Dialogue Summer 2013

Inside: Market Commentary and Outlook Creating a Family Constitution Online Fraud: Using your Email Account to Steal your Identity

Horse Racing at Goodwood Schroders Private Banking Dialogue – Summer 2013

Contributors

Philip Mallinckrodt Group Head of Private Banking [email protected] +44 (0)20 7658 6969

Robert Farago Head of Asset Allocation Private Banking [email protected] +44 (0)20 7658 6545 Keith Wade Inside: Chief Economist and Strategist Schroder Investment Management [email protected] +44 (0)20 7658 6296 01 Welcome Harry Herbert 02 Market Commentary and Outlook Managing Director Highclere Thoroughbred Racing 05 The Great Rotation... Or is it? Earl of March and Kinara The Goodwood Estate 06 The Next Steps for the Euro Jonathan Riley Partner 08 Why Nations Fail: Michelmores LLP The Origins of Power, Prosperity, and Poverty Suzanne Kingston Partner – Family Law Team 10 Backing a Winner? Join a Racing Syndicate Withers LLP

Phillip Gilbert 11 Horse Racing at Goodwood Security Manager Schroder Investment Management 12 Creating a Family Constitution [email protected] +44 (0)20 7658 7992 13 An Alternative Resolution: Jaw, Jaw – not War, War Alan Brown Senior Adviser 14 Online Fraud: Schroder Investment Management [email protected] Using your Email Account to Steal your Identity +44 (0)20 7658 6575 15 Wines to Really Shout About Editorial Contacts

Daniel Marinelli 16 Private Banking News Editor Private Banking [email protected] +44 (0)20 7658 3786 Schroders Private Banking Dialogue – Summer 2013

Philip Mallinckrodt Group Head of Private Banking Welcome

On 2 July 2013, we announced that we had completed the recommended acquisition by Schroders of Cazenove Capital, which significantly increases our presence in private banking and wealth management. We believe clients in the UK and internationally will benefit from the enhanced opportunities we are now able to offer across investment management, financial planning, deposit-taking and lending services.

Our primary focus remains unchanged – from the Thought Leadership debate on the to provide our clients with the high-quality ‘Great Rotation’. Keith Wade discusses the of investment expertise and personalised near term outlook for the euro and what is service that they expect from us. There is needed to ensure its survival. a strong service culture inherent in both businesses, which share an established Jonathan Riley from law firm Michelmores heritage and long-term investment tells us why families are turning to their own approach. We share a common ethos of family constitutions to help structure their excellent client service and as we progress wealth and Suzanne Kingston from with integrating our businesses, we will Withers explains the different alternatives ensure that client interests come first. to divorce litigation through the courts. Lord March shares his passion for the The Investment funds business of Cazenove Glorious Goodwood festival and Harry Capital is being merged into Schroders’ Herbert from Highclere Thoroughbred Asset Management division, adding Racing explains how you can join in the complementary strategies across UK and thrill by owning your very own racehorse. European equities, multi-manager and fixed income and you may see some advertising Regrettably, online fraud is an ever present for the funds business over the next few concern and Phillip Gilbert tells us about months. Private Banking and Wealth the latest developments in identity theft Management clients will continue to have and what you can do to minimise the risk. access to the best fund and investment Finally, Alan Brown gives us his latest wine products from around the world. recommendation to really ‘shout about’ and we also celebrate three members I look forward to updating you on our future of the Schroders’ team who have raised plans over the next few months. considerable money in support of charity.

In this edition of Dialogue, Robert Farago Philip Mallinckrodt presents his quarterly Market Commentary Group Head of Private Banking and Outlook and we summarise our findings

1 Schroders Private Banking Dialogue – Summer 2013

Robert Farago Head of Asset Allocation Market Commentary and Outlook

A subtle shift in stance by the US Federal Reserve (the Fed) proved to be enough to push government bond prices lower and send yields to their highest levels in over a year. This hit all asset markets, with emerging nation debt markets down sharply, gold suffering its worst quarterly performance since the 1980s and Japanese equities giving up most of their gains since the bank of Japan upped its bond buying at the start of the quarter. In China, slowing growth and a spike in interbank interest rates led to renewed concerns of a credit crisis.

1. Global equities 2. Global bonds 3. Gold bullion

Index (rebased to 100) Percentage (%) US dollars 140 4.0 1900 130 3.5 1800 120 3.0 1700 110 2.5 1600 100 2.0 1500 90 1.5 80 1400 1.0 70 1300 0.5 60 0.0 1200 Jul 11 Jan 12 Jul 12 Jan 13 Jul 11 Jan 12 Jul 12 Jan 13 Jul 11 Jan 12 Jul 12 Jan 13 US: S&P500 index US 10-year yield Gold – Price per Troy ounce UK: FT All-Share index UK 10-year yield Germany: DAX index Germany 10-year yield

Source: Bloomberg. Past performance is not a guide to future performance.

Economic data provided few surprises over the prospect of tighter monetary policy The gold price fell sharply as the rise in bond the quarter. The announcement that upset sent inflation expectations lower. Emerging yields and the fall in inflation expectations markets was Fed governor Ben Bernanke market bonds saw the biggest declines, are both negative for the metal. Other metal explaining how the Central Bank will reduce with local currency debt also hit by falling prices moved lower as forecasts of demand (or taper) its bond-buying programme. exchange rates. fell due to the slowing growth in China. Policy has changed from “we will taper if The notable exception was the oil price, data gets better” to “we will taper unless Equity markets were led lower by emerging which was little changed despite continued data gets worse”. While subtle, this is the markets. Japanese equities soared early in positive news flow on US production growth. first announcement by the Fed that could the quarter as the Bank of Japan boosted be construed as a move towards tightening stimulus more than expected, but gave up The downswing in emerging market asset policy since the financial crisis five years ago. most of these gains as global risk appetite prices extended to currency markets, with turned down. Shares of companies that widespread weakness. Countries such as Bond yields in the US, UK, Germany and offer bond-like characteristics, relatively high Brazil and Turkey, that offer high interest Japan rose to their highest levels in over dividend yields with steady earnings to back rates but run trade deficits, were hit hard. a year, sending prices lower. Corporate them up, suffered as bond markets moved The Indian Rupee hit new all-time lows. bonds also saw negative returns. Inflation- lower. The US equity market fell less than the Commodity currencies, including the linked bond prices suffered bigger falls as global average. Australian dollar and New Zealand

