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A TRUS T N E T D I REC T P U B L I C AT I O N

ISSUE 11 MAY 2014

DON’T PUT ALL YOUR EGGS IN ONE BASKET

WHY YOU SHOULD IGNORE INVESTMENT CLICHÉS

PORTFOLIO MANAGEMENT10 SIGNS IT’S TIME TO SELL

CATCHING FALLING KNIVES

WHAT YOU CAN LEARN FROM THE EXPERTS’

MISTAKES

DANGER!HOW TO AVOID THE

STOCKS THAT WILL BLOW-UP

IT’S A BRAVE NEW PENSION WORLD WHAT SHOULD YOU BE

DOING WITH YOUR POT?

INTRODUCING MACRO & CHEESEHOW GLOBAL EVENTS AFFECT YOUR PORTFOLIO

SAFE AS HOUSESIS NOW THE TIME TO GET ON THE PROPERTY LADDER?

EDITOR’S NOTEAre the classic investment clichés worth their salt?

INTRODUCING ‘MACRO & CHEESE’Investazine’s Daniel Lanyon looks at the global events impacting your portfolio.

CONTENTS

FIVE STOCKS FOR A £15,000 ISACompound interest is key in growing your investments over the long term. These five stocks put the rest to shame when it comes to growing their dividends.

HOW TO AVOID A BLOW-UPBuying a stock when it’s cheap can be a winning strategy, but how do you avoid the ones that will implode?

THE VOICE OF TRUSTNET DIRECTAre the 2014 Budget changes an investor revolution or just more political noise?

10 SIGNS IT’S TIME TO SELLThe experts reveal the key signs it’s time to let an investment go.

PENSION-PROOFChancellor George Osborne came to savers aid, releasing pensions from the grip of annuity providers. But what’s the best course to take with your pot?

TRUSTNET DIRECT’S FUND OF THE MONTHFE Head of Research Rob Gleeson reveals the fund he’s backing in the current market.

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DON’T PUT ALL YOUR EGGS IN ONE BASKET

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MY BOND IS MY WORDPremium bonds are part of the fabric of British culture, but Steve McDowell asks whether they make sense for investors.

CATCHING FALLING KNIVESJM Finn’s Brian Tora reveals the biggest investment mistakes he’s ever made and what you can learn from them.

MY HERO: BILL MILLERSteve McDowell looks at what investors can learn from ‘The man who beat the S&P’.

UNWINDING THE NEW PENSIONS MAZE. WATCH THIS SPACE.

THE PASSIVE APPROACHWhitechurch Securities’ Gavin Haynes explains the ins and outs of building a cheaper, market-tracking portfolio.

THE MOST ILLIQUID INVESTMENTInvesting in the things you like might be fun, but there are hidden dangers investors need to watch out for. Daniel Lanyon investigates.

SAFE AS HOUSESProperty prices are soaring, but is now the right time to get on the property ladder?

FOOL’S GOLDAll that glisters isn’t gold these days, as Joshua Ausden discovers.

GILT TRIPWhy your income stocks need to pay more than the Bank of England.

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Nothing good happens after 2am. It’s a cliché I heard from my parents and it’s one that no doubt many of us have dis-covered is all too true at one time or another.

When it comes to investing, there is a glut of oft-repeat-ed phrases aimed at keeping investors from burning their fingers when markets blow up. Unfortunately, mar-kets are unpredictable so figuring out whether you’re early or late to the party isn’t quite so easy to tell.

In this month’s issue of Investazine we’re taking a look at some of the offending financial clichés and asking whether you should heed or ignore them. We’ll also look at some of the best stocks on the market when it comes to growing their dividend, or amount they pay out to shareholders. If you’re interested in dipping your toes into alternatives, there’s a guide to investing in every-thing from wine to art to aged whiskey.

As ever, we’ve asked a number of financial experts to share their experiences – the good, bad and the ugly. We think you’ll be able to learn a thing or two from their mistakes.

Thanks again for downloading this issue of Investazine. In today’s busy world, we know it isn’t easy to keep up with your investment research. To be sure you don’t miss an issue, subscribe today and your fresh copy of Investazine will be downloaded to your device of choice each month.

Jenna Voigt

FE TRUSTNET INVESTAZINEInvestazine is published by the team behind FE Trustnet in Soho, London.Website: www.trustnet.comEmail: [email protected]

CONTACTS

EditorialJenna Voigt, EditorDirect line: 0207 534 7661

Alex Paget, ReporterDirect line: 0207 534 7696

Thomas McMahon, Reporter Direct line: 0207 534 7697

Daniel Lanyon, Reporter Direct line: 0207 534 7640

GeneralPascal Dowling, Head of publishing contentDirect line: 0207 534 7657

AdvertisingRichard Fletcher, Head of publishing sales

Richard Casemore, Account managerDirect line: 0207 534 7669

Jack Elia, Account managerDirect line: 0207 534 7698

Photos supplied by Thinkstock and Photoshot

JENNA VOIGT

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk Please quote MINC TNM 01

We strive to go deeper.Murray Income Trust ISA and Share Plan Investing for income growth is a skill. Sometimes, an investment that seems great on paper may not be so good when you look beneath the surface.

Murray Income Trust searches for high-quality income opportunities by getting to know in depth every company in whose shares we invest. We meet management face-to-face. We ask tough questions – and we only invest when we get to the bottom of how a business works.

So when we include a company in Murray Income Trust, you can be sure we’ve done the legwork.

Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan.

The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00 murray-income.co.uk

121006833_ITADMINCTNM01.indd 1 24/04/2014 16:46

THE BIG PICTURE

A look at what’s going on in the world and how it affects your investments

MACRO CHEESE&

DANIEL LANYON

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An ancient Chinese proverb states ‘may you live in interesting times’ and the first four months of 2014 certainly live up to that accolade.

Speaking of China, figures show business conditions worsened in April, with manufacturing orders falling to a five-year low. The main driver of growth has been infrastructure, but the figures indicate this is chang-ing. Managers claimed their businesses have been hit by a stronger Chinese currency, making exports less attractive.

The big question is whether slamming the brakes on this previously export-driven economy will interrupt the performance of equities and the funds that invest in them.

The ongoing argument between the yes and no camps is more drawn out than the country’s epony-mous Great Wall but investors need to remember the effects could reach the entire global economy and therefore anyone with money, anywhere.

The escalating tensions in the Ukraine – or is it Russia – present a similar problem.

While sales of balaclavas are going through the roof, the FTSE Russia index has fallen nearly 20 per cent since the start of the year, leaving investors in both east and west wondering whether to jump ship or buy more, at rock bottom prices.

Year-to-date performance of Russian equities

Source: Trustnet Direct

In reality few know what is going on and even fewer know how it will af fect investment risk in the region. Sanctions could become very harsh – aimed square-ly at Russia’s economy, Iran style.

A clear place to avoid for all but the white-knuckle investor, at least until the dust settles.

In such times of uncertainty people head for the world’s oldest safe haven – gold – or so you have been told.

However, gold is less popular with the market at the mo-ment, having fallen to their lowest levels for two months. Joshua Ausden explains why gold may not be the safety net investors think it is later in this edition.

Analysts attribute the fall to accelerating popularity for eq-uities. This is most evident in the UK and the US where the economic data points to an improving economic situation.

Unemployment was revised down to 6.9 per cent in the UK, a five-year low.

In the US a host of business sentiment surveys and data have pointed to an economy on an underlying upward trend but that is recovering from unusually bad winter weather that closed roads, factories and shops for weeks.

But 2014 continues to be a year when things happen quickly and unexpectedly.

With this in mind investors would be wise to consid-er emerging markets, keep a wary eye on Russia and gold and hold onto their US and UK equities. But keep checking the news as things are moving fast.

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JENNA VOIGT

FIVE STOCKS

FOR YOUR

£15,000 ISA

Under the New ISA rules taking effect in July this year, in-vestors will be able to squirrel away up to £15,000 in a cash, stocks & shares or combination ISA, making it a little bit easier for diligent savers to build up a healthy investment portfolio over the long term.

One of the best ways to make your money grow significant-ly over the long term is the wonder of compound interest, as Warren Buffett would say.

That’s why investors with a few years to put money away for a rainy day far down the line will be best served investing in shares with a record of paying out a steady dividend, as long as they keep that dividend invested. Equally important to paying out a dividend is a company’s ability to grow that dividend over time, as this helps investors keep up or beat the shadowy threat of inflation.

We highlight five UK companies with decades-long track records of growing their dividends.

STOCKPICKING

The globally-focused investment trust has one of the longest track records of growing its dividend of any listed-UK company, dwarfing the records of traditional companies on the index. The trust is managed by stalwart investor James Anderson and deputy manager Tom Slater, both of Edinburgh-based asset manager, Baillie Gifford.

SCOTTISH MORTGAGE103

years

The Anglo-Dutch oil giant has grown its dividend every year since the end of WWII, though performance has been volatile over the years. It was created in 1907 when Royal Dutch Petroleum Company and the Shell Transport and Trading Com-pany of the UK merged, creating what we know as Royal Dutch Shell today.

ROYAL DUTCH SHELL68years

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Dorset-based manufacturing company and constituent of the FTSE 250 index. Cobham pioneered in-flight refuelling in the 1930s when it was founded by Sir Alan Cobham. It was also the first contractor to join the Berlin airlift in 1948.

COBHAM44years

The publisher of the Financial Times has grown its dividend to shareholders for more than two decades. Beyond the pink-tinged paper, the group is also a multinational publishing and education conglomerate, best known for Penguin books.

