Bouncing Back: The Revival of the Tech Sector - GAM's Ben Sears
With the tech sector enjoying a renaissance, GAM outlines how their Discretionary Fund Management business gives clients access to the most promising opportunities on offer.
The technology market seems to have shaken off the dismal reputation of the dot.com bubble and is generating keen interest and some attractive returns. Since the beginning of 2008, the MSCI World Technology index has experienced something of a turnaround, outperforming the MSCI World by almost 18%. This has triggered an industry shift and the start of a new, positive performance trend, reviving hopes that the unfulfilled promises of the late 1990s may finally be realised. Indeed, amid the height of the market turmoil in 2011, the once-branded ‘high-beta, high-risk’ sector delivered a 285 basis point outperformance over the year – and it has continued to do well for investors during the turbulent markets of 2012.
Revamped and revitalised
Technology investing is now enjoying a renaissance. Many of the opportunities on offer have evolved from being highly-leveraged, speculative investments to largely high-quality, highly cash-generative businesses with positive long-term outlooks. Beyond the obvious drivers, such as consumer trends, the technology sector is currently supported by strong growth estimates.
At GAM, our models gain exposure to the sector via the talents of manager, Mark Hawtin, who has extensive experience in managing money in the technology space. The key to Mark’s distinctive approach is his drive to look beyond the traditional sector leaders and seek out less well-known stocks that show true potential.
Savvy selection
Names such as Facebook and LinkedIn were heralded as the stars of the technology revolution, reshaping the way society functions and spearheading the social networking revolution. While the social impact of these companies can have a global reach, Mark warns that, from an investment perspective, the marketing hype does not always deliver.
Ironically, getting the best returns from the sector often requires investors to steer clear of the industry’s leading names – and this is the key to Mark’s success. He believes that some of the most exciting opportunities in the markets can be found in the companies that supply the index heavyweights with components, systems and intelligence – rather than in the heavyweights themselves. These firms tend to be the beneficiaries of increasing business spending levels, rather than the ones spending the capital. So instead of jumping on the social media bandwagon and buying names that are hard to accurately value but command high buy-in prices, Mark recommends that investors take an alternative approach. For example, investing in cloud computing – a supporting industry and the backbone behind all of the social media players – provides exposure to the upside of the industry’s popularity, but without the isolated risk of buying into one big industry name. Similarly, the resounding success of YouTube and the increasing appetite for on-demand video has opened up investment opportunities within the data storage industry, another beneficiary of visual media’s popularity.
Future challenges
As with any sector, current macroeconomic issues pose certain threats to performance. Slower global growth and corporate cost-cutting programmes threaten IT spending levels in its most general form. Companies that are exposed to financial services and government spending are struggling. On a product-specific front, PC sales growth has slowed considerably, and therefore the PC chain is also weak. This is a reflection not only of general growth weakness, but also of the accelerating secular trend from fixed to mobile computing.
On the flipside, the technology sector has some compelling growth themes, such as cloud computing, social networking, video and mobile payment facilities, which are prospering despite the macroeconomic issues troubling the world.
At GAM, we believe Mark’s approach exemplifies the benefits of investing in high-quality, well-established companies that are not necessarily the headline-grabbers or the index heavyweights. It seems that going against the herd and seeking true value outside of the spotlight can open up exciting opportunities for investors who know how to get the best out of this exciting and fast-moving sector.
The FED goes all in – writes RMG’s David Man
The FED, as expected, decided that the US economy requires more stimulus this past week. We cannot disagree with the simple fact that the US economy is not doing well, especially considering the unprecedented stimulus (both monetary and fiscal) that has been thrown at it in the last 4 years. We do, however, strongly disagree with the FED's response. The economy is not growing for reasons that are outside of the FED's control, and there are many commentators who now agree with our view that the FED may now actually be making things worse. Together with politicians, the US central Bank is part of the problem, not part of the solution.