2 Schroders Private Banking Dialogue – Summer 2013

dollar, also weakened significantly. The 4. Japan Economy Watchers Survey Expectations yen weakened over the quarter but hit its Percentage (%) low as equity markets reached their highs. 60 Movement between the US dollar, the euro and the pound were modest compared to 50 the swings elsewhere. 40

UK commercial property prices stabilised 30 after declining modestly since 2011. The London office sector continued to 20 provide the best returns. 10 2007 2008 2009 2010 2011 2012 2013 Private equity investors have benefitted from Diffusion index Source: Bloomberg. the rise in equity valuations over the last twelve months and the increasing availability of debt financing. The level of activity in balance of payments and excessive scenario is that the Minksy moment has remains well below peak levels. In contrast, credit creation. been reached, when income is insufficient to the easing of debt covenants is reminiscent cover the interest due on debt outstanding. of the pre-crisis peak. The recent market falls are not helping This would trigger a financial crisis and a matters. Interest rates are rising just as severe economic slowdown. The economy Trend-following hedge funds suffered growth is slowing. Falling exchange rates is too big and complex, and the data too significant falls as a large number of markets will push inflation higher. Falling commodity unreliable, to be confident of the outcome. changed direction at the same time. Losses prices are bad news for commodity Still, either way, for now slowing growth and over the last week of May and first week of exporters. The one commodity where a tightening credit in China and elsewhere in June wiped out all gains made over the first lower price would prove a boost to the the emerging world is not a good backdrop half of the year. There was no generalised consumer, oil, has proved stubbornly stable. for markets. pattern amongst other strategies although Energy subsidies are both a major cost to few funds proved immune to the widespread a number of governments currently facing Optimism towards Japan has also faded sell-off in risk assets. growing deficits. They are a perverse policy but here we remain more optimistic as at a time when politicians are trying to cut fundamentals remain favourable. Business Outlook carbon emissions. However, it is politically confidence is at a post-financial crisis high In one sense we can be encouraged by the difficult to remove energy price subsidies as (see chart 4). Profitability is improving. policy shift by the US Federal Reserve. It Indonesia found out to its cost. Rising fuel Earnings are expected to expand this year shares our growing confidence in the outlook prices caused by subsidy cuts triggered and next. The approval rating of Prime for the American economy. A recovering rioting. Turkey and Brazil are two other Minister Abe remains high after his first housing market and healthier bank balance countries that have enjoyed a prolonged 100 days in office, in contrast to the four sheets make the economy less vulnerable period of growth but are now faced with previous holders of this post (which, it should to external shocks. Unfortunately, there are serious social unrest. be made clear, includes Abe’s first stint in three new developments that threaten this the role between 2006 and 2009). This is recovery. First, the rise in bond yields has Investors have been rightly concerned about important because more policy action is pushed mortgage rates from 3.4% in May excessive credit growth in China for a few needed to break the deflationary psychology to 4.6% today. This represents a direct hit to years now. Trophy towers built in the middle of the nation. He understands the urgency of the consumer. Second, the fall in asset prices of nowhere have been the most visible the situation. “Time is not on our side. …This is a hit to wealth. Third, the outlook for the signs of excess. However, more relevant for is the last chance for us and the sense of emerging world has deteriorated, with clear investors has been the widespread growth urgency is therefore enormous. It is shared signs of stress emerging in China. in capacity that has put downward pressure more widely than ever before among my on corporate returns. A spike in interbank fellow lawmakers.” His strong ranking in the The emerging world has enjoyed a lending rates is a sign that we may have polls means that his LDP party is expected prolonged period of stability since the series reached the limits for credit driven growth. to triumph in July’s upper house elections. of crises in the 1990s. The cycle is turning An optimistic take on events is that the We expect further market friendly policies to for the worse, with slowing growth and new government is embarking on genuine be announced after these elections. rising imbalances. A steady inflow of capital reform and is willing to allow unprofitable since the financial crisis has contributed to a businesses to fail. This would be good We see upside for other developed market deterioration in competitiveness, a worsening news in the longer term. The worst-case equities in our baseline scenario. We are

