CHARLES STANLEY Issue 9 INVESTMENT CHOICES NEWS€¦ · 06 | Charles Stanley Investment Choices News Autumn 2018 The events in 2008 acted as a reset button for many asset classes

www.csinvestmentchoices.co.uk

01482 861455

CHARLES STANLEYINVESTMENT CHOICESNEWS

Issue 9 Autumn 2018

brought to you by

Viaduct over the River Nidd, Knaresborough, North Yorkshire.

Artificial IntelligenceShould we embrace or fear it?

BondsDo we need to worry?

Charles StanleyFinancial PlanningA world of difference

Investing MonthlyOur Monthly Income Portfolio

Our Fund Short ListFunds worth a second look

Investing GloballyNot putting all your eggs in one basket

UK Smaller Company FundsWhat’s the attraction?

Inheritance TaxFind out how you could save

on IHT for invested assets

held for 2 years or more

02 | www.csinvestmentchoices.co.uk

Fund Focus:Need help?

01482 861455

5/7 Landress Lane, Beverley, East Yorkshire, HU17 8HA

[email protected]


If you would like to discuss the investments described in this newsletter, or need help completing the application forms, please get in touch - we’re here to help!

We have highlighted the following funds in this newsletter.

• Fundsmith Equity I Fund - Page 8

• Rathbone Global Opportunities Fund - Page 9

• Smith & Williamson Artificial Intelligence B Fund - Page 12

• Pictet Robotics Fund - Page 13

• Marlborough Special Situations P Fund - Page 18

• Old Mutual UK Smaller Companies U1 Fund - Page 19

• Artemis Strategic Bond I Monthly Fund - Page 22

What’s inside?

Charles Stanley Investment Choices News Autumn 2018

06

16

10 14

20

Investing GloballyCould a diversified global portfolio help mitigate volatility?

UK Smaller Company FundsWhat is the attraction?

Artificial IntelligenceShould we embrace or fear it?

Investing MonthlyWe take a look at our Monthly Income Portfolio.

BondsDo we need to worry?

23 Our Fund Short List Funds that are not in our portfolios but are worth a second look

24 Inheritance TaxSave on IHT for invested assets held for 2 years or more

Products:• Monthly Income Portfolio - Page 15

• Charles Stanley Inheritance Tax Portfolio Service - Page 24

• Charles Stanley Financial Planning - Page 26

26 Charles Stanley Financial PlanningA world of difference

www.csinvestmentchoices.co.uk | 03

A note from your co-editor...

Welcome to the latest edition of the Investment Choices magazine which I hope you

will find interesting and informative. We always appreciate feedback from our clients

(both positive and negative) so if you have any suggestions in connection with the

content or ideas on how we could improve what we provide to you, please let us

know. If you have received our newsletter for the very first time and would like to

know more about our services and products – please call us or visit our website

www.csinvestmentchoices.co.uk.

If you received our last magazine (the summer edition), you will remember that we

made some changes to our income and growth portfolios following our annual

review. We also covered the rising importance of sustainability investing and

commercial property as a potential diversifier. If you would like another copy of the

magazine please contact us.

In this issue, we focus on the continuing improvement in the global economy which

has been assisted further by tax reforms in the US and how that progress might be

impacted by trade wars/barriers and rising interest rates. With a focus on current

equity valuations in general we continue the theme of diversification by considering

the merits of investing globally and in bonds. For those seeking a regular income we

feature our monthly income portfolio which is proving popular amongst investors.

Over the last decade, the returns from equities in general have been very impressive

but some sectors have performed better than others. The UK Smaller Companies

Sector in particular has outperformed the All Companies Sector by almost 100%

over the last 10 years to 31st July 2018. We have taken a look at what is driving this

outperformance and whether it is likely to continue featuring two of the outstanding

contributors to that success story.

Another area we focus on is the impact of artificial intelligence (AI). Today

technology runs our lives. Improvements to our smartphones, tablets and computers

are what we see happening day to day but AI has a much larger scope and has the

potential to disrupt and improve how we lead our lives on a much larger scale. We

consider what those changes are likely to be and some of the options available to

investors.

Last but not least, we also cover Charles Stanley’s approach to financial planning

and our in-house inheritance tax service for those seeking to reduce their inheritance

tax liabilities.

Good luck with your investing!

Stephen.

Stephen Luwero ACSI

Client Relations & Business

Development Manager


£10,000

£80,000

£40,000

£60,000

£20,000

£10,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equities £68,779

Bonds£46,492

Cash£24,512

Nelson Mandela becomes South

African president1995

Asiancurrency

crisis1997

Establishmentof the ECB1998

eLT CMfailur1998

September 1 1th2001

Dot Compeak 2000

4,00 0

3,00 0

Invasionof Iraq2003

Subprimeloan problems

emerge2007

European M&A

surpasses US

2007

L ehman Brotherscollapses

2008Europeansovereigndebt crisis

2010

US losesits ‘AAA’

credit rating2011

Hurricane Katrina makes landfall

2005

BREXIT Leave Result 2016

US Election

Spike in CBOE Volatility Index


Long TermInvesting for the

Despite volatility, markets have appreciated over time

Financial markets can be volatile and downturns as well as upturns are part of equity investing. But short-term declines should not detract from the potential of the stock market to help investors meet their goals. In fact, short-term market declines underline the case for a long-term approach to investing.

Of course, the investment choices depend on an investor’s specific circumstances, goals, attitude to risk and investing time horizon. This will influence how much money is allocated and, if appropriate, how much of this is invested in growth-oriented equities. All financial investments involve an element of risk, so the value of your initial investment cannot be guaranteed and the historical performance of markets is not a guide to future returns.

Past performance is not a guide to future returns.

Source: Thomson Reuters Datastream. All data from 30 July 1993 to 31 July 2018. The information provided is for illustrative purposes only and is not meant to represent the past or future performance of any particular investment. It is not possible to invest directly in an index. Equities are represented by the FTSE All-Share Index (total return). Bonds are represented by the FTSE Actuaries UK Gilts All Stocks Index (total return). Cash is represented by three-month LIBOR rates. All returns are in sterling terms and are based on monthly closing prices of the respective indices.

£10,000

£80,000

£40,000

£60,000

£20,000

£10,000

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Equities £68,779

Bonds£46,492

Cash£24,512

Nelson Mandela becomes South

African president1995

Asiancurrency

crisis1997

Establishmentof the ECB1998

eLT CMfailur1998

September 1 1th2001

Dot Compeak 2000

4,00 0

3,00 0

Invasionof Iraq2003

Subprimeloan problems

emerge2007

European M&A

surpasses US

2007

L ehman Brotherscollapses

2008Europeansovereigndebt crisis

2010

US losesits ‘AAA’

credit rating2011

Hurricane Katrina makes landfall

2005

BREXIT Leave Result 2016

US Election

Spike in CBOE Volatility Index

The chart shows that even with market volatility, an investment in the FTSE All-Share Index 25 years ago would have grown to nearly seven times its original value by July 2018.


Investing for the long term



The events in 2008 acted as a reset button for many asset classes including bonds, equities and property. Following the extraordinary intervention by central banks around the world in the form of Quantitative Easing, there has been a virtually unbroken bull market for equities and bonds. Notably, growth has not been at the same rate across all regions due to specific issues such as persistent Japanese deflation, the European sovereign debt crisis and the economic uncertainty surrounding Brexit. The result has been considerable variations in equity returns. In the US for example, investors have seen significant levels of growth whereas Europe and Japan have struggled to keep pace.

More recently, sentiment has shifted with Europe and Japan providing attractive opportunities for many fund managers. However, the protectionist stance of President Trump has changed that sentiment resulting in the rotation away from the US/UK to Europe and Japan being stopped in its tracks.

