Foreword
By Annabel Brodie-Smith
After last year’s unexpected twists and turns, we thought we had experienced our fair share of political shocks. We thought we knew which European elections were taking place this year, with Holland’s and France’s elections now over and Germany’s election in September. However, Theresa May had a surprise in store us for us, and the UK election is just under a month away.
UK investment company managers remain unfazed about the forthcoming election. Whilst some are keeping their powder dry in this uncertain political environment to see how markets progress, others are taking the opportunity provided by market volatility to add to their favourite positions. Read the comments of the investment company managers of Fidelity Special Values, Merchants and BlackRock Smaller Companies amongst others in our article.
Following on with the political theme, Donald Trump has had an eventful 100 days in office. His ‘100-day action plan’ has had its fair share of hurdles, particularly where it has required legislation to be passed through Congress. Trump himself admitted: ‘Nobody knew that health care could be so complicated’. Geoffrey Hsu, manager of the Biotech Growth Trust, explains in his piece the ‘tumultuous ride’ of investors in biotech and the strong US political influence on the sector.
Environmental investors were also understandably concerned about the implications of Trump’s plans on the sector. In his analysis Jon Forster, co-manager of Impax Environmental Markets examines Trump’s influence on the environmental sector: “we believe that whilst the impact is mixed, much of the negativity is likely overdone.” Jon explains why he believes environmental markets will continue to prosper way beyond the Trump presidency.
Finally, this week is Financial Planning Week which aims to encourage consumers to take control of their finances, as well as raise awareness of the financial planning profession. For those of you who are considering finding a financial adviser, our Head of Training, Nick Britton, has put together five questions to ask any potential candidate.
Hope you have a great May. Chelsea Flower Show will be a highlight for me this month.
Annabel Brodie-Smith, Communications Director, AIC
The General Election
Managers comment on its impact and where they are finding opportunities
On 18th April Prime Minister Theresa May surprised everyone by calling a snap election for 8th June. The AIC has collated comments from UK investment company managers on the impact of the election, the outlook for the UK and where they are currently finding opportunities.
Investment company managers remain unfazed by the election and focused on their investments. The short-term impact of the election announcement was sterling strengthening but as Robin Boyle of Athelney Trust commented: “the pound has strengthened recently - no great surprise since it was madly oversold with the world and his dog heavily short.”
Annabel Brodie-Smith, Communications Director of the AIC said: “Investment company managers remain sanguine about the short-term uncertainty caused by the election. Whilst some are keeping their powder dry in this uncertain political environment to see how markets progress, others are taking the opportunity provided by market volatility to add to their favourite positions.
"Investment companies have seen many elections and have produced good long-term returns for their shareholders. As ever, investors need to take a long-term view and have a diversified portfolio. If investors are in any doubt they should speak to a financial adviser.”
Focus on companies and valuations amidst an uncertain political environment
Alex Wright, portfolio manager, Fidelity Special Values PLC said: “While some investors and commentators will keep a sharp focus on the day-to-day evolution of the political landscape, I prefer to focus on what is happening within the companies and industries I invest in, and avoid skewing the portfolio too heavily towards one political outcome or another.
Alex Wright, Fidelity Special Values
"2016 should serve as a reminder to us all that proper diversification is the only defence against the unexpected.”
Simon Gergel, Manager of Merchants Trust said: “The political environment seems more uncertain than for many years. The nature of the UK's future relationship with the EU is unclear. We are set to have another UK general election, and there are elections in France and Germany, and rising social unease within the Eurozone.
"2016 should serve as a reminder to us all that proper diversification is the only defence against the unexpected"
– Alex Wright, Fidelity Special Values
"Donald Trump's US presidency could lead to unpredictable changes in policy within the world's largest economy, not to mention potentially major changes to foreign policy towards the superpowers of Russia and China.
“It is hard, as ever, to predict where the overall market will go in the short term. We prefer to focus on individual company prospects and valuations when assessing investments and constructing a portfolio.
Simon Gergel, Merchants Trust
"There are many businesses with strong competitive positions offering the combination of an attractive dividend yield and the potential for capital gains for investors. These businesses should deliver good returns over the medium to long term.”
Robin Boyle, manager of Athelney Trust said: “Short-term, I would not advise taking up big positions in advance of 8 June - much better to have a calm, considered look at the French elections first. Longer term, though, I aim to maintain a more-or-less fully invested position and will continue to identify attractive smaller companies in which to invest for capital growth and a rising dividend.”