We comment more below on the QE move, but first, we need to explain what our short term views are on the financial markets now that the FED seems to be unleashing unlimited QE and the ECB has set itself up to do the same as soon as a sovereign requests a bailout. The unlimited nature of the current policy response from the two biggest central banks is a real escalation and something that we were not expecting. If we have truly moved into a new era of unlimited money printing, financial markets are unlikely to suffer a major decline from current levels.
Market implications of recent central bank actions
First, we need to recognise that central banks are pumping money into the financial system with the express intention of forcing investors to take greater risks. This will probably lead to most assets moving further above fair value. Furthermore, the FED extended its guidance for how long interest rates will be kept at 0%, until mid 2015 - another 3 years. With money printing and zero rates as far as we can forecast, we have to find sensible investments that offer a reasonable yield and a prospective return that compensates for the risks that are inherent in such an investment in all scenarios (including a world where central banks are not printing).
Gold - with the majority of central banks printing money, Gold should be seen as an obvious beneficiary. We first bought gold on 17 th May when the price was about US$1,550 and we bought a little bit more early last week before the FED announcement. The current price of gold is US$1,775 and we think that Gold should perform well in an environment of widespread money printing.
High quality corporate bonds - with interest rates at zero across most of the developed world, and likely to remain there for a very long time (3 years minimum according to the FED), then investment grade bonds that pay a safe yield in excess of the rate of inflation will be sought after by investors. We already own some US corporate bonds that yield approximately 4%. We are contemplating buying some more for the yield.
Equity markets - we noted last week that we wanted to be more constructive on Europe and we removed a small bearish position we held. As a result of this action we are now marginally long of equities overall, and we may increase this a bit in the short term. We have not changed our big picture thinking here, and still believe that US equity markets in particular are overvalued at the moment. However, the unlimited nature of both the FED and the ECB printing programmes is new news and we have to take this into account. Being a bit more constructive on equities for the next few weeks and months probably makes sense.
FX markets - the theme that makes most sense for the long term is to focus on currencies that are not printing money and that hold decent foreign reserves. On this basis, we like Canada, Norway and South Asian currencies. We already hold South Asian currencies such as the Singapore Dollar via our Asian bond exposure. We are looking to add some Canadian Dollars as well.
Thoughts on QE
We cannot stress enough that although the FED's actions may boost equities, they do not help the real economy and they create problems that will eventually lead to significantly bigger problems than we face today.
There are many unintended consequences and costs of printing money. However, one immediate cost will be higher energy and food prices for everyone, whereas the benefit of higher equity prices only helps the small minority that hold substantial assets in the equity market. Rising food and energy prices act as a tax on consumption and will slow the economy.
Central bankers tell us that the QE is necessary to push up asset prices so that the "animal spirits" are raised and that will lead to jobs growth and so on. Academic evidence has always shown that rising equity prices have only a small and limited positive impact on future economic growth. It is a fallacy that QE creates a wealth effect through rising equity markets. The way to create true long term wealth is to create new capital (through savings) which is then invested into sensible projects that will deliver true value added over the long term. Yes, QE does seemingly lead to higher equity markets in the short term, but without creating long term wealth as just described, the short term rise in equity markets is simply "stealing" growth from the future. Without more QE, future equity returns will be lower after a QE induced rally.
A major concern over continued QE is the moral hazard that it creates for both politicians and the markets. Politicians do not like to take tough decisions at the best of times - decisions that cause pain in the short term are not vote winning decisions. When central banks are perceived as the only game in town and politicians are able to delay tackling excessive budget deficits, printing large amounts of money to gain a very small boost at best for the economy will only delay the hard decisions that politicians need to make. Furthermore, if financial markets believe that central banks will continue to boost markets regardless of the underlying fundamentals, unsuitable risks are taken - the period up to 2007 being the most recent example. As well as the central bank protection, the "too big to fail" issue, whereby excessive risks are taken with the belief that governments will bail out failed institutions with further risk taking. Clearly, the authorities have not learned the lessons that should have been learned from the 2008 financial collapse.
We are truly surprised that a small group of mostly academics are able to impart an experiment of epic proportions on the real economy when they themselves are unsure of the benefits of the prescribed policies and when the costs and unintended consequences could be ruinous for today's society.