Markets are fickle and will react positively or negatively to events around the world and having all of your “investment eggs” in one basket by focusing on one region can affect returns considerably. Every region, advanced or emerging will go through periods of increase and slowdown of economic activity. Having a diversified portfolio that invests globally could help mitigate the volatility investors experience when focusing on one region – investing in a fund with a global mandate could be the answer. Getting the timing right to make adjustments is not an easy feat as things change very quickly and for a retail investor it is almost an impossible

task. Take for example the immediate effect of the tax changes introduced in January 2018 by Donald Trump which have further given reason to hold on to US assets. Although it was common knowledge that the administration was working on this, its prompt passing through Congress caught many by surprise. This is precisely why we suggest that a global well run fund could be the answer.

Key benefits of investing globally:- performance should be less dependent on one region or sector- can be ideal for those looking for indirect exposure to emerging economies- in uncertain times the strategy represents a level of diversification- improvement in the breadth of investment opportunities

Key disadvantages:- can be expensive due to higher fees- currency exchange rate risk- change in business environment due political risk

There are many global funds – what should I look for?

It would be natural to assume that if a fund classes itself as “global” that is exactly what it should be - investing in companies around the world. Surprisingly though, many have a bias to a particular region such as the United States. A true global fund is one with exposure to many regions but particularly important are the emerging markets. Fund managers can accomplish this directly by investing in local companies or indirectly by investing in companies that are based in the UK for example but have emerging market operations.

Investing Globally

Not putting all your eggs in one basket

“In uncertain

times the strategy

represents a level

of diversification.”


Investing Globally

RegionsGross Market Capitalisation %

United States 24,614,865 36.2%

Other Developed Markets

26,647,332 39.2%

Emerging Markets 16,715,742 24.6%

Total 67,977,939 100%

Source: World Bank, World Development Indicator March 2017

The importance of Emerging Markets is highlighted in the table below.

Total market capitalisation of the various regions of the world in trillion US Dollars

Note that the United States represents 36.2% of the world’s market capitalisation and Emerging Markets accounted for 24.6%. If an investor wished to hold a global portfolio weighted by market capitalisation, almost one quarter of that portfolio would have consisted of Emerging Market equities.

While the US is still the largest economy in the world today, its lead continues to shrink as emerging market regions expand their economic output more rapidly. These emerging regions are being assisted by a number of factors but none more so than the powerful structural trend of a growing middle class.

The spending power of the expanding middle-class population is leading to greater consumption related expenditure which in turn is benefiting those companies that invest in the sector.

Globalisation and an increase in cross border trade have had a significant impact on emerging countries and have helped them grow economically and socially. The promise of cheap labour and the availability of abundant resources are attractive for many companies. Today, a large number of companies headquartered in UK, Europe, Japan and the United States generate an increasing proportion of their revenue

overseas. Globalisation has required many companies to change

their focus from inward

looking to an outward looking one to remain competitive.

Are all global funds the same?

The simple answer is No!

Globalisation has led to a closer correlation between different sectors with many companies generating revenues from multiple regions. There is a growing opinion that if a fund manager simply selects the top performing companies in a sector index, for example the FTSE 100, that the portfolio could become too index focused. The fund manager may also have restrictions imposed by the fund investment mandate and could miss out on investment opportunities.

Fever-Tree, the drinks manufacturer was founded in 2004. Its success story is well-documented and there seems to be almost daily commentary on their latest innovations and expansion plans. Today many global funds have a holding in the company following its meteoric rise but only those funds that have a flexible investment mandate would have invested earlier in the development cycle.

Amongst the funds that have a flexible mandate are Fundsmith Equity fund, managed by Terry Smith and the Rathbones Global Opportunities fund, managed by James Thomson. Both are highlighted on the following pages where we discuss what has made their investment processes such a success.


DISCRETE ANNUAL PERFORMANCEAS AT 03/09/2018

0-12m 12-24m 24-36m 36-48m 48-60m

Fundsmith Equity I Acc +18.4 +21.3 +40.8 +15.2 +15.2

IA Global +10.4 +19.2 +20.4 -0.7 +11.3

01/11/2010 – 03/09/2018 Source: FE Analytics

ASSET ALLOCATION

Fundsmith Equity I Fund – Income of 0.58% per annum payable half-yearly (variable as at 3.9.2018).

Fund Manager Terry Smith is one of the UK’s most high profile investors who seeded the fund with £25 million of his own money at launch in 2010 and then backed this up with an additional £115

million in 2016 – a strong statement backing his own ability in managing money. He is a long term, contrarian and a high conviction investor. Terry’s philosophy is to buy and hold a small number of quality companies that will compound in value over the long term. As a result he will only hold relatively small number of stocks (between 20 to 30 companies) in his portfolio which potentially can lead to higher levels of volatility.

Terry scours the globe for those stocks offering the potential for long-term growth employing a strict selection criteria in doing so which includes:-

• Those that can sustain a high return on operating capital employed

• Businesses whose advantages are difficult to replicate

• Businesses which do not require significant leverage to generate high returns

• Businesses that reinvest their cash flows providing a high degree of certainty of growth

• Businesses that are resilient to change particularly by technological innovation

• Businesses whose valuations are considered attractive.

So what sets Terry apart from other fund managers?Terry has honed his investment style over a number of years. He considers attempting to predict global events to base investment decisions on to be an unreliable strategy and argues that in order for that to work he would have to be 100% correct, 100% of the time – something that he considers impossible to achieve. Instead he prefers to

identify companies, using his selection criteria and wait for an entry point which represents value.

Terry’s approach of ignoring global trends has been vindicated. In his fund review of 2017, he stated that over the previous 5 years many analysts had suggested that the stocks he held were overvalued and they would begin to underperform. Instead, his fund had risen in value by over 175% over that period. In addition, and for the benefit of investors, he aims to keep costs to a minimum by trading only when it is absolutely essential with the portfolio turnover averaging 5% since launch.

Terry’s investment strategy has resulted in impressive returns since launch. The fund’s composition is not restricted to any particular benchmark or region and could provide added diversification to a portfolio. Terry’s ability to spot investment opportunities could serve investors well over the long term.

Fund Focus

IA Global

Fundsmith Equity I Acc

Technology 35%

Healthcare 25%

Consumer Staples 25%

Source: Funds Library

Industrials 9%

Consumer Discretionary 4%

Money Market 2%

PERFORMANCE

Investing Globally

CHARGES

*The ongoing charges figure will include the cost of investment

management and administration, plus other costs of running

the fund, such as fees for custodians (organisations that hold

the assets safely for the investment managers), regulators and

auditors. It will not include stamp duty, which is payable when

buying shares in investment trusts, nor any performance fees.

However, these fees will be published separately on the Key

Investor Information Document.

FUND FACTS

Fund Size £16658m

Fund Type OEIC

Classification Accumulation

Launch Date 01/11/2010

Yield 0.58%

Dividend Dates July & January

Ongoing Charges Figure* 0.96%

Initial Charge 0%

Charles Stanley Investment Choices Servicing Fee 0.37%

Aegon Platform Fee 0.23%

Total Ongoing Charges 1.56%

% Net Assets

350%

300%

250%

200%

150%

100%

50%

0%

-50%

Nov 2010 Sep 2011 Sep 2012 Sep 2013 Sep 2014 Sep 2015 Sep 2016 Sep 2017

Performance %


Investing Globally

Best described as a specialist stock picking fund with a global reach, the fund has vastly outperformed its peer group since manager, James Thomson, took over the reins in 2005. James honed his trade working in tandem with the experienced Julian Chillingworth who he jointly ran the fund with between 2003 and 2005. Today he is ably assisted by Sammy Dow who joined in 2014 and together they have maintained and built on the foundations inherited from Julian. The objective of the fund has remained the same since its launch ‘to provide above average long term capital growth from a global portfolio of stocks’.

James’s success can be put down to a straightforward, disciplined approach based on three very simple steps when selecting companies for inclusion in his portfolio.

Step 1 – conduct a high level fundamental

analysis of the company. This is more opinion based (qualitative) rather than based on financials only. In other words what potential does a company have and which helps discount many ideas at an early stage.

