ISSUE 68

INVESTME NT N E W S FOR CLIENTS OF ST. JAMES’ S PLACE WEALTH MANAGE M E NT

W I NTE R 2011

HORSE SENSE JACK BERRY MBE ON KEEPING THE BIT BETWEEN HIS TEETH 02 | The Investor TheThe Investor Investor | |07 03

C ONTENTS

Welcome

Welcome to the latest edition of The Investor.

Britain has avoided a double-dip recession, at least so far, but no one believes 2011 will be an easy year. Further economic growth is likely, but it 08 12 may be lower than in 2010, as the government’s spending cuts start to take their toll. The Chancellor hopes that a recovery in private sector growth 04 It’s in the Diary... 12 The Interview will offset the fall in public expenditure. In this issue, William Kay reviews A day in the life of a fund manager Richard Saunders on leading the the spending cuts and assesses the chances of the Chancellor being right. 05 Investor News charge for fund management The outlook for 2011; banks 14 Taking Care Britain’s prosperity depends to a large extent on the continued health of 06 Analysis How to make arrangements world trade. We have recently heard much about ‘currency wars’ and the Will the private sector be the saviour for going into care damaging threat that rising protectionism could have on world trade. We of the UK economy? 15 Back to Basics examine what this means and the likelihood of any escalation. 08 My Money Volatility Jack Berry MBE on training racehorses 16 Looking Ahead Back at home, the government has now published the details of its review and raising funds for injured jockeys Why new rules are set to simplify on pensions. We report on the implications for savers, and describe the 10 Why Should I Care About… your pension planning changing landscape for annuities. ...currency wars? 17 Fund Update 11 The Issue Your guide to the performance I do hope there will be lots here to interest you. If you have any queries, Discovering new sources of income 06 of St. James’s Place funds please do not hesitate to contact your St. James’s Place Partner. i STOCKPHOTO

Sir Mark Weinberg Chairman, Investment Committee, THINKSTOCK/BOB WALKER/DAVI D HARRISON/ St. James’s Place Wealth Management THIS PAGE:

14 10 COVER IMAGE: BOB WALKER For further information on any of the articles in this issue of The Investor, please contact your St. James’s Place Partner 04 | The Investor The Investor | 05

