ISSUE 96 | WINTER 2018

ONE VISION
FORMER SOLDIER DEAN STOTT
IS GEARING UP FOR
A 14,000-MILE CHALLENGE
CHAIRMAN’S LETTER

welcome

A
 
year has passed since Donald Trump became
the 45th President of the United States.
Trump’s impact on American (and global)
politics has been immediate, but how has the
US economy reacted to one of the most divisive
leaders of modern times?
We also consider the impact of populist politics that swept Trump
to power and whether we can expect to see more of the same in the
upcoming Italian elections.
At home, we look ahead at what investors should be considering
as we move towards the tax year end. Elsewhere, our cover feature
focuses on the challenge that former soldier Dean Stott has set
himself as he undertakes a 14,000-mile cycle ride to raise money
for mental health charities.
And we focus on Estonia’s transformation and look at how this
small Baltic nation has become a world leader in digital technology.
Finally, we consider the future of cash – how much longer will
‘physical money’ be used to make purchases?
I do hope the articles will be of interest to you. As always, if you
have any queries, please do not hesitate to contact your St. James’s
Place Partner.

■ D AVID LAMB
Chairman, Investment Committee, St. James’s Place Wealth Management

FOR FURTHER INFORMATION ON ANY OF THE ARTICLES IN THIS ISSUE OF THE INVESTOR, PLEASE CONTACT YOUR ST. JAMES’S PLACE PARTNER

02 | THE INVESTOR
 winter 2018 contents
04
Budget round-up
A review of Philip Hammond’s November Budget, which
06
included surprise boosts for investors in Enterprise Investment
Schemes and first-time home buyers

06
Back on track
After injury ended his army career, Dean Stott has found a new
challenge as he prepares to cycle 14,000 miles from South to North
America, supported by the St. James’s Place Charitable Foundation

10
Cash futures
As card transactions overtake those made in cash,
and contactless payments continue to grow in popularity, is
old-fashioned money on the way out?

12
All facts and statistics in this issue of The Investor are correct at the time of going to press. Cover photography by Robert Wilson. Grooming by Aga Dobosz/Carol Hayes Management

Altered states
Following an eventful first full year in office, Frederick Studemann
looks at the highs and lows of Donald Trump’s presidency so far,
and whether it can be judged a success or not

16
e-Estonia
Already one of the most digitally-progressive countries in Europe,
is Estonia moving towards an entirely digital state and, in doing so,
creating a template for other nations to follow?

18
Zeitgeist
As populist politics – from Bernie Sanders to Marine Le Pen – gathers 16 THE INVESTOR CENTRE

momentum around the world,Victor Smart looks at whether this

is the new norm, and the impact it is having on markets
26 The quarterly report

20
Get your ducks in a row
A review of market performance over the 
past three months
28 Portfolio overviews
As we approach the end of the tax year, we look at ways A report on our range of Growth and Income Portfolios
to make your money work harder by using the
34 Portfolio analysis
allowances available
All the latest fund and asset allocation data from across
our Portfolios
22
Three retirements
36 Viewpoint
Llewellyn Consulting’s Russell Jones on why central
Three clients of St. James’s Place share their personal stories bank tightening needs to be managed carefully
of retirement, discussing what life is like and how their finances 38 Insights
have fared during some choppy market conditions Why a sideways market should favour the stock-pickers,
provided they have patience

The information contained within this edition of The Investor does not constitute investment advice. It is not intended to state, indicate or imply that
current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of
any prospective fund or investment.The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected
and may fall as well as rise.You may get back less than the amount invested. Equities do not have the security of capital which is characteristic of a deposit
with a bank or building society.Where favourable tax treatments are shown, please note that these are subject to changes in legislation and dependent on
individual circumstances.Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.
FTSE International Limited (‘FTSE’) © FTSE 2018. ‘FTSE®’ is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence.
All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices
and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

THE INVESTOR | 03
 BUDGET
ROUND-UP
By Faith Glasgow
T
he biggest headline to come out
of Philip Hammond’s first autumn
Budget on 22 November was the
gloomy prognosis for the UK’s
economic growth, on the back of
Brexit uncertainty and a persistent inability to
improve productivity since the financial crisis.
GDP growth for 2017 was revised to 1.5%,
down from 2% in March, and is forecast to fall
further over the coming three years. It means the
economy will be £65 billion smaller by 2020
than was forecast in March – against a backdrop
of current strong growth globally, that is a
depressing prospect indeed.
Otherwise, the Chancellor’s focus was primarily
on the housing market and small businesses, with
little on offer for either savers or investors.
There was widespread speculation that he might
cut the £40,000 annual allowance for pension
His restraint contributions or somehow reduce the pension
was broadly contribution tax-relief limits for high earners, but
welcomed by no changes were announced to the pension system
the pensions beyond the fact that the £1 million lifetime
industry, which allowance will rise in line with CPI inflation by
has seen repeated £30,000 next tax year. That’s a tax break of £16,500
tweaking over for people with very large pensions.
the years His restraint was broadly welcomed by the
pensions industry, which has seen repeated
04 | THE INVESTOR
tweaking over recent years – though it had been
hoped that he would broaden automatic enrolment
to help the growing tranche of self-employed to
save into a pension.
Nor was there much news for ISA investors.
There will be no inflation-linked rise in the £20,000
annual allowance for the coming tax year, although
the Junior ISA limit will rise in line with the
Consumer Price Index to £4,260.
Although Hammond made no mention of it in his
speech, the small print confirms that the £5,000
dividend allowance will be cut to £2,000 with
effect from April 2018, having been announced in
March but then shelved after the general election.
Meanwhile, the Capital Gains Tax exemption
allowance rises from £11,300 to £11,700,
enabling a married couple (who can transfer the
ownership of assets freely between them) to
realise £23,400 of tax-free gains in 2018/19. That
increase in scope to realise gains tax-efficiently,
alongside the slashing of tax-free dividends, flags
up the importance of considering the security and
shelter that ISAs or pensions offer for most equity-
based income investments.
The Income Tax personal allowance rises from
£11,500 to £11,850 and the higher rate threshold
Getty Images
will increase from £45,000 to £46,350, easing the
pressure for taxpayers around the threshold margins.

There’s rather more interesting news for wealthy
investors. It had been anticipated that the
Chancellor might boost his coffers by attacking
the generous 30% tax relief available on
investments into Venture Capital Trusts (VCTs)
and Enterprise Investment Schemes (EISs). Instead,
he threw a surprise sop to those investors as part
of a wider focus on boosting investment in small,
high-growth companies.
Thus, he outlined various measures to support
research and development and technological
innovation, including an unexpected doubling of
the EIS investment limits for ‘knowledge-
intensive’ companies. In effect, the amount
investors can put into such businesses goes up
from £1 million to £2 million, provided any
amount over £1 million is invested in knowledge-
intensive companies. A £2 million investment
would receive 30% tax relief of £600,000.
At the same time he stressed that the investment
focus of these schemes needs to be on the high-risk,
potentially high-return end of the small business
spectrum for which they were originally designed,
pledging to ensure ‘that EIS is not used as a shelter
for low-risk capital preservation schemes’.
In a similar vein, measures were announced to
limit the drift towards a relatively more risk-
averse approach by some VCTs and halt their use
AUTUMN BUDGET 2017
The Chancellor
threw a surprise
sop to wealthy
investors, as part
of a wider focus
on boosting
investment
in small
high-growth
companies
as ‘tax-motivated investments’, whereby the tax
relief provided in practice generates most of the
return and investors’ capital is less at risk (it needs
to be remembered that VCTs and EISs are only
suitable for experienced, sophisticated or high net
worth investors who accept that they may get back
significantly less than the original investment).
The rabbit in the Chancellor’s hat, pulled out
with a flourish at the end, was a Stamp Duty break
designed to help people onto the property ladder.
The new rules mean that first-time buyers no
longer pay Stamp Duty on properties priced
below £300,000. On properties costing between
£300,000 and £500,000, 5% Stamp Duty is
now levied on the amount in excess of £300,000.
For example, £10,000 is payable on a £500,000
property; previously, it would have been £15,000.
The government alleges that this now helps
95% of first-time buyers, with 80% paying no
Stamp Duty at all. The measure means that first
time buyers can use more of their savings towards
a deposit, which for many is the real stumbling
block. However, a subsequent report from the
Office for Budget Responsibility said that, based
on previous Stamp Duty ‘holidays’, property
prices are likely to rise as a result of the cut.
Faith Glasgow is Editor of Money Observer
THE INVESTOR | 05
IN YOUR INTEREST
 CHARITY

BACK Dean Stott felt cast adrift

when he was invalided out
of the special forces. Now,

ON
though, he is riding across
continents for mental health
campaign HeadsTogether

TRACK By Victor Smart

T he story behind Dean Stott’s

Pan-American Highway
Cycling Challenge goes
back to a fateful parachute
jump, seven years ago. His Special Boat
Services (SBS) squadron was making
a training jump before a tour of duty
in Afghanistan. In a high-altitude,
high-opening manoeuvre designed to
‘insert’ soldiers into hostile territory,
Dean’s team had to open their chutes
immediately before making a
30-minute controlled descent,
navigating nearly 30 miles sideways to
land in the target zone.
For a special forces regular like Dean,
the manoeuvre should have been
routine. But as he jumped from the
plane his leg caught in the rigging line,
damaging his muscles and hamstrings
beyond repair. It was a life-changing
event: Dean was told he would never
be able to run again and was invalided
out of the service. From being at the
pinnacle of his career and among the
‘best of the best’, he found himself
stuck at home in Aberdeen with little to
keep him occupied.
This was when his entrepreneurial
wife Alana stepped in to change things.
Photography by Robert Wilson

She registered a new company from her

mobile and with that Dean became a
self-employed consultant in the world
of private security and close protection.
And he found he was good at it – he

THE INVESTOR | 07
single-handedly evacuated the entire
diplomatic staff of the Canadian
embassy in Libya.Yet beneath the
surface there were troubling signs.
When his father died, Dean showed
little emotion and returned to work the
day after the funeral. A baby arrived,
yet he toured the world and spent less
than one month a year at home with his
new family.
‘Looking back, I hadn’t adjusted to
civilian life,’ says Dean. I was still
looking for the adrenalin rush that
I had had in the military. There, I was
supported by friends. Now I was
taking similar risks, even though I was
on my own.’
He had come to live by the special
forces ethos of an ‘unrelenting pursuit
for excellence’. He and his wife agreed
that what he needed was a challenge.
Not just any challenge, but an
extraordinary physical feat that
matched the relentless demands of the
SBS – but without the risks that might
rob the family, by then with a second designated campaign, kicking off with a
child on the way, of their dad. promotional video shot with the prince at
Running, of course, was out – but Kensington Palace. Dean was irreversibly
Dean could learn to ride a bike. set on an initiative to raise awareness
Choosing a route was a decision that for mental health and £1 million for the PRUDHOE BAY
made itself once he heard about the campaign’s charity partners.
Pan-American Highway, the longest Dean hasn’t suffered post-traumatic
‘motorable’ route in the world. Dean stress himself, but he has seen plenty
would devote two years of his life in of colleagues who have. And his own
preparation for a 14,000-mile ride behaviour after quitting the special forces
northwards from Ushuaia in Argentina clearly showed he was perilously out of
to Prudhoe Bay, Alaska. touch with his feelings. ‘I was in pain
Guinness World Records agreed to every day,’ he says. ‘When you go from
let Dean challenge the record, which being at the top of your physical fitness
stood at 125 days. He phoned former to being unable to perform the most
comrade in arms Prince Harry, whom basic of tasks your mental health takes
he had met while serving in the army, a real hit.You lose your identity and you
for advice. The young royal had yet take it out on the people closest to you.
to launch the mental health campaign ‘But from the outset I was
Heads Together with the Duke and determined that this would not just
Duchess of Cambridge, but their plans be a “forces thing”. Mental health
were crystallising. issues exist everywhere, not only as
Harry was willing to lend his name to post-traumatic stress among soldiers USHUAIA
the Pan-American Highway Cycling but as post-natal depression among
Challenge with Heads Together as Dean’s mums,’ he says.