Prospects for UK, sterling and why Mrs May called an election
Robin Boyle, manager of Athelney Trust said: “Once again, the UK is the second fastest-growing country in the G7: even the IMF has admitted its mistake by increasing its GDP forecast to 2 per cent. But, as usual, the home economy is dreadfully unbalanced with the consumer until recently spending heavily by the use of credit cards and business investment low by international standards. The hope must be (and it is only a hope) that a weaker sterling leads to stronger exports which might encourage more business investment.
“Having said that, the pound has strengthened recently - no great surprise since it was madly oversold with the world and his dog heavily short. As with most crowded trades, they get unwound often to the detriment of the trader. I see more shorts being closed in the weeks ahead with the pound rising to $1.30-35. Expect the economy to soften in 2018 as lending standards tighten and the consumer being a little more careful.
"The hope must be (and it is only a hope) that a weaker sterling leads to stronger exports which might encourage more business investment"
– Robin Boyle, Athelney Trust
“As for the election, I believe that it was not only the size of the mandate that Mrs May seeks, it was the length so that she does not need to go the country again until 2022, which gives her wiggle room for negotiations plus two or three years of transitional arrangements.”
Smaller companies performing well
Smaller companies rallied in April, with a number of UK Smaller Companies investment companies, including BlackRock Smaller Companies, reaching record share price highs.
Mike Prentis, manager of BlackRock Smaller Companies Investment Trust said: “The UK economy has been performing well and ahead of most expectations at the time of the EU referendum last June. GDP growth, employment data, new housing completions have all been good, and consumer confidence has proved to be fairly resilient to date.
"We have seen good trading data from companies as varied as sports fashion retailer JD Sports and recruitment company Robert Walters, in respect of their UK operations. Other defensively positioned companies, such as veterinary surgeries business, CVS Group, should continue to fare well, whatever uncertainties Brexit negotiations may bring.
“Of course, many UK listed small and mid-cap companies are very international in their sales. Recently many industrial companies have been faring well as export markets strengthen on the back of weaker sterling over the last 9 months, and given strengthening GDP growth in markets such as the USA and China. We have seen good trading updates from internationally exposed industrial companies in recent days.
“We tend to invest for the medium term, taking care to avoid any significant shorter term risks. Even for more UK exposed companies, there are always some strong enough to take advantage of uncertainty and win market share. The UK is home to many excellent companies offering great innovation and technology with global application. These will not be impacted materially by any short-term uncertainties.”
Where are managers finding opportunities?
"The UK is home to many excellent companies offering great innovation and technology with global application. These will not be impacted materially by any short-term uncertainties"
– Mike Prentis, BlackRock Smaller Companies
Simon Gergel, Manager of Merchants Trust said: “Two major areas offer particular value; selected ‘mega-cap’ companies and recovery situations. Within the mega-caps, we remain positive on Royal Dutch Shell, BP, GlaxoSmithKline and HSBC. Whilst three of these performed very well last year, they all still offer good value. Dividend yields of 5% or more, which look increasingly secure, provide a solid underpinning to their value, with opportunities to grow profits significantly.
“Recovery situations have been a focus for some time. In an uncertain world, with low interest rates, investors have been prepared to pay high prices for companies with relatively predictable earnings streams. The flip side has been that many businesses with strong competitive positions, but which are undergoing specific short term issues, have been lowly valued. There are still many companies trading well below their long term intrinsic value.
"We continue to have a diversified exposure to recovery situations, particularly within the cyclical consumer and industrial sectors and within financial services.
“Outside of these areas, we see good value in life insurance and utilities, two sectors offering high yields and, in most cases, real dividend growth. Conversely, we see little value in consumer staples sectors, like food producers and beverages, where valuations are high and future returns are likely to be modest at best.”
Alex Wright, portfolio manager, Fidelity Special Values PLC said: “Although in general, there is still a large gap in valuations between cyclical and defensive stocks, the picture is more nuanced than it was 12 months ago, and stockpicking opportunities have become available in some classically defensive sectors, such as healthcare, telecoms and even tobacco.
"However, the defensive companies I am finding attractive have esoteric features which has led to them becoming unloved in the market and therefore trading at inexpensive valuations. I welcome this opportunity to give my portfolios a more balanced exposure.”