3 Schroders Private Banking Dialogue – Summer 2013

encouraged that US data is coming in 5. US Economic surprises broadly in line with expectations, in contrast Data releases vs. expectations: positive implies above expectations to the last three years when the summer saw US Eco Surprise (CITI) a period of disappointment (see chart 5). 150 We find more value in companies growing dividends and those with traditional value 100 characteristics than in simple high yielding 50 stocks. Those companies that look the 0 most like bonds, with a predictable earnings stream covering an attractive dividend, look -50 expensive and are vulnerable if bond yields -100 continue to rise. -150 97531 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 The rise in government fixed-income bond Weeks through the year yields has not been sufficient to mean that 2010 2011 2012 2013 they now offer value for long-term investors. Source: Citibank, Bloomberg However, they would do well in a deflationary environment. The risk of deflation has risen There is little to choose between the US equilibrium level. Support is more likely to as inflation has declined, monetary conditions dollar and the euro, which trade close to come from buyers in the emerging world where have tightened and the slowdown in growth their underlying equilibrium rate. fundamentals are deteriorating rather than in the emerging world reduces upward from the West, where the economic backdrop pressure on commodity prices. Still, we We are encouraged that UK commercial is stabilising. The price at which support will continue to see more risk of inflation than property prices seem to have found a arrive is impossible to say but the rapidity of the deflation over the long-term. History tells us floor. Debt availability has increased. fall tells us that we are approaching a turning that this is one of the few options available The occupational market is improving as point. We would not expect the 2011 highs to to reduce the debt burden of countries that businesses are becoming more optimistic become a realistic price target until the risks of are unable to grow sufficiently to bring about about the outlook for the UK economy. inflation start to rise. a sustainable debt situation. This applies to The rise in yields on lower quality property almost every country in the developed world is in stark contrast to the fall in yields on In conclusion, while a subtle change in stance due to the combination of current high debt more risky debt instruments. The recent falls by the US Federal Reserve does not mean that levels and aging populations. In addition, in bond prices may encourage multi-asset a cycle of rate rises is imminent, it is probably rising uncertainty over monetary policy investors to switch from bonds into property. right for markets to factor in a greater degree argues for higher long-term rates. So too of policy uncertainty than has been present for does the reduction in tail risk as the US has The worsening outlook for emerging the past five years. This means higher bond avoided a government debt crisis and economies weakens expectations for rates are appropriate, which in turn tells us the stresses in the euro area have eased demand for commodities. At the same that we have probably seen the lows in bond (at least for now). time, a decade of strong prices has led to yields for this cycle, and quite possibly for our increased investment in production. While lifetimes. Our central forecast of sustained In currency markets, we expect additional significant new finds have been few and far economic expansion in the US together with policies in Japan that weaken the yen. between, we are now seeing some growth a resumption of growth in Europe provides a The currency acted as a safe haven through in output. This makes it hard to be bullish supportive environment for equities. However, the financial crisis and we do not expect on commodity prices. Indeed, the only the risks of a growth slowdown have increased any significant resistance to a return to its real positive for commodities as an asset as long-term borrowing costs have risen pre-crisis range of 110 – 120 against the class is the complete lack of interest sharply. In particular, the emerging world is US dollar. The negative spiral unfolding in amongst investors. facing the unattractive combination of slowing emerging countries is likely to drive most of growth and tightening monetary conditions. these currencies lower. We do not expect It will take tough political decisions to get The unattractive yield on both cash and the arrival of Mark Carney at the helm of government finances onto a sustainable basis government fixed-income securities makes the Bank of England to mark the start of a and these are typically only made in response balancing equity risk challenging. The near dramatic easing cycle. It is not clear that to a crisis. Gold remains the ultimate hedge term risks have shifted towards deflation, a weaker pound would really help the UK against a government debt crisis. Still, in although outright price falls remain unlikely economy, since manufacturing exports are the near term the moves towards an end outside Japan. The underlying debt dynamics a small part of the economy and imported to quantitative easing are negative for gold. means it is still right to worry about inflation inflation is a negative for consumption. The price remains above its long-term further out.

4 Schroders Private Banking Dialogue – Summer 2013

The Great Rotation... Or is it?

At the Schroders’ Thought Leadership debate, panellists Peter Harrison, Philippe Lespinard, Alan Brown and Diana Mackay explored the much-vaunted theory of the ‘Great Rotation’. Their views are summarised below.

Mini rotations History repeating? The panel took the view that there is no The panellists and viewers were asked single Great Rotation happening but several which year 2013 will most resemble from smaller ones underway. a market perspective: 1993, 1999 or 2006. In an interactive vote, viewers were largely Philippe Lespinard pointed out that he is divided, with 1993 coming out marginally not currently seeing money leaving fixed on top. income for equities, rather that the rotation Peter Harrison is taking the form of investors moving out of Peter Harrison said there are some parallels Schroders’ Global Head of Equities cash and government bonds into corporate with the late 90s, but doubts markets are bonds and emerging market debt. Investors close to the dot-com bubble territory of now have to take on greater risk in order to 1999. He added there are no signs of the get the equivalent income of the past. ‘irrational exuberance’ or ‘silly IPOs’ that marked previous bubbles. Peter Harrison pointed out the ‘schizophrenic’ situation whereby equity However, Alan Brown said that valuations markets are rising despite there being a generally do not look overstretched and strong bias towards defensives. But he are not in bubble territory yet. Even if fixed Philippe Lespinard Schroders’ Co-Head of Fixed Income thinks that this could be changing and in the income investors eventually choose to turn US it has been possible in recent weeks to their attention to equities, it could still take discern a rotation from defensives into more a long time for the shift to be complete. cyclical areas as the rally starts to broaden. When will quantitative easing (QE) end? Shift to Emerging Markets With the unconventional measures taken All the panellists agreed that emerging by central banks distorting the market by markets continue to gain in importance as driving an increase in liquidity, the panel flows to the area show no signs of easing. concurred that extreme care will have to Alan Brown be taken when exiting QE. Senior Adviser Diana Mackay said investors are ‘agnostic’ on whether to invest in bonds or equities, Alan Brown thought we are still a year away and are more interested in buying into the from the US Federal Reserve turning off its longer-term emerging markets story. QE tap, while Philippe Lespinard pointed out that we may see a situation where the Fed Philippe Lespinard added that traditional ends its QE programme but other markets, notions of what constitutes a safe haven such as Japan, keep going. have been turned on their head, with Diana Mackay emerging markets now seen as a safer place Funds Industry Expert to invest than some European markets.

5 Schroders Private Banking Dialogue – Summer 2013

Keith Wade Chief Economist and Strategist The Next Steps for the Euro: What is Needed to Ensure its Survival?

The near term outlook for the eurozone remains bleak, with the latest International Monetary Fund (IMF) forecasts showing 2013 as another year of falling output for the region. Better growth is desperately needed and there is a case for more cyclical support through easier monetary policy, but there are also structural obstacles to stronger growth. Unless these are addressed, any pick-up in growth will ultimately flounder. There are two areas the eurozone needs to address; both can be seen as fault lines in the design of the common currency.

