simpler terms, the fund structure is nothing more than a bucket or container, designed to safeguard the rights and interests of the investor. It makes very little difference to the returns if an investment strategy is applied in an OEIC, SICAV, ETF or investment trust structure. The pricing of investment trusts can cause complications and it is possible to access assets at a discount to NAV but do not forget that if one investor is buying on a discount, another is forced to sell at a discount.

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