FUND SPOTLIGHT 2 - Summer 2019

ISSUE 2

INSIDE THIS ISSUE: PREMIER Multi-asset volatility- targeted solutions SCHRODERS Two common errors that investors make FIDELITY Revisiting the case for quality INVESCO Five questions that investors are asking me OCTOPUS Intergenerational planning – why it can be tricky and how to get it right Plus much more...

FUND SPOTLIGHT – 3

WE L C OM E . . . ...TO THE SECOND EDITION OF OUR FUND SUPPLEMENT, FUND SPOTLIGHT.

In Octopus’ article they highlight that the life experiences of millennials (those born between 1981 and 1996) and their baby boomer parents (born between 1946 and 1964) differ enormously. This poses a challenge for financial advisers working with clients on intergenerational planning. Generations expert Dr Eliza Filby and Ben Charrington, Head of Estates and Probate at Octopus Investments, share their thoughts on this important topic on page 13. In M&G’s article ‘Making a difference (and a return)’, they highlight the M&G Positive Impact Fund which provides such an opportunity for those who want to make a difference with their investments without giving up returns. They believe that impact investment should increasingly help drive solutions, and can do so while delivering attractive investment returns to investors. Read their full article on page 18. Plus there are plenty more articles and information from other fund specialists such as Aberdeen, BlackRock, Blackfinch, BMO, Brewin Dolphin, Columbia Threadneedle, Deepbridge, Investec, Kuber, Sinfonia and Vanguard.

We open up this edition with an article from Fidelity, ‘Revisiting the case for quality’. With the outlook for earnings growth and valuations precarious, Fidelity Global Dividend Fund Manager Dan Roberts discusses why dividends could be a valuable source of returns for investors in the year ahead. He outlines how he goes about identifying sustainable dividend payers that possess the competitive and financial strength to prosper across cycles. On page 8 Simon Morris, Head of Strategic Partners at Premier Asset Management, provides an overview of the Liberation fund range, Premier’s multi-asset, multi-manager volatility-targeted solutions. The past six months have highlighted two common errors that investors frequently make. The first relates to a misunderstanding about the way investments compound over time and the second is the way that emotions can cloud our judgement. Both can be remedied relatively easily. Schroders article outlines how to overcome these two common errors highlighting the impact of compounding and how to keep investments balanced. ALSO IN THIS ISSUE On page 11 Mark Barnett, Head of UK Equities at Invesco responds to recent investor questions, sharing his thoughts on topical issues such as; his outlook for the UK economy, the potential catalysts for a revaluation of the UK equity market, what part of his portfolio offers the biggest potential at the current time plus more.

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Dan Roberts Portfolio Manager - Fidelity Global Dividend Fund

R E V I S I T I N G T H E C A S E F O R Q U A L I T Y

WITH THE OUTLOOK FOR EARNINGS GROWTH AND VALUATIONS PRECARIOUS, FIDELITY GLOBAL DIVIDEND FUND MANAGER DAN ROBERTS DISCUSSES WHY DIVIDENDS COULD BE A VALUABLE SOURCE OF RETURNS FOR INVESTORS IN THE YEAR AHEAD. HE OUTLINES HOW HE GOES ABOUT IDENTIFYING SUSTAINABLE DIVIDEND PAYERS THAT POSSESS THE COMPETITIVE AND FINANCIAL STRENGTH TO PROSPER ACROSS CYCLES. When thinking about future returns from global equity markets, it can be helpful to break the sources of investment return into three components: yield, growth and valuation change. The sum of these three components gives an investor their total return. In very good years, for example 2017, a positive return will come from all three components. Last year, however, we saw a significant multiple compression due to a combination of rising US rates and the emergence of a more negative narrative around the health of the global economy. This resulted in an overall negative return from global equities in GBP terms last year, despite a positive contribution from earnings and dividends.

In the case of the Fidelity Global Dividend Fund, this approach results in a portfolio that is cheaper than the market on a dividend yield and free cash-flow yield basis and similarly valued in terms of price/earnings ratio. However, the quality of the assets in the fund is higher than the market, with more resilient return profiles and a lower level of debt. Important information This information is for investment professionals only and should not be relied upon by private investors. The value of investments and any income from them can go down as well as up so the client may get back less than they invest. Past performance is not a reliable indicator of future returns. The Fidelity Global Dividend Fund can use financial derivative instruments for investment purposes, which may expose it to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The annual management charge for the income share class is taken from capital, therefore distributable income may be higher but the fund’s capital value may be eroded, which will affect future performance. Changes in currency exchange rates may affect the value of an investment in overseas markets. This fund invests in emerging markets which can be more volatile than other more developed markets. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document and current and semi- annual reports, free of charge on request, by calling 0800 368 1732. Issued by Financial Administration Services Limited and FIL Pensions Management, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0119/23241/SSO/NA

Interestingly, as the US Federal Reserve continued to raise rates in the fourth quarter, high-dividend strategies generally outperformed the broader market, which challenges the consensus assumption that rising rates lead to the underperformance of dividend-based strategies. In terms of what may lie in store for investors over the coming months, given the uncertain outlook around valuations and growth, I think it makes sense to emphasise dividends as a component of total return, and to do so by investing in assets that trade at an attractive yield and will be well-supported throughout a range of economic scenarios. LOOKING PAST THE HEADLINE YIELD FOR A MARGIN OF SAFETY It is important, however, to look beyond a high headline yield and hone in on those companies that possess the quality and resilience to deliver sustainable dividend growth over time. As a result, I do not simply invest in the highest yielding or cheapest companies, as a high headline yield can often be a sign of stress in the underlying business. So, while I place significant emphasis on the price I am being asked to pay for a stock, I also demand certain characteristics from companies – such as a strong balance sheet, predictable cash flows and management that recognises the importance of good capital allocation – to help provide clarity over a stock’s true value and sustainability of its earnings and dividend.