Divergence rather than convergence Lasting convergence between the eurozone Arguably, this is the direction we have One of the fault lines was predicted before economies has proved elusive, but as we been moving in with the bailouts. Although the single currency even started and have seen in other single currency areas, officially these are loans, the softening of is the divergence in economic activity such as the US and UK, regional divergence terms to Greece – and now Ireland and which results from a one-size-fits-all can persist not just for years, but decades. Portugal – means that there will be a future monetary policy. Prior to the formation of Think of Scotland and the South East transfer from core to periphery through the euro this was often referred to as the of England in the UK, or the North East below market interest rates and favourable Walters critique, where one interest rate and the US southern states. Even with a repayment terms. across the region would create different common language and culture there is inflation rates and hence gains and not the flow of capital or labour to iron out This is burden sharing on a case by case losses in competitiveness. These would regional disparities. basis and yet even with the European then be reflected in divergent economic Financial Stability Facility (EFSF) and its performance as those who had improved The currency unions in the US and UK have successor the European Stability Mechanism their competitiveness ran trade surpluses proved durable largely because they have a (ESM) bailout fund in place, there is no while the rest saw increasing deficits. fiscal mechanism which recycles surpluses automatic mechanism to redistribute to where they are needed through public surpluses and deficits. Instead each bailout Such a pattern soon became apparent in spending and taxation. One reason why is considered separately, often accompanied the eurozone with low inflation in Germany the euro has been described as a political by a damaging confidence-sapping crisis. and the core countries enjoying increasing project is because it is implicitly recognised trade gains as the periphery sank into that ultimately, the institutions needed Eurobonds deficit. Prior to the financial crisis such to ensure its survival require a political One means of moving closer to a fiscal imbalances were easily financed as cross- mandate. Whilst we may eventually get to union would be to issue Eurobonds, border lending accelerated. After the crisis a European political union and a common effectively mutualising the guarantee on the capital flows dried up and went into reverse exchequer for the eurozone, there is no public debt of eurozone counties. The aim as banks cut their exposures. Countries mandate for it at present. would be creation of a euro-area safe asset, running current account deficits then where sovereigns would be jointly liable for struggled to attract capital, interest rates So we have to find other means of debt. Not all public debt would have to be rose and they were driven into recession. redistributing the gains and losses. mutualised. Instead, it could be split such

6 Schroders Private Banking Dialogue – Summer 2013

that the mutualised part would be senior to banking and sovereign crises have often This would also help address the fracturing the non-mutualised part. gone hand in hand. Indeed there was just of the euro financial markets. At present, the such a crisis within Europe during the euro fails to meet one of the key conditions Eurobonds also create winners and losers. 1990s when the Swedish government of a single currency in that the trust inspired Germany and the core would be sharing stepped in to rescue its banking system. by a deposit should be the same regardless their credit rating and have to pay higher However, rather than acknowledging this of its jurisdiction. Euros in German banks are rates of interest, the periphery would enjoy link, the focus of eurozone policy from more secure than those in the periphery. a lower interest rate than if they issued debt Maastricht has been solely on public debt in their own name. Currently, Germany has limits, thus ignoring the likelihood that Outlook ruled this out. the government may have to take on a So should we be optimistic about the significant portion of private debt. ability of the euro to address these fault However, Eurobonds might be acceptable lines? On the face of it: probably not. if conditions were attached so that states It has proved very difficult to break this link The proposed solutions both involve some would lose the freedom to issue debt at will. as once a banking crisis has infected the form of fiscal union and Germany has already For example, members wishing to issue sovereign, the fall in the creditworthiness of ruled out any cross subsidisation. There may Eurobonds would require pre-approval of government debt further undermines banks’ be progress on banking union, although their budget plans. In this way, the policy balance sheets, creating a downward Germany has made it clear it should only system would move from the existing spiral. One means of stopping the negative deal with new, not old legacy problems. framework of ex-post sanctions in case of feedback loops would be to build a banking infringement of common rules, to a frame- union and this seems to be where we are But that does not mean that this is the end work of strong ex-ante control. Should a heading. Progress is being made in terms of the matter. draft budget fail to meet common principles, of the appointment of the European Central the euro-area partners could veto it before Bank (ECB) as the region’s supervisor and As the euro crisis has evolved, it has it came into force. on which banks will be covered. However, become increasingly apparent that Europe the more important issues involve the makes progress through a series of crises. Banks and Sovereigns organisation of a resolution mechanism Only when faced with the prospect of the The second fault line was not anticipated when banks fail and the nature of deposit system breaking down do we discover prior to the creation of the euro: the fact that insurance. Neither have been settled what is a non-negotiable line in the sand banks and their sovereigns are inextricably and both require a means of pooling the from a bargaining position. linked and as such that their debts need resources of the wider group. to be considered together rather than However, one of the side effects of the separately. Banks and Sovereigns each Any banking union will involve the European ECB’s policy of flooding the markets with have the potential to bring the other down authorities in distributing bank losses liquidity (actual or threatened) and reducing and the eurozone has had cases of both. between shareholders, creditors and market volatility has been to reduce the risk depositors, as well as between national of a crisis. Peripheral bond spreads have In many ways this is a surprising oversight and European partners. As we have seen, continued to tighten as investors hunt yield, as a long view of history shows that these are very political choices. believing that the ECB stands behind them. Clearly such action has created a much needed breathing space for the euro, but by removing the danger of crisis it has taken the pressure off governments to take action.

Germany and the other core countries (Benelux, Finland and France) have benefitted from the trade gains created by the single currency and are now benefitting indirectly from the crisis through extraordinarily low levels of interest rates. The route to a sustainable euro will involve persuading the core to give up some of these gains on rates for higher growth and a stable euro over the medium term.

7 Schroders Private Banking Dialogue – Summer 2013

Why Nations Fail: The Origins of Power, Prosperity, and Poverty

James Robinson is the David Florence Professor of Government at Harvard University. He is co-author, with Daron Acemoglu from MIT, of “Why Nations Fail”, which looks at the origins of power, prosperity and poverty in order to understand why some nations are rich and others poor. Professor Robinson presented at a recent Schroders Secular Market Forum. Here we give a brief overview of his book and presentation, followed by Robert Farago’s conclusions.