PEARSON 22years

This longstanding investment trust, run by Henderson’s Job Curtis, has nearly half a century under its belt when it comes to growing its dividend. The company was established in 1981 and is currently part of the FTSE 250 index. The company uses a cash reserve to continue to pay a growing dividend in difficult markets.

CITY OF LONDON INVESTMENT TRUST

47years

As at 31 December 2013. © 2014 Franklin Templeton Investments. Issued by Franklin Templeton Investment Management Limited, 1-11 John Adam Street, London WC2N 6HT. Authorised and regulated by the Financial Conduct Authority.

WHY MAKEHAY ONLY WHEN

THE SUNSHINES?

YOU HAVE TO WORK HARD WHEN IT’S RAINING SO WHY SHOULDN’T YOUR MONEY? Unfortunately, no-one can predict the economic climate. So our investment professionals aim to cultivate dependable, long-term returns, come rain or shine. We do this by gaining a deep understanding of every investment we make, considering the potential risks and rewards before investing for over 24 million customer accounts worldwide. Remember, the value of investments can fall as well as rise and you may not get back the amount originally invested.

To fi nd out how our investment blueprints can work for you, simply ask your fi nancial adviser for more details.

www.franklintempleton.co.uk/blueprint

C53487_ SunTimes_Baler_330x213.indd 1 25/03/2014 15:10

STOCKPICKING

NEAL UNDERWOOD

Buying stocks when they’re cheap is the key to strong gains, but bad news can be a warning sign. Neal Underwood explains how to avoid the stocks that will blow up.

HOW TO AVOID A BLOW-UP

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The key to value investing is selecting stocks that look cheap on the basis of their price while avoiding those that could be termed ‘falling knives’. Some companies are cheap because they have been un-fairly punished by the market or they have encoun-tered some short-term difficulties; others are cheap because they are genuinely not a good investment.

The challenge for investors is to identify which are worth buying and which are sending out genuine dis-tress signals.

Henry Dixon, manager of the GLG Undervalued Assets fund, says he carries out two key pieces of work on each and every stock. “First is the price to replacement cost – how much money it would take today to replicate things. Then we look at the returns of the business on the re-placement cost value. Overwhelmingly we love to buy shares at a valuation less than the cost to replace it with cash generation.”

Dixon cites Rio Tinto as a good example of a stock that was unloved due to last year’s fears of tapering and rising interest rates.

“You could have paid $100bn all in [for the company]. On our analysis, based on the amount of capital expendi-ture, there was no chance of replicating that for less than £100bn. The company pared things back, we invested in it and shares have pushed on by 20 per cent.”

Performance of Rio Tinto over 1 year


With other stocks it is less easy to see where this would come from, says Dixon. “For something like [supermarket chain] Morrisons, I would hate the task of replicating it with its current debt. It’s spent way more expanding than the amount needed to service net debt. It now has £2.8bn of debt at a time when profits have gone from £1bn to about £300m.”

Dixon believes around 40 per cent of companies in the UK market are good value buys.

Under-researched and unlovedGeorge Godber, who runs the Miton UK Value Opportunities fund, says buying stocks at intrinsic value – where the actual value of a company is not the same as its current market value – is an approach that does work over time.

“We’re active and very uncon-strained, which means we’re in some weird and wonderful stuff. There are two types of stocks we target: those where you’re getting a pound coin for 50p, and those where the business can trade above its asset value through stable cash generation.”

Stocks in the first category are typically under-researched and unloved.

“This is the Benjamin Graham school of investing,” says Godber. “Stocks don’t often get down there unless the market sees something wrong, for example supermarkets at present. But you can get real lay ups, for example Voda-fone was down there for a long time. There’s usually an element of fear or some cyclical issue.”

Godber highlights Aer Lingus as a good example of a val-ue stock pick he has got right.

“When it had its IPO the government kept a lot of the li-abilities. It has £340m in cash and planes worth £700m, with a market capitalisation of £874m. Shares have gone up, so this is a real one pound for 50p story. It also has hidden assets – it’s got 26 stocks at Heathrow. So there is a way to unlock value.”

Performance of Aer Lingus over 1 year


The preference for stocks that are under-researched is also highlighted by Colin McLean, chief executive officer of SVM Asset Management.

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George Godber

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“Factors such as how well researched [a stock is] help a lot. We look a bit harder there. Once you get away from the very largest companies, you’re starting to get companies that are less well researched. Even in the FTSE, stocks such as ITV can take two or three years before analysts pick up on them.”

The second type of stock Godber invests in, which he de-scribes as the Warren Buffett approach, can encompass companies like funeral businesses that will always trade irrespective of market conditions.

Avoiding the value trapsAvoiding value traps is just as important, says Godber. “If you’re anchoring value on balance sheets you need to be sure of that value. Is there a replacement cost of the asset? What’s absolutely crucial is avoiding landmines. Look at the retained cash flow. When the company has paid dividends and bond holders, has it still got sufficient money left over?”

Value investors must also have a price target, says Godber. “You have to be disciplined and strict on target prices. We had to sell Vodafone which remains a good company, so it can be a tough balance.”

McLean says he also looks for companies with lower op-erating profit margins than their peers. This means how much cash is left over after a company pays its costs and debts.

“We’re looking for potential recovery there. Another issue is the company’s financial structure with credit improv-ing. We look at this in terms of capital expenditure and net debt.”

“Stocks like Thomas Cook and Trinity Mirror exemplify this. Both have had high levels of net debt, but have taken top-level measures in order to recover margins. Compa-nies where there has been an element of restructuring and self help appeal to us.”

Angel Agudo, portfolio manager of the Fidelity American Special Situations fund, focuses on companies that have gone through a troubled period and are typically disliked by the wider market.

“The recent strong performance from US equities does mean that value is now a little harder to find, although the size and diversity of the market means that there are still opportunities,” says Agudo.

Agudo says some of the best hunting grounds for value stocks at the moment are in the technology and health-care sectors, where stocks like Microsoft, Oracle and old pharmaceutical firms offer strong growth potential as well as downside protection, which means if the market falls, they aren’t likely to slide as far.

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JOHN BLOWERSHEAD OF TRUSTNET DIRECT

VOICE OF TRUSTNET DIRECT

Now the dust has settled on Osborne’s much heralded budget, what are the implications for you and I, in practical terms?

Well, there were broadly two key announcements: firstly that the ISA limit will rise to a more significant £15,000 allowance per annum with no restrictions as to whether you need to hold cash, funds or shares (or any combination) and secondly, that you no longer have to purchase an annuity at retirement.

ISAs are useful because they allow flexible tax-free saving for the medium term but the limits never made them truly attractive for longer-term retirement saving. On the other hand, you aren’t tying up your investments until retirement, so if you have an emergency, you can dive into your ISA savings, whereas with a pension you can’t.

Having a £15,000 limit – and the ability to hold your investments in cash and funds/shares – helps out the young and old alike. When you’re in your 30s and 40s, you have a real opportunity to build up a useful medium to long term pot of cash.

If you invest £15,000 each year from 35 to 65 years old, assuming a 7 per cent annual rate of growth, net of charges, you’ll build up a really significant fund of £1,207,771 tax-free.

If you need some or all of this cash before you retire, then you can get access to it.

And now that cash and stocks & shares ISAs have effectively been merged, you can afford to take more risk in the markets when you are younger and gradually move to lower risk holdings and cash as you approach retirement, protecting your gains.

And then there are annuities.

Don’t get me wrong: I can fully see why annuities are a sensible option. As we live longer – and who knows how

long we will live these days – they provide a guaranteed income until we die. The problem has been the amazing disparity in annuity rates and how little value many of us received from cashing in our savings for a monthly pittance at retirement.

So instead of buying an annuity, we can just spend our savings. What is known as ‘drawdown’ offers a different solution. Let me explain.

Assume you have invested diligently over the years and retire with £500,000 in your portfolio. At retirement (or at 55 years old), you can go out and spend up to 25 per cent of this, tax-free, straight from your pension and leave the rest in situ.

The remaining £375,000 (assuming you’ve blown your £125,000 on a Lamborghini) forms your retirement pot and you will need to carve out an income from this. If you’re still interested, you can put this money to work by investing it, generating income from it, or selling units/shares. But remember that this income is taxed at your prevailing rate (as if you were earning a salary).

The big question is, will your money expire before you do? If it does, you’re on the state pension, which is currently £110.15 per week.

To conclude – pensions (SIPPs) and ISAs can work together under the new rules to create a more flexible retirement plan, so it is worth considering how these two tax efficient vehicles can be used together when you’re planning for later life.

The portfolio management section of FE Investazine is brought to you in association with Trustnet Direct. For more information on how to manage your portfolio, including how to make the most of the new pension and ISA rules, continue reading or visit the Trustnet Direct homepage.

AN INVESTOR REVOLUTION — OR JUST POLITICAL GERRYMANDERING?

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TRUSTNET DIRECT PORTFOLIO MANAGEMENT

10 SIGNS IT’S TIME TO SELL

Financial experts reveal the warning signs that indicate it’s time to boot a fund or investment trust out of your portfolio.

JENNA VOIGT

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2. Strong performance

When a fund has performed exceptionally well it can be time to think about taking profit and reinvesting elsewhere. Investors need to ask questions like why did this fund outperform – was it due to a small number of stocks or a broad market rally? Was the outperformance more luck than judgement?

5. Swapping sectors

If a fund changes sector – for example leaving the IMA UK Equity Income sector for the IMA UK All Companies sector – due to changes in holdings, investors may need to go.

1. Poor performance

If the fund has been underperforming its benchmark for more than three to five years, investors should think about selling, according to Aurora Financial Planning’s Aj Somal.