08 | THE INVESTOR

From the outset, the Stotts
appreciated the need for robust project
planning. Dean would spend a year
on achieving hyper-fitness, while
Alana became campaign director. They
would need a support team and a
strategy, plus marketing materials,
logistics and finance.
The money aspect was solved by a
chance encounter at a lunchtime talk
Dean gave in Aberdeen. Representatives
from St. James’s Place were there and
they put Dean in contact with the
St. James’s Place Charitable Foundation.
The charitable arm of St. James’s
Place was rebranded in 2017 to better
reflect its role as a grant-making
charity. Most of the funds raised are
from donations or fundraising from the
St. James’s Place community of clients,
Partners and employees, to which the
company matches every pound raised.
Since its formation in 1992, the
Failure is one
of those options
that I don’t ever
think about
Charitable Foundation has raised more
than £65 million, supporting hundreds
of charities.
The Charitable Foundation is
committed to supporting mental health
causes, alongside the three existing
areas of support for disadvantaged
children and young people, combating
cancer and the Hospice Movement.
‘The challenge that Dean is set to
take on is a once in a lifetime moment
that will propel the mental health
conversation,’ says Mark Longbottom,
Head of the St. James’s Place Charitable
Foundation. ‘The Charitable
Foundation is all about supporting
initiatives that are making a positive
and lasting difference to people and
those around them.
‘We hope that supporting Dean will
help to continue the conversation and
awareness among others, including
other businesses across the UK.’
CHARITY
The St. James’s Place
Charitable Foundation is
committed to supporting
mental health causes
Dean’s challenge will begin on
24 February 2018, when he will mount
the saddle and begin the four-month
trek northwards. Ahead of that he
will spend six weeks in an oxygen tent
to increase his red blood cell count.
Diving and parachuting in the military
has prepared his body for high-altitude
exertion – necessary for this as at some
points in Colombia the Pan-American
Highway rises to 2,500m (8,000ft)
above sea level. But Dean’s stocky
physique, honed by special forces’
activities, is ill adapted to cycling while
the muscles of the leg he injured had
suffered wastage. To offset this, he has
already undergone gruelling sessions
in an altitude chamber to improve his
muscle tone and endurance.
Supporting Dean on this journey
will be a team of 12 – seven on the
ground, three production and two back
in the UK. A soft-tissue therapist will
tackle saddle sores but, as Dean admits,
it is the mental challenge that will
prove the toughest to conquer.
Not everything can be planned for.
Since Guinness World Records first
accredited him, another eight days have
been shaved off the Pan-American
Highway record, meaning that Dean
must now pedal it in less than 117 days
to earn the laurels of victory.
True to the spirit of the unrelenting
pursuit for excellence, Dean is
undaunted. He comments, resolutely:
‘To be honest, failure is just one
of those options that I don’t ever
think about.’
THE INVESTOR | 09
 CASH FUTURES
Does the rise in contactless payments spell the end
for coins and notes? Governments are keen but
consumers may not be ready In 2016, the
average card
spend in
By Rebecca Jones the UK was

£18.42

T
he year 2016 marked items quickly and easily. Gone are the
a watershed for the UK days when one had to adopt a pained
when the proportion expression and apologise for paying
of transactions paid for for a £2 latte using a debit card rather
using plastic overtook than cash. This is supported by BRC
In 2016, UK
debit, credit
cash payments for the figures, which show that as the volume
or charge cards
first time. According to the British of card payments increases, the average
accounted for

54%
Retail Consortium (BRC), debit, value of transactions falls. In 2016,
credit and charge cards accounted for the average card spend was £18.42,
Getty Images. Sources: 1,2,4, brc.org.uk, January 2017; 3 wikipedia.org, September 2007, June 2016; 5 creditcards.com, June 2016; 6 accaglobal.com,

54% of all transactions compared down from £18.63 a year earlier; of all
with 42% for cash. This represents while the average value of cash transactions
a 4.5% year-on-year increase for our transactions is rising. in the UK
flexible friends and a 5% decline for Does this mean cash is dead? The
banknotes and coins. 1 long-term trend seems to suggest as
The BRC attributed much of this much. Since the introduction of the
growth in card use to increased Barclaycard, the UK’s first credit card,
investment among UK retailers in in 19665, the use of debit and credit
payment technology – particularly cards has gone in only one direction.
contactless. This type of payment now Yet, while it has taken some 50 years 68%
accounts for a third of all card for cards to gain the upper hand
transactions in the UK2 – an astonishing over cash, many believe that further
Proportion of
July 2017; 7 truepublica.org.uk, August 2017; 8 blog.euromonitor.com, February 2017

statistic when you consider growth in non-cash payments

UK retailers
that contactless payment was won’t be as sluggish.
Governments in 2016
only introduced in the UK in Dom Giuliano, Deputy
across the globe that accept
2007 and only widely
3 Chief Investment Officer
have all but contactless
adopted in the past few years. at Magellan Financial payments
Ease of payment explains its declared war Group (which manages
popularity: the proportion of on cash as a the St. James’s Place
retailers that now accept way to end International Growth fund),
contactless has grown tax evasion believes that growth in card
significantly over the past payments is set to explode.
year – from 47% in 2015 to 68% in According to Giuliano card payments
2016, and the BRC forecast further throughout the world are growing fast.
investment in the area4. ‘Right now, card payments are growing
Contactless arguably provides the in significant multiples of GDP. In
missing link in the card payment story, Europe it’s around 10% – which is
as it enables payment of lower-value ahead of the US. But in Central Europe,

10 | THE INVESTOR
CASH AND DIGITAL PAYMENTS

the Middle East and Africa it’s 20%,’ he

says. At these rates, it can’t be long
before we see an end to cash altogether.
And this, Giuliano observes, would be
music to the ears of many. ‘Throughout
the world, public policy is fuelling
growth in card payments – a cashless
world means fewer people can evade
taxes or spend illicitly,’ he declares.
This is the second factor fuelling the
demise of cash – and perhaps the one
that could hammer the final nail in the
coffin for cash. Governments across
the globe have all but declared war on
cash as a way to end tax evasion. The
most radical action so far has been
taken by India, where in November
2016 Prime Minister Narendra Modi
banned the country’s highest
denomination notes overnight in an
attempt to eradicate the so-called
‘shadow economy’, which accounted for
just over 17% of Indian GDP in 2016.6
Meanwhile, in Australia, the one and
two cent coins are no more; while in
the UK it was recently revealed that
former Chancellor George Osborne
had planned to end all cash transactions
by 20207 in a bid to boost productivity
and cut tax evasion.
In all cases, however, governments
have been met with opposition. In
India, the mass upheaval caused by the
so-called ‘demonetisation initiative’ has
done little to curb the use of cash, with
reports suggesting 97% of the country’s
transactions are still cash-based.8 And
even in countries such as the UK,
where it is more usual for people to
have both a bank account and a debit
card, governments have found that
low denomination coins, laden as they
are with symbolism (especially for
the older generation), are hard to
actually withdraw from circulation. So
cash will inevitably survive a while
longer until all consumers find card
payments have become so easy that
there is no benefit to using coins and
notes any more.

THE INVESTOR | 11
IN YOUR INTEREST

ALTERED
STATES
 T
US PRESIDENCY
A ‘self-inflicted wound’ is how

a Washington think tank has described

he first year of the Trump presidency

has certainly been eventful. A regular
stream of presidential announcements
Donald Trump’s first year of presidency. – many delivered by Twitter, often in
the wee hours – was the steady backbeat
of 2017. From a drastic strengthening
of immigration controls and loosening
of environmental protection laws at
home to tough talk overseas, the 45th
US President has used his first year in
office to make clear that, under his
leadership, America does not intend
‘business as usual’.
But from the markets’ standpoint, Ambitious border fortifications are
to be built, smokestack industries
revived and foreign miscreants cowed
as the US firmly puts its interests first.
The response from most quarters
around the world has been one of
despair and bewilderment, as many fear
that they are witnessing the unravelling
of the post-1945 world order which
things have never looked better saw the spread of democracy, opening
of economies and underpinning of
trade by a US security guarantee.
For all Trump’s rhetoric, actual
achievements were slow to
materialise. One clear win was at the
Federal Reserve, where the President
was able to exercise his executive
powers, refusing to reappoint Janet
Illustration by Andrew Wells

Yellen as Chair of the US central

By Frederick Studemann bank, opting instead for Jay Powell,
a well-respected Republican. But
hopes of repealing Obamacare –
the signature legislative act of his