IT’S IN THE DIARY... A TYPICAL WORKING DAY IN THE LIFE OF A ST. JAMES’S PLACE FUND MANAGER INVESTOR NEWS Dan O’Keefe t will, it seems, be a long and Artisan Partners slow recovery. Yet 2010 turned out to be a slightly better year than expected and, while economicI growth promises to be muted in 2011, opportunities Most days I am up between 5am and monetary policy is difficult to apply across countries with remain for the selective investor. 05h00 5.15am and then ride my bike to work. different fiscal policies. I do wonder about the euro’s future. Last year was not dull, though the I live in San Francisco, which is very hilly, and it’s seven miles excitement was not always entirely to the financial district. So this is a good way to get some One of our analysts and I make calls to some welcome. A hung parliament ushered in exercise and at this time of day there is very little traffic. 11h00 competitors of a company in our portfolio. the novelty of a coalition government, While the company in our portfolio appears to be losing which promised tough action on public Take a shower at the office and am at my market share, management gives a rosy view of its spending – just how tough will be revealed during 2011. economy will grow by 2% this year – higher than its earlier 06h00 desk, as usual, by 6 or soon after. I get coffee prospects. We find their arguments unsatisfactory and we Early in 2010, the unfolding Greek – soon to be European – forecast - followed by 2.4% in 2012. It acknowledges that the and breakfast and turn on the computer to review any news have been recently talking to other companies in the same sovereign debt crisis gave markets an attack of nerves. This 2012 figure is lower than you would expect in the third year on the companies in our portfolios. I’m looking for anything industry. It seems that their market share losses are combined with natural and man-made disasters such as the of a recovery, but says that the risk of a double-dip back into fundamental that might impact the value of our businesses – meaningful and I conclude that the management assessment Icelandic volcanic eruption (which hit aviation stocks) and the recession is low. earnings reports, acquisitions and any major economic news. is incorrect or over-optimistic. I decide that estimation of Gulf of Mexico oil spill (with its effect on the influential BP Schroder Investment Management is a touch more optimistic, Stock prices move around a lot, but I’m more interested in value is too high and we need to reduce our position. share price) to produce a grim first half-year for UK equities. forecasting 2011 growth of 2.3%. It points to ‘encouraging’ rises thinking about the value of the business. A lot of our They bounced back in the second in business investment and notes that firms are managing to companies have been reporting quarterly earnings recently, Quick lunch at the office, ordered in, half, however. The pace of economic raise capital and choosing to expand capacity despite lower and today it’s the turn of one of our major positions – Signet 12h30 with our analysts. It’s a fairly regular event. Great recovery was a little stronger than domestic demand and tougher lending conditions. Jewelers, the world’s largest speciality jewellery business. We talk about stocks and macroeconomic issues, debating everyone had expected, with retail What does this mean for the stock market? Many predict a Signet used to be Ratners and, though it still owns the and swapping opinions. We touch on a new addition to expectations sales holding up surprisingly well continued swing away from low-yielding bonds and back into H. Samuel and Ernest Jones chains in the UK, it is primarily a the portfolio, Heidelberg Cement. Cement and aggregates is and corporate earnings growth of the equity market. Both the world economy and financial [1] US business trading under the Kay Jewelers and Jared brands. a very nice business – no substitute, difficult to transport, so After a turbulent 2010, well over 30% . UK equities took markets remain sensitive and vulnerable to mini-crises, and The recession was tough on Signet, but it was much tougher generally a local monopoly with good pricing power and heart and, by the end of the year, market volatility may well continue. on the competition, many of which went bust. usually highly profitable. German-based Heidelberg is one what can investors expect total returns had outperformed the ‘In the short term (and we regard 12 months as short term), Signet remained profitable and took tremendous market of the largest cement and aggregates companies in the in the year ahead? MSCI World Index (excluding the prices will be driven by sentiment rather than fundamentals,’ share through the downturn. The strength of its management world, but it had a rough patch – including the suicide of its UK) by more than 7%[2]. believes Ian Lance of fund managers RWC Partners. ‘It is and business model is really shining through now, as the billionaire industrialist owner - and needed restructuring. This year has begun with a rise in VAT from 17.5% to 20%, almost impossible to forecast what events might unfold in results attest. The business is growing again and looks set We think sales and profits have bottomed out and we which will do little for consumer spending. Public sector job the next year let alone how investors will react to them. to have a good year. bought at a very attractive price. cuts will raise unemployment and it remains to be seen ‘But it is important to remember that there will be pockets whether private business can take up the slack (see Analysis, of the market that are fashionable and overvalued and other Spend some time updating our Signet model Prepare for what could be an interesting p6). But as 2011 gets under way, there are some encouraging pockets that are unfashionable and undervalued. Ignore the 07h30 with the new figures and thinking about our 13h30 meeting tomorrow. The portfolio holds signs. The amount of orders being placed by manufacturers siren calls of the market strategists to buy “equities” and use target price. We are value investors with a twist. We look for shares of Publicis, the large French advertising group. suggests that they are seeing the fastest rise in activity since the this polarisation in valuations to buy some great businesses undervalued businesses, set a target price based on what we Coming in to see us are the CEO and CFO of a major mid-1990s. Helping them along are negligible interest rates and at excellent prices.’ think they are worth, and take profits when they hit the competitor. I shall look at their strategy, performance weaker sterling, making their export prices more attractive. target. Or, if something happens to raise our value and valuation compared with Publicis, see what I can The Confederation of British Industry believes that the UK SOURCES: [1] Datastream, 25 Nov 2010 [2] Datastream, 17 Dec 2010 estimation, we raise the target. The twist is that we focus on learn to add to my understanding of the French company higher quality companies, with strong balance sheets, low – and consider the competitor as a potential investment. leverage, good management and growth potential. SECTOR SPOTLIGHT ago but they remain in debt, and there issuance of the last two years has left Hong Kong is starting its day. Set up is no guarantee that they will not suffer UK banks much stronger than they I read the papers each day – the Financial 16h00 a call with Guoco, a Hong Kong holding Banks some further erosion of their capital. were before. ‘UK banks have taken their 08h30 Times, Wall Street Journal, South China company with real estate interests in Asia. They recently Yet Barclays, Lloyds and Royal Bank of medicine early,’ notes Nick Purves of Morning Post. But everyone reads the papers and I like to hear announced a S$1.7bn residential property development Scotland are all now trading at a discount RWC Partners, adding that they now have things direct from the source if I can. With the debt crisis in Singapore. We need to learn about the economics of to book value – their shares can be bought enough capital to satisfy very onerous Heidelberg Cement is still swirling around the eurozone, I watch a video of the the development and how they will finance it. After the credit crunch became a full- for less than, technically, they are worth. regulatory requirements. ‘They have a recent addition to governor of the Central Bank of Ireland talking to chartered blown financial crisis in the autumn of That’s not good enough for some said that the end of 2009 is likely to have Artisan’s portfolio accountants in Dublin. Ireland is facing a long road to I generally leave the office by 4.30pm or 2008, many avoided bank shares like investors, who think their future remains represented the peak of their loan losses recovery, and unfortunately its problems reflect some of 16h30 5pm, so it’s back on the bike. On the return the plague. But by late 2010 they were far too uncertain. Invesco Perpetual’s Neil and, so far, that has been the case.’ among the most actively bought by Woodford has not dropped his long-held Current share prices, Purves says, do THINKSTOCK the structural problems of the euro currency – a unified journey, the traffic is somewhat more treacherous. private investors. So is it safe to get aversion to the sector, believing that banks not fully reflect the banks’ loan to book back into the UK banking sector? are nowhere near the end of ‘a long and values. ‘Once their loan losses start to “Cement is a very nice business – no substitute, difficult It’s a fact that banks remain riskier than painful journey of balance sheet repair’. moderate to more normal levels – in 2012, to transport, so generally a local monopoly with good many other stocks. Their balance sheets Others take a more positive view, perhaps, or 2013 – their returns could look stronger than they did two years pointing out that the massive equity increase substantially.’ STOCKPHOTO

pricing power and usually highly profitable” i i STOCKPHOTO 06 | The Investor The Investor | 07