3. Change in management

It could be a signal to sell if the fund’s manager has recently left or the investment objectives of the fund shift.

“This one is never easy as the new manager could be very good. The key thing is whether there is a change in the investment process and whether the fund will be reshaped significantly,” says Tim Cockerill, investment director at Rowan Dartington.

4. Size matters

Fund of funds manager David Coombs says investors should keep a close eye on the size of their funds. Sometimes, when a fund has a bout of strong performance, it swells to a size where the manager – no matter how good – can no longer deliver the type of performance he could with a smaller fund. If this is the case, says Coombs, investors need to get out.

“Investors need to understand what the fund’s capacity is and sell when it reaches that capacity. Ask where have they outperformed? What is the key driver [of performance]? If they were good stockpickers in companies that are under researched (small- and mid-caps) and then are forced to buy large caps which have more research, is their edge lost?”

6. Getting pricy

Head of multi-asset investment at Rathbones, David Coombs says it is important to look at a fund as a single stock and gauge whether or not it is expensive relative to the market. Does the manager tend to hold companies that trade at a premium to the market or has a run of strong performance driven up the share price? If the latter is the case, Coombs says it’s time to take a profit because the underlying companies are looking expensive and likely due a negative turn.

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Trustnet Direct Portfolio Managementin association with

10. Premium risk

One of the most telltale signs an investor needs to sell an investment trust is when the trust sector – such as IT UK Equity Income – is trading on a premium and the trust is on a wider premium than the sector, according to Coombs.

“If the trust is on a premium to the premium, it’s a sign it is overbid and you should be taking profits. That’s a key sell sign for us.

8. Asset allocation change

From time to time investors will want to change their asset allocation, whether away from bonds and into equities if they think markets will be strong, or away from the UK and Europe and toward emerging markets if they think this area is set for a rally. Making this asset allocation shift will trigger a sell as investors move money from one area and into another.

9. Fresh ideas

You don’t want to put all your eggs in one basket, so as your savings build, it’s a good idea to make room for some new ideas in your portfolio. This may mean selling out of a holding that’s done well or reducing exposure to a particular sector or region where you’ve got a lot invested in order to diversify your portfolio.

7. Sticker shock

Aurora Financial Planning’s Aj Somal says any noticeable increase in the charging structure of the fund should send investors out the door.


What to do when you hit retirement

PENSION PROOF

ANNA LAWLOR

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KEY PENSION CHANGES FROM THE 2014 BUDGET

From March 2014:• Savers with total pension savings of £30,000 can take the whole lump

sum as cash (up from £18,000)

• Savers with larger pensions can take up to three pensions worth £10,000 each

as cash (instead of two worth £2,000)

• Those who use “income drawdown” will be able to take larger sums as income

From April 2015:• Savers will be able to access their pension in

full from the age of 55 (subject to income tax rates on three quarters of the pot). This means a saver with a pension of £100,000 would be able to take £25,000 of their money tax free. They could then leave the remaining amount in the pension, or take it out and invest it else-where – though this would be treated as in-come for the year

In one swift thump of the dispatch box, Chancellor George Osborne transformed the retirement plans of millions of people, effectively turning their previously hard-to-reach pension pots into bank accounts and dumb-founding the pensions industry.

The gradual shifting of re-sponsibility from companies – via final salary corporate pension schemes – to in-dividuals, through defined contribution schemes and (auto-enrolment) Workplace Pensions, has been taken to its perhaps inevitable conclusion by the March Budget: more people are being trusted to cash-in their whole pension savings and to manage the money responsibly so that it doesn’t run out.

Yay, I can retire! Now what?After all the years of toil, the final hurdle to re-tirement is the host of pension-related decisions that need to be made, which ultimately affect the amount of income derided, tax liabilities and, to top it all off, tend to be decisions that once made cannot be changed. Usually a pension can be used to provide an in-come stream on or after age 55 – but there are a number of ways that income can be drawn from the pension.

Tax-free lump sum Now: Typically up to 25 per cent of the pension can be taken as a tax-free lump sum – and can be taken ‘early’ (from age 55) or at the time of retirement, with the remainder used to produce an annual income. Tax-free money is certainly attractive and can be used to pay down debt, such as a mortgage, but the drawback is that it leaves less money to convert into an income for life.

In some cases, depending on the pension provider’s rules, smaller pension pots could be cashed-in at retirement age entirely under what’s known as ‘trivial commutation’. Previ-ously, all of a person’s pension pots added together could not exceed £18,000 in total but the Chancellor raised this limit in the Budget to £30,000, with effect from 27 March 2014. The first 25 per cent will be treated as tax-free (unless a 25 per cent lump sum has already been taken from the

pension) and the remaining 75 per cent is liable to 55 per cent tax.

From April 2015: However – and this is where it gets pretty exciting – from April 2015, the 25 per cent tax-free lump sum option remains but then the option is between an

annuity (see below) and withdraw-ing the remaining cash in stages or as

one lump sum, subject to tax at your highest rate, which for many will be 20 per cent.


Annuity

Pension pot:Entering

retirement (age 55)

Full or gradual withdrawal:

Take some or all of your pension pot – this will be taxed as incomeas income

Drawdown:Enter drawdown –

You keep your money invested but take an

income

25% tax free lump sum

SAINTS AIMS TO BE A CORE INVESTMENT FOR PRIVATE INVESTORS SEEKING INCOME AND GROWTH.

Two for the price of one.

THE SCOTTISH AMERICAN INVESTMENT COMPANY

The Scottish American Investment Company aims to deliver dividend growth by pursuing income from a variety of UK and overseas investments. It targets a level of dividend growth which aims to beat inflation over the medium to long term and pays out a dividend regularly every quarter.

On top of this, the fund also seeks to team up income with capital appreciation by investing in a portfolio of high quality companies on a global basis, each selected for their potential to offer sustainable earnings growth or high-yield characteristics. It’s a relationship designed to mature over the long term.

The Scottish American Investment Company is an investment trust managed by Baillie Gifford and is available through our Share Plan and ISA.

Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

Open an ISA to receive a £10 Amazon gift card*.

For investment that aims to provide dual rewards over the long term, call 0800 917 2112 or visit www.saints-it.com

Baillie Gifford – long-term investment partners

*For a limited period and new eligible ISA customers only. Terms & Conditions and minimum investment amounts apply. Please refer to our website or the application pack that we will send you for full details. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of the Scottish American Investment Company P.L.C. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.


FE head of research Rob Gleeson shares the fund he’s tipping for the current market conditions.

TRUSTNET DIRECT FUND IN FOCUS

ROB GLEESON

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A – Fidelity emerging Europe Middle East and Africa (82.8%)B – MSCI Emerging EMEA Index (59.0%)

Fidelity Emerging Europe Middle East and Africa5 YEARS PERFORMANCE

ONGOING CHARGES 1.36%+82.8%

22

The five crown rated fund has avoided the big outflows from emerging markets recently and offers a nice counterpoint to traditional China heavy emerging market funds that might be affected by slowing Chinese growth. The fund is part of the Trustnet Direct 100 list of recommended funds.

The fund has been out of favour over the last 12 months, losing 5.02 per cent. However, the fund’s benchmark, the MSCI Emerging EMEA index lost even more, shedding 7.28 per cent. Over the last five years, the fund made 82.76 per cent while the benchmark was up 58.96 per cent.

It could be a good time for investors to buy into the fund be-cause frontier markets have diverged widely from the rest of the emerging world. The rally may have more room to run.

The manager, Nick Price, has a long track record of running emerging markets portfolios. He also heads up the Fidelity Emerging Markets fund as well as sev-eral offshore emerging markets equity funds.

23

COVER STORY

HOLLY THOMAS

SELL IN MAYAnd other investment clichés you should ignore.

The adage “Sell in May and go away; don’t come back till St Leger Day” recalls an era where the entire City would plan a leisurely summer, attending sporting events rather than tending to their portfolios. Investors duly followed suit.

Each year experts debate whether it’s a val-id investment technique, despite the fact the City doesn’t clock out – even with a long list of

events to attend including Cowes Week, Chel-sea Flower Show, Wimbledon, Royal Henley and Royal Ascot.

It’s one of the oldest clichés that can actually catch investors out because the market is not that predictable. Investors are susceptible to a huge number of pitfalls when deciding on a home for their savings. Even the most experienced investors can fall foul. Here we look at some of the main ones to avoid:

24

Investors are naturally attracted to investments producing a high level of income or yield. However, it can also be a warning sign. There is likely to be a very good reason why an investment yields so much.

Analysis by BlackRock revealed that once dividend yields top 6 per cent, the risks outweigh the benefits of a better return.

Stuart Reeve, co-manager of the BlackRock Global Income fund said: “High-yielding investments are yielding a lot for a reason – namely they are probably higher risk and the market has concerns over that particular business, or a part of it.”

The yield of an investment is relative to the cost of buying it. If you get an income of 10p from an investment that cost 8p, that’s a much lower yield than the same income from an investment that cost 3p.

A tumbling share price is often the cause of a high yield. The share price fall is normally due to either a profit warn-ing or some other disaster to befall that company. For bonds, higher yield means higher risk – there is more chance of default.

That’s not to say one should be put off buying high yield investments, just make sure you understand why they yield the level they do.

Go for a high yield

Focusing on the latest trend or purchasing last year’s winners is almost always a big mistake, say experts. Many novice in-vestors learned this lesson the hard way when the technolo-gy bubble burst back in 2000.

Indeed when it comes to investing, past performance is not a guide to future returns.