THE INVESTOR | 13

A less welcome
development
for many
ordinary working
Americans has
been a slowing in
wage growth
predecessor – have been stymied by
lawmakers in Congress.
Executive orders to impose travel
bans on individuals from a select group
of nations initially ran into resistance in
the courts, until the Supreme Court in
December allowed it to take effect
pending appeal. And it took a similar
time for Trump’s tax-cutting changes
to the US tax code to gain a fair wind
from the Senate.
The overall reception from media
pundits and political analysts to the first
year of the Trump administration has
often been withering, with many
highlighting the divisive ‘anger’ and
‘disruption’ that has exacerbated
divisions in an already polarised society.
The White House is dogged by
allegations of inappropriate relations
between Trump’s campaign and Russian
entities, an often chaotic approach
to personnel management against
a backdrop of warring factions, and
a governing bureaucracy unable to
function properly due to a failure to
staff necessary positions in the State
Department and elsewhere.
‘By and large, the first year of his
presidency has been nothing but one
14 | THE INVESTOR
big self-inflicted wound,’ says Elaine
Kamarck of the Center for Effective
Public Management at the Brookings
Institution, a prestigious liberal
Washington think tank.
Even conservatives were inclined to
give the President a poor report card.
‘The general pattern is a productive
first year and then a steady decline
toward exhaustion, incompetence, and
scandal,’ Yuval Levin, the Editor of
National Affairs, a leading conservative
policy journal, told Politico. ‘Trump’s
first year has felt like the eighth year
of recent presidents, but the beginning
was likely worse than the end.’
Trump’s approval rating among
voters as a whole – around 39% at the
time of the anniversary of his election
win1 – has reached a record low.
And yet perhaps this is only one
side of the story. The President did
start to make headway with his policies
later in the year and the political
turbulence was accompanied by
improving economic performance
and rising stock markets.
Business leaders and investors were
quick to greet Trump’s surprise
election victory with a sense of
optimism about pro-growth policies,
such as a promised splurge on
infrastructure spending, and
Getty Images. Sources: 1 projects.fivethirtyeight.com, November 2017; 2 tradingeconomics.com, November 2017; 3 peoplespunditdaily.com, November 2017;
a business-friendly stance on
regulations and tax. The US
unemployment rate edged down to
4.1% in October – that is a fall of
0.7 percentage points since January.2
And economic confidence indicators
have risen: the Institute for Supply
Management manufacturing index
remained at elevated levels in October
as 16 out of 18 industries reported
continued growth and was described
as ‘extraordinarily strong’.3
In the cheerleading words of one
opinion writer, Jonathon Trugman of
the NewYork Post: ‘While Trump is
probably the most politically incorrect
president we have ever had, he’s
brutally honest. He promised to bring
4 cbsnews.com, October 2017; 5 reuters.com, August 2017
economic growth, and that’s exactly
what we have.’
The 30th anniversary of the ‘Black
Monday’ stock-market crash of 19
October 1987 saw the Dow Jones
Industrial Average touch a record
23,157.4 One person was clear about
why this was so. ‘Highest stock market
in history,’ proclaimed the President,
adding: ‘The reason the stock market
is so successful is because of me.’

Making America First:
Economic confidence
in manufacturing is at
its highest in a decade
Others offer a more nuanced view.
An improving international outlook,
rather than an unleashing of animal
spirits by the White House, has been
positive for US growth. ‘Of all the
ways you can slice and dice the
market, foreign exposure was the
best-performing attribute,’ Jill Carey
Hall, US equities strategist at Merrill
Lynch, told CNBC. Other analysts also
note that the President inherited an
economy that was gaining momentum.
Trading high:
The Dow Jones
reached a record
23,1574 on the
30th anniversary
of the ‘Black
Monday’ crash
Not everything has gone according
to expectations. In the immediate
aftermath of the presidential election,
investors expected the dollar to
strengthen markedly, with some
analysts forecasting parity with the
euro by the end of 2017. Such
bullishness, however, waned as it
became clear that realising some of the
campaign promises will actually take
time and may not happen at all.
Similarly, those who expected the
political turbulence to be matched by
market volatility have, so far, been
proved wrong.
One less welcome economic
development for many ordinary
working Americans, including
a fair share of Trump voters, has
been the slowing in wage growth,
despite a tightening labour market.5
Divining the causes of this has been
one of the great debating points
among policymakers and analysts.
Some have wondered whether a
fundamental structural shift has
occurred, driven perhaps by the
development of technology, which is
rendering many of the textbook
assumptions obsolete.
US PRESIDENCY
That said, a benign economic
outlook sets the stage nicely for the
President and the Republicans for
2018. Midterm elections towards the
end of the year will be the first major
national test for the President,
indicating whether his brand of
populist politics that so rocked the
system in 2016 has staying power.
Elections in Virginia and New Jersey
in November 2017 saw victories for
the opposition Democrats, bolstering
a party that has been floundering
in its attempts to mount a credible
response to Trump. But whether
these are evidence of a trend that
could see the Democrats regain seats
in the Republican-controlled Senate
and House of Representatives is
The year since Trump’s
election saw markets
experience their calmest
period in more than
half a century
anything but clear. The opposition has
fallen short in other local votes
across the country. Trump’s overall
approval ratings may be woeful, but
support among his base remains
strong. For all the horrified reactions
of the liberal elites to his style of
politics, it manifestly resonates with
a significant number of voters.
As George Shultz – Republican
grandee, Trump critic, former Secretary
of State and Treasury Secretary – puts
it: ‘Trump has figured out how to
communicate with people in an
unusual way and knows how to use it.’
Frederick Studemann is Comment and
Analysis Editor at the Financial Times
THE INVESTOR | 15
E-ESTONIA
Young and independent, the former Soviet
republic is looking to the future and driving its
citizens towards an all-digital state

By Victor Smart

16 | THE INVESTOR

N
owhere in the world has the state
gone digital further and faster than
Visit Estonia. Sources: 1 wired.co.uk/magazine, July 2015; 2 csmonitor.com, July 2003; 3 e-resident.gov.ee, December 2014; 4 medium.com, September 2017; 5 medium.com, August 2017; 6 wikipedia.org, September 2017; 7 eu2017.ee, September 2017;
in Estonia.1 The small Baltic
country, the first to declare
internet access to be a human
right and to hold a nationwide election online,2 has
all but banished paperwork from citizens’ dealings
with government. And it is forging ahead with
a clutch of bold new digital initiatives. One is to
8 doingbusiness.org, September 2017; 9 eu2017.ee, September 2017; 10 valitsus.ee, October 2017; 11 eu2017.ee, September 2017; 12 instituteforgovernment.org.uk, September 2017; 13 medium.com, September 2017
offer ‘e-Residency’, which allows individuals
anywhere in the world to create virtual companies
in Estonia without setting foot in the
country,3 while another is to lay down
the rules on deployment of artificial
intelligence within the EU.4 There was
even talk of creating a blockchain
currency, the estcoin, to rival the
cryptocurrency bitcoin.5
Behind Estonia’s daring bound forward
is its recent history. It emerged from
rule by the Soviet Union in 1991 as an
independent but tiny state, short of
natural resources and with a population
of just over a million.6 It had no desire to
retain anything in terms of bureaucratic
machinery from the Soviet era: its
youthful government ministers junked
the old system and started afresh.
Each child becomes a digital citizen at
birth, being given a digital ID by the
doctor – parents add the baby’s actual
name later.7 Adult Estonians have been
issued with identity cards that include
microchips containing personal
information, allowing access to government and
commercial services; and they have the right to
know precisely what information is held on them,
who has seen it and when. There is a common
digital infrastructure used by both government and
commerce. And the country has poured money into
education and digital skills: Estonian engineers
devised Skype (now owned by Microsoft). The
seemingly old-fashioned capital Tallinn is abuzz
with start-ups – Estonia is proud that it is high in
the world rankings for ease of doing business.8
Critical to the uptake of these digital solutions
is the fact that services are optimised for online
engagement. It is no good taking a paper-based
approach and simply uploading it. Estonia’s
government services are designed to be online.
DIGITAL STATE
In 2017, during the rotating presidency of the
Council of the European Union, Estonia had the
chance to extol the virtues of e-government to the
EU’s 28 leaders. At a summit in Tallinn last September,
they heard that more digital initiatives could increase
The seemingly the bloc’s GDP by €2.5 trillion by 2025.9
old-fashioned Among the agenda items for Estonia are: creating
capital, Tallinn, a single EU market in data; pushing ahead with 5G
is abuzz with mobile phone networks it sees as crucial for the
start-ups introduction of driverless cars; and sweeping aside
outdated tax rules which fail to cater for millennial
workers, who are both footloose and
digitally savvy.10 Estonia’s President,
Kersti Kaljulaid, explained the scale of
action needed to cope with the new
landscape of work, citizenship and tax
and gave other EU leaders a flavour of
the government’s immense openness to
a ‘portable state’. ‘We collect tax from
corporates globally, but soon our citizens
will be global too.The tax flow from
the old industries will end and we will have
to be like bees flying from flower to
flower to gather taxes from people
working in France in the morning,
Britain in the evening – or spending
one half of the year in Estonia and the
other in Australia.’11
Government delegations from around
the world now trek to Tallinn. But few
larger states are rushing to follow the
Estonian model. The UK got its fingers
burnt by its ambitious identity cards
scheme, initiated by the Blair
Government-issued
e-Residency smart ID government and then scrapped in 2010.
cards allow citizens Meanwhile, observers see Brexit as an opportunity
to sign documents
digitally, access
for the UK to start afresh, especially on regulations.
government services But the abrupt nature of the separation will
and set up companies probably preclude this, according to the London-
in Estonia from
anywhere in the world
based Institute for Government.12 Ultimately, it
seems the UK hasn’t made the shift to drafting
policies that can only be delivered digitally.
Estonia, however, is confident of its way ahead.
Marten Kaevats, National Digital Advisor, says: ‘We
see Estonia as a pathfinder, constantly moving in
uncharted territories. The practical experience and
knowhow from these experiments will be our
contribution to the global discussion, so that
governments with a far bigger headcount can avoid
strategic mistakes.’13
THE INVESTOR | 17
 ZEITGEIST
Populist policies are winning
hearts and minds on both sides
of the Atlantic. How might this
impact the markets?
By Victor Smart
H
as the surge in
populist politics,
from Bernie
Sanders on the left
to Marine Le Pen
on the right,
established it as the new norm – and will
it deliver fresh shocks to investors?
In a bid to answer this question,
experts are focusing on the likely impact
of the upcoming general election in Italy,
which is likely to be held between March
and May this year.
One well-informed observer is Megan
Greene,1 Chief Economist at Manulife.
She describes one possible scenario:
the populist Five Star Movement forms
18 | THE INVESTOR
a coalition government, then holds a
referendum on Italy’s euro membership
– and Italians vote to leave the eurozone.
Such a step would deliver a jolt across
Europe every bit as seismic as the Brexit
referendum result and pose an
existential crisis to the eurozone.
Greene points out that Italy is the only
country where support for the EU has
fallen since the Brexit vote – and Five
Star has been ahead in opinion polls for
about 18 months. The Italian populist
party has been hostile to the euro,
although it has softened its line of late.
However, in Greene’s view, rather
than winning a mandate and forcing a
referendum, there is a higher probability
that the election will result in a weak
governing coalition with the centre-left
Democratic Party. That would spell
political gridlock in Rome but would
not convulse the investment markets.
Meanwhile, the success of Silvio
Berlusconi’s Forza Italia party in
November’s Sicilian regional election has
further increased the range of national
coalitions being talked of as feasible.
Since the Brexit referendum, gauging
voter sentiment has proved tricky. With
the presidential victory of the ardently
pro-EU Emmanuel Macron in France,
the traditional centre parties seemed to
have snatched back the momentum. But
the poor performance of Angela Merkel’s