It is hard to exaggerate the scale of the maintain control for the benefit of a small elite same inclusive/extractive category as book, which spans over 10,000 years and (estimated elsewhere to be 300 families). China is today. This ultimately led to the visits more than 70 countries. The authors military coup in 1930, becoming an extractive conclude that it is not culture, the weather, The creation of inclusive institutions creates economy again. geography, ignorance of the right policies a virtuous cycle, where the ruling powers or religion that determine whether countries find it is in their own interests to deepen Robinson believes China, in the longer term, succeed or not. Instead, success or failure democracy once the economic benefits is unlikely to be as successful as Democratic is determined by the economic and political become clear. Unfortunately, the opposite is India which, despite its problems, has more institutions that have been put in place. true of extractive institutions, where a vicious inclusive institutions in place. cycle unfolds as the rulers take ever more There are two ingredients of success. extreme steps to maintain power. First, a country must have a centralised government. Most do, but those few The iron law of oligarchy is the vicious countries where power is split between cycle at its extreme. When revolutionaries different factions are doomed to fail. Somalia overthrow corrupt dictatorships, all too often is the clearest example of this right now. the institutional structure of the country remains intact. This leads to the new rulers Second, the key thesis of the book is that eventually taking on most of the practices inclusive institutions are the vital ingredient of that led them to revolt in the first place. long-term progress. Take North and South Korea as an example. The government in Robinson also cited a number of countries the south is a democracy and the institutions past and present where increasingly inclusive in place allow creative destruction to take economic institutions are not or were not place, reward innovation and allow everyone underpinned by inclusive political institutions. to participate in economic opportunities. Long-term progress hits the buffers unless In contrast, the authorities in the North the non-inclusive institutions open up. have established extractive institutions that Argentina, for example, used to be in the

8 Schroders Private Banking Dialogue – Summer 2013

Robert Farago Head of Asset Allocation What does it tell us about the Decade Ahead?

The book itself is an entertaining and informative ride through history. In the style of Dr Who, every new chapter takes you to a different time and place. Once there, you meet a range of goodies and baddies: inclusive institutions, extractive institutions, and the odd decentralised regime.

As ever, it is the baddies who provide the Robinson points out that governments have most likely role model for aspiring emerging best entertainment. These include the to be trustworthy to allow debt to build up nations. In less than two generations it has Russian tsars who did not build railways in the first place. Investors do not lend to gone from military leadership to a democracy to avoid the spread of information that the worst extractive regimes. He is more where GDP per capita is on a par with the might threaten their rule; the Sierra Leone confident on the outlook for America than European average. president who went one step further and his Harvard colleagues. But perhaps we dug up existing tracks with the same should bear in mind that a tough decade Robinson and Acemoglu see modern China thoughts in mind; and the Guatemalan or two, which is what Reinhart and Rogoff as run by extractive political institutions. prime minister who is a direct descendant predict, would not undermine an analysis This means that past success will not of a conquistador, marking 400 years of that can span centuries. This is a book that translate into sustained growth. There are control by a 22-family elite. informs and entertains, but also leaves you parallels with the development of the Soviet curious as to what rival theories there are Union, which underwent rapid growth as the Both the strength and the weakness of the on this important topic. economy industrialised but then ground book is that it looks at the world through to a halt. this one very specific lens. Every situation Critical junctures in the financial crisis is considered in terms of an institutional What determines which way a nation goes? Critical junctures ahead framework. In some cases, this analysis Robinson and Acemoglu identify critical There are two critical junctures that we can seems stretched. For example, surely the junctures that set the direction for the be reasonably confident will occur on a decline of Venice had more to do with a decades, or even centuries, ahead. This is a ten-year horizon. First, the euro area must change in shipping routes than changes useful framework to think about the financial either progress towards a true political union to the domestic political regime? crisis and beyond. or break up. A break-up would not only have severe economic consequences but lead to Missing from the analysis is a clear link to Over the last forty years, a number of unpredictable political fallout too. the item at the top of our list when thinking institutional changes proved to be critical about the outlook over the decade ahead: junctures in the story of the financial crisis. The second critical juncture is a change in government debt. The work of Carmen Changes to the monetary regime, global the monetary regime. While this is already Reinhart and Kenneth Rogoff, fellow trade rules, the foreign exchange regime, underway, policy is currently set for crisis Harvard professors, shows a strong link financial regulation and the entry of emerging mode. It is not clear what will be put in between financial crises and subsequent economies into the mix all played a part. place when this is no longer appropriate. government debt crises. Are government This will be the key area of policy to watch debt crises a symptom of a failing Lessons for the future for some years. government or a cause? Should we be The success stories of the last fifty years have less concerned about the current situation been the tiger economies of South East Asia: because the excessive borrowing is in South Korea, Taiwan, Singapore and Hong countries with inclusive institutions? Kong. South Korea perhaps provides the

9 Schroders Private Banking Dialogue – Summer 2013

Harry Herbert Managing Director, Highclere Thoroughbred Racing Backing a Winner? Join a Racing Syndicate

‘Laugh, and the world laughs with you: Weep, and you weep alone’; opening lines of the poem ‘Solitude’, by Ella Wheeler who did not have horseracing in mind when she wrote them in 1883 but which resonate throughout this emotion-busting sport.

The world loves a winner, and the joy presence of like-minded souls enhances or Timeform, the bible of racing, owning a of victory after willing your horse home gives succour to unforeseen events. syndicate share establishes you on the brings laughter and tears of joy. Highclere same footing as your fellows; be they lords, Thoroughbred Racing syndicates range Every share owner is treated as though ladies, stars of stage and screen, taxi- in numbers between ten and twenty and they own the horse outright so in effect drivers or even a great football manager. contain people from all walks of life – Highclere acts as personal racing manager perhaps the only place where Highclere to each and every person who participates One syndicate firm sells itself with the line owner Sir Alex Ferguson and a Manchester in their syndicates. Their success has “it’s easier to own a winning racehorse than City fan can grip one another other than been remarkable, with seven European to win the lottery”, and who would argue by the throat! Champions and a World Champion, not to with that? But you would not go round mention a multitude of Royal Ascot victories. advertising too loudly how many millions The reward from their victories will mainly you’d pocketed on the lottery – for any be measured in memories rather than the Every syndicate owner’s share is equal. number of reasons. Win a horse race and life changing sums – such as was accrued According to one of the intellectual giants you feel you’re in seventh heaven, priceless. when the 2010 middle-distance champion of racing, the late Phil Bull who founded of Europe, Harbinger, was sold to Japan by Highclere. His twelve owners shared over five million pounds and those UK tax payers had the added bonus of not having to pay any capital gains tax on the spoils.