Patrick Connolly at Chase de Vere, the financial advice firm, said: “Investors often jump into strong performing asset classes – or funds – believing that their outperformance will continue and they can benefit from it. This approach can lead to people making sizeable losses.”

He said the result is that too many people invest at the top of the market after strong performance has already been achieved and sell out at the bottom when losses have already been made.

“Try to ignore fashions and trends and have a well balanced portfolio with investments you have researched and believe in the story long term.”

Chasing last year’s winners

25

Predicting the best time to enter the market is very dif-ficult. Some say it’s the hardest part of a fund manag-ers’ job, so for private investors, perhaps even more so.

To smooth the effects of the highs and lows, investors can drip-feed money into the market through a fund. Drip-feeding simply means investing a set amount reg-ularly, often via a standing order or direct debit, into a specified fund.

Drip-feeding helps investors to avoid buying on the highs and lows because the money is invested auto-matically, without regard to the peaks and troughs of the market – helping you to avoid the temptation to try and time the market, which is virtually impossible.

Trying to time the markets

It is important to make sure money isn’t overly tied up in funds that are hard to sell if and when things go wrong, and that’s what liquidity is all about. Something which has good ‘liquidity’ is easy to ‘liquidise’, which simply means it is easy to sell, turning the asset into cash – the ultimate liquid asset.

Physical property – bricks and mortar – cannot be traded like an equity; it is slower to buy and sell and has high trans-action costs. Managers could not offload “bad” properties, so investors were left high and dry. Investors couldn’t take their money out when they wanted to most!’

Even though the property market is booming today, it’s best to be prepared for the worst, warns Thomas Becket at Psigma. He said the lesson of the past would be to ask yourself – will you be able to get out if and when you really need to?

“We would advise that an investor should never hold more than 10 per cent of a balanced portfolio in assets that are non-readily realisable. We would also advise any investor to check on any prior liquidity constraints of a fund and seek advice from an investment professional if unsure.”

Liquidity won’t dry up

26

This is generally one to heed, though there are times, such as last May, where all asset classes plunged in tan-dem and investors were left licking their wounds before the equity market rallied.

A common mistake investors make is not diversifying enough: as a result, some have been burnt by having all their eggs in one basket – or all their money in one asset class like equities. If you diversify your investments, by investing in a variety of asset classes like bonds, equities, property and commodities, your overall portfolio tends to be less volatile.

However, it is possible to get carried away and over-di-versify, according to Gary Potter, a multi-manager at fund group F&C.

“At the other extreme, it is also a mistake to over di-versifying: some investors hold so many different asset classes or funds that the impact of any individual part of their portfolio is diminished and they just end up with an expensive tracker.”

Your portfolio could contain a blend of equities, bonds, cash, property and other asset classes such as commod-ities and gold, to benefit from their different investment cycles.

Don’t put all your eggs in one basket

Investors can become attached to investments and hold on too long.

Gavin Haynes, managing director at Whitechurch Securi-ties said: “Often with falls in stock prices, investors can be-come ‘anchored’ to the previous highs reached. Investors may believe that the stock is undervalued and will return to this level without considering the possibility to change in its underlying fundamentals.”

“Arguably, this was a factor in the global financial crisis as financial shares continued to lose money, many fund man-agers and private investors continued to buy them even as the climate worsened.”

Haynes said savers must be objective and evaluate an in-vestment from a variety of standpoints and not just focus on the past. “Sometimes you need to accept a share price may not recover and “cut your losses,” he added.

You should have a long-term time horizon

GAVIN HAYNES MANAGING DIRECTOR AT WHITECHURCH SECURITIES

THE PASSIVE APPROACHIn 2012, we responded to demand from clients and launched a trio of model portfolios specifically designed to provide access to low cost “passives vehicles”. The key motivation for providing a solution that is focused on passive funds was to offer investors the opportunity to capture market returns at very low cost.

The two key instruments we use in these passive portfolios are exchange-traded funds (ETFs) and index funds. There are key differences between the two. Both aim to replicate a specific market or index, but they are structured differently. ETFs trade as individual shares and are listed on a stock exchange. However index trackers are open-ended investment companies (OEICs) and have a similar structure to a unit trust.

Both have their place in a passive portfolio, and each has their pros and cons. Active investors who trade regularly will like the fact that ETFs are priced like as share in “real-time” so you know the exact price when buying and selling. In contrast index funds are priced once a day and you will purchase or sell at the next set price. However, for long-term buy and hold investors this is not a major issue.

Both ETFs and index funds will give you access to major indices across global stockmarkets and fixed interest markets. However, the range of ETFs is wider and provides access to more esoteric areas of investing.

The charging structure is similar, as regard annual charges, although it is worth comparing prices for both ETFs and index funds to gain your chosen exposure, as different providers will have different fee structures. With an ETF, as it is listed as a share you need to pay stockbroking charges (although ETFs are not subject to stamp duty like most shares). Therefore trading can be more expensive if you are making regular additions or withdrawals to your investment portfolio.

The passive funds will look to replicate the performance of the markets that we choose. However, when choosing


The difference between ETFs and index funds

• ETFs are traded on the stockmarket, so they have a “real time” price while index funds are valued once day

• The range of ETFs is wider and offers access to more niche investments

• Investors need to pay stockbroking charges when investing in ETFs, so they can be more expensive

28

passive funds, we need to be aware that they will not totally mirror their chosen index because it is not possible to replicate exactly the timings of index movements.

How can you pick the right tracker?We can identify which fund replicates the index the best by looking at tracking error. The lower the tracking error, the better. You can get an idea of tracking error by comparing the performance of fund against the index they are tracking. The shortfall will be due to a combination of charges and tracking error.

Asset allocation is king When we are constructing the portfolios, using passive vehicles provide us with the purest form of asset allocation. The key determinant in investment performance of a passive portfolio will be the mix of asset classes and stockmarkets into which the portfolio is invested. Different asset classes offer diverse characteristics that, in turn, provide differing levels of risk and potential levels of performance. Our approach is to construct portfolios through mixing asset classes based upon the strategy, investment objectives and risk profiles under which they are managed. For example, for balanced portfolios we would not commit more than 60 per cent of monies to stockmarket investments.

Within the passive portfolios we employ a core/satellite approach, where the mainstay of the portfolio will comprise of “buy and hold” investments.

For example we will maintain a long-term core position in the US stockmarket (we use L&G US Index fund). However, we also employ short-term tactical positions, used to exploit short-term valuation anomalies and cyclical opportunities and threats.

For example we have been investing in Vanguard Global Small Cap Index to take advantage of smaller companies benefiting from a global economic recovery. ETFs provide scope for more esoteric and short-term satellite positions.

Like all portfolio management it is important to regularly rebalance as divergent performance of different vehicles will change the balance of the portfolio over time.

What’s the catch?Whilst the passive portfolios provide a low-cost route to investing, there are several drawbacks when portfolio building. Outside of equity markets, the range of diversification is limited. Within fixed interest market, there is less scope to take specialist positions. Commercial property is a favoured asset class at present within our top-down views, but you cannot gain exposure to bricks and mortar in the same way as through actively managed funds.

Within stockmarkets you will be fully exposed to falling markets and, unlike active management a tracker has no flexibility to move into more defensive stocks to protect capital. Because indices are market capitalisation weighted, passive investors may have an unhealthy concentration of risk in the largest companies. At the current time, approximately 40 per cent of a passive investor’s assets in the UK stockmarket is invested in just 10 stocks, with around 15 per cent in two major oil companies (BP and Shell).

These are some of the key considerations when constructing a passive portfolio as well as some of the pros and cons. I appreciate that passive investing is popular due to low costs. However, for many it makes sense to consider both active and passive vehicles when building a portfolio. This can provide the best of both worlds. If well-researched, using active fund managers can add value in many areas. However, using passive vehicles in your portfolio is an ideal way to gain low-cost market exposure.

Witan wisdomTM

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DANIEL LANYON

Taste for fine wine has exploded in popularity in recent years, but not in the way you might think.

Rather than sip a tipple alongside a rare-cut steak, investors are

choosing to store their wealth in liquid form.

THE MOST

ILLIQUID ASSETS

31

Demand for fine wine, particularly the most pres-tigious names in Bordeaux and Burgundy, has shot up in recent years, especially in Asia where dizzying prices have reached tens of thousands of pounds for single bottles.

Some of the most expensive wines ever sold have gone for more than £100,000. If you’ve only paid a few hundred, those aren’t returns to sniff at.

So what could possibly go wrong?Well, actually quite a lot according to Tim Cockerill, investment director of Rowan Dartington.

The risks are likely to be greater in alter-native investments, than in traditional investments, he says.

“To do this properly you really need to know your subject and as far as I can see this is the preserve of the profes-sional,” he said.

“From my perspective the two main dangers are lack of li-quidity and lack of knowledge.”

IlliquidityLiquidity, or how easy it is to sell an asset at any price, is a key investment consideration.

The vast number of buyers and sellers in traditional stock markets keep the market liquid. All this means is that when an investor is ready to sell, they can do it quickly and easily.

This is not the case with wine, art or most alternative invest-ments, says Cockerill.

Paul Warner, managing director of Minerva Fund Man-agement says liquidity can be a problem with alterna-tive investments like wine because there are less buyers and sellers, tastes in fashion, art and what is collectable changes rapidly and the prices paid can also rise and fall quickly alongside this.

“[Wine] is not liquid, which can be a big issue if you need to sell and you don’t want to be a forced seller in these types of investments and being so far away from the mainstream investing you wouldn’t have daily valuations,” he said.

Also, whilst it’s not a problem for art or antiques, wine is a perishable good, its price is determined by the relative de-mand and supply for its vintage at a given time.

