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. STOCKPHOTO i HARRISON/ D Sir Mark Weinberg Chairman, Investment Committee, THINKSTOCK/BOB WALKER/DAVI St. James’s Place Wealth Management THIS PAGE: BOB WALKER 14 10 COVER IMAGE: 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 Ieconomic 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 06h00 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 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.