But when Harbinger fractured his leg forcing his retirement, the syndicate found solace in fellow owners: the lone racehorse owner has no shoulder to cry on when fortune swings against him or her. Indeed every race is pregnant with expectations and they can be undone in an instant by the fragile nature of the sport and the thread by which fortunes hang. One is not in racing to meet triumph and disaster all the same and the Harry Herbert flanked by Denise Lewis and Sir Alex Ferguson with other Highclere owners. 10 www.highclereracing.co.uk Schroders Private Banking Dialogue – Summer 2013

Earl of March and Kinrara Horse Racing at Goodwood

Horse racing at Goodwood is over 200 years old. The story began when the Third Duke of Richmond introduced horseracing to Goodwood for the benefit of the officers of the Sussex Militia. The officers held their annual races in nearby Petworth Park, courtesy of the Earl of Egremont, but when the invitation was withdrawn in 1801 the Duke of Richmond came to the rescue, establishing a course on the Goodwood Estate known as “The Harroway” and now widely considered the most beautiful racecourse in the world.

These days there is a whole season of summer season. Glorious Goodwood is enclosures it is a mix of fabulous fashions, racing at Goodwood – 19 days including the pinnacle of Britain’s sporting and social champagne and hospitality all showcased the famous Glorious Goodwood five-day calendar and has become something of in an incredible setting. festival in July, which closes the British a celebrated social event. With a range of The five day festival this year runs from Tuesday 30th July until Saturday 3rd August and is certain to be the highlight of the season. The fashion is elegant and floaty, Goodwood heritage with a dash of panache. Ladies and Gentlemen dress in the latest fashions and gather shade from their hats and panamas.

The thundering hooves of the world’s very best horses on the hallowed Sussex turf help create the atmosphere and for the last two years we have been very lucky to play host to the highest rated horse racing has ever seen with ‘Frankel’ in our Sussex Stakes which is run on the Wednesday.

Along with the incredible worldwide racing talent, we welcome many high profile personalities from around the globe. The Thursday is always particularly popular because of the Magnolia Cup. This Ladies Race is now in its third year and sees a host of influential women take to the course in a thrilling five furlong dash. Previous winners have included model Edie Campbell and jewellery designer Philippa Holland. Image courtesy of Goodwood. 11 Schroders Private Banking Dialogue – Summer 2013

Jonathan Riley Partner, Michelmores LLP Creating a Family Constitution

A family constitution is a written statement recording the guiding principles by which a family agrees to manage its family wealth. The arrangement “sits above” the existing legal structure (such as trust deeds, partnership arrangements, corporate vehicles, etc.) and although typically not legally enforceable, provides strong moral encouragement for family members to follow agreed paths of behaviour and a shared approach to wealth management.

The problem addressed by a agreement in respect of some or all of be signed by relevant family members. family constitution the family wealth; Periodically, perhaps every two or three There are many reasons why family wealth –– how management of family wealth is years, the family members may be asked becomes dissipated. These can include controlled and the circumstances under to confirm their continued agreement to misapprehensions of family members as which this may alter; the constitution’s terms and in doing so to the benefits the wealth should provide, –– the process by which younger members reaffirm their consent to the continuing disagreements as to who should exercise of the family may be involved, for arrangement. control over the wealth and in what example in a family business or estate; circumstances younger members of the –– the means by which information is By recording a common understanding of family should participate. Not infrequently circulated among family members; and how a family’s wealth should be managed, these issues are only discussed when a –– the family’s agreed position in respect a family constitution provides stability. difference of opinion arises or when a family of any philanthropic endeavours. Moreover, the relatively “light touch” ‘event’ such as death or divorce occurs. it represents provides the flexibility to Many families view their family constitution Agreeing these (and other) matters adapt as circumstances alter. At a time of as an important means of avoiding these can develop an understanding across continuing economic uncertainty, these points of possible conflict and managing generations of the family’s mode of benefits are more welcome than ever. the family wealth regardless of the events operation; shaping both rights that are that occur. due and responsibilities that are owed. Note: This article is for information purposes only. Readers should seek professional Typical areas covered by a Creation and maintenance advice for their own specific circumstances. family constitution In agreeing a family constitution a family A family constitution will typically set out is able to discuss (often sensitive) matters a family’s agreed view of some or all of at a time of the family’s choosing rather the following: than when forced to do so by events they cannot control. Equally, by involving –– the family’s medium and long term a broad number of family members objectives for the wealth it owns; (and, depending on the circumstances, –– the extent to which profit is extracted their spouses) the process can ensure from the family’s wealth and under support which is more likely to deliver long what circumstances; term success than if the family wealth is –– whether family members intending managed in a less inclusive way. Once to marry should enter into a nuptial agreed, the constitution would typically

12 Schroders Private Banking Dialogue – Summer 2013

Suzanne Kingston Partner – Family Law Team, Withers LLP An Alternative Resolution: Jaw, Jaw – not War, War

Having been a divorce lawyer for 30 years, I am acutely aware how stressful litigation can be for clients. Sometimes it is inevitable. The clients have no choice but to seek the intervention of the court and to have a decision imposed on them.