Quickly back to the potential for equity markets. Despite all the money printing and the huge government deficits, the FTSE has simply staggered sideways. Perhaps the market is getting ready to break out to the upside, and the new "unlimited" policy from central banks may be the catalyst. Our preference on equity markets in light of the aggressive policies now being pursued by central bankers and we suspect that markets will trend higher in the short term. How long is short term? Our best guess is 2 to 4 months and of course this will be influenced by policy adjustments as will our investment policy. As noted above, QE does not create value and rising equity markets in the short term will only serve to reduce the long term reward of holding equities.
Simply put, the balance of probabilities indicate that equity markets continue higher for a period of time and central bankers are telling us that they will do everything in their power to stop any bear market tendencies.
London & Capital's Pau Morilla-Giner is Going for Gold
The fundamentals that led gold to trade at the $1900 mark nine months ago are, if anything, more compelling and supportive than ever. These include, but are not limited to: sputtering economic conditions, intractable fiscal issues in all western democracies, the slow motion demise of the euro as a credible reserve currency, a loss of faith in traditional economic prescriptions, alarm at the readiness of policy makers to resort to radical and ad hoc measures to buy time.
Uncertainty as to whether or not additional rounds of QE will be forthcoming have strongly influenced fluctuations in the gold price over the past twelve months. On three occasions since the December 29th 2011 low of $1523.90/ounce, the Bernanke Fed has stated that further rounds of QE were off the table. The first was during congressional testimony on February 29th 2012, where gold reacted by dropping more than $100 in 24 hours to $1688. The second was the release of the Fed minutes April 3rd 2012, the reiteration of Bernanke’s earlier stance led gold to drop $72 in two days to $1613. The final instance came in Bernanke’s congressional testimony of June 6th 2012, when following a very weak jobs report and a subsequent sharp rally in the gold price to $1640 intraday, Bernanke disappointed the gold market by removing the prospect for additional QE - gold dropped $86 to $1556 in two days.
QE3 or not (and I believe we will see additional QE by the end of the year as the US ‘fiscal cliff’ detracts from growth), our main thesis is that gold prices are heading towards higher levels. The path will be volatile, but ultimately the trend emanating from the terminal condition of public policy as it struggles, with the overhang of debt that has corrupted balance sheets of the banking system and fundamentally altered behaviour in the private and public sectors.
With respect to more QE, we believe the risk/reward posture of the gold market is asymmetric and at this stage market expectations for additional QE have been sufficiently dashed, and that any new round of monetary easing will come as a big surprise. The possible absence of QE seems unlikely to inflict incremental damage to the gold price. On the other hand, a new round of QE will most likely be triggered by emergency conditions in the financial markets and be seen as both an act of desperation and a tacit admission by policy makers that they really have no answers. In such a moment, we would not be surprised by a leap in the gold price approaching several hundred of dollars an ounce in too short a period for significant capital to enter.
It is of course possible that a political sea change could occur in the United States election this coming November that would lead to a meaningful restructuring of the fiscal and monetary position underlying the U.S. dollar. However, based on the precedent set by Europe in which clamour for fiscal reform has been silenced by austerity fatigue, we have serious doubts that such a shift would yield durable progress on issues that undermine the dollar’s credibility.
Beyond QE, we believe there are many factors that should remain supportive of the gold price. These include the unresolved issue as to how the Fed will exit the liquidity of its bloated balance sheet, the unresolved issue of fiscal deficits in all Western democracies, and the never ending travails of the euro zone.
Keeping it simple for RDR
In recent weeks requests for information about our post RDR charging structure have been increasing. We've been pleased that our response has always been quite simply - we don't have to do much at all as we are already operating a model where advisers charge client agreed remuneration.
Unlike many other providers, there will be no need for advisers to go through the lengthy process of contacting all their clients with a new remuneration agreement. You simply continue as you have before.
Whilst we will be changing some of our terminology to remove use of the word 'commission', the options available will remain the same. This means both the selection of charging options and the subsequent reporting of remuneration will remain unchanged.