Step 2 – Meet the management. James and Sammy conduct around 200 meetings a year with the companies they see becoming part of the fund.

Step 3 – Valuation. This is a key determinant in working out the risk profile of an investment, as excessive valuation shows them that stock has already been widely flagged and is unsuitable for inclusion. James and Sammy do say though that they try not to get too bogged down with valuations and focus on stocks where they are reasonable and more importantly exhibit the prospect of earnings upgrades coupled with the potential for multiple

expansion. Many companies will end up on their ‘watch list’ and will be sized-up for potential inclusion at a later date.

James’s approach is long term and high conviction in nature and looks for easy to understand businesses that can grow to dominate their industry and defend themselves from competition. The fund holds a concentrated portfolio of 40 to 60 stocks selected following the screening process and considered his best ideas. With such a small number of stocks this potentially exposes the fund to higher levels of risk but this has been managed well to date. He is flexible around company size, sector and geography but prefers mid-sized growth orientated companies in the developed world.

This fund does not “follow the herd” and could provide the diversification clients seek for their portfolios.

Rathbone Global Opportunities Fund – Income of 0.13% per annum payable half-yearly (variable as at 13.8.2018).

PERFORMANCE


Rathbone Global Opportunities Inst Acc

IA Global

0-12m 12-24m 24-36m 36-48m 48-60m

Rathbone Global Opportunities Inst Acc +24.8 +14.7 +20.3 +23.3 +3.0

IA Global +12.3 +13.8 +17.5 +8.8 +3.5


ASSET ALLOCATION

Fund Focus

FUND FACTS

CHARGES









Fund Size £1253m

Fund Type Unit Trust



Yield 0.13%

Dividend Dates February & August


Initial Charge 0%



Total Ongoing Charges 1.39%Technology 26%

Financials 15%

Industrials 15%

Health Care 13%

Consumer Goods 12%


Consumer Services 10%

Cash & Cash Equiv. 6%

Utilities 1%

Telecommunications 1%

Oil & Gas 1%

% Net Assets

450%

400%

350%

300%

250%

200%

150%

100%

50%

0%

-50%

May 2001 Apr 2003 Apr 2005 Apr 2007 Apr 2009 Apr 2011 Apr 2013 Apr 2015 Apr 2017

Performance %


Artificial Intelligence, or AI as it is affectionately termed, is affecting all of our lives today and will be incredibly important in the future. It is not however about to replace the global workforce or wipe out humanity instead AI is all about enhancing lifestyles and taking over the more mundane tasks that we face on a daily basis.

AI is naturally receiving an extremely high level of coverage in the media with the current boom being driven by a breakthrough in an area termed as “machine learning”. This involves “training” computers to perform tasks based on examples, rather than relying on programming by a human. A technique called “deep learning” has made this approach much more powerful.

For most of us the most obvious influence of AI can be seen with the almost daily advancements with the devices we use such as smart speakers (i.e. Amazon’s Alexa) or being able to unlock your iPhone via facial recognition. However, AI is also poised to reinvent other areas of life such as healthcare – in India, hospitals are testing software that checks images of a person’s retina for signs of diabetic retinopathy, a condition frequently diagnosed too late to

prevent vision loss. Machine learning is also key in projects developing autonomous driving where it allows a vehicle to make sense of its surroundings.

A brief history of the development of AI

The term was first used by Dartmouth College Professor, John McCarthy in 1956 when he invited a small group of equally minded scientists to consider how to make machines do things such as using a language. He later admitted that he was overly optimistic with his ambitions but the workshop helped to galvanise researchers to develop his ideas further.

Early work revolved around solving problems in mathematics and logic but it was not long before AI started to show promising results on more human tasks. In the late 1950’s Arthur Samuel created programs that learned to play draughts and in 1962 one managed to beat a master at the game. In 1967 a program called Dendral showed it could replicate the way chemists interpreted mass-spectrometry data on the makeup of chemical samples.

Over time as AI developed, different strategies were employed to make smarter

– should we embrace or fear it?

Artificial Int elligence


Milestones that shaped AI

Meta-Dendral, a program developed at Stanford to

interpret chemical analyses, makes the first discoveries by

a computer to be published in a refereed journal.

The Dartmouth Summer Research Project on Artificial Intelligence coins the name

of a new field concerned with making software smart

like humans.

Joseph Weizenbaum at MIT creates Eliza, the first

chatbot, which poses as a psychotherapist. 197519561965

Artificial Intelligence


machines. Some tried to convert knowledge into code or develop rules for tasks such as understanding language. Others built systems that could improve at a task over time such as simulating evolution or by learning from the data provided. Progression was rapid and computers began to master more and more tasks that had previously only been able to be carried out by humans.

Deep learning which is currently fuelling AI development, is a revival of one of the oldest ideas in AI. The technique involves passing data through layers of software which are loosely based on how brain cells work and known as artificial neural networks. As the network processes data, connections of

the network adjust, building up an ability to interpret future data. In 2012 a series of experiments showed that neural networks provided with masses of data could give machines new powers of perception. One of these involved researchers from IBM, Microsoft and Google who showed that deep learning could deliver a significant improvement in the accuracy of speech recognition. As a result it is not surprising that deep learning experts are in extremely high demand!

The Future of AI

However we feel about AI, it is here to stay. The giants of the technology industry such as Google, Microsoft and Amazon have built up huge levels of computer processing power to increase their core businesses of targeted advertising or predicting your next purchase. They are also making their technology available (for a fee of course!) to other companies to run their own AI projects. This will lead to advances in healthcare and national security for example and will help to accelerate the spread of AI into other industries.

Consumers can expect to be offered more gadgets and services with AI powered

features. Google and Amazon in particular are confident that improvements in machine learning will make their virtual assistants and smart speakers more powerful. Amazon, for example, has devices with cameras to look at their owners and the world around them.

There are however, many things that machines cannot do such as common-sense reasoning and learning a new skill from just one or two examples. AI software will need to master tasks like these if it is to get close the capabilities of humans.

Because of the almost limitless possibilities of the research into and the implementation of AI, development is moving at an incredible pace. Some fund management groups have identified the potential that AI offers to investors and have launched funds that pick up on these development opportunities – two examples of which you will find over the page.

Arnold Schwarzenegger famously coined the phrase “I’ll be back” in the nightmarish vision of the future in the Terminator films where AI had evolved to such an extent that machines were thinking for themselves. Whilst that version of the future is extremely unlikely, AI is certainly not “going away”!

– should we embrace or fear it?

Artificial Int elligence

AlphaGo, created by Google unit DeepMind, defeats a

world champion player of the board game Go.

The Pentagon stages the Darpa Grand Challenge, a race

for robot cars in the Mojave Desert that catalyses the

autonomous car industry.

A Mercedes van fitted with two cameras and a bunch

of computers drives itself 20 kilometers along a German

highway at more than 55 mph, in an academic project led by engineer

Ernst Dickmanns.

Researchers in a niche field called deep

learning spur new corporate interest in AI by

showing their ideas can make speech and image recognition much more

accurate.

IBM’s computer Deep Blue defeats chess world

champion Garry Kasparov. 20162004198720121997



0-12m 12-24m 24-36m 36-48m 48-60m

Smith & Williamson Artificial Intelligence B Acc +40.5 - - - -

IA Specialist +1.5 +12.1 +22.3 -9.8 +9.0


ASSET ALLOCATION

Smith & Williamson Artificial Intelligence Fund

The development of Artificial Intelligence (AI) is still very much in its infancy but it has the potential to transform our global economy in profound ways by disrupting entire sectors. Smith & Williamson launched their fund in June 2017 at, what they believe, was a crucial moment for AI with many experts believing that it will expand exponentially driving economic growth around the world.