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N O T- S O - P L A S T I C FA N TA S T I C

MOUNTING HOSTILITY TOWARDS SINGLE-USE PLASTICS WILL CREATE CLEAR WINNERS AND LOSERS. Plastic is the environmental issue of the moment. Campaigners have long argued against the use of single-use plastics and sought to highlight the scourge they create for the natural world. But it was a BBC documentary, Blue Planet II, that produced a literal sea change in how the US, Europe and the UK view plastics. The documentary graphically highlighted the extent to which plastics have infected food chains, and the immense suffering they inflict on sea creatures. The response from consumers has been stark, with many people moving swiftly to reduce their usage of plastic. Companies have been equally quick to put in place policies that cut down reliance on plastic. Governments too are reacting, with the UK and Europe both announcing strategies to regulate plastics. By contrast, the investment community has been slow to react. Many investment managers have talked up the need for action. However, that rhetoric has not necessarily been reflected in portfolios. This is surprising. There are likely to be some clear winners and losers among plastics manufacturers. Simply put, companies with the capital to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper. Conversely, less well-capitalised companies dependent on single-use plastic will struggle to adapt. Companies able to invest in the production of more sustainable forms of plastic, or that have limited exposure to single-use plastics, stand to prosper.

production of Sealed Air Corporation is single- use plastic, and a number of their products are market-leading. The company’s bonds are supported by strong free cashflow, a solid balance sheet and healthy debt levels. Most crucially, Sealed Air Corporation is investing to adapt to a world intent on using plastic more sustainably. The company has combined product innovation with its work on sustainability. It is also undertaking various initiatives aimed at increasing usage of recyclable materials. Additionally, it is developing bio-materials that are recyclable or that degrade much faster than petroleum- based products. Not all companies are quite so forward- thinking. Some firms in the US high-yield market are heavily indebted, with as much as two-thirds of production dedicated to single-use plastics. Their lack of financial resource leaves them in a precarious position. Such firms will face stark choices about the direction that they want – and are able – to take in the future. What applies to the US high-yield market does not apply to all jurisdictions. Asian consumers have been almost silent on the issue of single-use plastics. Consequently, there is little impetus for change in companies in the region. The very raw outrage of many western consumers about plastic might fade over time. But companies and governments are moving in a direction that means that some of the changes being sought are likely to prove durable. As our love affair with plastic sours, the investment community must hasten to catch up with the shift of mood.

Samantha Lamb Head Of Fixed Income Esg, Aberdeen Standard Investments

The US high-yield debt universe includes many companies producing single-use plastics. For instance, almost all of the

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SIMON MORRIS, HEAD OF STRATEGIC PARTNERS AT PREMIER ASSET MANAGEMENT, PROVIDES AN OVERVIEW OF THE LIBERATION FUND RANGE, PREMIER’S MULTI-ASSET, MULTI-MANAGER VOLATILITY-TARGETED SOLUTIONS. The Premier Liberation fund range consists of four actively managed, diversified multi-manager funds, managed by Premier’s award-winning multi-asset investment team. The funds are managed to be aligned with Distribution Technology risk profiles 4, 5, 6 and 7, based on volatility boundaries that are provided to Premier and updated quarterly. TAILORED VOLATILITY OUTCOMES Each fund has an objective to generate long-term capital growth, income or a combination of the two but is also managed to be aligned with a specific volatility level. In this range of funds, Premier Liberation No. IV Fund is expected to have the lowest volatility and also the lowest expected returns over the long-term, whilst Premier Liberation No. VII Fund is expected to have the highest volatility and potential for higher returns over the long-term than the other three funds in the range. DIVERSIFIED, MULTI-ASSET PORTFOLIOS The Liberation funds typically invest in funds and other investments managed by carefully selected, specialist fund managers. This includes funds providing exposure to equities, bonds, commercial property and alternative assets, to create a diversified investment portfolio to spread risk and help the multi-asset team manage the volatility. PROVEN INVESTMENT APPROACH Premier’s multi-asset team continually research new investment ideas, monitor existing investments and actively manage the holdings in each fund with the aim of keeping the portfolios on track to meet their long-term investment objectives. Since the multi-asset team started managing the funds to be aligned with specific volatility levels in 2012, the desired volatility profile has been achieved, with risk steadily increasing from Premier Liberation No. IV (lowest expected volatility) to Premier Liberation No. VII (highest expected volatility). M U LT I - A S S E T V O L AT I L I T Y-TA R G E T E D S O L U T I O N S

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