Some advisers will still choose to take remuneration in the form of a percentage of the investment on an initial and/or ongoing basis, whilst others may choose to take one monetary payment at the time of investment. We will also continue to allow the option to take ad-hoc payments as agreed with your client and to charge for work related with switching.
The charges for both adviser & platform will still be deducted from the client’s cash account minimising the number of transactions required. Where a platform does not operate a cash account, these fees will be deducted each month by encashment, usually across the range of investment instruments. This will result in 100’s of transactions all of which are a potential CGT event.
Novia will also continue to avoid fixed costs wherever possible as this has a disproportionate impact on lower value investors & makes evidencing client suitability across a broad range of clients much more difficult.
We're trying to keep things as simple as possible so that our supporting advisers can get on with the business of working with clients to achieve their investment goals...instead of spending time on the additional administrative burden of completing new remuneration agreements.
Turbulence in the financial markets - Heartwood Investment Management's Noland Carter takes stock...
Have you ever flown through a thunderstorm in a light aircraft? In recent years, the turbulence in financial markets has felt a bit like that, with investors constantly buffeted by strong headwinds.
The second quarter of this year was no different. The eurozone crisis continued to flare up in all sorts of ways – Greek elections, Spanish banking problems, an endless succession of summits – while a softening of data from the US and China, not to mention Europe, raised genuine concerns about the sustainability of the recovery. Here at home, the UK is back in recession, and the financial pages have been filled with articles about excessive executive pay and skulduggery at some of our oldest financial institutions.
So it is important every now and then to rise above the fury of the storms and take stock of where we are. It is now five years since the credit crisis first struck, and many of the problems have still not been fixed. Not surprisingly, therefore, investors have reached a state of chronic apathy. Trading volumes are low, and most new money continues to go into areas – such as government and corporate bonds – which are perceived as low risk. And that is in fact creating a risk all of its own.
Yet significant progress has been made.
US – companies are in great financial shape, and consumers have gone part of the way to reducing debt levels. The banks have been recapitalised and are now lending again (see graph), which gives a particular boost to smaller business.
Europe – after lots of huffing and puffing, with smokescreens to save face in front of its electorate, Germany appears to be gradually relenting on its opposition to common eurozone bonds and to helping the eurozone grow its way out of the crisis. Most countries have started reducing debt levels, and Ireland has even returned to the bond markets.
UK – the headlines have been messy, and there has been lots of talk about the threat to the City’s leadership in Europe. Actually, a return to a more responsible banking culture, with the Bank of England bringing its moral suasion to bear, should lay the foundations for a more sustainable future as the UK rebalances its economy and becomes less dependent on the financial services industry.
China – the leadership transition makes the picture cloudier than ever, but the authorities are taking more active policy measures to sustain growth while cooling the overheating housing market and making the economy less reliant on fixed asset investment and exports.
This is not to ignore the remaining problems – far from it. Clearly, global economic growth is still lower than we’d like, the eurozone continues to lurch from one crisis to another on the tortuous road to a sounder structure, European banks aren’t lending enough to businesses, and the UK’s position within Europe becomes increasingly unclear. On top of all that, we can expect a lot of anxiety about the US fiscal deficit, especially in the run-up to November’s presidential election. In short, we remain unusually vulnerable to decisions taken by politicians and central bankers.
As a result, we at Heartwood are being quite guarded in our portfolio positioning. Currently, we are retaining cash as firepower in the event of further market falls, rather than aggressively seeking opportunities at these levels. The period of turbulence is not yet over, and we can expect markets to remain volatile in the next few months.
Noland Carter, Chief Investment Officer, Heartwood Investment Management
Important Information
Heartwood Investment Management is a division of Heartwood Wealth Management Limited (Heartwood), which is authorised and regulated by the Financial Services Authority (FSA) in the conduct of investment business. This article has been prepared for readers of the Novia Financial Blog and is intended to be Heartwood’s commentary on markets and on its own investment strategy. It is not investment research and you should not treat this publication as a recommendation to buy, sell or trade in any of the investments, sectors or asset classes mentioned. Past performance should not be seen as a reliable indicator of future results. The value of investments may fall as well as rise.