Robin Boyle, manager of Athelney Trust said: “The best opportunities will occur in home-based companies such as populate the FTSE 250, SmallCap, Fledgling and AIM indices such as house-builders, breweries and one or two banks such as Lloyds. Being a small company specialist, my sectors have not really seen any weakness since June last year but I am always looking out for bargains: they can still be found but are much fewer than was the case in 2016.”
Biotechnology: The fundamentals remain strong
By Geoffrey Hsu, The Biotech Growth Trust
Geoffrey Hsu, Portfolio Manager, The Biotech Growth Trust
Investors in biotechnology over the past few years have had a tumultuous ride, but the long-term outlook remains bright. The biotech sector delivered strong performance from 2011 to mid-2015, but then entered a dramatic correction in the fall of 2015 due to investor fears about the sustainability of high drug prices in the US. Certain specialty pharmaceutical companies were criticized in the media for excessive price increases, and presidential candidate Hillary Clinton made lowering drug prices a key part of her election campaign.
As a result, after a steep slide in valuations in early 2016, the biotechnology sector remained largely range-bound throughout the rest of the year, as fears over a potential Hillary Clinton victory in the US presidential election acted as an overhang on the sector.
The Trump rally
The surprise election victory of Donald Trump in November 2016 briefly catalyzed a relief rally in biotech, sending the Nasdaq Biotech Index up 9% on the day after the election. Investors perceived the Republican sweep of the presidency and both chambers of Congress as a more favorable outcome for the drug industry than a Democratic victory, as it appeared to lessen the likelihood of any dramatic government action to control drug prices.
"While the policy backdrop remains unclear, the key fundamentals of biotech remain strong"
– Geoffrey Hsu, The Biotech Growth Trust
Indeed, Trump’s platform had largely been based on jobs, trade, taxes, and national security rather than lowering prescription drug prices. His pledge to repeal Obamacare suggested a shift towards a healthcare system based on free market principles rather than one based on government intervention.
Uncertainty creeps back in
The burgeoning biotech rally was cut short, however, in January 2017, when President Trump made comments suggesting he favored having government more aggressively negotiate drug prices with manufacturers. Repeated comments by President Trump regarding his intention to lower drug prices in the US re-established the pricing fears that had weighed on the biotech sector pre-election.
As a result, there is still great uncertainty about specifically what Trump intends to do with regards to drug pricing.
Biotech is undeterred
While the policy backdrop remains unclear, the key fundamentals of biotech remain strong. Innovation continues, with significant progress occurring across many new drug modalities, including gene therapy, antisense, and cellular therapy. New product launches, including a novel drug for spinal muscular atrophy and a whole new class of migraine medications, should open up billion-dollar market opportunities.
Growth of M&A
In addition, M&A should continue to be an important driver of small-cap biotech performance as innovative assets and technologies are acquired by larger companies. Republican plans to institute a tax repatriation holiday should facilitate this M&A activity by allowing large pharmaceutical companies to repatriate overseas cash at a reduced tax rate, increasing the cash balances available to make acquisitions.
Positive signs for regulation
"New product launches, including a novel drug for spinal muscular atrophy and a whole new class of migraine medications, should open up billion-dollar market opportunities"
– Geoffrey Hsu, The Biotech Growth Trust
On the regulatory side, the environment for new drug approvals continues to be favorable. Trump has said repeatedly that he would like to expedite the approval of new drugs, and his nominee to head the FDA, Scott Gottlieb, is regarded as industry-friendly. Once there is more clarity about Trump’s plans for drug prices, we would expect biotechnology share prices to more appropriately reflect these positive fundamentals.
For The Biotech Growth Trust, our focus remains on investing globally in companies developing innovative compounds across a wide range of therapeutic areas. Areas of particular focus include neuroscience, oncology, and rare diseases. With regards to drug prices, our view is that companies will increasingly need to demonstrate the value of their drugs to the healthcare system, which favors innovative assets addressing unmet medical needs.
Environmental Markets:
Drivers are increasingly beyond political intervention
Jon Forster, Co-Manager, Impax Environmental Markets plc
Investors in environmental markets are, understandably, concerned about the implications of a Trump presidency. Trump campaigned as a pro-coal, climate change sceptic and his cabinet is packed with foes of environmental regulation.
However, we believe that whilst the impact is mixed, much of the negativity is likely overdone. The legislative and regulatory mechanisms, together with pure economics, will drive healthy growth in the areas in which Impax Environmental Markets (IEM) invests.