During the research carried out prior to the fund launch fund manager Chris Ford and his colleague Tim Day identified that AI was not simply restricted to technology companies and was becoming embedded in a wide range of industries, countries and sectors. In total around 18,000 stocks globally meet the criteria for inclusion in the fund but it would be impossible to invest in all of them. A way was needed to boil the list down to manageable proportions to around 500 which Chris and Tim then could review in

more detail. With this in mind they developed their own AI in conjunction with a specialist company called Orbit to whittle down the list. The AI is extremely flexible allowing them to define precisely the characteristics of the stock they are interested in. It also never gets tired and works whenever they need it – there are no gaps in coverage geographically, by sector or language (i.e. the AI does not care if a report is written in French, German, English or Japanese!).

Having integrated AI in research processes can lead to fewer mistakes and both Chris and Tim are confident in the prospects of the stocks held in the portfolio. There are no restrictions on stock selection with the fund having a global mandate – innovation can spring up anywhere and both Chris and Tim felt that it was important not to have their hands tied when seeking out investment opportunities.

Although having just passed the first anniversary of the fund the view of the manager is that stocks selected will be held for the long-term and as a result turnover will be low. The number of companies in the portfolio is also expected to remain at a lower level than other funds with a global exposure and currently remains in the range of 30 – 35 holdings which could lead to a higher level of risk for investors.

Fund Focus

IA Specialist

Smith & Williamson Artificial Intelligence B Acc

Information Technology 53%

Consumer Discretionary 14%

Industrials 11%


Heath Care 11%

Money Market 7%

Financials 5%

PERFORMANCE


FUND FACTS

CHARGES









Fund Size £131m

Fund Type OEIC



Yield 0%


Initial Charge 0%




% Net Assets

45%

40%

35%

30%

25%

20%

15%

10%

5%

0%

-5%

Jun 2017 Sep 2017 Nov 2017 Jan 2018 Mar 2018 May 2018 Jul 2018

Performance %


PERFORMANCE



ASSET ALLOCATION

Industrials 49%

Technology 25%


Money Market 6%


Fund Focus

0-12m 12-24m 24-36m 36-48m 48-60m

Pictet Robotics I GBP +17.0 +37.2 - - -

IA Technology & Communications +19.6 +36.3 +9.2 +15.1 +13.9

Robotics is another area that is benefiting from the technological advancements driven by Artificial Intelligence (AI). Pictet have long been advocates of investing in what are termed as “Megatrends”. Megatrends are powerful forces of change that reshape society and the world around us. They impact business, economies, society, cultures and our personal lives providing long-term investment opportunities - AI certainly falls into this category.

Pictet, in conjunction with scientists, academics and entrepreneurs, have identified robotics as a megatrend and launched this fund to take advantage of the opportunities available in late 2015. The fund aims to capture opportunities in three main areas:

• Industrial Automation – including electric and driverless cars

• Robotic Solutions – robots that respond to their environment

• Enabling Technologies – including medical diagnoses

The fund is jointly managed by Peter Lingen and John Gladwyn. Peter joined Pictet in 2016 to specifically manage the fund and John joined in 2017 to add his considerable experience in technology to the resources of the team. They select companies for inclusion in the portfolio from an investment universe of around 200 businesses.

The fund has a global mandate when seeking investment opportunities although there is a heavy bias towards the United States where currently over 61% of the portfolio is held. The fund will hold between 40 to 60 companies (48 as at 31/08/2018) at any one time but it does not include those that are active in weapons or offensive military development or distribution.

On an ongoing basis, Peter and John benefit from the support of a dedicated advisory board. This enables them to test their views with experts in their respective fields providing a deeper understanding of the regulatory environment and the trends supporting the robotics theme.

Although still a fund very much in its infancy, returns have consistently exceeded its benchmark and it provides an alternative investment route to the Smith & Williamson AI fund which may appeal.

Pictet Robotics I GBP

IA Technology & Communications

Pictet Robotics Fund

FUND FACTS

CHARGES









Fund Size £6336m

Fund Type SICV



Yield 0%


Initial Charge 0%





% Net Assets

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

-10%

-20%

Nov 2015 Mar 2016 Jul 2016 Nov 2016 Mar 2017 Jul 2017 Nov 2017 Mar 2018 Jul 2018

Performance %



One of the main reasons that clients approach us is because they are disappointed with the interest payable on their Cash ISAs. As at the 29th August 2018 the best instant access Cash ISA interest rate available was 1.35% (source:

Moneysupermarket.com) and this includes the recent interest rate rise of 0.25% announced by the Bank of England. This was the second rate rise since 2007 taking it to a heady 0.75%. Prior to that rates had increased just once since the financial crisis and interest from Cash ISAs had remained at a similarly subdued level.

It is unlikely that we will see many increases until the Brexit negotiations have reached a satisfactory conclusion. UK inflation is targeted at 2% and is running 2.5%pa as at 1st July 2018. Unless we see significant wage growth, increased money supply or full effects of the higher oil prices coming through, we believe interest rates will remain at these historically low levels for the foreseeable future.

Mind the Gap

Many investors that previously relied on the interest payable from their Cash ISAs now

have to draw on the Cash ISA balances to cover the gap between the interest available and day to day living expenses – bills still have to be paid. However, there are other options that can help to plug this gap, one of which is income paying funds available through a Stocks & Shares ISA.

Many investors prefer to receive a monthly income which prompted us to launch our monthly Income Portfolio.

How is the portfolio put together?

We recognise that changing from investing in a Cash ISA to a Stocks & Shares ISA is a big step for many. Knowing your savings are held as cash provides some reassurance and an investment in a Stocks & Shares ISA will mean exposing your capital to the stock market and its fluctuations. To help we have selected funds for the portfolio where the focus is mainly to provide an income. The underlying holdings as a result are diverse which could reduce the risk profile overall. That’s not to say they will never fall in value because there will always be that possibility but, the fall may not be as severe due to the diversification. Please note that this is not an actual fund of funds but what a monthly income portfolio with CSIC could look like.

As with our other portfolios, we have not constructed it with a particular geographical split in mind. Neither is it designed for a particular type of client other than it may be an option for those that require a higher monthly income than they

are currently receiving and who are

prepared to accept some risk to achieve it.

Use the Portfolio as an inspiration for your income investment strategy

If you are unsure where to begin when making an investment, the portfolio is a good starting point but you can select any number of funds to build your own portfolio if you wish. The portfolio is simply a suggestion from us to assist with fund selection.

What do I do next?

If the potential for a monthly income of 4.5% (variable and not guaranteed) appeals to you, take a look at the funds we have included. If you need any extra information about them please give us a call. To invest, complete the ISA application enclosed or contact us to invest via debit card. We have constructed the portfolio very simply by dividing it equally between the 5 funds selected. If you want to vary that percentage split please let us know when you return the form. Equally, it is not necessary to include all the funds we have suggested. If there are one or two you prefer simply add them to the application.

Investment Limits

The minimum initial lump sum investment is £500 or £10 per month per fund. The minimum for the portfolio is therefore £2,500 or £50 per month. Apart from the limits on ISA contributions there are no upper limits to the amount you can invest unless it relates to a pension – please contact us for more details regarding this.

Monthly Income Investment Choices

Portfolio

Investec Diversified Income Fund

The fund invests in a mixture of global bonds and equities with the aim of providing a consistent monthly income together with some capital growth. It has been managed by John Stopford for the last 6 years who is also co-head of Multi Asset at Investec, responsible for all multi-strategy income. The fund will typically have an equity allocation of up to 35%, a defensive fixed income allocation of between 25-70% and 0-20% in emerging market debt. The yield as at 3rd September 2018 was 4.07%pa. Total ongoing charges were 0.65%pa.

Premier Multi-Asset Monthly Income Fund

Launched in Jan 2009, the fund is managed by David Hambidge – Director of Multi Asset Funds. The fund sits in the IA Mixed Investments 20-60% Shares sector which allows the fund manager to hold between 20% to 60% of the assets of the fund in shares with the balance in other assets such as property and corporate bonds. There is a stated aim however to hold at least 30% in fixed income and cash. The yield as at 3rd September 2018 was 4.63%pa. Total ongoing charges were 1.29%pa.