Its vintage can be a key selling point the older it gets but it also has a ceiling where the price can quickly diminish.

Tim Cockerill

KRUG1928

£12,621

INGLENOOK CABERNET

SAUVIGNON NAPA VALLEY

1941

£14,689

CHATEAU LAFITE1787

£93,125

CHATEAU MARGAUX1787

£133,919

JEROBOAM OF CHATEAU

MOU-TON-ROTH-

SCHILD1945

£184,916

The most expensive bottles of wine ever sold

32

FraudInvestors could also lose their money through fraud. Little regulation oversees alternative investments, according to Warner.

He cites the case of Glafira Rosales in New York, who fooled art galleries to buy 63 forgeries over a 15 year period for more than $30m.

AccessibilityTheir elite status and illiquid tendencies also make wine harder to invest smaller amounts of money in.

‘If you are wealthy enough to buy pretty much what you want then there are artefacts that seem to be perennially sought after – jewellery of iconic people for example,” says Cockerill.

“However for the man on the street this type of investing is hard to get into, yes you can buy wine – which is probably the easiest option as there are companies that will help you do this and the cost is easier to manage.”

But it is still difficult for investors to access alternatives with-out having to buy, hold and sell the assets themselves.

One way this can be avoided is through wine mer-chants Berry Bros and Rudd, who launched their own online exchange – BBX – in 2010. The exchange also advises on investment plans and has storage facilities for wine investors without their own cellars.

There is also an independent market index, Liv-ex, which provides pricing information for buyers and sellers, that has live data of auction hammer pricing.

Some of these challenges can also be lessened by accessing alternatives via a fund that specialises in the market for a particular alternative investment.

Another option would be through a wine specialist fund such as the Wine Investment Fund from Anpero Capital which offers access to fine wine investment for a minimum of £10,000.

However, investors be warned, such funds are unregulated and can carry substantial fees.

The goodCockerill says alternatives investments could act as a diversi-fication amongst other assets such as investments in stocks or funds, providing protection against volatility.

He says alternative assets can add potential value to an investor’s portfolio, although they would need to consider this benefit against the risks of holding them over traditional assets and advises caution.

There is also a tax incentive because alternatives are exempt from capital gains tax.

Also, there is a theoretical use of alternatives as a hedge against inflation and market crashes as the market tends to be less correlated with the traditional economy.

“The rule has always been; buy what you like and enjoy it, that way there is a double value to it but whether some-thing works as an investment is harder to assess,” Cockerill said.

Warner, says he doesn’t recommend wine or other alterna-tives to clients as the risk outweighs the potential returns compared to holding traditional funds or stocks.

“We have seen over the years, funds that have held assets with pricing and liquidity issues have suffered significantly if large numbers of investors wanted to re-deem their holdings,” he said.

“Antiques are like art, fashions come and go and you need to buy from reputable dealers, but the chances are you’re paying top prices. So it becomes a long-term game – some-thing to pass onto the children.”


ANALYSIS

SAFE AS HOUSES

Is now the right time to climb onto the property ladder? Alex Paget investigates the rapidly heating housing sector in London.

Part I:The London Conundrum

ALEX PAGET

34

THREE STEPS FOR FIRST-TIME BUYERSThree key boxes every first time homebuyer needs to tick, from Plutus Wealth’s Andrew Richards.

Within 10 minutes of any conversation about living in London, the topic of its housing market will rear its ex-pensive head.

London is the only place in the UK where the old saying of “house prices always go up” is true – so far – and anyone who was able to muster the cash to get on the ladder within

1. Check your credit fileBefore you even start to look at a proper-ty, even though you might have a good credit file, you should check it. You can get a free credit report from Experian and Equifax.

Make sure all your addresses are correct on the credit file and that you are on the electoral roll. Buyers should also have at least some sort of credit, such as a cred-it card. If you haven’t got credit it can, strangely, work against you because it can appear to a lender that you might not be able to handle a load. Just take out a credit card, spend a little bit on it and pay it off each month.

2. Have a solicitor in mindBuyers should have a solicitor in mind be-fore looking to buy because it means that if your offer is accepted on a property the buying process will be a lot simpler and faster. You can get the ball rolling more quickly. Solicitors’ conveyance work tends to be the longest part of the pro-cess, so it is good to keep on top of that early.

3. Get an agreement in principleFirst-time buyers should make sure they are eligible for a mortgage straight from the word go. Get an agreement in prin-ciple before you even start looking at a property. It’s just a promise from a lend-er saying that they will – based on your circumstances, your credit file and how much you want to borrow – give you a certain amount.

There is nothing worse than finding a property you like, having the offer accept-ed and then finding out that you can’t get a mortgage. You may as well find that out right at the very start.

striking distance of the capital two years ago will have un-doubtedly seen a huge return on their purchase.

But, why are London house prices rising?

Supply and demandThere are simply not enough properties in London to match the huge demand. There are 13 buyers for every one London property, according to recent research from estate agents Barnard Marcus.

35

Foreign influxDue to the cosmopolitan nature of the capital and its safe-haven characteristics, London attracts huge swathes of foreign buyers.

While that money has been targeting more fashion-able areas like Chelsea and Mayfair, it has caused a “ripple effect”; pushing prices up further and further out of travel zone one and two.

I spoke to a mortgage specialist who told me that one of his clients had bought a property in Peckham 12 months ago for £385,000. This same client had the property re-valued by an estate agent last month at a staggering £800,000.

While that is all well and good for those already on the property ladder in London, what does it mean for those of us who aren’t?

According to London Property Watch, an average two bed property in Notting Hill, Islington, Camden and Fulham will cost you more than £700,000. However, even in “up and coming” areas of London like Brixton, Clapham and Bethnal Green a two bedroom property will still set you back north of £400,000.

But Roger Bootle, managing director at Capital Econom-ics, who recently made the point in the Telegraph, said he doesn’t think first-time buyers who are trying to get on the ladder now are doing it to make quick return.

It comes down to fear. Buy now or you won’t be able to in the future.

But will house prices in London keep going up?Alex Ross, manager of the Premier Pan European Fund, doesn’t believe that will happen. He thinks that “politically, something has got to give” in the run up to UK elections next year.

He says that like the energy and utility sectors, London’s residential market will also face huge political intervention. He thinks that will come in the form of higher taxation of foreign buyers, which could create a ceiling for prices.

“Yes, it has got further to run, but as we get closer to the election you could see that market start to turn,” Ross said.

“But, if I were buying as a younger person who wanted to live in London for the next 30 years, buying today might not be a bad investment, though there will be a time when it will look horrible.”

However, Andrew Richards, independent mortgage broker at London-based Plutus Wealth, doesn’t think a significant crash is on the horizon.

“London is always going to be a weird anomaly,” he said.

His point is that, though prices do look high, the majority of professional salaries in the capital are still in keeping with even some of the most expensive boroughs. He also comes to back to the point that there is such demand for such little supply, that it is hard to see at what point prices will start to fall.

Interest rate riskHowever, he says that people who are currently saving for their first home or those who have now have enough to cover their deposit need to be very wary of one factor in particular: interest rates.

“People should think about the worst case scenario,” Richards explained.

“Rates will start to go up over the next two to three years and most, if not all, have not factored in that happening. There is going to be that realisation in two or three years when mortgage payments go sky high and a lot of people are going to be in trouble, to be honest.”

In order to reflate the UK economy after the financial crash, the Bank of England slashed the base rate to just 0.5 per cent. That figure has remained the same for the past five years now, but many of the fund managers we speak to are factoring in a rate rise as early as 2015.

Richards points out that most people have been buying a two year tracker mortgage – a type of variable rate mort-gage which tracks the base rate at a set margin – instead of a two year fixed mortgage – which leaves rates locked for a fixed period of anywhere from one to 10 years – because they have been looking to benefit from the ultra-low rate environment.

According to Richards, fixed rate mortgages tend to be 2.5 per cent plus the base rate. However, he says many buyers are oblivious to the fact that rates will rise at some stage and therefore so will their monthly payments.

Because of this, he says that no matter what the chances for capital growth are over the coming years, buyers need to think about affordability.

“I think some people are definitely rushing into it and over-stretching themselves. I know what they are trying to do; they are trying to take the biggest step onto the ladder as possible because of the capital growth potential.”

36

Throwing money away?Richards says that the desire to own a home is a quintessen-tially British thing. Across continental Europe it is common for people just to rent.

He points out that while it may seem like you are throwing money away, renting does give you a higher degree of flexi-bility because you will be able to move out of your property more quickly than a current homeowner in the event a buy-ing opportunity arises.

He also says quality of life is key.

“To put it simply, if you are renting you can probably afford to live in a nice property in a nice area. If that same person was looking to buy it could be they are having to look at a rubbish place in a rubbish area.”

While I am in no position to even think about putting down a deposit for a house, I would agree that lifestyle is very important. For instance, I rent in an area of London I really enjoy and the large majority of my friends live within spit-ting distance.

I know full well that I probably won’t ever be able to buy there, but I don’t want to sacrifice the quality of life I have and move somewhere that I don’t want to live just because I could afford to buy there.

Not yet, anyway.

Commuter cityFor those that are happy to compromise on a few as-pects for their home of choice, another option is move out into the commuter belt.

While prices are lower out of town, the majority of housing experts agree that areas outside of London like Woking, Watford, High Wycombe, Maidenhead and Tonbridge Wells are all likely to benefit from the ever increasing ripple effect of London house prices.

“If you are a bit further out, you are probably going to be putting a larger deposit down,” Richards said.