We’re also confident that by investing globally across a diverse range of markets, including energy efficiency, alternative energy, water, waste and sustainable food and agriculture, we can safely navigate any challenges that we may encounter.
Focussing on the US, we outline why we believe environmental markets will continue to thrive well beyond the Trump presidency.
The negativity on prospects for renewables is overdone
Concerning US renewables policy, we don’t expect changes to existing policy mechanisms for several reasons. First, with bipartisan support, the subsidy mechanisms were recently extended to fade out in the early 2020s.
We expect this arrangement to be honoured, not least because renewables is now a significant job creator. For example, in the US in 2015, the solar industry created jobs 12 times faster than the overall rate throughout the country.
Second, much of renewables growth is driven by state-level policy - not Federal. It’s also notable that whilst Trump has commenced proceedings to cancel the Clean Power Plan, which was to be an important market driver from the mid-2020s, 17 states have voiced their intention to carry on as before.
"We believe environmental markets will continue to thrive well beyond the Trump presidency"
– Jon Forster, Impax Environmental Markets
Finally, the last few years have seen dramatic falls in the cost of renewables, which are increasingly able to compete, unsubsidised, against natural gas- and coal-fired capacity. Take-up will accelerate further as the price of battery storage continues to fall, allowing renewables to supply power when the wind isn’t blowing or the sun isn’t shining.
Let’s also remember that IEM’s exposure to renewables globally is only around 10%, and US renewables holdings currently account for approximately 3 - 4% of the portfolio.
Pure economics drive many markets in which IEM invests
At the same time, many environmentally focussed companies have built business models that don’t rely on subsidies or regulatory support. Rather, they help their customers to reduce resource use and therefore cut costs.
Industrial energy efficiency, for example, offers some of the highest returns on investment that companies can make with their capital expenditure.
A commitment to increased infrastructure spending
President Trump has stated his intention to boost infrastructure spending - a plan for which there is broad bipartisan support. This should benefit environmental markets, especially new water infrastructure.
While considerable uncertainty remains on the exact nature for delivery on the ground, as well as how to integrate new initiatives with existing mechanisms, water infrastructure has been specifically highlighted as a focus area for investment - spurred on by the high-profile lead poisoning incident in Flint Michigan, which has been linked to the state’s outdated distribution network.
The investment case gathers momentum
Promises to cut corporate tax rates will also benefit the environmental markets sector, which largely comprises small and mid-cap firms, and rising interest rates shouldn’t pose issues for environmental firms, as they tend to carry relatively low levels of debt.
If a business-friendly Trump administration is prepared to put economic pragmatism ahead of the ideological preferences of parts of its base, it will recognise – and reward – the economic potential of environmental markets.
This all leads us to conclude that the drivers of environmental markets continue to gather momentum and the reasons for investing in environmental markets are as compelling as ever.
5 questions to ask before you choose a financial planner
By Nick Britton, AIC
Nick Britton, Head of Training, AIC
I’m sure it wasn’t planned, but it’s rather appropriate that Financial Planning Week coincides with Mental Health Awareness Week. Finance worries can take a huge toll on our mental health, and having a good plan in place can be a great aid to peace of mind.
When it comes to choosing a financial planner, it’s a bit like choosing a therapist or counsellor. Their qualifications, knowledge and experience are all important – but it’s also important that you click with them and feel they understand you.
Here are five questions to help you decide if a financial planner is right for you.
1. What will I pay?
The charging structure might be an hourly rate, a fee per job, or a percentage of your assets. Make sure you understand the fees and have them in writing.
2. What ongoing contact with you will I have?
Can you just phone up out of the blue? Are there regular reviews? (The CISI recommends annual reviews as a minimum.) What’s included in the fees? And which people in the firm will you be dealing with?
3. Who does most of the talking?
A long-term relationship is a balance. You should have the opportunity to say how you feel and what your aspirations are, while a financial planner’s job is to explain how they will get you there.
4. What are your qualifications and experience?
Check if the financial planner holds any advanced level professional qualifications, such as the Certified Financial Planner qualification. The CISI recommends you should opt for a planner with at least two years’ experience in working directly with individuals and planning their financial needs.
5. What kind of products do you currently recommend – and do you recommend investment companies?
A financial planner who describes themselves as ‘independent’ should cover all retail investment products, including investment companies. If they don’t, this should ring alarm bells.
Finally, you can check that both the firm and the individual planner you are speaking to are authorised by the FCA. To do this, you can search the Financial Services Register on the FCA’s website.