Schroder Mixed Distribution Z Fund

The fund provides worldwide exposure by investing in shares, bonds and money markets and has a target income of 5%pa. It is internally focused, investing in Schroder’s own funds covering a broad spectrum of assets but equity exposure is limited to between 20% and 60%. The fund is managed by Mike Hodgson who joined

the group in 2016 and who has 25 years experience in financial markets. The yield as at 3rd September 2018 was 5.31%pa. Total ongoing charges were 0.88%pa.

Jupiter Monthly Income Fund

Fund Manager, Richard Curling joined Jupiter in 2006 and has been managing both this fund and the Jupiter Fund of investment Trusts since 2012. He also took over responsibility for the Jupiter UK Alpha fund in 2016. Launched in 2000 the fund’s stated objective is to achieve a high level of sustainable income with prospects of capital growth. It achieves this by investing in various classes of investment trusts with the option to hold back 15% of dividend income received to supplement dsitributions during leaner years. The yield as at 3rd September 2018 was 4.4%pa. Total ongoing charges were 0.95%pa.

Newton Multi-Asset Income Fund

The fund was launched in 2015 and is still comparatively new but it has performed well in an economic environment where generating an attractive income is not straight forward. Managed by Paul Flood the funds’ investment mandate allows him the freedom to seek out assets around the world which helps to achieve the stated aim of the fund of generating a sustainable income. Paul believes that having the option to invest in a wide range of sectors such as infrastructure where companies can increase prices and dividends in line with inflation even during difficult economic conditions. The yield as at 3rd September 2018 was 3.91%pa. Total ongoing charges were 0.78%pa.

Initial Charge 0%




Historic Yield 4.46%

Total Ongoing Charges Figure* 1.50%

MONTHLY INCOME PORTFOLIO

Investec Diversified Income (20%)

Premier Multi-Asset Monthly Income (20%)

Schroder Mixed Distribution Z (20%)

Jupiter Monthly Income (20%)

Newton Multi-Asset Income (20%)

PORTFOLIO ALLOCATION




the assets safely for the investment managers), regulators

and auditors. It will not include stamp duty, which is payable

when buying shares in investment trusts, nor any performance

fees. However, these fees will be published separately on the

respective Key Investor Information Documents.

Monthly income portfolio composition

Monthly Income Portfolio


“The minimum initial

lump sum investment is

£500 or £10 per month

per fund.”



The aim of any active fund manager is to deliver returns in excess of the market but not all manage this feat. This can be particularly difficult for those that are focussed on larger companies in the UK where choice can be narrow and is restricted to FTSE100 listed companies. However, for those managers that ply their trade dealing in smaller companies the choice is much broader and historically has proven very lucrative.

Over the past 10 years to the 31st July 2018, the UK smaller companies sector has returned more than any other UK sector for its investors. It has delivered 280.1% (with income reinvested) compared to 142.6% from the UK all companies sector, making it the sixth best performer of the Investment Association’s 38 sectors. This extends to the medium term too, with UK smaller companies delivering more than any other UK sector over five and three years (source:

Money Observer).

UK smaller companies benefit from lower valuations, stronger growth and the ability to adapt quickly to changes in a buoyant domestic market. The sector can be subject

to high levels of volatility however driven by localised events (such as BREXIT) but despite this it remains resilient offering attractive investment opportunities.

How the BREXIT referendum result impacted on smaller company funds

Prior to the vote in June 2016, the UK economy had been making steady progress following the financial crisis that began in 2008. The FTSE All Share index was a particular beneficiary thanks to loose monetary policies (including historically low interest rates) and Quantitative Easing (creating new money electronically by the Bank of England to make large asset purchases).

When David Cameron announced the date of the BREXIT vote following the Tory party’s return to power, financial markets and institutions did not expect the result to turn out the way it did. It was generally expected that the UK population would vote to remain in the European Union and the fact that it did not came as huge surprise to most. The immediate reaction was a fall in sterling which for a number of months boosted the share prices of larger companies such as BP and Unilever. With a large proportion of their earnings being generated overseas, the lower value of the pound artificially increased profits when the earnings were converted back into sterling making them more attractive to investors.

The majority of UK smaller companies, however, are more domestically focused than their medium and larger sized counterparts. With a limited currency boost available the sector as a whole suffered a decline in popularity for a number of months.

UK Smaller Company Funds

- what is the attraction?



Sterling decline exaggerated?

Following the BREXIT result markets and institutions remained in a state of shock however it soon became clear that the fall in the value of sterling had been overcooked. The economic updates provided by the Bank of England showed that the UK economy had not fallen off the cliff edge as had been predicted and in fact was holding up very well supported by strong consumer spending. Further positive economic news

in the following months helped improve the sentiment surrounding the currency with a further boost provided by the Government and their evolving negotiating stance with the European Union. The potential for a “softer” BREXIT agreement has assisted the rise of the pound from the lows we saw in late 2016.

There remain choppy waters ahead however. Not only do we have the uncertainty surrounding BREXIT but

concerns over inflation remain with the recent increase in interest rates to 0.75% being the result. The value of sterling tends to rise (historically) when interest rates are increased and this would normally impact on the larger constituents of the FTSE 100 Index with much of their revenue being generated overseas. The initial uncertainties surrounding BREXIT have been diminishing which has seen a return in popularity of smaller companies for investors where earnings are more directly correlated with the UK domestic market and, arguably, more predictable.

Taking advantage of the opportunities in the UK Smaller Companies sector

The UK smaller companies sector is a true “stockpickers” market where the skill of a fund manager in identifying firms that have the potential to grow and thrive needs to be at its most honed. According to FE Trustnet, for example, the UK smaller companies sector has more Alpha rated managers (those that consistently beat their benchmarks) than in any other sector. A third of UK Smaller company fund managers have achieved this title compared to just 4 per cent of global equity income managers for example.

The Marlborough Specials Situations Fund, managed by Giles Hargreaves and Eustace Santa Barbara along with the Old Mutual UK Smaller Companies run by Daniel Nickols, are two that have consistently outperformed their benchmark, details of which you will find over the page.

“UK smaller companies benefit from lower valuations,

stronger growth and the ability to adapt quickly to

changes in the buoyant domestic market.”

How do I invest?If you hold an existing ISA with us, complete the ISA application enclosed and return the form to us along with a cheque made payable to Cofunds Ltd if required. Alternatively, if you do not hold an ISA, or wish to transfer an existing ISA (Cash or Stocks and Shares) or invest outside of ISA, please request an application using the response form enclosed.



0-12m 12-24m 24-36m 36-48m 48-60m

Marlborough Special Situations P Acc +13.8 +25.5 +11.6 +14.5 +19.4

IA UK Smaller Companies +12.2 +26.4 +6.1 +9.2 +13.0

30/08/2013 – 30-08-2018 Source: FE Analytics

Marlborough Special Situations Fund – Income of 0.98% per annum payable half-yearly (variable as at 30.8.2018).

Investing in smaller companies attracts a higher level of risk generally when compared to the risks associated with those companies listed in the large and mid-cap sectors of the FTSE All-Share Index. However, because of the diverse nature of smaller companies investment opportunities exist for those managers that are skilled in identifying the next “Fevertree”. Giles Hargreaves, manager of the Marlborough Special Situations fund, is one of this rare breed who has built his reputation spotting ‘hidden gems’ since assuming responsibility for the fund in 1998.

Over this period, performance has been exceptional, with the fund returning 2,837.7% compared with 425.2% for the average fund in the sector. In 2014, Eustace Santa Barbara joined the team as co-manager to assist Giles and since this period the fund has returned 56.3%, compared with 43.4% for the sector.