Often it is possible to reach a settlement One of the main areas of concern for outside the court process and indeed clients (particularly celebrities) is the issue of Litigation over the last 10 – 15 years there has confi dentiality. Since 27 April 2009, the media been a substantial increase in cases have been able to attend all private family being resolved by alternative processes hearings (but there are very strict reporting including Mediation, Collaborative Law and restrictions placed on journalists). Mediation Arbitration. A major contributing factor in is entirely confi dential and there is absolutely this is the government’s drive to encourage no chance of the media attending. Arbitration Mediation and thus alleviate pressure on the already overburdened Court Service. The clients see the Mediator together and The holistic approach that can be taken in so the charge out rate is halved! Value for Mediation to incorporate consideration of money is often cited as one of the reasons all aspects of a family dispute, including for undertaking Mediation but others Collaborative importantly, the children, is also proving include the constructive and amicable attractive to those who wish to avoid the approach taken by the Mediator. hostility of court proceedings. Most recently the paucity of public funding for litigants, The sorts of clients who would seek introduced as a result of changes to the Mediation are those who actively pursue provision of Legal Aid in April 2013 has also a harmonious outcome; who wish to Mediation had an impact. minimise confl ict; who are prepared to see things from the other person’s point Apart from the pre-action protocol which of view; who are happy with the concepts was introduced in 2011 in which the clients of transparency and accountability and are obliged to attend a M.I.A.M., Mediation importantly who wish to put their children’s Information and Assessment Meeting, interests and needs fi rst. Negotiation to learn about Mediation before issuing a court application, Mediation is a voluntary As set out at the beginning, Mediation isn’t process. Very few Mediations break down for everyone but in my experience having – the Mediation training for family lawyers the opportunity to sit around a table and is intense and rigorous and the majority to discuss your family situation with your of cases conclude amicably. partner directly is often the best way of Consultation coming to a speedy and fair outcome. Hierarchy of dispute resolution.

13 Schroders Private Banking Dialogue – Summer 2013

Phillip Gilbert Security Manager Online Fraud: Using your Email Account to Steal your Identity

Fraud is a crime that statistics tell us is on the increase globally. No longer the high risk opportunist crime, fraud can be relatively simple to execute online. The risk of being caught is very low, the rewards are high and you do not even have to be in the same country as the victim to carry out the crime.

The internet is part of modern life: online One way fraudsters are gaining access using a website which is storing personal shopping, banking, travel booking and many to your finances is through building information, then it needs to have its own other things that we can now do from the sophisticated email chains. For example, unique password. Above all, if it does not comfort of our own home, office, or even on they might create false correspondence feel right then it probably is not right – call the move through smartphones and tablets. that authorises an online payment from the sender or run a search online to verify Protecting ourselves and our families in the your account to one of their accounts. For its authenticity. “real” world is second nature to us, but we all intents and purposes these fraudulent often fail in the virtual world. emails appear legitimate and without the Schroders takes these risks very seriously, right checks and controls they can slip both on its own and your behalf, and As we continue to combat the instances through the cracks. actively manages a secure process for of online fraud, we are seeing it develop validating transactions – particularly and become much more sophisticated. Using the same password for all of your payments to external recipients. Although Fraudsters are continually finding new accounts is like having one key that unlocks occasionally it can be a slight inconvenience ways to impersonate us, compromise every door to your life, and once one for our clients, we believe that to be infinitely our data and get access to our personal account is breached things like your social preferable to accepting the risk of fraud on and financial information. media account or even your online banking their accounts. are easy pickings. Common email accounts Something as simple as a compromised like Gmail, Yahoo and Hotmail can be easily Finally, our best weapons against email account can give a fraudster accessed with the right know-how, so it is online fraud are awareness and active everything they need. If breached, they important to stay vigilant. management. If we understand the can access your entire history – the emails mechanisms by which someone can you have sent, received and even deleted. Thankfully, there are a few easy steps we steal your identity, we will be more alert Your email account can be used to ascertain can take to protect ourselves and reduce to the risk, and better equipped to stop who you deal with and what companies the risk of fraud. While it can be tedious, it happening. you favour, even how you phrase your email using different passwords for different correspondence! Fraudsters are now using types of accounts is crucial. This doesn’t all this intelligence to copy your online profile mean every single account you have online and steal your identity. needs its own password but if you are

14 Schroders Private Banking Dialogue – Summer 2013

Alan Brown Senior Adviser Wines to Really Shout About!

Douro Valley, Portugal.

2012 En-primeur offering a damp squib! So if Bordeaux is not going to lay claim to A common question when it comes to Pity the poor negociants and wine your wine wallet this year, where else can Port is why should it always travel round merchants trying to shift 2012’s offering one go? 2011 is a wonderful year for wines the table to the left. Some believe it is a from Bordeaux. It was a very diffi cult from the Douro Valley, i.e. Port. It is one of naval tradition, while others that it keeps year with extremes of weather. Early those rare years where quality was so high your sword-hand free! One explanation is downpours brought outbreaks of mildew. and so consistent that all the major houses that vintage port can be left to breathe for August brought drought conditions and have declared it. Vintage Port only accounts a few hours but then it begins to go off. temperatures over 40 degrees, and then for some 2% of total port production. You should never leave any for the next there was more horribly wet weather during We are therefore talking about the best of day, so it’s wise to keep it moving around the harvest. It was so diffi cult that Chateau the best. Port may not be so fashionable the table. d’Yquem (which I wrote about in the last these days but that makes these wines edition of Dialogue) will not produce a 2012 extraordinarily good value. Most of the great And that’s why if the Port stops still, Sauterne. It was, by all accounts, the left houses have priced their 2011 vintage at you should ask the person holding up bank that suffered most, while Pomerol between £350 and £500 for a case of 12. the decanter “Do you know the Bishop got off more lightly. Admittedly you are going to have to sit and of Norwich?” If that doesn’t get it moving look at these for 10 to 15 years if you want again, you should say “He’s a terribly For me, this is a vintage I can pass on to drink them at their best, but after that good chap, but he always forgets to although a diffi cult vintage can still provide they should give you (or your heirs!) pleasure pass the Port!” attractive drinking if the price is sensible. for another 40 years or so. As an example, a wonderful chateau, and Cheers! an old favourite of mine, La Conseillante was And if this is making you think you might like released at £660 a case. Trouble is the 2004 a sip of Port rather sooner, you could always Conseillante is available at about the same go back in time and pick up a case from price (incidentally that’s just over double its the 2000 or 2003 vintage. There is plenty release price in 2005). The 2004 vintage is available at between £30 and £50 a bottle a known quantity and is ready to drink right and very good they are too. now, I know which I would prefer.