The fortunes of populists
wax and wane with
the economic cycle,
with downturns fuelling
their successes
Sounding fanfares for the
common man: Bernie Sanders;
(below, left to right) Jean-Luc
Mélenchon; a supporter of
Beppe Grillo
Christian Democrats in September,
followed by right-wing successes in
Austria and the Czech Republic, has
confounded those who felt populism
had run its course.
The fortunes of populists often wax
and wane with the economic cycle,
where downturns may fuel their
successes. One view is that what is new
this time is that the rich economies are
stuck in a period of slow economic
growth. Central banks have pumped
debt and liquidity into the economy,
preventing a slump and pushing up asset
prices. But their actions have distorted
the traditional business cycle and
extended its length – coupled with a glut
of cheap labour globally, this has meant
years of sluggish wage growth for
millions of voters.
Some mainstream politicians have
been quick to accommodate populist
sentiment. But it is important not to
oversimplify the many cross-currents. As
well as the rise of the populist right,
there has been the unexpected resurgence
of the populist left in the guise of Jeremy
Corbyn in the UK, Bernie Sanders in the
US and Jean-Luc Mélenchon in France.
An increase in separatist movements,
such as that in Catalonia, is perhaps also
a symptom of this disquiet.
Indeed, populist demands are typically
for the return of sovereignty, restrictions
POPULISM
on immigration and free trade, and
more state intervention in industry. And
populist politicians typically press for
increased investment in infrastructure
and spending on defence, higher budget
deficits and, often, capital controls; in
short, a reversal of globalisation, which
is seen as benefiting multinational
corporations at the expense of the
average citizen.
Getty Images. Sources: 1,6 Interview with the writer, The Investor – Autumn 2017; 2 businessinsider.com, June 2016; 3 jhinvestmentsblog.com, May 2017; 4 londonstockexchange.com, November 2017; 5 bing.com, June 2017
So what does all this mean to the
markets? To the extent that global
investors tend to fear fragmentation and
higher inflation, populism and the
instability it heralds translates into bad
news for them.
The immediate consequences of the
Brexit vote were a sharp fall in the pound
and the decision of ratings agencies such
as Standard & Poor’s to cut the UK’s
credit rating.2 Similarly, Greene describes
an Italian exit from the eurozone as ‘very
bad’ economically; whereas a hung
parliament would be ‘moderately bad’.3
Populist successes, however, aren’t
necessarily disastrous in all respects;
as President Trump has not been
slow to point out, US equity markets
have been booming under his presidency
despite his ‘America First’ message.
In the UK, the sharp post-Brexit fall
in the pound has made international
stocks in the FTSE 100 look cheap and
driven the index higher. Significantly,
even the more broadly based FTSE 250,
supposedly more vulnerable to a lack
of confidence in the home market,
has prospered.4
Sectors deemed especially sensitive to
Brexit, such as UK housebuilding,
tumbled after the referendum.Yet
several of the worst performers at the
time, such as the Berkeley Group, were
significantly higher a year after the poll
than before Britons voted.5
Some asset managers hope to
maximise returns by spotting flaws in
other investors’ strategies in order to
profit from big shocks such as Brexit.6
But as Greene counsels: ‘It is hard to
have a trade or hedging strategy around
populism that will work generally.’
THE INVESTOR | 19
IN YOUR INTEREST

GET YOUR
DUCKS IN A ROW
Make your money work even harder by
making sure you use all the allowances
available to you before the end of the tax year

By Faith Glasgow

O
ver the
past
couple
of years,
investors
have had
to digest
some
mixed news. Despite the second-longest
bull market in history, the OECD
predicts a slowdown in the UK
economy.1 Brexit uncertainties and
geopolitical tensions persist, and inflation
is outstripping the rise in earnings.2
This makes it doubly important at
this time of the financial year to see
how you could best use the various tax
Getty Images. Sources: 1 oecd.org, Nov 2017; 2 bbc.co.uk, May 2017; 3 savingschampion.co.uk, December 2017; 4 Moneyfacts.co.uk, November 2017; 5 gov.uk, August 2017
reliefs and allowances available.
Despite November 2017’s 0.25%
base rate rise, Cash ISA rates
remain derisory, trailing far behind
inflation; even the best account
pays only 1.3% (as at the start of
December 2017).3 As Phil Woodcock
of St. James’s Place says: ‘ISAs are
about long-term tax benefits, so it
makes no sense to waste your tax
allowance on an asset that currently
generates a negative real return.’
There is still a place for an
emergency cash fund, but the Personal
Savings Allowance enables basic rate
and higher rate taxpayers to earn
interest of up to £1,000 and £500
respectively, free of tax. The current
average easy access account pays
0.39%,4 which means a basic-rate
taxpayer could hold around £256,000
and still receive all interest tax-free.
For a higher-rate taxpayer, the figure is
around £128,000.
Your ISA allowance – £20,000
across all ISA types in the 2017/18
tax year, and unchanged for 2018/19
– should therefore be considered for
longer term investment needs and
invested in assets that have the scope
to maximise the tax breaks provided.
The £5,000 Dividend Allowance
introduced in April 2016 will be cut to
£2,000 from April 2018, underlining
the importance of holding most income-
paying assets in an ISA or pension.
Children have their own Junior ISA
allowance, amounting to £4,128 this
tax year (£4,260 in 2018/19). Once
opened by a parent, others can
contribute; it will grow free from
further tax liability until the child
reaches 18 and then roll over into
a standard ISA. It’s a great way to give
younger family members a head start.
Pension contributions, which receive
tax relief at your highest marginal rate
(assuming that anything over the basic
rate of tax is reclaimed via your tax
return), are the most tax-efficient way
to save for retirement. You can
normally pay in up to £40,000, but
there are restrictions for top earners
(tapered annual allowance). These
payments include contributions from
your employer, each tax year; if you use
all of the current year’s allowance, you
can then make use of unused allowances
from the previous three years.
Even people with no earnings –
children, or non-working spouses, for
example – have a tax-free pension
allowance; a maximum £2,880 put
into a pension in their name each year
is topped up to £3,600 through basic
rate tax relief.
HMRC took a record £4.8 billion in
Inheritance Tax (IHT) receipts last tax
year on the back of years of rising
house prices,5 highlighting the
continuing need for IHT planning.
Even people with no
earnings – children,
or non-working spouses
– have a tax-free
pension allowance
FINANCIAL YEAR END
Spouses can use both
partners’ allowances
and take profits of up to
£22,600 tax-free
‘Although the introduction of
the Residence Nil Rate Band in
April 2017 means home-owning
couples are able to pass on up to
£850,000 free of tax to lineal
descendants, rising to £900,000 from
April 2018, many people could still
leave a potential IHT bill for their
families, and should therefore consider
whether they can afford to use their
various gift allowances each year to
reduce their estate,’ says Woodcock.
These include an annual exemption
of £3,000 per person. Since unused
allowance from the previous tax year
can also be used, a couple could make
gifts of up to £12,000 in one year.
Regular gifts out of income are also
permitted, as are any number of small
gifts up to £250, provided you don’t
give recipients exempted gifts in the
same tax year. You can also make
wedding gifts of up to £5,000
(depending on the donor’s relationship
to the happy couple).
Capital gains are taxed at 10% for
basic rate and 20% for higher rate
taxpayers. But everyone has a Capital
Gains Tax (CGT) allowance, currently
£11,300 (£11,700 in 2018/19), so limit
the gains you realise each year to below
that threshold and you need never pay
CGT. Spouses can freely transfer
ownership of assets between them. This
means that by transferring assets before
selling them, they can use both partners’
allowances and take profits of up to
£22,600 entirely tax-free this year.
Faith Glasgow is Editor of Money Observer
THE INVESTOR | 21
THREE Three clients of St. James’s Place discuss
their differing experiences of retirement

RETIREMENTS
NIGEL JONES
Retired in 2009,
aged 57

I had a rude awakening when my

retirement preceded a worldwide financial
crash but the markets recovered well, as my
St. James’s Place Partner said they would

I hadn’t really thought about retirement but

grasped an opportunity to leave three years
earlier than planned. In fact, retirement has
been wonderful – touch wood, to date my
health has been good; so I am able to pursue
hobbies like sailing, golf and cycling.
I share a catamaran with friends which we have
sailed across the Bay of Biscay and on to Mallorca
where she is berthed. And I also write novels,
including The Lake, published on Amazon under the
name NG Jones. That fills wet and damp winter
days while sitting by the fire.
In all honesty, I hadn’t really thought about
retirement. I did sit down with my wife and discuss
how my time would be filled, but it was soon
apparent that it would not be a problem.
Finances are fine. Under the arrangements I have
chosen, when my wife and I die, my pension pot can
be passed on to my son, minus any taxes. I cashed in
the percentage of the pot that was allowed tax-free.
Most of that was used to buy investment bonds
in my wife’s name. The rest went straight into my
St. James’s Place pension fund.
Still, I had a rude awakening when my
retirement preceded a worldwide financial crash
by a few months! That said, seven years on
and the markets have recovered well, as my
St. James’s Place Partner said they would.
Buoyed by the mantra ‘You are investing for the
long term’, my present pension fund is as good
as, if not better than, it would have been in
my company scheme. And the flexibility of how
I can utilise my fund is far greater, not only
for inheritance reasons but on a monthly and
annual basis.
Part of the tax-free money went to buy a boat
and a small holiday home on the Isle of Wight.
And like so many other people with kids struggling
to buy their first homes, I am helping my son and
his family buy an apartment.