“That means that your mortgage rates will be lower than stretching yourself in Central London. Your monthly out-goings would probably lower and you would therefore be more prepared for a rate rise if you do live a bit further out.”

The caveat to that, of course, is that you are not living in London anymore. Also, while it may be cheaper, not only could you be spending a lot of time commuting, but you also need to factor in the cost of that travel: an annual rail season ticket can be in excess of £2,000.

Given the threat of rising interest rates and the unknown effect of the upcoming UK election, it may be best for first-time buyers to sit tight on their nest-egg and continue to rent in their current London borough.

In the next edition of FE Investazine, we look at a case study of a typical first-time buyer and ask the experts which tricks they can use to get ahead of the market.

Issued by Artemis Fund Managers Limited which is authorised and regulated by the Financial Conduct Authority (www.fca.org.uk), 25 The North Colonnade, Canary Wharf, London E14 5HS. For your protection calls are usually recorded. Contains Ordnance Survey data © Crown copyright and database right 2014.

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A273451_Hand Investazine_1536x2048px.indd 1 30/04/2014 10:57

ANALYSIS

Of all the asset classes available to investors, gold has arguably the biggest cult following. The term gold-bug has been applied to those bordering on obsession, but even their resolve has been tested of late following a very poor run for the precious metal.

JOSHUA AUSDEN

FOOL’S GOLD

39

Gold has been a unit of exchange for centuries and an overt display of wealth on jewellery and decora-tion. It has three main investment cases, all linked to the fact it has a proven record of maintaining its real value through the ages.

In recent years gold has grown in popularity, with many ordinary investors building up substantial holdings in the metal rather than buying equities or bonds. The threat of financial collapse in light of the 2008 financial crisis saw investors flock to the yellow metal for the worst case scenario. The central bank’s reaction to the crisis – mass money printing, referred to as quantitative easing (QE) – appealed to the first and second invest-ment cases.

Like all investments, gold is subject to speculation, and the mass buying of the metal via physical holdings, ex-change-traded funds, and open-ended funds saw the price of bullion jump more than 150 per cent between October 2008 and September 2011. Over the same pe-riod, global equities – measured by the MSCI AC World index – returned less than 20 per cent.

Performance of gold and global equitiesover 5yrs


Gold has had a torrid time since then however, losing more than a third of its value since its peak of more than $1,900 per troy ounce in September 2011.

The strength of the global economic recovery in the West, the slowing down of QE, and lessening worries

over inflation have contributed to the fall. There’s more to this however; while gold has no intrinsic value in its own right, the flows of money pouring into gold un-doubtedly led to a bubble in its price.

“Gold has lost some of its lustre, and the sharp volatility last year reminded us that it is by no means a risk free asset,” says FE Alpha Manager Steve Russell, who runs the £2.6bn CF Ruffer Total Return fund.

“It got a bit of a mythical following after the financial crisis, and I think its future path will be bumpier.”

The fall from grace has led many financial experts to ques-tion its place in investors’ portfolios, and whether the three base cases for holding it are valid.

In a paper titled The Golden Dilemma, academic research by Claude B Erb and Campbell R Harvey, both of Duke Univer-sity and the National Bureau of Economic Research, called into question gold’s ability to hedge against inflation, cur-rency risk and negative market sentiment.

They point out, for example, that the price of gold and US equities have often fallen steeply in unison, and show that gold and inflation have been far from directly correlated over the long term.

To see whether the metal was a successful hedge, they looked at the correlation, both measured at the end of each month.

If gold was a short-term hedge against inflation, Erb and Harvey argue that the ratio between the nominal price of the gold futures contract and inflation – measured by CPI – should be the same. However, this is far from the case.

In January 1975 the ratio was 3.36. In the preceding time it has averaged 3.2, reached a low of 1.46 in March 2001 and a high of 8.73 in January 1980. It currently stands at 7.31.

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B

A


A – S&P GSCI Gold Spot (29.7%)B – MSCI AC World index (84.2%)

The investment case for gold

1) Inflation hedge

2) Alternative to paper currency

3) Safe haven against black swan events like stockmarket crashes and war

Inflation-linked bonds are those whose payment of income is directly linked to inflation, usually measured by the consumer price index (CPI). These bonds tend to be held by investors who believe in-flation is likely to be higher in the future, and want to protect their purchasing power as a result.

It’s possible to get exposure to inflation-linked bonds via an open-ended fund, such as M&G UK Inflation-Linked Corporate Bond.

40

While gold has at times protected against a sudden spike in inflation and sentiment, they point out that the relationship is far from straight forward.

One of the biggest critics of gold is legendary investor Warren Buffett, who describes it as working on the “greater fool” mechanism – as long as there is someone else foolish enough to pay more, the price goes up.

Russell agrees with this scathing assessment to some ex-tent, but continues to hold it in his portfolio regardless.

He says the precious metal’s durability makes it a useful hedge against inflation, which he thinks will be much high-er in the medium to long term; however, he believes there are now better mechanisms to protect yourself.

“The problem with gold is that it has no intrinsic value, and the price only moves if sentiment changes. In other words, people have to behave in the way you expect them to, and so there is a greater level of risk than investing in something that is a proxy,” he said.

“We still think it has a place in the portfolio and added to it last year, but I would imagine it will stay within the 6-8 per cent range.”

“Gold’s main purpose is to protect against currency de-valuation. This and inflation aren’t directly linked, but in-flation tends to be a result of this happening. In the past gold has been a good place to hide away from the ef-fects of a spike in inflation, but it’s not a proxy for it, no.”

“This is why we have far more in inflation linkers and not gold. In the 1970s these products didn’t exist and so all you had was gold. However, these days you have an asset class that is directly linked to inflation.”

Paul Davies, a financial adviser at Clear Financial Advice, thinks gold’s ability to protect investors from spikes in nega-tive sentiment and inflation makes it a useful hedge – even though it is not a direct hedge for either.

He says its low level of correlation to other asset classes makes it a useful diversifier, though prefers to back man-agers with a willingness to invest in it rather than buying a gold ETF or fund.

“It’s still an important tool. We currently have exposure to it via one of our multi-asset funds – Troy Trojan, managed by Sebastian Lyon,” he said.

“I would never hold a specialised fund like BlackRock Gold & General. There’s no way I would want that much direct ex-posure. However, a manager prepared to invest in it if they see an opportunity is a good thing.”

Trustnet Direct data shows that the S&P GSCI Gold Spot index has a correlation of 0.05 to the average UK Equity Income fund over the last decade, and -0.02 – in other words, no correlation whatsoever.

Correlation of gold, equities and bondsover 10yrs

Name

IMA Sterling Strategic Bond TR

in GB

IMA UK Equity

Income TR in GB

S&P GSCI Gold Spot

in GB

IMA Sterling Strategic Bond TR

in GB

0.68 0.05

IMA UK Equity

Income TR in GB

0.68 -0.02

S&P GSCI Gold Spot

in GB0.05 -0.02


The correlation between equities and bonds is far higher, however.

As well as Trojan and CF Ruffer Total Return, other multi-as-set funds with a sizeable exposure to gold and gold min-ers include the £2.8bn Investec Cautious Managed fund managed by Alastair Mundy, and the £8.6bn Newton Real Return fund managed by Iain Stewart.

ETF providers such as ETF Securities and iShares enable investors to track the gold price via an easily tradable product.

There are seven gold funds in the IMA unit trust and OEIC universe. As well as investing in gold and other precious metals, they invest in gold mining compa-nies. While they have some correlation to the gold price, they are subject to the same headwinds and tailwinds as all equity shares. High profile examples include BlackRock Gold & General and Investec Global Gold.

ANALYSIS

GILT TRIP

Why your income stocks need to pay more than the Bank of England

THOMAS MCMAHON

42

All cricket fans and players know the rule: if you win the toss think about bowling first then bat anyway. It’s one of the oldest sayings in the sport, supposed to reflect the fact that it is always easier to bat first. It’s also completely untrue.

Investing, like all sports, has its own lore and proverbs, which seem to be handed down through the generations, offering the hope that there is some simple, practical wisdom that can guide investors through a complex environment. It’s probably best to ignore it all.

In the investment world most of the supposedly traditional thinking is of relatively recent provenance, borne out of the most recent concerns and fears of investors.

So says FE Alpha Manager Julian Lew-is, who runs the Cavendish World-wide and Cavendish UK Balanced Income funds.

One of the proverbs doing the rounds at the moment is that you shouldn’t buy a share yielding more than the 10-year gilt – or staple UK govern-ment bond. The theory is that if the stock is paying too much cash back to shareholders, it isn’t investing enough in its future growth. This increases the likelihood the company will fall flat on its face in years to come.

For investors, if you still hold a stock when it blows up, the assets you’ve invested in it will blow up right along with it. The fear of massive capital losses makes this proverb tempting to heed.

But, if true, this would make it impossible to get a decent yield from equities at the current time given that the 10-year gilt is yielding just 2.9 per cent. The average yield on a stock on the FTSE All Share is 3 per cent.

Lewis says this myth probably derives from some spe-cific period in the market when it seemed to make sense.

“I think financial thinking has changed a lot over the years,” he said. “My father told me that he once looked in his fa-ther’s bookshelf and found a book from 100 years ago and it said buy gilts, and buy equities only if you can get twice the yield.”

“The reason for that was that equities are risky, therefore you need to get twice the yield.”

“But in the 1950s and 1960s people looked at the fact that while bond yields are fixed, equities can grow. If you buy shares in companies they are able to pass price increases onto consumers.”

“Therefore, you should be happy to accept a lower yield than on gilts because you know that yield is to some extent inflation protected and will grow as prof-its do.”