ANALYSIS

To the rescue As public spending cuts and higher taxes start to bite, can UK plc bolster the economy? William Kay gives his views

ast October the Chancellor of the Exchequer, George massive £43 billion. It is a Osborne, took what many commentators saw as the tough set of measures and biggest gamble of his political career. He announced will need 500,000 fewer people to operate it. But can all those £81bn of spending cuts over four years, in an effort to people be shunted into private companies? rebalance the UK’s books after the huge borrowing In some cases the jobs, such as waste collection, will still be needed. needed to prevent economic disaster. They will simply be provided by businesses rather than directly David Blanchflower, a former member of the Bank of organised by local or central authorities. Companies such as Serco, England’s Monetary Policy Committee, called the package ‘the biggest Mitie and Capita have long kept public sector budgets in check Land riskiest macroeconomic experiment undertaken by any advanced by charging as much as 30% less for a range of services. That trend country in living memory’. will continue as the squeeze takes effect and councils try to find At the heart of Osborne’s cuts are plans to axe 500,000 public sector the money to hang on to cherished projects. jobs. By itself, that would be political suicide. But, more than that, the UK economy needs The gamble is that the UK’s faltering recovery to revive quickly enough to take up the slack. will in the meantime build up enough steam It may do this – just. While unemployment for private companies to absorb all those remains stubbornly high and retail spending jobs and more. sputters only fitfully into life, some company If the Labour party had won last year’s managements are taking advantage of low general election, they would have had to have interest rates to launch new projects. taken similar measures. But Alan Johnson, the For example, property giant British Land shadow chancellor, insisted that Osborne committed £600m to new developments in went too far, risking the dreaded ‘double dip’ 2010. ‘We’re seeing signs of stability,’ says that could plunge the country into fresh Chris Grigg, British Land’s chief executive. misery. However, Carl Emmerson, acting ‘We’re in a long-term business, but our director of the Institute for Fiscal Studies, said: customers and clients are also now prepared ‘It is quite possible that further tax rises or to make long-term decisions, and that gives deeper spending cuts might prove necessary.’ us confidence.’ The Office for National Statistics Company profitability is on the up, but subsequently announced that the UK “Some jobs, such as waste mainly because costs have had to be cut economy had grown by an encouraging 0.8% collection, will still be savagely. While the economy was at its in the three months to the end of September. rockiest, in 2008 and 2009, millions of people ‘This is the second major growth surprise in needed. They will simply put off whatever spending they could a row and suggests that the UK economy is be provided by businesses postpone so they could pay down debt. more resilient than many had feared,’ says rather than directly Once a holiday or a restaurant meal has James Knightley, economist at ING Bank. been skipped, it is gone for good. But if you Osborne has taken an axe to the benefits organised by local or have to move house, or need a new washing and pensions systems, as well as the budget of central authorities” machine, you can’t put it off for ever. That is every government department. The running how recoveries start, and the signs are that costs of health and education have been this is what is happening now. spared, but even their building programmes are being culled. Last November the independent Office for Budget Responsibility Whitehall’s budgets are shrinking by £6bn and local councils threw its weight behind Osborne’s gamble. OBR chairman Robert will collect 7.1% less from central government. Chote said he expected employment growth in the private sector to Over the next two years the current system of means-tested, more than offset the forthcoming cuts in general government working-age benefits and tax credits will gradually be replaced with employment, just as it did during the mid-1990s recession. Universal Credit, an integrated payment system designed to increase So it looks as though Osborne might pull off his gamble. But, as work incentives and make it harder to claim benefits unfairly. we have seen already, workers, pensioners and students will try to In 2013 child benefit will be withdrawn from families that have a embarrass the government through demonstrations and there may higher-rate taxpayer, but the child tax credit for poorer families will be major setbacks along the way. rise faster than inflation. The working tax credit will be frozen for three years from this April. By 2018, women’s state pension age will be 65, William Kay is a columnist for The Sunday Times, and a former City editor

REX/ i STOCKPHOTO like men’s, and both will rise to 66 in 2020. All of this will save a of both The Times and The Mail on Sunday 08 | The Investor The Investor | 09