22 | THE INVESTOR

PETER RAE
Retired in 2010,
aged 57
With our children, we are now
playing the ‘Bank of Mum and
Dad’ game and helping them to
get on to the property ladder as
tax-efficiently as possible
F or 33 years, I was a pilot for
a major airline. They offered
us senior captains an attractive
retirement package but gave
us only 10 days to consider the offer.
I rejected it as I felt I was not ready to
retire. Given time to think it all over, I
regretted that decision – and when they
offered the same package six months
later, I was at the front of the queue! In
fact I spent the last two years flying part
time, which prepared me for retirement.
Financially we are OK, and with
the support and guidance from our
St. James’s Place Partner, we certainly
feel like we have control of our finances.
I took the tax-free sum allowed from
my pension pot. Some was used to buy
bonds and the balance of the pot went
straight into my St. James’s Place pension
fund. At the time I chose to drip-feed the
money in, as the stock market was
recovering from a turbulent period. As
my St. James’s Place Partner predicted,
CASE HISTORIES
it proved to be a good time to invest.
It was one of the biggest financial
decisions of my life. But the options
were well explained to us and we have
been mostly happy with the outcome so
far. Initially, we checked how the fund
was performing on a weekly basis. Now
I check it about twice a year.
Our St. James’s Place Partner keeps
us updated on our financial affairs. And
our annual meeting with selected fund
managers goes a long way to reassure us
that our investments are in safe hands.
With our children, we are now playing
the ‘Bank of Mum and Dad’ game and
helping them to get on to the property
ladder. Our Partner advised us on setting
up a deed of variation on a recently
acquired inheritance, which will benefit
them in the future. Our eldest daughter
lives in New South Wales and I think
they will be seriously house-hunting in
2018 and we will be making trips to
Australia to join in the fun!
THE INVESTOR | 23
CASE HISTORIES

JOHN MARTIN
Retired in 2004,
aged 58

We live in the real world and have to

remember that, when you are older, you
have less time to undo any disastrous
decisions you have taken. So, for me,
it is important to keep to professional
advisers you are sure you can trust

W hile I cannot claim

to be a financial
whizz kid, I do have
a pretty good grasp
of financial affairs and have always
tried to be financially cautious – not
always successfully.
If you have had a busy and responsible
job, it’s a bit of a relief to hand over the
work problems to someone else. Still,
you do miss your former colleagues,
and for me it was important to keep in
touch with friends and contacts gained
over a lifetime.
I have been very lucky financially. My
financial retirement plan was to try to
live on my company pension, augmented
by some private investments, until such
time as I needed to dip into my pension
pot, which is invested with St. James’s
Place. I have not had to face too many
difficult financial choices. But about 18
months after my retirement, my wife
was diagnosed with a brain tumour at
the age of 56. Although it was initially
not aggressive, she deteriorated and
spent the last four years being cared for at
home until she died just over a year ago.
The difficult choices I have had to
make relate to caring issues and taking
on a live-in carer. As many people are
aware, caring is a very expensive issue.
I am sure that seeking professional
advice was the right course of action for
me. Apart from not having a great deal
of time when I was working, I thought
it was a good idea for my pension pot
to be managed at arm’s length and
independently from me. I do like to run
my own share portfolio, which isn’t
large, but when it comes to my pension
pot then I think objectivity is important.
We live in the real world and have to
remember that when you are older you
have less time to undo any disastrous
decisions you have taken. So, for me,
it is important to keep to professional
advisers you are sure you can trust.

24 | THE INVESTOR
 THE INVESTOR CENTRE

WELCOME
TO THE
INVESTOR
CENTRE
T
he final quarter of 2017
delivered more growth across
global markets and, as our
Chief Investment Officer Chris Ralph
discusses in his quarterly update,
brought an end to what had been a
profitable year for many investors.
2017 was also notable for a change
in monetary policy in the UK as the
Bank of England followed the US
Federal Reserve by raising interest
rates. In our ‘Viewpoint’ article,
Llewellyn Consulting’s Russell Jones
explains why he believes any further
central bank tightening will need to be
managed carefully.
Finally, our ‘Insights’ article explains
why stock-pickers should benefit from
a sideways market.
IN THIS SECTION

26 The quarterly report

28 Portfolio overviews
34 Portfolio analysis
36 Viewpoint
Russell Jones
Llewellyn Consulting
38 Insights

Fund manager quarterly commentaries are now

available in the ‘Insights’ section of your Partner’s
website or at www.sjpinsights.co.uk

The Investor is a publication distributed on a global basis

to St. James’s Place clients. Certain funds referred to in ‘The
Investor Centre’ section may not be available for public sale in all
jurisdictions in which St. James’s Place operates. The discussion of
these funds is for information purposes only and is not intended
Getty Images

as an invitation or offer to invest in any of the funds. You should

contact your St. James’s Place Partner for further information on
the funds available for public sale in your jurisdiction.

THE INVESTOR | 25
THE INVESTOR CENTRE

The quarterly report

End of Q4 2017

Eurofirst 300
rose by
7%
Chris Ralph
Japanese
Chief Investment Officer, St. James’s Place
Nikkei 225

On all cylinders
rose by
12%
Stocks surged in the fourth quarter, concluding a strong year
for growth and markets alike, reports CIO Chris Ralph

L
ast year the S&P 500, for the first
time in its history, rose in every
month of the year, a symptom of both
investor confidence and the absence
of major shocks.The fourth quarter
made an outsized contribution to performance in
what was already a strong year.The world’s leading
index, the S&P 500, rose by 19.4% over the
12-month period. Early in the year, the Dow Jones
Industrial Average broke through 20,000 for the
first time, only to then break through 25,000 in the
first week of 2018.1
Corporate earnings made a strong showing in the
US, not least among technology companies, while
President Trump’s end-of-year success in securing
his tax cuts plan further contributed to optimism in
the markets. December also saw the US Federal
Reserve raise rates for the third time in 2017,
indicating its own confidence in the trajectory of US
growth – official figures released in the fourth
quarter showed annualised GDP growth at 3.2%.
Yet if the US led the way, it was far from alone.
The MSCI World index rose by more than 20%
in 2017 and, by the fourth quarter, all major
economies were growing at a healthy pace.2 The
eurozone recovery was particularly noticeable,
and was aided by the election of centrist leaders
in the Netherlands, France and Germany.The
election of Emmanuel Macron in France was
warmly welcomed by markets, as were his moves
to reduce the wealth tax and change labour
bargaining rules. Despite a more muted fourth
quarter, the Eurofirst 300 rose by 7% in 2017.
After months of reversals, Prime Minister
Theresa May achieved her aim of winning EU
approval to move UK exit negotiations to phase

26 | THE INVESTOR
 THE QUARTERLY REPORT

two, albeit having acceded to EU demands over
negotiation sequencing, the exit bill and Northern
Ireland.The approval followed a fraught year in
which she triggered Article 50; lost her majority in
a snap general election; delivered a well-received
keynote speech on Brexit in Florence; delivered
a disastrous speech at the Party conference; lost two
cabinet ministers in the space of eight days, and lost
her first parliamentary vote. She also presided over
indicators that saw UK growth fall mid-year to the
lowest of any EU28 or G7 country.
By the late autumn, however, growth
projections had improved, and the final quarter
marked the 20th consecutive quarter of UK
growth.The FTSE 100 rose by 7.6% over the year,
posting more than half of the increase in the final
quarter of the year.3 Perhaps the most notable shift
in the UK economy came in the form of inflation,
Technology stocks were notable outperformers
through the year. In the US, the technology majors
far outperformed the market, buoyed by both
earnings and sentiment.Their impact on broader
indices is significant – the five largest listed stocks
in the world are all technology stocks.They were
outdone, however, by China’s top three internet
stocks. Last year the ‘BATs’ (Baidu, Alibaba and
Tencent) rose by more than 80%.
In recent years, global growth has often been
patchy and corporate earnings fitful, but growth in
2017 was notably broad-based, while corporate
earnings improved materially. Investors can never
afford to let optimism compromise their approach,
but they do at least start 2018 with the best
economic backdrop seen for several years.
1 ©S&P Dow Jones LLC 20[16]. All rights reserved. 2 MSCI. MSCI makes no express

which tracked upwards over the course of the year, The fourth or implied warranties or representations and shall have no liability whatsoever
with respect to any MSCI data contained herein. The MSCI data may not be further
and in December struck 3.1%, breaching its target quarter made redistributed or used as a basis for other indices or any securities or financial products.
band.Yet wage growth failed to follow suit and an outsized This report is not approved, endorsed, reviewed or produced by MSCI. None of the

savings rates fell to a 50-year low. contribution to MSCI data is intended to constitute investment advice or a recommendation to make
(or refrain from making) any kind of investment decision and may not be relied on as
Sluggish wage growth figures marred the Autumn performance such. 3 FTSE International Limited (‘FTSE’) © FTSE 2016. ‘FTSE®’ is a trademark of the
Budget.The Office for Budget Responsibility in what was London Stock Exchange Group companies and is used by FTSE International Limited

downgraded its growth projections on the basis that already a under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its

the UK would complete two decades without wage strong year licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions
in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of
growth.The revised growth figures implied there FTSE data is permitted without FTSE’s express written consent.
would still be a sizeable budget deficit in 2022 and
that UK debt wouldn’t fall to pre-crisis levels until
the 2060s.The Chancellor of the Exchequer adopted
a relatively light touch, raising two of the Income Tax
thresholds, targeting housebuilding, and leaving
pensions largely alone.
Growth in Asia and emerging markets played a
major part in the improving global outlook. China
and India both continued to grow at a reasonable
pace, and Hong Kong’s Hang Seng index (which
includes many mainland Chinese companies) rose
Illustration: Masao Yamazaki. Photo: Getty Images

by 36% over the year. Japan’s growth rate increased

significantly during 2017. Shinzo Abe won a
‘supermajority’ in elections in Japan, adding
momentum to his push for corporate reforms and
to rising stock prices.The Nikkei 225 rose by
almost 12% in the final quarter of the year, and by
more than 19% over 2017 as a whole.
Despite the rate at which stock indices
progressed, differentiation was significant.

THE INVESTOR | 27
THE INVESTOR CENTRE
THE PORTFOLIO REVIEW
Portfolio overviews
Winter 2018
Growth
Portfolios
DEFENSIVE
O
ver the final quarter of
2017, the Defensive
Portfolio posted healthy
returns.
Stock markets performed strongly
over the course of 2017 while volatility
struck new lows.The VIX, used as an
indicator of volatility on the S&P 500,
has a long-term average of 20.0, but in
2017 the average daily close was 11.1
– the lowest of any recorded year (since
VIX’s founding in 1986) by more than
1.5 points. Improvements in global
growth and corporate earnings played
their part in holding down volatility, as
did a series of European electoral wins
for centrist candidates. Low volatility
provided a tailwind for the Schroders-
run mandate within the Multi Asset
fund, enabling it to participate in the
broader stock market rally.
Both commodities and corporate
bonds picked up in value in the fourth
quarter.The price of a barrel of Brent
28 | THE INVESTOR
crude rose from just above $55 to above
$66 across the three months.
Commodity price momentum benefited
the Alternative Assets fund over the
period, compensating for a more
lacklustre year over the previous three
quarters.The fund also has significant
holdings in corporate bonds in both the
US and emerging markets, which acted
as a further boost to performance.
Although it slipped marginally against
the euro, the value of sterling rose
versus the dollar over the course of the
year. Gilt yields, however, remained
stubbornly low through 2017 in
contrast to the US and Germany, where
yields rose as rising confidence led
investors to seek out riskier assets. A
combination of political uncertainty and
unspectacular growth in the UK held
investors back from exiting the safe
haven asset of government bonds.The
Gilts fund, which invests largely in
shorter-dated government bonds,
ended the year essentially flat, as
It was a good year
for emerging market
equities, as improving
growth and corporate
earnings buoyed
confidence
short-term yields (which move
inversely to prices) remained subdued,
reflecting expectations that interest
rates are unlikely to increase rapidly in
the near term.
The Diversified Bond fund ended a
strong year more quietly.The fund’s
European credit mandate, which is run
by TwentyFour Asset Management,
performed especially strongly. Bond
prices rose over the course of the year,
aided by supportive central bank
policies – the rally was only arrested in
the final two months of the year. In
October, the European Central Bank
announced it was tapering its monthly
asset purchases by €30 billion, but also
extending its programme to at least
September 2018.
CONSERVATIVE
T
he Conservative Portfolio
posted a positive return
across the quarter.
It was an exceptional
year for global equities, led by the
S&P 500 in the US, which rose some
20% over the course of 2017. It was
also a good year for emerging market
equities, as improving growth and
corporate earnings buoyed confidence
in markets. The Global Equity fund was
a major contributor to performance
over the course of the year, and