Breakfast Waffle from Thurleigh Investment Managers’ Charles MacKinnon
Where are we now? Pretty much in the same place that we were three, six and nine months ago with politicians trying to find a way around the problem that they have made promises that cannot be fulfilled. At its simplest, if people work shorter hours they cannot get bigger wages and bigger pensions.
How are the markets relating to this? In many senses with a classic very short term attention span. Focus has become huge on the next crisis meeting, the next summit, the next bail out promise, but the longer it lasts, the less impact each new hit has.
What should we be doing? Where are the safe havens? What are rational expectations for the next year?
For most individuals, the purpose of investment capital is to help them satisfy Maslow’s hierarchy of needs; Somewhere to sleep, something to eat and something to do and the absence of fear that you are going to lose the first three.
For most investors, the first three have been dealt with, and so the purpose of their investment capital is best described as to prevent something bad from happening, as opposed to the way investment products tend to be marketed, which is to make something good happen.
So if our main function as wealth managers is in fact to reduce people’s fears of loss, then it becomes slightly more straightforward as to how we should arrange ourselves. It is important to note that all we are trying to do is to reduce peoples’ fear of loss, not, in fact to reduce peoples’ actual exposure to loss.
People’s fears of loss are in general driven by where they have lost money before; for many individuals who lost money in hedge funds in the 2008 crash, they will never feel comfortable with hedge strategies again. For people who lost money in the internet bubble in the 2000-2003 crash, they will never feel comfortable investing in technology companies.
The reverse is also true, and people will constantly keep investing in a theme or style that worked for them before, even though the environment may have changed out of all recognition.
So what do we do with all this waffle?
Things have changed out of all recognition, and what used to be safe is not anymore, and we have to invest with a clean mental sheet.
Indexes used to be a good way to invest, as in general all equities moved the same way as they were all being driven by the same force (cheap credit) even though we did not realize at the time. That time has passed, and while the removal of credit and leverage will have an impact on investment returns, different assets will move in a very different way.
This means that our basis of selection for investments needs to change. For us, using indexes, we were driven by market cap, which ultimately was driven by the multiple that investors were prepared to pay. Going forward, we are becoming more focused on the underlying earnings.
This then means that our focus should move away from passive managers ( e.g. indexes) to active managers. The problem this gives us is that we know that ever since records have been kept, index funds have outperformed the vast majority of active funds. So if we buy active managers, we are almost certainly doomed to underperformance….but of what? It may be that the commonly held indicators of “performance” cease to be what people use as reference, and people will stop focusing on the movement of the FTSE 100 and the DJIA and start focusing on the bond index, but frankly I doubt it. In nearly 30 years of investment management, I have constantly been told that the DJIA is an old fashioned index and nobody cares about it anymore,, but it is still the most quoted index; we are also often told that the FTSE 100 is no longer representative of what is actually happening in the UK, and this is true as it has 29% in Oil, Gas and mining, despite having almost no natural resources left in the UK, but a big fall or rise in the FTSE 100 is still the lead item on the News at 10.
So while we may make the intellectually correct choice to invest in stable earning companies, they may perform differently to the indexes; sometimes better and sometimes worse, but hopefully over time better. This exposes us, as managers, to the disappointment risk for our clients, who may have expectations that are different from the reality they are experiencing.
So what do we do with this extra waffle?
We are reducing our exposure to emerging market index funds and allowing our emerging market active managers to have a large proportion of the pie.
We are focusing very intently on the “risk factors” that our investment s are exposed to.
We continue to hold higher levels of cash than normal as we think the opportunity for a further market event is very high.
We continue to avoid government bonds as were are fearsome of their ability to change the rules and steal our money in a legal sounding way.
We continue to hold high yield.