15 Schroders Private Banking Dialogue – Summer 2013

Private Banking News Update

Three members of the Schroders’ team have recently pushed themselves to the limit in support of charity.

The Cape Crusader Pedalling from Coast to Coast One Marathon Task Head of Charities, Giles Neville, recently Karen McGibbon, Executive Secretary, Matthew Bennison raised over £4,500 for took part in the 110km Cape Argus Cycle braved some of Northern England’s most the Snowdon Trust, a charity that helps Tour in South Africa, along with over 35,000 rugged and spectacular scenery, cycling disabled students access further and higher other cyclists from around the world. 130 miles from Workington near the Irish education. Participating in the London Sea, through the Lake District, North Marathon, with over 34,000 other runners, Giles took part in the event with his wife Pennines and finishing at Tyneside. On final Matt crossed the line in a very impressive and a team of eight others and raised an count, Karen raised over £6,500 on behalf time of 3 hours and 17 minutes. impressive total of almost £20,000 for of ChYps, which provides full hospice Zisize, which when translated from Zulu care to children and young people with means ‘help yourself’. The charity supports life-limiting and life-threatening conditions orphaned children who have been left to in their own home. run their families in Kwazulu Natal in South Africa, many of whom have been orphaned through HIV.

Giles Neville. Karen McGibbon. Matthew Bennison.

We are delighted to build on the success of recent years by winning several industry awards so far in 2013.

We have been named ‘Private Bank of Our team in the Channel Islands was also the Year – International’ at the Citywealth named ‘Offshore Investment Management Magic Circle Awards, as well as winning two Company of the Year’ at the Citywealth awards ‘UK Private Bank – Domestic Clients International Financial Centre Awards earlier Team’ and ‘Private Investment Manager’ this year. at the WealthBriefing European Awards. Kate Leppard (middle), Head of Private Clients, accepting an award.

16

UK CHANNEL ISLANDS ITALY SPAIN Schroder & Co. Limited Schroders (C.I.) Limited Schroders Schroder & Co Bank AG 100 Wood Street PO Box 334 (Italy) SIM S.p.A. Calle Pinar, 7 4th floor London EC2V 7ER Regency Court Via Della Spiga 30 28006 Madrid United Kingdom Glategny Esplanade 20121 Milan Spain Tel: +44 (0)20 7658 6000 St Peter Port Italy Tel: +34 (0)91 590 05 05 Fax: +44 (0)20 7658 3827 Guernsey GY1 3UF Tel: +39 (0)02 763 771 Fax: +34 (0)91 563 05 76 Email: [email protected] Channel Islands Fax: +39 (0)02 763 77300 Email: [email protected] www.schroders.com/privatebanking Tel: +44 (0)1481 703700 Email: [email protected] www.schroders.com/privatebanking Fax: +44 (0)1481 703600 www.schroders.it Schroders Private Banking Email: [email protected] SWITZERLAND 2nd Floor www.schroders.com/ci Schroders Private Banking Schroder & Co. Bank AG Quayside Tower Piazza della Maddalena, 6 Central 2, Postfach 1820 Broad Street Schroders (C.I.) Limited 00186 Rome CH-8021 Zurich Birmingham B1 2HF PO Box 490 Italy Switzerland United Kingdom 29 Esplanade Tel: +39 (0)6 321 8368 Tel: +41 (0)1 250 11 11 Tel: +44 (0)121 698 8549 St Helier Fax: +39 (0)6 326 5266 Fax: +41 (0)1 250 13 12 Fax: +44 (0)121 698 8600 Jersey JE4 9WB Email: [email protected] Email: [email protected] Email: [email protected] Channel Islands www.schroders.it www.schroders.ch www.schroders.com/privatebanking Tel: +44 (0)1534 756600 Fax: +44 (0)1534 756601 Schroders Schroder & Co. Banque SA CAYMAN ISLANDS Email: [email protected] (Italy) SIM S.p.A. 8, rue d’Italie Schroder Cayman Bank www.schroders.com/ci Piazzetta Bettiol 15 CH-1204 Genèva and Trust Company Limited 35137 Padua Switzerland PO Box 1040 GT GIBRALTAR Italy Tel: +41 (0)22 818 41 11 2nd Floor, Harbour Centre Schroders (C.I.) Limited Tel: +39 (0)49 876 5776 Fax: +41 (0)22 818 41 12 Grand Cayman PO Box 1239 Fax: +39 (0)49 876 5780 Email: [email protected] British West Indies 24 College Lane Gibraltar Email: [email protected] www.schroders.ch Tel: +1 (0)345 949 2849 Tel: +35 (0)200 77760 www.schroders.it Fax: +1 (0)345 949 5409 Fax: +35 (0)200 77742 SINGAPORE Email: [email protected] Email: [email protected] Schroder & Co. (Asia) Limited www.schroders.com/ky www.schroders.com/ci 11 Beach Road #06-01 Singapore 189675 GERMANY Tel: +65 (0)6507 0123 Schroders Private Banking Fax: +65 (0)6507 0122 Frankfurt Branch Email: singaporeprivateclients@ Taunustor 2 schroders.com D-60311 Frankfurt www.schroders.sg Germany Tel: +49 (0)69 975717-5 Fax: +49 (0)69 975717-300 Email: [email protected] www.schroders.com/privatebanking

100 Wood Street, London EC2V 7ER, United Kingdom Tel: +44 (0)20 7658 6000 Fax: +44 (0)20 7658 3827 Email: [email protected] www.schroders.com/privatebanking

Past performance is not a guide to future performance. You should remember that Investors may not get back the amount originally invested as the value of investments, and the income from them can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of overseas investments to rise or fall. This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Opinions stated are matters of judgment, which may change, and information herein is believed to be reliable. Schroder & Co. Limited does not warrant its completeness or accuracy. This does not exclude or restrict any duty or liability that S&Co. has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. For your security communications may be taped or monitored. Schroder & Co. Limited is authorised by the Prudential Regulatory Authority and regulated by the Financial Conduct Authority and the Prudential Regulatory Authority. Issued and approved by Schroder & Co. Limited. w43660