especially in the fourth quarter. The
equally weighted core of the fund,
which is managed by BlackRock,
benefited from its exposure to
emerging markets.
The International Equity fund was
also a strong performer, improving on
its 2016 performance thanks to the
changing fortunes of IT stocks. In the
US, internet majors far outperformed
the broader market, aided by several
quarters of strong corporate earnings.
Magellan, which manages the fund,
holds around 25% exposure to some
of the biggest IT names, such as Apple,
and Alphabet, the parent company
of Google. The fund also benefited
from holdings in payment providers
MasterCard, PayPal and Visa, although
it sold PayPal in the final quarter due
to the company’s high valuation. The
fund posted its strongest quarterly
performance for the year between
October and December.
It was also a good final quarter for
the Multi Asset fund. Payden & Rygel,
co-manager on the fund, invests
thematically across a global universe
of government and corporate bonds,
and benefited particularly from its
high exposure to US mortgage-backed
securities.
In the UK, politics remained
significant on markets, as Prime
Minister Theresa May lost her
Commons majority but succeeded
in winning EU approval to move to
phase two of EU exit negotiations.
Meanwhile, economic indicators
delivered underwhelming news until
late in the year. Demand for fixed
income assets remained relatively
constant through the year, only slipping
slightly late in the year as economic
confidence rose. Although the Bank
of England raised rates in November,
it was not expected to mark the
beginning of a rapid hiking cycle.
BALANCED
A
cross the fourth quarter
and the year as a whole,
the Balanced Portfolio
performed strongly.
In the immediate aftermath of the
UK’s EU membership referendum,
the domestic commercial property
market suffered a significant dip in
investor confidence. It has been quick to
recover since, however, and commercial
property yields tightened materially
in 2017.The Property fund, which is
managed by Orchard Street, enjoyed
both reasonable income returns and
a rise in capital values over the course
of 2017.The fourth quarter was
particularly strong for the fund.
The Portfolio benefited from strong
fixed income performance across the
year.The high-yield market, in particular,
benefited from improved corporate
PORTFOLIO OVERVIEWS
In the US, internet majors
far outperformed the
broader market, aided
by several quarters
of strong corporate
earnings
earnings and rising business confidence
in the US. In a low-income world, many
fixed income investors will move further
up the risk spectrum in their hunt for
yield. Although it was essentially flat
over the final quarter, the International
Corporate Bond, which is managed
by Capital Four and Oaktree, made a
significant contribution to performance
across the year.The Alternative Assets
fund, which performed especially well
in the final quarter, likewise benefited
from the credit rally – its investments
in index-linked gilts contributed
meaningfully to returns.
It was a strong year for equities on
both sides of the Pacific, as the S&P 500
rose by close to 20% and the MSCI
Emerging Markets index surged more
than 30%. Stocks listed in China, South
Korea and Taiwan account for more
than half of the MSCI Emerging
Markets index, and all three economies
enjoyed strong growth rates in 2017.
THE INVESTOR | 29
THE INVESTOR CENTRE
THE PORTFOLIO REVIEW
Portfolio overviews
Winter 2018
The Emerging Markets Equity and
Global Equity funds performed strongly
in the final quarter.The former benefited
from exposure to consumer staples and
increasing exposure to China.Wasatch
Advisors, which manages the fund,
added both Tencent, the Chinese
technology major, and Alibaba to their
holdings in 2017. Among other
tailwinds, the Global Equity fund was
aided by the IT exposure held by Sands
Capital, one of the satellite managers for
the fund. Internet and technology stocks
enjoyed an exceptionally strong year in
both the US and China, as corporate
earnings reached new highs and
confidence rallied. Sands Capital
benefited from holdings in Alphabet,
Baidu, Facebook, Netflix and Amazon.
The Worldwide Opportunities fund
also contributed to Portfolio performance,
in part for similar reasons.Tencent and
Nintendo, the Japanese gaming giant,
were significant contributors.
Internet and
technology stocks
enjoyed an
exceptionally strong
year in both the US
and China
30 | THE INVESTOR
MANAGED FUNDS
T
he Managed Funds Portfolio
delivered a positive return
over the quarter.
Stocks in the US enjoyed
an exceptionally strong year, as the
S&P 500 rose by 19%, but performance
in parts of the emerging world was
better still. Hong Kong’s Hang Seng
index, which hosts a number of listings
of large mainland Chinese companies,
rose by more than 35% in 2017.
BlackRock, core manager on the
Global Equity fund, benefited from
the significant emerging market
exposure within its equally weighted
mandate. Sands Capital, a satellite
manager on the fund, also benefited
from emerging markets exposure,
notably in India. Maruti Suzuki, an
automobile manufacturer;Titan, a
luxury goods company; and Eicher
Motors, a motorbike manufacturer, all
provided major contributions to fund
performance over the course of the year.
The International Equity fund also
posted high returns across 2017,
reflecting its heavy overweight in IT
stocks and to consumer discretionary
stocks. Magellan, which manages the
fund, benefited from holdings in Lowe’s,
a US home improvement and appliance
chain, and Amazon, the e-retailer.
Returns were more subdued in
2017 for the Managed Growth fund,
which is managed by Schroders, but
still made a positive contribution
to Portfolio performance.The fund
reduced its allocation to equities and
cash in favour of high-yield credit. It
benefited from an underweight to the
materials sector and, specifically, its
holding in SCA, a Swedish timber, pulp
and paper manufacturer; while holdings
in Centrica, Pearson and Debenhams
detracted over the quarter.
Despite the significant rise in the
oil price over the course of the year,
energy stocks struggled – the S&P 500
Energy index finished 2017 marginally
down. The Strategic Managed fund,
which is managed by Threadneedle,
benefited from its low exposure to
energy and materials stocks, but
returns were held in check by lack of
exposure to IT stocks.
Gains in emerging markets were
not restricted to equities – bonds
also performed well. BlueBay, which
co-manages the Strategic Income fund,
saw its credit holdings benefit from
the broader rise in credit prices, the
growing normalisation of the
US Federal Reserve interest-rate
policy, sustained global growth and
rising inflation expectations.

ADVENTUROUS
T
he Adventurous Portfolio
delivered a positive return
over the quarter.
Over the course of
2017, global economic growth became
increasingly coordinated. In the third
quarter, the growth rate in the eurozone
was above that of the US and UK, which
had been unthinkable through most of
the recovery after the global financial
crisis, although initial signals suggested
it slipped slightly in the fourth quarter.
The Greater European fund
performed strongly over the course
of the year. S.W. Mitchell Capital,
co-manager of the fund, achieved
strong growth over 2017, largely
due to positive stock selection in
the consumer discretionary and IT
sectors. Among the best performers
were STMicroelectronics, a French
semiconductor manufacturer – and
Volkswagen, whose stock price rose
significantly during the second half of
the year as the market fallout from the
emissions scandal began to clear.
As equity markets gained
momentum, investors looked
beyond the largest global names,
offering increasing support to smaller
companies.The Global Smaller
Companies fund, which is managed
by Paradice Investment Management,
recorded a strong final quarter, thanks
As equity markets gained
momentum, investors looked
beyond global names
in part to exposure to the industrial
sector. Disappointing revenues
weighed on the price of Astronics, a
US aerospace electronics company,
over the summer; but the stock surged
thereafter, rising around 40% in the
fourth quarter.
In the US, indices were supported
by strong performance in the financial
sector. President Trump’s success in
winning passage of his tax-cuts bill
through Congress also precipitated
a last surge on markets in the final
trading days of the year. The North
American fund delivered healthy
returns in the final three months of
the year, playing a significant part in
the Portfolio’s performance. Home-
builder Lennar saw a high number of
new orders mid-year after hurricanes
struck Texas, Florida, Georgia and
South Carolina – the four states
account for 40% of the company’s
annual home-building revenues.
The FTSE 100 delivered much lower
returns than the S&P 500 through the
last three months of the year, and this
was partly reflected in the more muted
returns posted by the UK & General
Progressive fund. Although the fund
still posted a positive return, it was
held back by allocations to Merlin,
Auto Trader and two UK energy
companies, Centrica and SSE.These last
two suffered price falls following the
government’s October announcement
of a price cap on energy bills.
PORTFOLIO OVERVIEWS
Income
Portfolios
IMMEDIATE INCOME
T
he Immediate Income
Portfolio achieved positive
growth across the year,
rising in every quarter.
The Strategic Income fund was a
major contributor to Portfolio growth,
and returns were driven in part by
the fund’s high exposure to emerging
market debt. BlueBay, which manages
the emerging market debt element of
the fund, benefited from this trend over
the course of the year. In part, these
price rises were the result of declining
concerns over the impact of US Federal
Reserve rate hikes on emerging market
fixed income markets. Broad-based
growth across emerging markets was
also a significant contributing factor.
As ever, one of the key metrics was
corporate default rates and, on this
score, the environment was much
improved. ‘In the final quarter, it
was positive to see the [corporate]
deleveraging theme continue to play
THE INVESTOR | 31
THE INVESTOR CENTRE
THE PORTFOLIO REVIEW
Portfolio overviews
Winter 2018
out, and hence we witnessed a big
year-on-year decline in default rates,’
said Polina Kurdyavko of BlueBay Asset
Management. ‘The emerging market
high-yield default rate ended the year at
2%, which was significantly lower than
the 2016 rate of 5.1% and lower than
market expectations.’
The Corporate Bond and Diversified
Bond funds also benefited from rising
prices in fixed income markets in the
final quarter.The Corporate Bond
fund’s allocation to high-yield bonds
provided further positive momentum,
while subdued long-term inflation
expectations served to reassure
investors about potential downside for
fixed interest assets.
Yet it was equities that stole the
show in the last three months of the
year, bolstered in part by the improved
economic outlook, not least in the US
and Japan.The Global Equity Income
and Worldwide Income funds both
profited from these trends, as well as
from positive stock selection. Manulife,
manager of the Global Equity Income
fund, benefited from an underweight
position in the utilities sector and
from holding financial names, such as
Wells Fargo.
‘We benefited from credit selection
in retail, such as food and drugs,’ said
Sheldon Stone of Oaktree Capital,
which manages the US element of the
International Corporate Bond fund.
‘However, we suffered due to our
32 | THE INVESTOR
avoidance of the strongly performing
home-builder sector. Looking ahead,
the potential for higher interest rates,
and President’s Trump’s policies, could
create volatility; but growth and stable
credit fundamentals are positives.’
BALANCED INCOME
S
upported by its exposure to
equity markets, the Balanced
Income Portfolio performed
well in the fourth quarter.
The MSCI World Index rose by
more than 20% over the course of
2017, reflecting a significant
improvement in global growth rates and
corporate earnings.The FTSE 100 rose
by a more subdued 7.6%, although it
posted most of its returns in the final
quarter. A combination of global
tailwinds and good stock selection
ensured a good end to the year for the
UK & International Income fund,
which is managed by Artemis.The
manager added positions in Anglo
American, a mining major, and Vivendi,
the French media conglomerate, in the
final quarter.
The Global Equity Income fund,
which is managed by Manulife, delivered
healthy returns over the quarter. New
names added over the period included
Airbus, Direct Line and Michelin.
Nevertheless, the manager expressed
caution about the outlook.‘Our analysis
shows that leverage levels have risen,
even as profit margins appear to be
near peak levels,’ said Paul Boyne, who
manages the fund.‘The biggest risks we
see result from high global valuations and
high debt levels.We view US financials
and sustainable quality franchises within
the consumer staples sector positively.’
The Strategic Income fund was a
major contributor to performance over
the year as a whole. Schroders, which
manages the high-dividend equity
portion of the fund, benefited from its
quality bias, outperforming the wider
market. But, gains were held in check
by a lack of exposure to the IT sector.
Rising global confidence was reflected
in fixed interest markets, as bond
investors pushed out beyond investment
grade bonds and into the high-yield
segment of the market. Figures released
by Bank of America Merrill Lynch show
that the US high-yield market returned
0.41% over the final quarter of the
year, although performance varied
significantly between sectors.
The Diversified Bond fund performed
strongly in the final quarter. Brigade,
which manages the US high-yield
segment of the fund, benefited from its
position in New Albertson’s, a grocery
and drug stores company. Comments
made by President Donald Trump about
wiping out Puerto Rico’s debt weighed
on the manager’s holdings of Puerto
Rico General Obligation bonds.