The strength of the management team is key for Giles when selecting businesses into which to invest. Even if a company operates in a sector that is struggling he will not discount it if the management of the company is strong enough. His selection process also involves reviewing the strength of balance sheets and ensuring cash flow is strong.

The fund has a heavy concentration in FTSE AIM listed companies and while the bulk of the exposure is in smaller companies, the fund does have an allocation to medium-sized businesses to provide a level of diversification. Giles tends to take a small holding in a company initially and then tops-up the position as they perform well with the largest holding typically less than 2% of the portfolio.

The fund has continually outperformed the FTSE Small Cap index due to Giles’s strong

stock picking skills. Years of experience has developed almost a second sense on the direction of markets allowing him to take decisive action when necessary. He is also not adverse to removing stocks from his portfolio where better options are available to help manage downside risk. An example of one of Giles’s many successes was his investment in Advanced Computer Software which he invested into in 2008 with the shares at 18p being a great admirer of the Chief Executive Officer, Vin Murria, at the time. Six years later it was taken over by Vista Partners for 140p a share, a return of 678% (source: Moneyweek).

Smaller companies often fall out-of-favour with investors in times of market stress, as was experienced in 2008. but this fund has historically managed to shelter investors from the worst of these falls. This has been assisted by the tendency of the fund manager to maintain a portion of the portfolio in cash at specific points in time.

Although mindful that the smaller companies sector has outperformed other sectors considerably over the long-term, Giles feels many of the companies they choose to invest in will continue to perform well. If there is a fall in the markets he will employ the cash balance of the fund to take advantage of investment opportunities that arise.

IA UK Smaller Companies

Marlborough Special Situations P Acc

PERFORMANCE


Fund Focus

ASSET ALLOCATION

Industrials 27%


Financials 12%

Health Care 11%

Technology 11%


Consumer Goods 10%

Cash & Cash Equiv. 6%

Basic Materials 2%

Oil & Gas 2%

Others 3%

% Net Assets

CHARGES









FUND FACTS

Fund Size £1688m




Yield 0.98%

Dividend Dates June and December


Initial Charge 0%




120%

100%

80%

60%

40%

20%

0%

Aug 2013 Apr 2014 Apr 2015 Apr 2016 Apr 2017 Apr 2018

Performance %



PERFORMANCE



Old Mutual UK Smaller Companies Fund – Income of 0.63% per annum payable yearly (variable as at 28.8.2018).

0-12m 12-24m 24-36m 36-48m 48-60m

Old Mutual UK Smaller Cos. U1 Acc GBP +10.2 +38.4 +12.5 +14.6 +10.5

IA UK Smaller Companies +12.4 +26.4 +5.6 +9.2 +13.4

The growth of any company, large or small, is first driven by the quality of the products on offer and secondly by the amount of exposure it receives. Exposure can be via word of mouth

but more than likely will be dependent upon the size of the advertising budget available – at least that was the case 20 years ago. Today, digital advertising is having a greater influence than ever before – rather than spending millions on television and newspaper advertising companies are focusing on the opportunities available online which come at much lower cost. Global exposure for goods and services is available to all companies, large or small, allowing them to grow and thrive.

It could be argued that the biggest impact of this has been on smaller companies.

The total returns of the IMA UK Smaller companies would seem to confirm this with growth of 280.1% over 10 years to 31st July 2018. In comparison, the IMA UK All Companies sector returned 142.6%. Despite impressive returns not all small companies are successful and indeed many struggle and fail. For this reason active management is necessary where stock picking and in-depth analysis skills are a prerequisite of managing money in this sector. The Old Mutual UK Smaller Companies Fund managed by Daniel Nickols and his team has been popular with investors for a number of years, providing impressive returns. Dan has a proven skill in being able to identify companies that exhibit potential at an early stage during their development. The rapid growth of a number of these has led to the top quartile performance of the fund over the past 10 years with a return of 335.5% (to 31 July 2018), well above the average of 280.1%.

The consistent returns have caught the attention of many investors resulting in funds under management growing to more than £1.44bn (as at 27.08.2018). Dan’s success has been supported by a highly experienced and stable UK mid and small cap team. His approach to fund management is unconventional combining different processes as opposed to relying on one particular approach. This combination has enabled him to follow trends and themes to great effect and identify companies which meet at least one of his selection criteria. Following the referendum result to leave the European Union he made adjustments to the portfolio reducing the exposure to companies focused on the UK consumer with the result that the fund is now underweight in real estate, housebuilders and retail, but slightly overweight in companies providing household goods and those involved in building new homes.

Whilst the negotiations continue with the EU on the terms of BREXIT, Dan’s opinion is that it is impossible to be certain of the future direction of the UK economy and he has positioned his portfolio accordingly. Despite the headwinds, he believes that stock selection remains key in continuing to outperform his peers.

CHARGES









FUND FACTS

Fund Size £1.44bn

Fund Type OEIC



Yield 0.63%

Dividend Dates 29th September


Initial Charge 0%




ASSET ALLOCATION

Industrials 24%

Financials 21%

Technology 12%


Consumer Goods 10%


Money Market 9%

Health Care 5%

Unquoted Investments 3%

Oil & Gas 3%

Others 2%

Old Mutual UK Smaller Companies U1 Acc GBP

120%

100%

80%

60%

40%

20%

0%


Performance %

IA UK Smaller Companies

Marlborough Special Situations Fund – Income of 0.98% per annum payable half-yearly (variable as at 30.8.2018).

% Net Assets

Fund Focus



Investment involves risk and there will be times when investors face difficult choices. Some commentators think that one of those times is upon us given the ongoing trade war rhetoric, Brexit and geopolitical instabilities.

To add to this, interest rates are rising in response to an improving global economy coupled with a tick up in inflation and this is putting at risk the capital value of some bond allocations.

More locally, the situation in the UK and Europe is somewhat different and is affected by a number of factors with the rate rise timetable less certain. In the UK for example, the ongoing Brexit negotiations and the uncertainty this is creating is likely to delay any further interest rate rises until the second half of 2019. Despite this the economy has continued to grow.

Should bond investors worry about rising interest rates?

The fact that yields are rising on bonds should not necessarily lead to negative returns for all concerned as there are options open to managers to mitigate risks. Our own Income Portfolio includes the Artemis Strategic Bond fund which has recorded a cumulative return in excess of 15% over 3 years to the end of June 2018 despite the rising rates headwind – a good indicator that opportunities still exist in the sector.

For investors, it is a good discipline not to over-react following negative media commentary. By all means, review portfolios but for those that do hold or wish to hold bonds the reason for investing in them remains the same - to provide regular income and reduce overall portfolio risk.

How Bond Managers can adapt in a higher interest rate environment

Investment managers have several tools at their disposal to mitigate some of the negative implications of rising interest rates. One option is to switch some of the portfolio of bonds to those that provide a higher return especially in periods of low corporate default rates. Bonds of this type are generally issued by companies that find it difficult to obtain finance from markets on preferential terms offering instead higher yields to attract inward investment from private finance. The downside of switching to lower credit ratings can be that it increases the overall risk level of a balanced portfolio so there is a need to strike a balance.

Another option open to managers is to adjust the duration of a portfolio’s bond allocation. Bonds are issued for a fixed term before being redeemed by the issuer whether it be for 1, 3, 5 or 10 years for example. The income (coupon) available is fixed for the duration of the bond. When

BondsShould they be part of a balanced portfolio?

“The fact that yields are rising on bonds should

not necessarily lead to negative returns for all

concerned as there are options open to managers

to mitigate risks.”


Bonds - should they be part of a balanced portfolio?

there is an interest rate rise, bonds issued prior to the rise will offer inferior returns compared to those that are issued after the interest rate rise. The lack of demand impacts on the underlying value of the bond with the price being discounted affecting the valuation. The longer the duration of the bond the more impacted the value will be basically because investors are unwilling to tie money up for a long period of time to receive an inferior rate of return.

