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AI is here and is everywhere

P3EXPLOITING ANALYST

ANXIETY IN BAE

P5IS SECURITY SELECTION

NEEDED IN BONDS?

T. Rowe Price's Josh Spencer believes the hype surrounding artificial intelligence is justified and has broad implications for investors (page 2)

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Josh SpencerT. Rowe Price

rtificial intelligence (AI), long the staple of science fiction, is quickly moving

into the mainstream of everyday life. It is already disrupting some industries and companies – forcing investors to become more nimble about how they evaluate new opportunities.

Robots and automated devices will not be taking over the world anytime soon, but computer systems are being trained to analyse more like humans – but with greater speed and accuracy.

With its rapid development, artificial intelligence, which involves programming machines to efficiently provide solutions, is permeating a wide range of fields, from healthcare to financial services to security.

AI is embedded in more and more sophisticated mobile devices and digital assistants, including Amazon’s Alexa and Apple’s Siri. It also is powering enhanced search functions on Google and Baidu, Tesla’s autonomous driving and more targeted customer recommendations on Netflix and Amazon. In healthcare, AI is improving illness prevention through diagnostics and is

aiding in treatments and surgical procedures. Digital health assistants can also bridge the gap between doctors and patients.

At T. Rowe Price, we believe AI tech has become so impactful that companies unable to recognise the benefits or threat of potential disruption risk being on the wrong side of change. Traditional auto companies, for example, are racing to catch up with Tesla. Ford has plans to invest $1bn over five years to develop driverless cars by 2021.

Companies dominating AI R&D include Google, Amazon, Microsoft, Tesla, Facebook and Alibaba.

While AI seems unstoppable, it does face hurdles. One is a shortage of high-level AI programming experts. Also, government regulation has lagged the innovation.

While there has been a lot of hype about the potential of AI and machine learning, we believe it is justified. Who would have thought a car could ever be self-driving? AI is already proving to be transformative with broad implications. It is the kind of disruptive tech we are always looking to take advantage of.

AI is here and is everywhere

he Wise Group has undergone an

organisational restructure to enhance its operational focus and strengthen its internal risk management. The move reflects the recent growth across all parts of the business.

The organisation will now have three operating subsidiaries functioning as distinct platforms: Wise Investments Limited, Evenlode Investments Limited and Wise Funds Limited, supported by a central services business.

While each platform will have greater autonomy, the group’s shared values remain steadfast: delivering long-term, value-driven, independent investment management and commitment to excellent client services.

As part of the process, the Evenlode Income Fund will become a sub-fund of a new Evenlode OEIC, operated by T Bailey Fund Services. Formerly, it was a sub-fund of the TB Wise Investment Funds.

Evenlode Income is managed by Hugh Yarrow and Ben Peters – with additional support from analysts Chris Elliott and Stephanie Pestell.

In 2016, Evenlode won the UK Income award at the Investment Week Fund Manager of the Year Awards.

Evenlode Income has an Elite-rating from FundCalibre, a 5 Crown rating from Financial Express and is also a RSMR rated fund.

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Wise restructures into three distinct subsidiaries

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"Companies unable to recognise the benefits or threats risk being on the wrong side of change"

Jeremy LangArdevora

efence spending has hit the headlines in recent months, particularly

following the victory of Donald Trump. For UK investors, the logical name to associate with this theme is BAE Systems.

A lot of what BAE does is difficult to replicate, but a large amount of what it does makes people nervous. Big defence contracts can go wrong. In addition, BAE historically has been more interested in being large than profitable. The company has been in serious financial difficulties in the past, caused by an unfortunate combination of unrealistic growth ambitions, too much debt and the associated reputational issues of questionable business practices – corruption to you and me.

There was real concern the company would go bust in 2002. Once it dug itself out of this hole, management was able to think about the future, rather than just survival.

The arrival of a new CEO in 2010 marked the start of a new strategy. It has since been moving in a subtly, but significantly different direction. Management has shifted focus to reducing risk and improving efficiency – and not being big for the sake of being big – to make the business more transparent and predictable. In time, BAE should feel less risky.

However, there is still a lot of concern for analysts. Sentiment is driven as much by the politics of defence spending – particularly in the US – as by fundamentals. In addition, the combination of high overseas earnings, a large pension deficit and its inherently opaque nature, provides many opportunities for angst.

From our perspective, we see a good business, which is difficult to break, which analysts and investors are still nervous about. The transformation of the business has been slow, but we believe it will keep going up as anxiety unwinds further.

Exploiting analyst anxiety in BAE

euberger Berman has opened an investment

management wholly foreign-owned enterprise (WFOE) in Shanghai.

The launch of the WFOE reaffirms the company's long-term commitment to this important market.

Once registration is complete, Neuberger Berman will be able to manage and distribute private funds to a broader client franchise – including private banks, independent wealth platforms and local institutions.

Given this development, Neuberger Berman has made several senior appointments, with Patrick Liu recently joining as Head of China. He will be joined by other senior personnel.

Nick Hoar, Neuberger Berman's Head of Asia Pacific, says: "As we further expand our investment and client coverage presence in the Asia Pacific region, China represents a significant growth opportunity for Neuberger Berman. We are glad to have Patrick join us at this important time."

Liu added: "Neuberger Berman's diverse investment capabilities, places us in a strong position to build both our investment capabilities and our client business in China. I look forward to leading the team as we embark on our next phase of growth in this important market."

Neuberger Berman strengthens its presence in China

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"The arrival of a new CEO in 2010 marked the start of a new strategy"

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Hartwig KosSYZ

Ketan PatelEdenTree

he result of the first round of the French election was spectacularly consensus,

but the market has reacted very positively to the outcome.