DEFERRED INCOME
T
he Deferred Income
Portfolio benefited from
exposure to equities, and
posted a positive return
over the quarter.
After a mixed year, the FTSE 100
gained more than 4% in the final
quarter, spurred on by improving
growth figures, as well as by political
developments.The UK & International
Income fund was a major contributor
to the Portfolio’s performance. ‘Part of
the equity rise in the final quarter was
down to progress in Brexit and chimed
with our view that it would only take a
little good news to help the UK market
out of its relative malaise,’ said Adrian
Frost of Artemis. ‘Predicting sunnier
times for Brexit and politics would take
courage; nevertheless, it wouldn’t take
much for UK equities to extend the
outperformance seen in December.’
One of the turnaround stories of the
year was the UK High Income fund,
which made a significant contribution
to returns in the final three months
of the year, following a tough third
quarter.The fund was hit earlier in
the year due to stock-specific issues,
but benefited late in the year from its
overweight to real estate. British Land
Company, one of the UK’s biggest
property developers, is a significant
holding within the fund, and rose more
PORTFOLIO OVERVIEWS
December. ‘We initiated several new
positions in November,’ said Jim Wiant
Global tailwinds and
of MidOcean. ‘One of the names
was Envision, a leading provider of
good stock selection outsourced physician staffing and an
ensured a good end operator of ambulatory [outpatient]
surgery centres.The bonds have traded
to the year for the up since we bought them.’
UK & International
Income fund The price of funds and the income from
them may go down as well as up. You
may get back less than the amount
than 10% over the period, buoyed by a invested.
positive property leasing report.
The Worldwide Income fund likewise Portfolio fund allocations are not
rebounded from a weak third quarter, rebalanced automatically. The overviews
in which it had been hit by overweight provided are based on the fund
exposure to consumer staples (notably managers currently in the relevant
tobacco), to finish the year well. In Portfolios. Client Portfolios may have
part, this was due to a turnaround different fund allocations and, therefore,
for the consumer staples sector, but some of the fund managers referred to
performance was also helped by its may not apply to their holdings.
holding in 20th Century Fox, Microsoft
and Nike.
It was a good period for high-yield
bonds as investors sought out new
opportunities and were willing to take
on risk.The Strategic Income fund
made a significant contribution to
returns. MidOcean, which runs the US
high-yield bond segment of the fund,
benefited from the broader market
rally that accompanied passage of the
tax-reform bill through Congress
and the Federal Reserve decision
to raise interest rates by 0.25% in
THE INVESTOR | 33
THE INVESTOR CENTRE

Unit Trust Portfolios

Asset allocation as at 31 December 2017

DEFENSIVE PORTFOLIO BALANCED PORTFOLIO

Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 33.0% ALTERNATIVES 6.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 1.9% EQUITIES 12.0%
BONDS 48.7% BONDS 28.1%
CASH 1.2% CASH 5.6%
EUROPEAN EUROPEAN
EQUITIES 2.6% EQUITIES 5.6%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 9.8% EQUITIES 19.6%
OTHER EQUITIES 1.1% OTHER EQUITIES 2.6%
PROPERTY 0.8% PROPERTY 9.1%
UK EQUITIES 0.9% UK EQUITIES 11.2%

FUND ALLOCATION FUND ALLOCATION

1 MULTI ASSET 40.0% 1 ALTERNATIVE ASSETS 10.0%
2 UK ABSOLUTE RETURN 15.0% 2 GLOBAL EQUITY 10.0%
3 ALTERNATIVE ASSETS 10.0% 3 INTERNATIONAL CORPORATE BOND 10.0%
4 DIVERSIFIED BOND 10.0% 4 INTERNATIONAL EQUITY 10.0%
5 GILTS 10.0% 5 INVESTMENT GRADE CORPORATE BOND 10.0%
6 INVESTMENT GRADE CORPORATE BOND 10.0% 6 MULTI ASSET 10.0%
7 WORLDWIDE OPPORTUNITIES 5.0% 7 PROPERTY 10.0%
8 UK & GENERAL PROGRESSIVE 10.0%
9 WORLDWIDE OPPORTUNITIES 10.0%
10 EMERGING MARKETS EQUITY 5.0%
11 ASIA PACIFIC 5.0%

CONSERVATIVE PORTFOLIO MANAGED FUNDS PORTFOLIO

Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 18.0% ALTERNATIVES 6.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 6.0% EQUITIES 8.0%
BONDS 44.4% BONDS 26.2%
CASH 3.3% CASH 5.5%
EUROPEAN EUROPEAN
EQUITIES 6.1% EQUITIES 9.9%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 17.6% EQUITIES 25.6%
OTHER EQUITIES 2.0% OTHER EQUITIES 2.2%
PROPERTY 0.8% PROPERTY 0.0%
UK EQUITIES 1.7% UK EQUITIES 16.6%

FUND ALLOCATION FUND ALLOCATION

1 GLOBAL EQUITY 15.0% 1 BALANCED MANAGED 15.0%
2 MULTI ASSET 15.0% 2 GLOBAL EQUITY 15.0%
3 ALTERNATIVE ASSETS 10.0% 3 MANAGED GROWTH 15.0%
4 INDEX LINKED GILTS 10.0% 4 MULTI ASSET 15.0%
5 INTERNATIONAL CORPORATE BOND 10.0% 5 STRATEGIC INCOME 15.0%
6 INVESTMENT GRADE CORPORATE BOND 10.0% 6 STRATEGIC MANAGED 15.0%
7 UK ABSOLUTE RETURN 10.0% 7 INTERNATIONAL EQUITY 10.0%
8 WORLDWIDE OPPORTUNITIES 10.0%
9 CORPORATE BOND 5.0%
10 INTERNATIONAL EQUITY 5.0%

34 | THE INVESTOR
 THE INVESTOR CENTRE

ADVENTUROUS PORTFOLIO BALANCED INCOME PORTFOLIO

Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 0.0% ALTERNATIVES 0.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 35.1% EQUITIES 2.6%
BONDS 0.0% BONDS 38.5%
CASH 5.4% CASH 4.4%
EUROPEAN EUROPEAN
EQUITIES 14.7% EQUITIES 8.0%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 20.0% EQUITIES 13.1%
OTHER EQUITIES 4.9% OTHER EQUITIES 0.9%
PROPERTY 0.0% PROPERTY 12.5%
UK EQUITIES 19.8% UK EQUITIES 19.9%

FUND ALLOCATION FUND ALLOCATION

1 EMERGING MARKETS EQUITY 15.0% 1 STRATEGIC INCOME 20.0%
2 ASIA PACIFIC 15.0% 2 DIVERSIFIED BOND 15.0%
3 GREATER EUROPEAN PROGRESSIVE 15.0% 3 PROPERTY 15.0%
4 GLOBAL SMALLER COMPANIES 15.0% 4 GLOBAL EQUITY INCOME 10.0%
5 NORTH AMERICAN 15.0% 5 INVESTMENT GRADE CORPORATE BOND 10.0%
6 UK & GENERAL PROGRESSIVE 15.0% 6 UK & INTERNATIONAL INCOME 10.0%
7 JAPAN 10.0% 7 WORLDWIDE INCOME 10.0%
8 EQUITY INCOME 5.0%
9 UK HIGH INCOME 5.0%

IMMEDIATE INCOME PORTFOLIO DEFERRED INCOME PORTFOLIO

Asset allocation Asset allocation

KEY KEY
ALTERNATIVES 0.0% ALTERNATIVES 0.0%
ASIA & PACIFIC ASIA & PACIFIC
EQUITIES 2.0% EQUITIES 3.6%
BONDS 68.6% BONDS 18.6%
CASH 3.7% CASH 4.5%
EUROPEAN EUROPEAN
EQUITIES 5.3% EQUITIES 12.0%
NORTH AMERICAN NORTH AMERICAN
EQUITIES 9.6% EQUITIES 17.8%
OTHER EQUITIES 0.6% OTHER EQUITIES 1.2%
PROPERTY 8.3% PROPERTY 0.0%
UK EQUITIES 1.9% UK EQUITIES 42.4%