Where investment mandates allow, in an increasing interest rate environment, bond managers will seek to dampen interest rate risk by shortening the average duration of the portfolio. But, there can be hidden consequences to taking such action. Shortening the duration of a bond allocation is likely to mean that the average coupon will fall and the overall volatility of the portfolio could be impacted.

The strategies that active bond managers employ can result in outperformance but a balance has to be struck – too much of a re-adjustment in a rising interest

rate environment can lead to higher fees affecting returns. Maintaining a strategic long-term allocation similar to that provided by the Artemis Strategic Bond fund in our income portfolio can provide significant benefits.

Bonds are a natural diversifier

Small, low frequency increases in interest rates will have relatively limited impact on bond capital values. The total returns from bond funds should be maintained as the proceeds from bond maturities are reinvested into those offering a higher coupon. The compound effect will appear minimal over the short term but over the long term it will make a considerable difference to maintaining growth.

Perhaps most importantly, bonds offer a diversification from equities that is extremely difficult, if not impossible, to replicate through investment in other asset classes. Investment grade and government bond issues are available with predictable cash-flows. Their volatility and cyclical

characteristics tend to have a negative correlation to equities that can be invaluable in times of equity market uncertainty. It is easy to overlook the ‘safety net’ offered by bonds when equity markets are performing well but it should not be forgotten that markets fall as well as rise. Bonds act as a natural diversifier and should not be discounted – with its global mandate, the Artemis Strategic Bond fund, covered in more detail on the next page, could provide that diversification.

“Small, low frequency

increases in interest rates

will have a relatively

limited impact on bond

capital values.”



0-12m 12-24m 24-36m 36-48m 48-60m

Artemis Strategic Bond I Monthly Inc +1.4 +6.1 +7.8 +2.1 +8.2

IA Sterling Strategic Bond -0.1 +3.5 +7.8 +0.9 +7.8


ASSET ALLOCATION

Artemis Strategic Bond – Income of 3.98% per annum (variable as at 27.8.2018).

A traditional bond fund manager generally is restricted with regard to the type of investments they can hold within the fund. Strategic bond managers however, are afforded a great deal more freedom allowing them to consider a number of options ranging from government and corporate bonds to high yield bonds. But these funds come in all shapes and sizes and the word ‘strategic’ can mean different things to different people. For this reason, when using a strategic bond it is important to understand whether the fund’s investment mandate meets your own objectives. Following our annual review we retained this fund in our income portfolio primarily as the managers have demonstrated a consistency of performance, both short and long-term, during different economic environments.

The wide range of investment options available in Strategic Bond Funds results in

more emphasis being placed on the skill of the managers in making the right investment decisions at the right time. James Foster and Alex Ralph have co-managed the fund since its launch in 2005 and it has stayed true to its objective of achieving a combination of income and capital growth. Their stock picking approach is tilted towards high yield bonds which helps to support a competitive yield of 3.98% per annum (as at 28th August 2018). The bias towards high yield bonds can also result in the fund suffering from higher levels of volatility than others in the sector – higher yielding bonds have the potential for an increased risk of default.

It has consistently been overweight in the financial sector which was partially responsible for its underperformance during the financial crisis of 2008. The fund has however recovered well since then vindicating the bond selections by the

fund managers and more recently it has performed strongly when compared to its peers despite the rate rise headwinds.

The trend towards normalising interest rates and the unwinding of Quantitative Easing has affected bond returns in general however funds such as Artemis Strategic Bond could continue to provide above average returns because of their flexibility.

IA Sterling Strategic Bond

Artemis Strategic Bond I Monthly Inc

Money Market 14%

Insurance 14%

Banks 11%

Utilities 10%

Financials 10%


Energy 8%

Government Bonds 6%

Telecomm. Utilities 5%


Others 16%

PERFORMANCE

Bonds - should they be part of a balanced portfolio?

FUND FACTS

CHARGES









Fund Size £1334m


Classification Income


Yield 3.98%

Dividend Dates Monthly


Initial Charge 0%




Fund Focus

30%

25%

20%

15%

10%

5%

0%

-5%


Performance %

% Net Assets


When selecting funds for our portfolios, we identify funds that have provided consistent long term returns but for one reason or another are not included in our Income or Growth portfolios but are very much worth a second look in our opinion.

Our shortlist of funds

Income UK EQUITY

• Jupiter Income Trust

• JOHCM UK Income

• MI Chelverton UK Equity Income

EUROPE Ex UK

• Schroder European Alpha

• Standard Life European Equity

Income

• Blackrock Continental European

Income

ASIA Ex JAPAN

• Schroder Asian Income

• Liontrust Asian Income

GLOBAL EQUITY

• Schroder Global Equity Income

• Threadneedle Global Equity Income

• Newton Global Income W Fund

BONDS & FIXED INTEREST

• Baillie Gifford Strategic Bond

• Artemis High Income

• Janus Henderson Fixed Interest

Monthly Income

GrowthUK - ALL COMPANIES

• Lindsell Train UK Equity

• Marlborough UK Multi-cap Growth

• Slater Recovery

UK - SMALLER COMPANIES

• Old Mutual UK Smaller Companies

• Liontrust UK Smaller Companies

• Marlborough Special Situations

EUROPE Ex UK

• Jupiter European

• FP Crux European Special

Situations

• Marlborough European Multi Cap

ASIA Ex JAPAN

• Smith & Williamson Oriental

Growth

• Schroder Asian Alpha Plus

• Old Mutual Asia Pacific

JAPAN

• Legg Mason IF Japan Equity

• First State Japan Focus B Fund

GLOBAL EQUITY

• Fundsmith Equity

• Baillie Gifford Global Discovery

Fund

• Rathbone Global Opportunities

Fund

Our Fund Short List

Want to find out more?If you would like to discuss any of the funds or need help in completing the application forms please get in touch by calling 01482 861455 or by emailing us at: [email protected] - we are here to help!



Inheritance Tax Portfolio Service

Charles Stanley

Save on IHT for invested assets held for 2 years or more

Historically, the Alternative Investment Market (AIM) has been regarded as a market full of high risk, loss-making technology and resource companies that were caught out in the dotcom bubble and the financial crisis. However, over the course of the past decade the number of stocks listed on AIM has reduced dramatically, while the total market capitalisation of the index is now more than £100bn. This means that the average company on AIM is now capitalised at more than £100m.

Despite the rise in quality and size of the constituents listed on AIM, many of these companies still qualify for Business Relief and therefore gain exemption from Inheritance Tax (IHT). This is provided that the company is not listed on a Recognised Investment Exchange (RIE) and it is a trading entity. The result is that investors can invest in a number of companies of reasonable size and still save IHT for their beneficiaries as long as their AIM shares have been held for two years and are held at the date of death. For example, an investor could hold a company such as ASOS, which currently has a larger market capitalisation than M&S and, after two years, benefit from 100 percent relief from any IHT due on that holding.

New Rules Ahead?

This change in quality and size has led to speculation that there could be adjustments to the current AIM Business Relief rules. Investors were nervous ahead of the November 2017 budget, particularly as

the government had ordered the “Patient Capital Review” earlier in the year, which was considering how to support smaller innovative companies with access to finance going forward.

Business Relief was not mentioned directly by Chancellor Philip Hammond, as he chose to focus on changing Enterprise Investment Scheme (EIS) relief and imposing a “capital preservation test” on EIS and Venture Capital Trust (VCT) investments.

The consultation response, however, noted that the relief played a valuable role in preventing the breakup of otherwise viable businesses purely in order to meet IHT liabilities. The government noted it will keep Business Relief under review, but said it remained committed to protecting the important role that this tax relief plays in supporting family-owned businesses, and growth investment in the AIM and other growth markets.

We therefore believe that investing in AIM will pass any “capital preservation test” as an investor’s capital is very much at risk when investing in these relatively smaller and less-liquid companies. We therefore conclude that Business Relief rules on AIM are unlikely to change, in the short term, while this government remains in place. In addition, we think that it would be unlikely that a government would retrospectively remove these reliefs for investors who have already started holding AIM shares.