A big part of this is the fact that the tail risk of a Marine Le Pen versus Jean-Luc Mélenchon second round has clearly gone away. Moreover, the risk of a Le Pen victory in the second round has also appeared to meaningfully subside.

While a standoff between Emmanuel Macron and Le Pen in the second round was widely suggested by the polls, the recent experience of Brexit and the election of Donald Trump made investors highly suspicious about the accuracy of opinion polls. However, this result of the first round in France, as well as the

he new CEO's tenure at GSK has begun with a solid set of quarterly results.

The group reported sales growth across all three businesses, with vaccines leading the ways.

In terms of tailwinds, the company was a beneficiary of the pronounced sterling weakness. In addition, the delay in a generic version of Advair, with two major entrants failing to bring a cheaper alternative to market, will add to both the top and bottom line.

GSK remains well placed in EM, with 19% growth. Investors will welcome new product sales, which at £1.4bn is on track to its £6bn sales target by 2018. It should be commended on leading the fight against malaria, where after decades of investment, GSK's injectable vaccine will be

recent Dutch elections, appears to show Continental European opinion polls to be much more reliable.

Macron currently leads the opinion polls for the second round by almost 30% – while Le Pen scored poorly in areas such as Paris, at below 5% in the first round. This has clearly improved sentiment and many investors are now more willing to bet on a positive election outcome.

We have also started to reposition our portfolios into a more pro-risk stance, recognising that political risks have moved more to the tail than previously expected. Despite this, we have kept some of our hedges intact, as the main characteristic of a tail event is the fact that it is unexpected.

offered to babies and children in high risk areas from 2018.

However, leverage remains a source of concern, with net debt moving down only £100m to £13.7bn – which is ~ 17% of its current market cap. The ability to manage the debt burden will have a meaningful impact on dividends going forward. While GSK has committed to a 80p dividend to 2018, income investors in particular will be looking for more guidance from the CEO in future quarterly result updates.

Although GSK has lagged the FTSE 100 and UK rival AstraZeneca over the past 12 months, its shares remain on an undemanding valuation – offering a yield in excess of 5%, the highest in global large cap pharma.

Adding risk as fears ease

GSK's large debt burden

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Hermes names Jackson as Head of Fixed Income

"European opinion polls seem much more reliable"

"Income investors will be looking for more guidance"

ermes Investment Management has

appointed Andrew Jackson as Head of Fixed Income.

Jackson will be responsible for leading the strategic development of the Credit and Direct Lending investment teams, and developing a multi-asset credit offering capable of accessing all areas of the global credit markets for pension funds and other long-term institutional investors.

With almost 25 years of investment experience, Jackson joins from Cairn Capital, where he was CIO. He has also had roles at Bank of America, Fitch Ratings and PricewaterhouseCoopers.

"I have watched Hermes operate at an extremely high level, becoming a market leader with its Credit and Private Debt offerings," Jackson says.

"It is with great enthusiasm that I join such a dynamic business and look forward to working with the teams to ensure that we continue to develop investment solutions for long-term investors."

Hermes Head of Investment Eoin Murray adds: "Andrew has extensive industry knowledge and experience and is a great fit with Hermes’ long term, active investment style. His appointment underlines our commitment to providing innovative, fixed income solutions to investors currently struggling with a world of low yields."

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T: +44 (0) 203 137 7823www.kl-communications.cominfo@kl-communications.com

Karsten BierreNordea

hen most managers discuss fixed income investing, particularly

in credit, many will unsurprisingly stress the importance of security selection. Indeed, when trying to beat a benchmark, there is no doubt ‘picking the winners’ and ‘avoiding the losers’ is crucial.

But is this the only way of generating attractive returns from fixed income markets? Our Multi Assets team does not believe so. The bond portfolios managed by our team are benchmark unconstrained, so we are free to explore opportunities across a wide range of asset classes.

Instead of trying to identify winners and losers within thousands of securities, we believe another equally rewarding opportunity lies in combining attractive risk premia across the bond universe. However, with no benchmark, risk becomes key.

Within fixed income, in particular, our first objective is to identify the exact risks we want to be exposed to – such as duration and credit spreads. We then look to combine risk premia able to generate attractive returns in risk-on environments, with risk premia able to deliver positive returns in risk-off periods.

For example, risk premia we are currently working with, among others, are US HY spreads and Canadian duration. HY spreads are a typical risk-on ingredient, performing well with the economic cycle when credit spreads are high and default

risks are low. On the other hand, duration is a risk-off ingredient, which particularly works when the curve is steep and there is a weak economic growth and inflation momentum. Once we have determined the desired premia, we then need to identify the instruments best able to deliver the required exposure.

In order to achieve the desired level of US HY credit risk, we use the most liquid derivative in the market – a credit default swap. Credit default swaps offer a synthetic replication of credit risk that can be traded in significant volumes at low costs. Again, we are looking to deliver on a market risk/return profile and do not need single security selection.

Similarly, we use liquid bond futures and benchmark bonds when obtaining exposure to duration. Our proprietary models track the duration level of high-

Is security selection needed?

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quality developed market bonds across different tenures, such as 5-year, 10-year and 30-year. Based on the level of duration suggested by the risk budget and the volatility levels of the tenures, we then seek the best market and tenure combination to achieve the desired duration exposure.

We have long spoken of multi-asset managers who repeatedly need to make the right macro calls in order to deliver returns through the cycle. This has often proven to be a difficult approach. In a similar vein, we also do not subscribe to the view it is a necessity to ‘pick the winners’ in order to achieve robust returns from fixed income markets.

Instead, we choose to rely on our risk balancing approach, which allows us to be well positioned in any environment and therefore generate stable and positive returns over time.

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"We do not subscribe to the view it is a necessity to ‘pick the winners’ in order to achieve robust bond returns"