“More recently, there was a big scare when people would accept almost no yield on gilts when they knew they couldn’t lose money.”

However, Lewis says that while the yield – or payout – on government debt is low now, that situation is changing. There may come a time again when investors should be wary of companies paying out more than the Bank of England.

“I think that the situation of high-equity yields and low bond yields is unwinding now. Bond yields haven’t really picked up but equities are recovering,” he said.

But the manager thinks for the moment, equities are the right place to be for income-hungry investors. For anyone in or near retirement, the payout from cash savings or government bonds isn’t going to go very far to cover your month-to-month expenses.

For this reason there are plenty of equities yielding more than gilts, he explains.

“You can get higher-yielding equities than gilts but that doesn’t reflect anything other than equities markets are still undervalued,” he said.

The reason for this is that if a company keeps its dividend payment constant, as its price falls its yield will rise.

Relatively high yields on equities reflect the fact that share prices have yet to rise to their highest levels in history, at which point yields will look very low on equities once more.

Julian Lewis

3.0%Average yield of FTSE All Share

2.9%Low yields for

10 years UK Government

Bonds

43

How to know when to maxi-mise dividendsKeith Ashworth-Lord, manager of the Premier ConBrio Sanford Deland UK Buffettology fund, says that a company’s dividend is an important part of the overall return to inves-tors, and businesses with high and low yields can both be appropriate in particular circumstances.

The issue comes down to whether companies can earn more money for

their investors by investing in their own businesses rather than paying it out directly in the form of a dividend.

Ashworth-Lord says that many growth businesses are able to reinvest their cash and make more from it in the future at a rate that will satisfy shareholders. These are good businesses to own, and this is the source of the adage in question.

However, there are other companies which are paying out a significant dividend, well above the payout on a 10-year gilt, which are good to own for other reasons.

He explains that some companies simply can’t earn sufficient returns on investing their own money in growing the busi-ness to make it worth it for shareholders. It all depends on whether there are projects available which the company can invest in that offer sufficient returns.

Ashworth-Lord says that GlaxoSmithKline is one such company he holds in this situation. The company pays out a high-dividend yield from its large cash reserves and has been doing so steadily for years.

“I think of them as stalwart businesses, which are generating cash but can’t generate a sufficient rate of return on their capital.”

In fact, he says, a high dividend can be the most appropriate way for a company to spend its cash. A healthy dividend payout can be a sign of a well-run company managed in line with shareholder interests.

Sometimes companies that have too much cash on their hands simply buy other firms to try and show higher rev-enues and profits that way. This ends up creating an un-wieldy, inefficient business likely to destroy shareholder value in the long run, he warns.

“If they cannot reinvest I hate seeing companies acquire businesses to bump up growth – nine out of 10 times it ends in tears,” he said.

Keith Ashworth-Lord

Dividend yieldHow much a company pays out in dividends

each year relative to its share price

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45

COMMENTARY

MY BOND IS MY WORD

STEVE MCDOWELL

Government-backed Premium Bonds have been close to the hearts of the

British saver for decades and in the recent Budget, Chancellor Osborne announced

large scale increases in the investment ceiling from £30,000 to £40,000 and next year to £50,000. Should they be a part of

your investment plans?

46

Certain things in British life carry the status of ‘Na-tional Treasure’. Nelson’s Column, perhaps, or Big Ben could be National Treasures. Strawberries and Cream, Wembley Stadium and Joanna Lumley – these are all definitely National Treasures.

You can tell someone or something has this unique status because you can’t make fun of them or it, unless you want to feel the rough end of Middle England’s wrath. Imagine it – disrespecting Joanna Lumley or defacing Big Ben – the culprit would be immediately viewed as evil, unbalanced or just plain nasty.

And this is where Premium Bonds come into play because as a financial journalist and commentator almost anything is fair game and in the last few years it is fair to say there have been some righteous targets. One can take a very big stick indeed to banks, insurance companies, pension providers, payment protection insurers, boiler rooms and so on ad nauseam. But do anything more than offer a faint criticism of “Britain’s Favourite Savings Product” and it is you who will endure the stick.

Enhancing their National Treasure status, Premi-um Bonds actually have a name too, though ERNIE is not a person. ER-NIE was one of the world’s first useful analogue computers and still works today in the same way (though as a piece of software known as ERNIE 4) as when he came on line in 1956. He does exactly as his name implies – it stands for Electronic Random Number Indicator Equipment and his job is to randomly select each character in the 10,11 or 12 letter and number combination of each bond. ERNIE is so much-loved he actually gets Christmas and Valentine’s Cards and the draw used to be televised live by celebrities in the 1960s – you can see now why you attack him at your peril.

SimplePopularity is one thing – so were flares, perms, power shoulders and Syphilis at one stage in British history – but practicality is quite another. In essence, Premium Bonds are simple. You buy between £100 and £30,000 worth of bonds

– though from June 1 this year that will extend to £40,000 and then £50,000 from 2015 – and each one of those is en-tered into a monthly draw.

A number of the bonds are picked out and they win a se-lection of prizes, which up to the maximum ceiling can be reinvested in the next draw.

One lucky bond holder will trouser £1m tax-free each month, three more will win £100,000, six more £50,000, 13 – £25,000, 32 – £10,000, 61 of £5000 and so on down in a pyr-amid of £1000, £500, £100 £50 and the smallest prize of £25.

The number of these prizes is pre-determined by a cal-culation which will provide a yield which used to roughly trail the base rate but since 2008 when it has been at 0.5 per cent the “Prize Fund Rate” as it is officially known is set on a three-cornered strategy (and only a Government de-partment could do this) based on the best deal for National Savings & Investments’ savers, a fair deal for tax-payers (who presumably are the same people) and the stability of the market.

This yield is currently set at 1.3 per cent. In the draw of April 2014 this means that 1.8m prizes totalling £51m were drawn out.

Premium Bonds are approaching their half-century anniver-sary after they were launched by Harold MacMillan in his Budget Day speech in April 1956 with the first one being bought for £1 by City Alderman Sir Cuthbert Ackroyd (later the Lord Mayor of London) in the Post Office on November 11 of that year. By the end of that day £5m worth of Premium Bonds had been sold.

Redeemed

Successive Governments have been ramping the heck out of them ever since. After all, it is public money that they get to play with and is rarely redeemed (though Premium Bonds are very easily are redeemed), so it makes sense to them. Still worth £1, there are now more than £47bn of them in the game.

47

This means the chance of winning £1m in each draw is more than 45bn to one – the odds of a National Lottery jackpot win are about 14m to one – with the odds of winning even £25 at one on 26,000. You can then divide this by the num-ber of bonds you hold. There will be a second £1m draw in each month from August 2014 so of course that will change, but odds of 23bn to one still seem a bit long to me.

The theory is then is that with average luck, then you will yield 1.3 per cent tax-free on your investment. But with the average savings account rate 1.6 per cent and the top cash ISA rate of 1.75 per cent you can do some simple maths. And what if you are not lucky?

As the Government Actuary’s Department will tell you (once you can hear them over the backdrop of the relentless par-tying) there is no actuarial test for randomness even though it issues a certificate to say it has no reason to believe the draw isn’t random. Only an actuary…

Because of this randomness, and because people have varying amounts of holdings in each draw, there are some wacky results thrown up. It takes a proper nerd to work out all the possible variables of the monthly draw but it stands to reason there are often some anomalies thrown up – more than one bond in one holding coming up, for example. This gives rise to a lot of mythology about Premium Bonds and the almost hysterical level of fondness for them.

RandomThere is a quite vigorous school of thought – though I can-not see how this logically works if everything about Premi-um Bonds really is random – that by churning your own holding you increase the chances of claiming a prize and therefore increasing your yield because…

… Newer Premium Bonds have a better chance of winning prizes. NS&I is robust about this and say simply that it has sold far more bonds in recent years than it did in the early days as the ceiling has been increased and so it appears this way. Neither can possibly be true, in my view.

And what about the £46m in unclaimed prizes – does that affect the yield?

On the upside the money is very, very safe, because the Government looks after it for you directly and if you are a high-rate taxpayer it does represent another place to put some excess dosh and hide it from the taxman. With inter-est rates higher in the future and a better yield this would become more a bit more attractive.

But as a central part of an investing strategy it really makes no sense to invest in something that appears to rely on a very high degree of luck even to beat inflation, never mind increasing the value of your portfolio.

Oh dear, I’ve done it now. I shall probably be lynched for heresy – and it’s all your fault.

BRIAN TORA IS AN ASSOCIATE WITH INVESTMENT MANAGERS JM FINN & CO

COMMENTARY

Catching falling knivesThe business of investing has plenty of folklore, some-times contained within pithy phrases, that investors be-lieve help them to make better decisions. If the chairman of a company takes the chair of his local football club, sell the shares, goes one piece of advice. In a way this is understandable because his new role could prove a dis-traction. One rule I chose to ignore – with disastrous con-sequences – was never try to catch a falling knife.

If this does not sound like a financially-savvy phrase, I should explain that it refers to trying to buy the shares of a company suffering a catastrophic fall in its share price. The argument is that you can never time the best entry point, so the wisest thing to do is to sit on the sidelines until the shares start to recover – assuming they do, of course. But when a well-known and highly-regarded company takes a dive, it is all too tempting to try to pick them up cheaply.

The company that caused me so much angst was Mar-coni. Formed from the mighty General Electric Compa-ny that had been built up by Arnold Weinstock, they be-came a stock market darling in the run up to the start of the new millennium as technology, media and telecoms shares enjoyed a massive boom. Peaking at more than £13 a share, the shares fell dramatically as the technol-ogy bubble burst.