MY MONEY

orkshire-born Jack Berry’s from many individuals including top jockeys ‘So a group of us set about collecting money working life revolved around such as Lester Piggott and Frankie Dettori. at the next race meeting at Wetherby and the horses, first as a National Hunt ‘We’ve sold more than a thousand bricks response was fantastic. That grew into the jockey and then as a successful already,’ says a delighted Jack, though there’s National Hunt Jockeys Fund, and then, since Flat trainer specialising in two- still a way to go before the estimated £5m Flat jockeys got involved – they get injured as Yyear-old sprinters. But although he retired target for the new centre is reached. well - it became the IJF as we know it today.’ from ‘the sport of kings’ ten years ago, 73- Jack knows all about the injuries that are Twenty years later the need for such facilities year-old Jack remains a man with a mission. part of a jockey’s life. ‘I began as a 15-year-old was brought home when Jack’s 19-year-old One of the founding members of the apprentice with Yorkshire trainer Charlie son, Sam, who had followed him into racing, Injured Jockeys Fund (IJF), Jack is raising Hall,’ he recalls, ‘and rode my first winner suffered a kick to the head at Sedgefield that money for a new centre in northern England when I was 17.’ After two years’ military sadly meant he ended up in a wheelchair. to provide care and rehabilitation facilities service with the Royal Horse Artillery, he As a successful trainer, Jack and the IJF were for jockeys who have suffered severe and, in returned to racing as a freelance jump jockey. able to assist Sam and build a bungalow on some cases, life-changing injuries. His vision ‘I’d ride just about anything that turned family land at Hunton, near Bedale. But Jack is to build a complex that would include up,’ he says, ‘and back then we wore cork points out that many injured jockeys don’t some housing and, more importantly, helmets and no back protectors. As a jockey have that level of family support. Hence the respite facilities for seriously injured jockeys I rode 49 winners and broke 46 bones.’ need for an Oaksey House in the North. and their families, as well as a gymnasium Jack switched to training in 1969 and As for his own family business and financial and physiotherapy services. It would be over a long career saddled no less than 1,657 planning, Jack says he left that in the capable similar to Oaksey House in Lambourn, winners. He specialised in sprinters because hands of his wife, Jo (pictured bottom left). Berkshire, (named in honour of IJF President he always liked speed and bringing on ‘I would only go into the office two or three John Oaksey), which opened in 2009. younger horses, mainly two-year-olds. times a week, so Jo signed the cheques while ‘We need one in the North,’ says Jack, ‘With a bit of love, common sense and TLC,’ I looked after the horses.’ pointing out that Lambourn is more than he says, ‘you can get the best out of them.’ His St. James’s Place Partner, John Carson, 200 miles from York, so many injured jockeys His favourite victories were when So Careful recalls how he became involved in advising and their families hesitate at such a move. won the Ayr Gold Cup in 1988 and his horses Jack and Jo on their pensions some twenty Moreover, at least as many jockeys suffer won a treble at Royal Ascot ten years later. years ago. More recently, John has helped in injuries on northern racecourses as in the But Jack was still a jump jockey when he setting up ISAs and bonds to provide an South and Midlands. So he is leading a first became involved in charitable initiatives additional tax-efficient income stream in fundraising campaign for a new complex, that evolved into the IJF. ‘It was in 1964 and retirement. ‘Together with our accountant to be built in either Malton or Middleham. my best mate Paddy Farrell had a bad fall Ian Bolland, John gave us some good, sound Jack’s approach to fundraising means in the Grand National on Border Flight. advice,’ Jack says. ‘It put us in good stead.’ leading by example – action and not just He broke his back and became a paraplegic. Even though he retired as a trainer ten words. Unless that is, the words are those of All of us other jump jockeys knew he’d never years ago, Jack remains a legendary figure on his autobiography, Better Late Than Never, walk again and would need a bungalow for the racing scene, instantly recognisable by published last year and sold direct rather than him and his young family. the red shirt he always wears – even to through bookshops ‘so that every penny of Buckingham Place when he received his MBE. the £75,000 earned went to the IJF.’ Far from being put out to grass, he still has He also launched a scheme enabling “Back then we wore cork the bit between the teeth, he says, and is Turf talk well-wishers to buy bricks, at a cost of £50, helmets and no back determined to see the planned northern Raising money for injured jockeys is a mission for inscribed with their name to decorate the wall protectors. As a jockey centre for injured jockeys through to of the gymnasium or the name of their equine completion. ‘That,’ he says, ‘will be to give legendary racehorse trainer Jack Berry MBE. He talks racing hero to adorn the footpaths. This I rode 49 winners and something back to a sport that has given me to Jonathan Gregson about his career, his finances initiative has already received great support broke 46 bones” so many great memories, a wonderful life.’ and giving something back to the sport he loves