FUND ALLOCATION FUND ALLOCATION

1 DIVERSIFIED BOND 20.0% 1 STRATEGIC INCOME 20.0%
2 STRATEGIC INCOME 15.0% 2 EQUITY INCOME 15.0%
3 CORPORATE BOND 10.0% 3 GLOBAL EQUITY INCOME 15.0%
4 GILTS 10.0% 4 UK & INTERNATIONAL INCOME 15.0%
5 GLOBAL EQUITY INCOME 10.0% 5 UK HIGH INCOME 15.0%
6 INTERNATIONAL CORPORATE BOND 10.0% 6 WORLDWIDE INCOME 15.0%
7 INVESTMENT GRADE CORPORATE BOND 10.0% 7 CORPORATE BOND 5.0%
8 PROPERTY 10.0%
9 WORLDWIDE INCOME 5.0%

Some of the products and investment structures documented within this publication will not be available
to our clients in Asia. For information on the funds that are available, please speak with your Partner. THE INVESTOR | 35
THE INVESTOR CENTRE
VIEWPOINT
Viewpoint
Russell Jones, Partner at Llewellyn Consulting
Russell Jones, economist and Partner at Llewellyn Consulting, believes
that further progress by investment markets requires central bank
tightening to be carefully managed
C
entral banks arguably
had little choice but
to cut interest rates to
historic lows, and
resort to other
unorthodox measures
such as ‘quantitative easing’ following
the Global Financial Crisis (GFC).
‘Neutral’ interest rates – those
necessary to keep economies growing
steadily while keeping inflation stable
– had been falling for several decades,
under the influence of ageing
populations, sluggish investment and
productivity growth, and massive
Chinese savings. But the GFC
exacerbated matters, to the extent that,
in some cases, neutral interest rates
actually became negative in real, or
inflation-adjusted, terms.
For monetary policy to stimulate
a depressed economy, central bankers
must reduce the real policy rate below
the real neutral rate, however low the
latter has fallen. To attempt to suspend
policy rates significantly above the real
neutral rate for any length of time
would be self-defeating: the high
inflation-adjusted cost of borrowing
would merely encourage output and
inflation to fall further; and once this
36 | THE INVESTOR
happened, nominal interest rates would
follow in sympathy.
That said, the extent to which
central banks had to resort to super-
low interest rates, and buttress them
with unconventional initiatives,
was compounded by shortcomings
in most countries’ fiscal and structural,
or supply-side, policies.Widespread
fiscal stimulus, which provided
significant support to world output in
2009 and 2010, was abandoned too
soon. Regulatory and other reform,
meanwhile, has stalled in the face of
political opposition. Central banks have
therefore had to shoulder a
disproportionate burden in the
post-crisis quest for recovery.
The monetary policy environment is
now changing, however. Ten years
on from the crisis, the upswing has
finally gathered momentum, and
neutral interest rates, although still low
by post-war standards, have begun to
edge upwards.
Over the past 12 months or so, the
US Federal Reserve has begun
gradually to nudge its main policy rate
away from the zero bound, rendering it
less negative in real terms. It has also
tentatively started to shrink its inflated
balance sheet, allowing some of the
bonds purchased during successive
bouts of ‘quantitative easing’ to simply
expire on maturity.
Other major central banks are
less advanced in this process of
monetary normalisation. But, if
economic growth remains robust and
inflation continues to rise back towards
target, they too are likely to gradually
unwind the various unorthodox
measures employed during the GFC
and its aftermath.
Monetary normalisation involves
significant challenges for policymakers
and investors alike.
Central bankers find themselves in
new and uncharted waters. There is no
modern-day template for what they
wish to achieve. It is difficult enough to
calibrate monetary policy with the
business cycle in even the most tranquil
and familiar periods. But the task is
harder still when those making policy
are unsure of the potency of the
instruments they are fine-tuning;
when their economies are in the
throes of major technology-induced
structural change; and when fiscal and
structural policies are insufficiently
co-ordinated and still shouldering

too little of the responsibility for
managing aggregate demand.
Just as was the case when central
bankers began the journey towards
unconventional policy, so too will this
new phase unavoidably involve
significant trial and error. And with the
risk of policy miscalculation comes the
threat of renewed macroeconomic
instability, and the possible need to
switch course.
Markets so far have not been
troubled. Indeed, latterly they have
been in something of a sweet spot.
While inflation and interest rates have
Getty Images
remained historically low, corporate
profitability has been high, economic
Historically, rising US interest
rates have caused problems
for emerging markets
Monetary normalisation
involves challenges for
policymakers and
investors alike
growth has accelerated, and resource
utilisation rates have picked up. In this
environment, numerous troubling
political and geopolitical developments
have been shrugged off, and the
volatility of certain asset prices has
collapsed. As so often in such bull
INTERVIEW
markets, an air of complacency has
descended on many investors.
Yet, as central banks begin to revert
to more orthodox policies, this benign
environment is at risk.
Periods of rising interest rates
invariably generate turbulence in
markets. Even if central bankers
can avoid acute policy errors, the
super-low interest rates for risk assets
are likely soon to become a thing
of the past. Monetary tightening
seems certain to result in at least
some drop in sovereign bond prices,
which is likely to spill over into
corporate credit too – especially if
policy normalisation proceeds quicker
than expected.
Historically, periods of rising US
interest rates, and especially rapidly
rising US interest rates, have caused
problems for the emerging market
economies. Today, not only do these
economies account for some 60% of
global GDP but many, not least China,
have for an extended period been
overly dependent on credit, much of it
dollar-denominated, to sustain their
economic growth.
The extent to which good investment
performance continues this year and
beyond will depend to a large degree
on whether central banks proceed in a
careful and non-doctrinaire fashion,
telegraphing their intentions clearly;
and on there not being any major
geopolitical or national shocks.
THE INVESTOR | 37
THE INVESTOR CENTRE
INSIGHTS
Sideways glance
When markets shuffle sideways, stock-pickers should come to
the fore – if they can avoid buying and selling too quickly
S
ince the mid-1990s, global
equity markets have been
nothing if not dramatic.The
S&P 500 has witnessed two
large market bubbles and
two major crashes during the period –
the latter came in 2000-02 and 2008-
09. Since then, the world’s leading
index has more than trebled in value.
As a result, many investors have
forgotten (if indeed they ever knew)
that there is a third kind of market – the
sideways market. In fact, sideways
markets were common through much
of the 20th century, as Robert
Hagstrom, author of the bestselling
biography TheWarren BuffettWay,
recounted in a paper published in 2010.
On 1 October 1975, the Dow Jones
Industrial Average sat at 784. On 6
August 1984, it again closed at 784.
That’s a period of almost nine years
with, ultimately, no capital growth.
At first glance, such statistics look
disheartening. Moreover, there has
been a great deal of speculation in
recent weeks that the current US bull
run – the second-longest in history –
may run out of puff, resulting in a
sideways market in the coming months;
the FTSE 100 rose 7.6% in 2017, which
is hardly to be sniffed at, but pales
beside the 16% capital return achieved
the previous year.
In such circumstances, some fear may
in fact be appropriate, but only for
certain types of investor. Hagstrom’s
research demonstrated that sideways
markets are a problem for those who
38 | THE INVESTOR
like to follow the herd – generally
through some form of passive investing.
But he found that they are not
necessarily a problem for stock-pickers.
So what average annual returns did
Warren Buffett, the consummate
stock-picker, generate in the zombie
market of 1975 to 1984, during which
the S&P 500 made no overall gain?
The answer is no less than 34%.Yet
Buffett is no day trader. His success has
come as a stock-picker who buys the
best companies he can and holds them
Sideways markets
provide stock-pickers
with exceptional
opportunities
for the long term – thus his well-
rehearsed line: ‘It’s far better to buy a
wonderful company at a fair price than a
fair company at a wonderful price.’
In his research, Hagstrom discovered
that the apparent flatness of the broader
index tends to mask considerable price
movements in the constituent stocks.
‘What we first thought to be a trend-less
sideways market was in fact a market
full of variation,’ the report concluded.
This is especially significant for stock-
pickers.When markets rally or decline
sharply, correlations between individual
stocks tend to rise – in other words,
stocks increasingly move in sync. In
sideways markets, however, correlations
are often quite low, meaning that the
prices of individual stocks head in
different directions – yet the net result is
a sideways crawl for the index itself.This
kind of market provides stock-pickers
with exceptional opportunities to profit
from identifying undervalued stocks.
When Hagstrom dug deeper into the
stocks themselves, it only strengthened
his case. In any individual year during
the period under scrutiny, Hagstrom
found that just 3% of the stocks on the
S&P 500 were able to provide a return
of 100% (ie double in value). But push
that up to three years, and the figure
was 18.6%. For long-term investors
able to avoid selling for five years, the
figure was higher still – 38% of the
stocks listed on the S&P 500 doubled
in value. At that point, the average
increase in the broader market matters
even less – what matters far more is
choosing the right stocks.
New research published in 2017 by
Fidelity showed similar trends in the
US, Japan, Europe and UK during four
different periods of sideways markets.
In short, if stock-pickers do their
homework on the companies they are
investing in, then they need not fear
sideways markets. Instead, they should
focus on sticking to the script –
investing for the long term in those
companies that offer real opportunities.
Too many sideways glances can prove
costly in the end.
 First-time buyers need to put down an average £33,000
deposit to get on the property ladder*.

Saving is a very fine thing, especially

when your parents have done it for you.
S I R W I N S TO N C H U R C H I L L

Contact your St. James’s Place Partner for more

information about investing for children.

*
Halifax First-Time Buyer Review, 2017.
The value of an investment with St. James’s Place will be directly linked to the performance of the
funds selected and may fall as well as rise.You may get back less than you invested.
 In control of the detail
Making the most of your tax-saving allowances and reliefs before
the end of the tax year is one way to put yourself in control of your
financial future. At St. James’s Place, we bring together your goals and
our expertise to help create financial security for you and your family.

DON’T MISS OUT. ACT BY 5 APRIL.

Contact your St. James’s Place Partner for more information.

The value of an investment with St. James’s Place will be directly linked to the performance of the
funds selected and may fall as well as rise.You may get back less than you invested.
The levels and bases of taxation, and reliefs from taxation,
can change at any time and are dependent on individual circumstances.
The ‘St. James’s Place Partnership’ and the titles ‘Partner’ and ‘Partner Practice’ are marketing terms used to describe St. James’s Place representatives.
Members of the St. James’s Place Partnership in the UK represent St. James’s Place Wealth Management plc, which is authorised and regulated by the Financial Conduct Authority.
St. James’s Place Wealth Management plc Registered Office: St. James’s Place House, 1 Tetbury Road, Cirencester, Gloucestershire, GL7 1FP, United Kingdom.
Registered in England Number 4113955.

SJP10000 V96