When they fell below £1, I made two rather serious mis-takes.

The first, of course, was to buy them at all. But standing at a mere fraction of their worth just a few months ear-lier, they seemed a steal.

The second mistake was to buy them in the name of my wife. When the shares fell below 10p she started to take an undue interest in the fortunes of the company.

49

I threw in the towel at 6p and sold them – just as well as the shares became virtually worthless. Ignoring such a well-known piece of folklore exacted a heavy price.

Anybody involved in the stock market is bound to make mistakes from time to time. One of my first was failing to understand that shares move according to what investors expect to happen, not necessarily what actually takes place. As a young bluebutton (a clerk who ran errands for the dealers in the market, but who could not buy or sell shares himself ) on the floor of the Stock Exchange in the mid 1960s, I bought shares in Associated British Pictures, then run by members of the Grade family, ahead of their results.

It happened that a friend in the entertainment business had told me the results would be good – hence my pur-chase (no insider dealing rules back then). You can imag-ine my disappointment when the shares fell on the pub-lication of higher profits. Nursing a small loss, I enquired of a market professional who traded the shares why they had fallen. It seemed that the chairman used to tell all his chums what the results were likely to be, so if they weren’t better than leaked, disappointment set in.

Another investment error on my part was to purchase shares without conducting proper research. This was all too easy to do in the days when markets were not as efficient as they are now and with less access to decent research, though by the 1980s the provision of profes-sional research material was becoming commonplace. “Have a few of these, old boy, they won’t do you any

harm” pretty much summed up the approach of brokers selling to investment managers back when I started out as an investment manager in the 1970s.

Then you might reasonably rely on the broker’s nose for a good situation, but as the market grew more professional, competition intensified, regulation started to make a dif-ference and information became more easily accessible, making due diligence a necessity. Due diligence doesn’t seem quite so important when you are dealing with your own money, though, particularly when you can point to a long career in the investment world.

My decision to diversify my portfolio into property through a closed-ended investment vehicle less than ten years ago proved to be another shot in the foot. Al-though I was careful to pick a manager with a proven track record, I failed to check on whether the company had substantial borrowings. One of the potential ad-vantages of investment trusts is that they can gear their portfolios, delivering higher gains in a rising market. But, the converse is true, so when the financial crisis of 2007/08 hit, the shares suffered severely. True, they’ve bounced back a little, but I could have avoided the con-sequences with just a little more research.

Overall, though, my successes have outweighed my failures. Some bad calls are inevitable and it is around half a century since I first ventured into the stock market. Indeed, any investor needs to accept that mistakes will occur and things do go wrong from time to time. Fol-lowing a disciplined approach and obeying a few sound rules will limit the damage to your portfolio.

MY HERO

I GET KNOCKED DOWN, BUT I GET UP AGAIN

STEVE MCDOWELL

Bill Miller was one of the greatest value investors of all time – beating the S&P 500 year after year. And then it all went horribly wrong… Steve McDowell examines the myth behind the man.

51

There are a few immutable laws of investing and they have all been learned the hard way.

One of them must be that we must all understand that no-one gets it right all of the time.

Another perhaps, is a human quality that some Smart Alec once coined “Bouncebackability” but what most of us might know as ‘resilience’.

And this applies to some very successful, very famous and very rich fund managers as much as it applies to the rest of us that got our fingers burned along the way.

Almost all of our heroes have made mistakes in their time, but that of Bill Miller, otherwise known as ‘the man who beat the S&P’ was pretty spectacular. De-ploying free thought and balls of such dimensions they are measured not in centimetres but in GDP, Miller made bets on stocks others were afraid of and outper-formed the S&P in every year from 1991 to 2005.

We all get it wrong from time to time but when some-one of the stature of Miller completely melts down because he bet into the biggest banking crisis in fis-cal history we can all feel a bit better about ourselves. Unless of course you happened to be an investor in his Legg Mason Value Trust at any time after 2006 – which would have made your eyes water.

PeléAt that time it was fair to say that in terms of sheer fame, if Bill Miller was a footballer he’d have been Pelé.

Just before it all went wrong his name was usually prefixed with the word ‘legendary’. Indeed in Novem-ber 2006, Fortune Magazine’s managing editor, Andy Serwer, said Miller was an iconoclast: “You simply can’t do what he’s done in the supremely competitive, ul-tra-efficient world of stock picking by following the pack… The fact is that Miller has spent decades study-ing freethinking overachievers, and along the way he’s become one himself.”

Pop! CNN estimated he personally lost a shade under $200m on Bear Stearns, Countrywide and KB Home – all major US stocks that practically vaporised in the mortgage-backed crisis of 2008; Freddie Mac too – all words which will put chills in an investor’s spine. In late 2007 the Legg Mason Value Trust he headed had $16.5bn under management – a year later it was worth

$4.3bn, including redemptions. His fund investors were left nursing losses worth 58 per cent.

Unlike the investors who were probably quite miffed, Miller was phlegmatic about it at the time: “The thing I didn’t do, from Day One, was properly assess the se-verity of the liquidity crisis… Every decision to buy anything has been wrong.”

Miller eventually stepped down from managing the Value Trust which of course was a slightly paradoxical solution. Given that he beat the S&P 500 for 15 solid years up to that point, you might have argued that one of the world’s great value investors could well have been the best solution to getting those investors back on track. The madness of the crowd can be a powerful force.

ParadoxesMany would have slipped back into obscurity – per-haps taken a discreet professorship (he is chairman emeritus of the Santa Fe Institute) or a few nice low-key consulting jobs. Nope, not Bill, he just stepped back a bit and still runs money today – the Legg Ma-son Opportunity Trust. In one of many paradoxes in the career of Bill Miller, the Opportunity Trust has put on, according to Trustnet Direct, 224 per cent over the last five years. In deeper irony, it is more than 30 per cent weighted in financials.

Born in 1950, Miller grew up in Florida and like almost all of our investing heroes took a deep interest in the stock market at an early age – in high school in his case. In the late 1960s he was investing the mon-ey he earned umpiring baseball games in stocks like RCA, making enough to buy a car. After graduating in economics with honours from Washington and Lee University in 1972 he had a stint for a few years as an intelligence officer in the US Army in Germany, during which he went into a Munich stockbroker’s office and bought, ironically, Intel Corp shares.

He studied philosophy as a post-graduate at The Johns Hopkins University and took a job with the JE Baker company steel manufacturing company in Pennsylva-nia managing its investments. His then wife worked at Baltimore-based Legg Mason. He met the founder Raymond ‘Chip’ Mason who mentioned he was keen to start some mutual funds. Miller leapt at the chance and joined in 1981 and Value Trust, with Miller as co-man-

52

ager, launched in 1982. A meeting with the great Peter Lynch of Fidelity in 1984 led him towards the mortgage market and his path was set.

He quickly made a reputation as a terrific contrarian. During the US savings and loan crisis of 1990/91 Miller piled into American Express, mortgage giant Freddie Mae and struggling banks eventually with more than 40 per cent of the portfolio in financials. After a shaky start Value Trust was coming out top of the pops and in 1996 gained more than 38 per cent – about the time Miller was moving on into AOL and distressed tech stocks while the rest of the fund management com-munity was catching onto the financials.

ErrorsThere were errors – quite big ones too – Enron and Worldcom among them and between 1998 and 2002 ten stocks in the portfolio lost 75 per cent or more. Yet he powered on as his good bets made great money, in doing so turning Legg Mason from a provincial in-vestment house into one of the world’s biggest money managers and Miller, eventually, into its chairman.

In the middle of this, in 1999, he made a tasty deal with Legg Mason to take the reins of a new trust, Op-portunity and the fees paid into went into an entity half-owned by Miller which, between 2005 and 2007, paid him $137m. When he stepped down from the Value Trust in 2011 – handing it over to his long-term co-manager Sam Peters – he retracted to running money for the Opportunities fund.

He went on and on making bold and apparently clever bets, putting his success down at one stage to ‘exhaus-tive security analysis’ and ‘portfolio construction’, two phrases which will resonate with any investor.

There were some quotes of powerful investing wis-dom from the great man too, many of which would prove very handy to investors in any circumstances, so perhaps these are the things we can take from this great investor.

Bitcoin, anyone?

I often remind our analysts that 100 per cent of the information you have about a company represents the past, and 100 per cent of a stock’s valuation depends on the future.

What we try to do is take advantage of errors others make, usually because they are too short-term oriented, or they react to dramatic events, or they overestimate the impact of events, and so on.

Yet you cannot put a good man down and it takes only a brief Google to discover what could well be the next chapter in the fascinating career of Bill Miller.

53

NEXT ISSUE

PENSIONSChancellor George Osborne effectively set savers free in his annual Bud-get statement last month, announcing the most sweeping changes to pension savings in decades.

Under the new rules, which take effect in April 2015, savers will be able to draw down the entire amount of their pension pot, rather than just 25 per cent tax-free at retirement (age 55). In the age before full drawdown, savers would have had to buy an annuity, or agreement with a provider that paid a set amount of income for the rest of your life. The price – your pension savings locked up in that annuity.

Now that savers can access all of their hard-earned cash – three quarters of which will be taxed at the marginal rate – what should investors do with their money?

In the next issue of Investazine, we’ll look at how to build, manage and draw down a pension pot. Coupled with the New ISA rules, which allow up to £15,000 to be invested in a cash, stocks & shares, or combination ISA in a given year, there is more opportunity than ever for the diligent saver to build a healthy retirement pot.

If you have any questions about the new pension regime or about how to make the most of your long-term savings, we want to hear from you. Email us at [email protected].

See you next month!

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