PHOTOGRAPHY: BOB WALKER 10 | The Investor The Investor | 11

WHY SHOULD I CARE ABOUT... CURRENCY WARS? THE ISSUE

antagonism. So-called ‘QE2’ - when the Federal Reserve bought bonds in a bid to stimulate the US economy, but increased the global supply of dollars in the process – New sources of income drew widespread criticism, from Germany BY EDWARD RUSSELL WALLING and many developing countries, that the US Financial writer and editor was trying to devalue the dollar in a bid to boost exports, and that the dollar liquidity created would leak out of the US and into other economies. Though many will not be celebrating, we approach the second anniversary of 0.5% With the re-emergence of capital controls base rates, the lowest in Bank of England history. The rate was 6% when the Bank was and US politicians calling for tariffs on founded in 1694, and it peaked briefly at 17% in 1979. That will be of little comfort to Chinese goods, an inevitable comparison today’s income seekers, but they could take modest cheer from the new sources of has been drawn with the 1930s. income being uncovered in this low-yield environment. Then, governments around the world Rates came down to 0.5% in March 2009, in the wake of a banking crisis that tried to cure domestic depression with began in earnest the previous September. A flight to safety and quality has driven beggar-thy-neighbour economics – gilts yields to eye-watering lows, even below market dividend yields. Traditionally, shifting demand away from imports onto bonds have yielded more than equities because they lack the same potential domestically produced goods, through for capital growth. tariffs, quotas on imports or by competitive Putting your money on deposit at the bank has not been a convincing alternative, devaluation. because deposit rates have been correspondingly meagre. So one solution for those Few nations gained lasting advantage, needing income has been to ferret out the kind of higher-yielding bonds and equities with the effects of devaluation quickly that do not carry uncomfortable levels of risk. countered by a corresponding devaluation High-yield corporate bonds have been looking more attractive of late. These by trading partners. More dangerously, it so-called ‘sub-investment grade’ bonds carry a higher risk of default than government proved extremely damaging to global trade, or blue chip corporate bonds, and so they pay a higher coupon. Even the better which plummeted as a result. quality ones can yield as much as 7% or 8%, compared to not much more than 2% Most bankers and analysts, however, for a five-year gilt. do not believe that we are about to replay Gilts prices move inversely up and down with interest rates and inflation – as rates the 1930s. Hans Redeker, head of FX go higher, prices go lower because coupon rates are fixed. High yield bonds are much currency strategy at BNP Paribas, says less sensitive to rate movements. Instead, their prices move in line with the perceived Money on manoeuvres there is certainly ‘currency stress’ – driven risk of the issuer’s default on interest or capital repayments. The good news is that by geopolitics, high commodity prices default rates right now are very low and likely to remain so for some time. Countries are starting to use currency as a weapon Since the financial crisis, however, debtor and diverging inflation trends – but it is Many of the companies that issue these bonds are enjoying modest post-recession countries have tried to boost exports to stay not a war. growth. They have reduced their debts and got their balance sheets back into good to boost their economies. Geraldine Lambe reports out of recession, and creditor countries fear Moreover, he says the notion that cheap shape, while those who were overborrowed have already defaulted. Default rates were this will harm their own economies. Brazil’s dollars from QE2 are flooding the global over 13% a year ago, but they are now down to under 3% and Moody’s, the credit industrial output fell by 2% between March market and pushing up emerging market ratings agency, believes they will stay there for the next two years. and September last year, for example. currencies is wrong. New attention is also being paid to ‘high yield equities’. Lower growth in n a speech to his country’s industrialists of local equities and bonds. In November Until recently, the debate was dominated by For one thing, he says, the dollar is no developed economies has prompted an investment surge into faster-growing last September, Brazil’s Guido Mantega he added a 1.5% tax on trades of American US accusations that China was manipulating longer falling: it has been strengthening emerging markets. But emerging market equities don’t necessarily offer the became the first finance minister to Depositary Receipts issued by Brazilian firms. its currency through the purchase of US since its early-November lows. dividend levels and sustainability required by income investors. Hence a new focus voice what many others were thinking. The problem stems from trade imbalances. government bonds, while maintaining strong BNP Paribas’s analysis shows instead that on global businesses that are plugged into developing country growth while offering ‘We’re in the midst of an international Deficit countries such as the US and the UK capital controls that limit the purchase of people who expect the dollar’s value to fall regular, decent dividends. Icurrency war,’ he said. ‘This threatens us have spent more than a decade borrowing Chinese assets by foreigners. have sold it ‘short’ in large quantities. After the downturn, many UK and US companies cut their dividend payments. There because it takes away our competitiveness.’ heavily from the rest of the world, importing China’s foreign exchange reserves, held Ironically, that means they will have to buy has been a bounce back, but care must still be exercised. Invesco Perpetual, one of the With many developed economies more than they export. Surplus countries, largely in dollar bonds, had increased by lots of dollars to close out their contracts, leaders in equity income investing, has a number of criteria for judging if a company will struggling, Brazil’s high interest rates and such as China, have lent to other countries a record $194bn in the third quarter, to which will again put upwards pressure on maintain high payouts. One is a strong balance sheet, and enough free cash flow for the deep pool of local savings have proved a to support their exports. $2,650bn. the currency. ‘This indicates that the dollar company to reinvest in the business and keep paying dividends. Another is a powerful magnet for foreign capital. Foreign investors But Brazil’s capital barriers signal that is likely to rise further,’ Redeker says. franchise, one that is hard to erode or to duplicate. And a third is management that cares have to buy Brazil’s currency to invest in “With the re-emergence this is no longer just a US-China showdown. More fundamentally, he believes about value for shareholders, and is disciplined about deploying its capital – avoiding local assets, helping to push up the real by Recently, Japan, Thailand, Switzerland, that inflationary pressures will help to expensive acquisitions or capital expenditure, for instance. more than 36% against the dollar in the of capital controls and US Ukraine, South Korea, Poland, Indonesia close the trade imbalance that is at the Such a company could, in theory, be anywhere. But many of them are western-based first 11 months of 2010. politicians calling for tariffs and Turkey have all either undertaken root of currency woes. global companies, such as Nestlé, Philip Morris or Vodafone. They enjoy a healthy A stronger real makes Brazilian exports on Chinese goods, an currency interventions or imposed new ‘With inflation rising in Asian countries, cushion of growing earnings from emerging markets, which helps to support an more expensive. In a bid to stop this tide of capital controls. for example, exchange rates are already on equally healthy and (barring accidents) reliable stream of dividends. As with any other money flowing into the economy, Mantega inevitable comparison has America’s second round of quantitative the rise and surpluses are likely to shrink investments, you should take professional advice before making any decisions. One introduced a 6% tax on new foreign purchases been drawn with the 1930s” easing in early November only fuelled global over time.’ of Invesco’s favourite companies is Fosters, the Australian brewer. Here’s to income. 12 | The Investor The Investor | 13