More Control

AIM remains an interesting option, when IHT planning, for investors who are willing to take on the risk. Unlike many other IHT solutions, an investor can maintain control of their assets as the holdings remain in their name. AIM portfolios are also straightforward and do not involve some of the legal complexities of Trusts. In addition, it can be an effective solution for an ISA. An AIM ISA is free from Capital Gains Tax, Income Tax on your dividends and has the potential to be free from Inheritance Tax.

At Charles Stanley, we have always maintained a focus on investing in cash generating, established businesses in our Inheritance Tax Portfolio Service. These companies need to have experienced and committed management teams who have a proven track record of successfully growing businesses. To find these potential holdings we screen companies, looking for strong balance sheets, profitability and cash generation. We then meet company management several times and often conduct site visits to fully understand the opportunities and risks in these businesses, BEFORE we invest. This approach allows us to construct portfolios that are diversified across multiple industry sectors, with strong companies that would hopefully survive in another economic downturn.

AIM remains a minefield, but the rise in quality of its constituents means that there are plenty of gems to be found.


Charles Stanley Inheritance Tax Service

Want to find out more?To find out more about the Charles Stanley Inheritance Tax Service and how it could help you reduce your Inheritance Tax liability, return the response slip enclosed with details how we can best contact you. The minimum investment is for £100,000.

As with any tax planning, people should consider taking financial advice.

The information contained within this article is based on our understanding of current UK Legislation, Taxation and HMRC guidance, all of which may be subject to change. Nothing contained within this article should be construed as personal advice based on individual circumstances.

“An AIM ISA is free

from Capital Gains Tax,

Income Tax on your

dividends and has the

potential to be free from

Inheritance Tax.”



Financial Planning

Charles Stanley

Services for You...

Charles Stanley has been providing financial peace of mind for generations and is one of the leading wealth managers in the United Kingdom, with assets under management and administration of some £23.8 billion (as at 31 March 2018).

We would like to make you aware of the range of financial planning services that we provide and to offer you a free, no obligation, initial consultation with one of our professional financial planners.

Taking financial advice can save you time and effort; it can also give you the peace of mind that you are making the right financial decisions now, and for the future. There are times when advice can be essential rather than simply useful. In particularly complex situations, expert knowledge may be required to structure your affairs appropriately and maximise the opportunities available.

Investing a lump sum

As well as making sure your money is working as hard as possible, a financial planner can help you make the most of tax allowances and reliefs. This is particularly relevant today given the changes to the taxation of dividends, buy to-let property and savings.

Large or complicated pensions

From 6 April 2016, the lifetime allowance changed; the amount you can build up in your pensions without paying tax of up to 55%, was reduced from £1.25 million to £1 million, potentially affecting many unsuspecting investors. It can be easy to overlook how much of the lifetime allowance you have used, or will use up, particularly with regard to Defined Benefit pensions; for example a final salary pension of £25,000 a year uses £500,000 of a lifetime allowance.

Your financial planner can help you check the values of your pensions against the lifetime allowance and potentially help apply for protection against the drop. They could also help with analysing whether it is appropriate to consolidate your pension pots. The taxation of pensions and investments

“Taking Financial advice

can save you time and

effort; it can give you

the peace of mind that

you are making the right

financial decisions now,

and for the future.”

Charles Stanley Financial Planning - a world of differenceThe scope of our financial planning services:

• Pension and Retirement planning

• Inheritance Tax planning

• Tax efficient savings

• Long-term care planning

• Wealth protection

• Life events

• Personal and family protection

Charles Stanley Financial Planning

depends on individual circumstances and is subject to change in the future.

Retirement planning

With life expectancy rising, many more of us will be living into our 80s and 90s, potentially increasing the number of years we will spend in retirement. A financial planner can assist you in working out how much you need to retire comfortably, and assess your existing finances to see whether you are on track to meet your goals. If you are approaching retirement age, they can also tailor a retirement plan using cash flow modelling to generate a sustainable level of income from pensions and other sources.

Inheritance Tax planning

There are a number of ways you can reduce a potential Inheritance Tax liability including making annual gifts. However, as your estate gets larger and more complex, advice from a professional can help guide you through the options for passing on your

wealth. If you own multiple properties or have significant business interests, this could be especially important.

Charles Stanley – Focusing on You

At Charles Stanley we provide a personal service and pride ourselves on our commitment to our clients. Our financial planners have a wealth of knowledge and experience and can help you with a wide range of services.

We tailor our advice to suit our clients’ needs whether it is for one off piece of advice or ongoing service advice, we tailor it to suit the clients needs.

Our financial planning team offer a free, initial consultation which is designed to help you find the right service for you. There is no obligation for you to use our services, however, if after your initial consultation you wish to proceed with financial advice, your financial planner will advise you of the next steps and fees involved.

The information contained within this article is based on our understanding of current UK Legislation, Taxation and HMRC guidance, all of which may be subject to change. Nothing contained within this article should be construed as a personal advise based on individual circumstances. www.csinvestmentchoices.co.uk | 27

To arrange your initial consultation please complete and return the enclosed response form.

“Our financial

planning team

offer a free, initial

consultation which is

designed to help you

find the right service

for you.”

Important Information

Past performance is not a reliable indicator of future results and the value of investments and income from them may fall as well as rise. The capital invested is therefore at risk and the amount realised may be less than the original sum invested. Investments should be considered for the medium/long terms (five years or longer).

This document is a marketing communication. The information does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual investors. If you are unsure as to whether an investment or a pension is suitable for you, please seek professional financial advice.

Before you invest and for your own protection,

please ensure you have read carefully the documents enclosed with this publication (the Cofunds application and other documents).

It is recommended that you also review the available product literature. On receipt of your application, where relevant, a Key Investors Information Document (KIID) will be sent to you containing further specific information on each of the funds in which you wish to invest. If you are investing online, the Funds Key Features/KIID will be available at the point of purchase.

For funds that invest overseas, exchange rate variations may cause the value of your investments to rise or fall. Investments in certain funds, including emerging markets, specialist geographical areas, smaller companies and specialist sectors (such as technology and ethical stocks) tend to be more

volatile. Where a fund’s objective is to provide income and the income is paid out, there can be a reduced potential for capital growth, especially over the medium to long term. The level of income payments can vary and where a bond fund’s running yield is greater than the redemption yield, this may erode capital.

Some funds invest in higher risk fixed interest securities, known as sub-investment grade bonds. These bonds have a low credit rating and higher risk of default than investment grade bonds. This means that there is an increased risk that the value of your investment could fall. The tax treatment of investments and pensions depends on individual circumstances and may be subject to change in the future. Fund switches outside of an ISA wrapper constitute a realisation for capital gains tax purposes.

Get in touch 01482 861455

5/7 Landress Lane, Beverley, East Yorkshire, HU17 8HA

[email protected]


How to invest

If you would like to discuss the

investments described in this

newsletter, or need help completing

the application forms, please get in

touch - we’re here to help!

1.

2.

3.4.


Identify the fund(s) you wish to invest into – feel free to call us to discuss

these funds in more detail.

Complete the application form enclosed and return it to us in the pre-paid envelope

provided. Alternatively, logon to your account online or call us with your debit card

details. If you want to invest monthly please also complete the Direct Debit Mandate

attached to the ISA application form.

Should you wish to invest outside of an ISA please contact us for an application form.

If you do not have an existing ISA with Aegon, please contact us for an application

pack.

Viaduct over the River Nidd, Knaresborough, North Yorkshire.

Charles Stanley Investment Choices is a trading name of Charles Stanley and Co. Limited, which is authorised and regulated by the Financial Conduct Authority.

A member of the London Stock Exchange and a wholly owned subsidiary of Charles Stanley Group PLC. Charles Stanley & Co. Limited is registered in England No. 1903304.

Registered Office: 55 Bishopsgate, London, EC2N 3AS.