THE INTERVIEW

ichard Saunders spent 17 years Saunders had a front-row seat when sterling RICHARD SAUNDERS’ CV at HM Treasury, during some was bounced out of the European Exchange of the most momentous times Rate Mechanism (ERM) in 1992. ‘It convinced 1951 Born, Gorseinon, West Wales The in UK financial history. So he me that we should never go near the euro,’ 1962-1965 Alleyne’s Grammar School, Stevenage 1965-1970 Bromsgrove County High School, understands the language he maintains. ‘After we left the ERM we had Worcestershire Rof Whitehall as well as anyone. As chief 15 years of uninterrupted growth.’ 1970-1974 Trinity College, Cambridge (mathematics) executive of the Investment Management Saunders rounded off his public service 1974 Civil Service Department, later HM Treasury mıddle 1990-1992 Press secretary to Chancellor of the Exchequer Association (IMA), it’s an invaluable skill with a couple of years at the embassy in as he argues his members’ cause to UK and Washington DC and, finally, a spell in Norman Lamont 1992-1994 Economic counsellor, British Embassy, European officialdom. charge of the Private Finance Initiative, Washington DC man The IMA represents the fund management which controversially imported private 1995-1997 Director of development and industry, both retail and institutional, and its finance into public projects. communications, United News & Media As CEO of the Investment Management 185 members manage over £3 trillion in assets. At the age of 43, he decided to ‘take control’ 1997-2001 Director, Cardew & Co That’s more than twice the UK’s annual GDP. and joined United News & Media as ‘chief bag 2001 Director general, AUTIF Association, Richard Saunders’ experience 2002 Chief executive, IMA of both the public and private sectors helps Saunders insists that its mission to carrier’ to its acquisitive CEO, Clive, later improve the industry’s regulatory and fiscal Lord, Hollick. He moved to PR agency him to represent fund managers’ interests in environment serves the interests of private Cardew & Co, where his accounts included removal of tax uncertainties that have Whitehall, he tells Edward Russell-Walling investors, by providing the scope for increased the ill-starred Equitable Life – ‘while the threatened the competitiveness of the efficiency and potential cost savings. balloon was going up’ – and the Millennium UK as a home for funds, in competition He has been running the organisation Dome. He was on site at the Dome when his with Dublin and Luxembourg. since its formation. In 2001 he became phone rang, with a headhunter asking if he Pensions has been a third major theme director general of the Association of Unit was interested in the AUTIF post. with, Saunders says, the successful Trusts and Investment Funds (AUTIF), With twin perspectives on business communication of the idea that long-term which represented the retail industry. and government, Saunders was admirably savings are about investment rather than His first big task was to oversee its merger equipped to become the voice of this heavily- insurance. ‘A-Day in 2006 was a milestone, with the institutional trade body, the Fund regulated industry. As he says, they don’t with its radical dismantling of a complex Managers’ Association. The result was the really get each other. Whitehall is interested system,’ Saunders notes. ‘We forget how IMA, created the following year. only in policy, and the private sector – ‘in complex it was. A-Day gave people far He brought with him experience from the best possible way’ – only in money. more investment choices, with access to both sides of the public-private divide, ‘Civil servants can’t understand why the whole market.’ earned in some of the headline events of business people would not want to have The IMA was an early advocate of NEST, Thatcherite and post-Big Bang finance. a Socratic dialogue about policy,’ he says. the auto-enrolment workplace pension After studying mathematics at Trinity ‘And business people complain that they scheme that comes into effect during 2012. College, Cambridge, Saunders joined the never get a straight answer from civil servants. ‘Direct contribution savings are now seen civil service, moving to the Treasury in 1978. Well, they are not in a position to deliver the very clearly as investments, which is the first He was the front-line official on the answer, nor are they able to make promises.’ step in empowering individual planning Building Societies Act of 1986, which One of the IMA’s big concerns over the for retirement.’ introduced demutualisation. Then he ran past decade has been European regulation, He sees the end of compulsory annuities as the Treasury health team that oversaw the and how to make it easier to run a pan- part of that empowerment process, allowing invention of NHS Trusts and GP fundholding. European business. Another has been the people to take control of their savings. ‘In the As private secretary to then-permanent US and Australia, people talk about what’s in secretary Sir Peter Middleton, he lived their 401K or Super pension plans. That will through the disastrous BP share issue of 1987 “Money in deposit accounts become a natural part of the conversation (‘We had some all-nighters then,’ he recalls). here, as people get more involved.’ Headier times would follow – as press gives capital certainty but Fund sales set a new record in 2009, secretary to then-Chancellor Norman Lamont, uncertainty of income” as people reacted to the financial crisis by saving more. Last year ran a close second as the search for yield continued in the face of very low interest rates. ‘One of the misunderstandings about equities is that people think they are high-risk and volatile,’ Saunders says, pointing out that interest rates are even more volatile. ‘Money in deposit accounts gives capital certainty but uncertainty of income. With shares chosen for income, the level of capital may be uncertain but, as long as you don’t want to sell, the income is steady.’

PHOTOGRAPHY: DAVID HARRISON 14 | The Investor The Investor | 15

TAKING C ARE BACK TO BASICS

Volatility Plotting your course BY WILLIAM TREVOR

It’s important to consider factors such as fees and legal ‘Markets have been volatile.’ You hear the phrase often enough. But representation before going into care, says Tony Müdd volatility is more than just barely suppressed chaos, with prices see- sawing at the slightest trigger of good or bad news. It is actually a mathematical phenomenon that can be measured. And while normal aking arrangements for moving is their only asset and who wish to stay in it – investors dislike the uncertainty volatility brings, active traders love it. into care can be unexpectedly equity release. The only solution specifically In this context, volatility describes the movement of prices – any complex, embracing as it does designed for care is the immediate needs prices. It can refer to the changing price of a particular share, such as funding, legal issues and a raft annuity. This can provide high levels of BP, or of an entire stock market such as the London Stock Exchange, M of possible welfare benefits, all of which guaranteed returns, tax free. as measured by a market index. They could be bond prices, demand specialist knowledge. And yet less The immediate needs annuity is a single commodity prices or an exchange rate between two currencies, than one in ten people actually take financial premium investment used to buy an annuity, such as the US dollar and the Swiss franc. In technical terms, volatility advice before they enter care, says Oliver which then guarantees to pay a specified level is about the extent and the speed of price changes. So if prices shift Wyman for Partnership. That is unfortunate, of care fees for the rest of the person’s lifetime. substantially and rapidly, volatility is high. Smaller price movements especially since the cost can be a significant It can be used to cover the cost of care in over longer periods of time are showing low volatility. drain not only on the individual’s resources their own home or in any registered nursing As far as investors are concerned, volatility means risk, though this but also on the family’s inheritance. or care home. is not always negative. The volatility of an individual share compared This neglect of advice is all the more The rate you get is determined for each with the market as a whole is known as its ‘beta’ coefficient. This surprising, since there are four distinct parties person individually based on medical reflects its historical returns relative to the market, where the market involved in any decision to move into care, and conditions or inability to perform certain has a beta of 1. So if a stock’s performance is absolutely correlated to it is in all their interests for advice to be given. functions of daily living. Escalation can be built the market, and does whatever the market does, it too will have a beta of 1. If the market rises or falls 20%, the stock will rise or fall 20%. The first, clearly, is the individual, who wants in at a compound rate of 1% to 8%, or based on If a stock is more volatile than the market, it is prone to to be able to choose the right home, in the right the retail prices index. Capital protection can outperformance in rising markets and undershooting in poor location and with the right level of service. be included; if not, the annuity ceases on the ones. A share with a beta of 1.5 will be expected to gain 30% They will want to make sure they have enough death of the individual and, if this happens in when the market is up by only 20%, which is no bad thing. But money to pay the fees, no matter what the the early years, the capital sum invested is lost. when the market has fallen 20%, the stock is likely to be down 30%, circumstances or how long they survive. The return to the individual is tax free, but only demonstrating the darker side of the risk/reward relationship. Higher The family will also want to ensure that the to the extent that the funds are being used beta stocks include companies whose fortunes fluctuate with fees are paid for life. If that can be achieved at to cover care costs, so the annuity should discretionary consumer spending, and banks. the same time as preserving some inheritance be limited to those costs. Certain stocks are less volatile than the market, typically in defensive for them – which, as a general rule, the There are other areas requiring specialist sectors such as utilities and food or drugs businesses. A stock with a individual going into care also wants – then knowledge, such as mental capacity and its low beta of 0.5 will rise only 10% when the market rises by 20%, but that is preferable. Likewise, the owner of the determining factors. Does the individual have should enjoy a corresponding cushion when the market is falling. care home wants to know that the fees are sufficient understanding to be able to enter There are now dedicated indices that measure overall market always going to be paid. If the resident runs out into contracts? volatility. The best known is the VIX, a volatility index managed by the of money, they either have to take the decision Familiarity with the use and limitations of Chicago Board Options Exchange. The VIX, sometimes referred to as to remove them from the home – not done Enduring Powers of Attorney and Lasting the ‘fear gauge’ by the media, actually reflects the prices being paid lightly, given the life-threatening nature of Powers of Attorney is necessary here. The role for options on shares in the S&P 500 index. such action – or to accept the local authority’s of the Court of Protection or Office of the Public There is a close connection between options pricing and volatility. contribution, likely to be well below the Guardian may become relevant if the person Options give someone the right to buy or sell at a fixed price some commercial fees they normally charge. loses capacity or has no powers of attorney. time in the future. But the option is only likely to be exercised once Finally, there is the local authority itself, Since instructions or advice may involve third the price has passed a certain high or low, thus providing its owner which doesn’t want to have to make any with a profit. Higher volatility makes it more likely that the option will contribution if it can be avoided and so would be exercised, making the option more valuable. So if the party selling much rather see the individual funding their “Less than one in ten people parties, advisers need to be aware of the is well equipped to give. The UK is faced the option expects big moves in the share price, the price of the option goes up. If that’s happening across many shares, it pushes up own care costs. requirements of the Data Protection Act. with an ageing population, rising health take financial advice before the VIX, signalling that more volatility is anticipated. Financial planning for care may appear a Then there are various welfare benefits to and welfare expenditure and an austere Those who buy and hold securities don’t like too much volatility, but simple matter of ensuring that fees can be paid they enter care, which is which the individual may be entitled. These economic outlook. Whatever solutions simply want to see steady increases in stock prices over time. Active from a set sum of money. Things are usually unfortunate since the cost range from pensions to mobility and attendance the government finally opt for, they will traders, on the other hand, and those who can sell stocks short, such as more complicated than that, but even in the allowances, nursing and carer’s allowances, include a significant element of private can be a significant drain on absolute return funds, prefer it when prices keep changing, no matter matter of funding there are different solutions heating, and housing and council tax benefits. enterprise and personal contribution. in which direction. Flat or slowly rising prices don’t give them chances available. They include unit trusts, ISAs, the individual’s resources These are all good reasons to take expert Relying on the state will, for most people, to turn quick profits. As long as they are being volatile, even if going

THINKSTOCK/iSTOCKPHOTO investment bonds and – for those whose home and the family’s inheritance” advice, something which St. James’s Place be an unattractive option. down, speculative traders can profit from the changes. 16 | The Investor

LOOKING AHEAD

A clearer view

Sorting out your pension arrangements is about to get simpler, writes Bernard Dooley

hanges to pensions don’t always Protection has certain conditions attached. provided you can satisfy a Minimum Income work to our advantage, but the No new contributions can be paid to any Requirement (MIR) test. In essence, you must latest round is welcome on at money purchase arrangement after 5 April demonstrate an ongoing guaranteed income least two counts. It has made 2012, and the benefits under a defined of at least the MIR, which has been set at retirement planning simpler, in benefits or cash balance arrangement will £20,000 a year. The MIR must consist of Ca way that has been long-promised but never be limited. Additionally, no new pension ‘relevant income’, already in payment when quite achieved. And the scrapping of the need arrangements can be set up, unless to receive Flexible Drawdown is taken, and guaranteed to purchase annuities has given people more a transfer from an existing arrangement. for life. So a temporary annuity, for example, flexibility, with more options to consider on On annuities, the government has made will not count but your State Pension will. their retirement. a radical departure from existing practice. All income from pensions will be taxed at Though the previous government moved Starting on 6 April this year, individuals are your marginal income tax rate. If you die to simplify pensions, the arrangements no longer required to buy an annuity before before crystallisation, or before age 75, the remained fairly complex. Now, from 6 April turning 75, and there will be no age limit by full fund value is available to your heirs as a Don’t let this year’s ISA 2011, the annual contributions allowance – including payments by both employee and employer – will be set at £50,000. “A pleasant surprise is that tax relief will continue to However, you will be able to carry forward be at your marginal rate, so higher rate taxpayers can opportunity pass you by unused contributions from the previous get up to 50% relief on their contributions” three years, back to 2008/2009 for the 2011/2012 tax year. That gives the potential for contributions of up to £200,000 in when they must ‘crystallise’ their pensions. lump sum, and is not normally subject to a particular year. However, tax-free cash can still be taken inheritance tax. On death after crystallisation, A pleasant surprise is that tax relief will when the benefits are crystallised. or after age 75 for uncrystallised benefits, any Higher taxes are headline news and making full use of your ISA continue to be at your marginal rate, so The Alternatively Secured Pension (ASP) fund value can be paid out as a lump sum, highest rate taxpayers can get up to 50% will cease to be available from the same date, subject to a 55% tax charge but not, generally allowance has never been more important. A St. James’s Place ISA relief on their contributions. including for those who are already in ASP, but speaking, to any inheritance tax liability. invests your money with some of the world’s top investment managers, From 2012 the Lifetime Allowance – the they will be able to move to the new rules. A dependant can continue to take an maximum fund qualifying for tax relief over So what are the alternatives to an annuity? income from the residual fund, in which giving you every opportunity to maximise the tax benefits. a person’s lifetime – will be reduced from One is drawdown, essentially the same as case the 55% tax charge won’t apply, but the £1.8m to £1.5m. But there will be protection unsecured pensions today. You can take payments will be subject to income tax at the for those whose funds are likely to be between income of 0% up to 100% (down from dependant’s marginal rate. Where there are no £1.5m and £1.8m. Called ‘fixed protection’, the current 120%) of the rate set by the living dependants, unused drawdown pension For more information on ISAs and other tax-efficient it requires registration with HM Revenue & Government Actuary’s Department. funds can be donated tax free to a charity. It all Customs before the end of the 2011/2012 tax Then there is the new concept of Flexible adds up to a substantial increase in flexibility, investments, please speak to your St. James’s Place Partner. year, although the registration forms have not Drawdown, which allows higher levels of while making advice on retirement planning

THINKSTOCK yet been issued. income, including one-off withdrawals, more important than it has ever been. Please note that the favourable tax treatment given to ISAs may not be maintained in the future as they are subject to changes in legislation. Winner

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