Novia Response to FSA Consultation Paper CP12/12
“Payments to platform service providers and cash rebates from providers to consumers”
Novia Response
The content of the long awaited FSA Paper “Payments to platform service providers and cash rebates from providers to consumers” contains no real surprises. The paper concerns the payment of rebates from providers to platforms and is in principle what we expected, when we expected it.
However two key questions seem to keep emerging when it comes to wrap platforms / fund supermarkets responding to this paper;
• The first being – will your business model need to change as a result of the paper?
• And the second being: Will you administer unit rebates post RDR?
Novia’s Business Model
The answer to the first of these from a Novia perspective is a resounding No. CP 12/12 provides no challenges to how the Novia business is structured and we will continue to operate as we currently do with the cash facility continuing to provide the hub through which assets are bought and sold. Novia operates a transparent model and all of our income is paid direct by the client with no dependency on fund rebates, be they in cash or units.
The RDR becomes reality on 1st January 2013. Novia has a minimal amount of work to become RDR ready and we will be ready in advance of this date.
Unit Rebates
The answer to the unit rebates question isn’t so straightforward. All the feedback from fund managers would indicate that they are not interested in paying rebates in units. However the paper isn’t as clear on this topic as we had expected. The proposed new Handbook rule 6.1E10 G suggests that it may be permissible for fund manager rebates to be paid in cash by the fund manager and for the platform to pass these on to client via units. So in summary the question of unit rebates remains open pending clarification in the final rules. However whichever way the rules go, the change to permit unit rebates represents a minor systems change.
Finally in terms of the Cash Rebate ban. We do not see anything terribly wrong with cash rebates as long as they are passed on 100% to the client, so it is not a question of bias or conflict of interest and we did not see any burning need for them to be abolished.
What next?
CP 12/12 is the final consultation paper on the question of platform rebates and we would expect to see what is contained in the paper pass into the FSAs rulebook. Comments are due in to the FSA by 27 September 2012 and the new rules to become effective from 1st January 2014.
Proud to be voted as Advisers' favourite platform for service.
In the recent Platforum awards we were pleased to ranked first for service by advisers. We also received the top rating for Usefulness of Online tools in Q4 making it a clean sweep for 2011. For us, the service we give to you, our supporting advisers, and the tools we provide to allow you to give the very best service to your clients is core to our business. With tools that assist you with everything from your initial investment process through to providing your clients’ annual review packs – we aim to ease your workload at all points of your client relationship.
We were also pleased to see that size was not necessarily a measure of success in the all important User Leader Board and - while we were pleased with our very respectable second placing - we are working hard to ensure we can clinch The Platforum Adviser's Choice award next year.
We've come a long way in 3 short years, reaching both profitability and achieving a strong rating from AKG. We would like to thank you all for your continued support and hope to see you at our Novia 'DMs wrap of choice' road shows in April.
Novia score highly in Defaqto adviser satisfaction survey
A strong result for Novia in Defaqto's adviser satisfaction survey today - 1st or joint 1st in 4 out of 8 categories - which stood out in an interesting article in IFA Online about the survey – despite Novia’s positive position it doesn’t make particularly pleasant reading for many in the industry. The article’s here if you’d like to take a look: IFA Online Article
Novia ranked very highly, alongside Wealthtime, with one or other of us coming top in every category - which is testament to the high quality administration and service we provide. But I think we all need to take a long hard look at how we do things as it demonstrates how important service remains – despite all of the technological advances we’ve seen over recent years. Technology is key to ensure we can all work efficiently and run a sustainable business – but a genuine understanding of the importance of service is essential if you're to meet the real expectations of advisers. This is especially true as the article points out that the categories where platforms scored lowest were considered the most important by advisers – such as ease of doing business.
It shows that our core responsibility remains delivering quality administrative service – even though this may not be at the glamorous end of what we do it is most important. Novia did well in this survey - providing quality service is a key attribute of the platform and something we’re rightly proud of, but we recognise we can always do better to ensure we meet the standards rightly expected. The Survey's also covered in Citywire: New Model Adviser Article
A lament that could look like an advert for Tesco but I would ask you all to bear with it……
It is widely known that Tesco established the Supermarket model we now have on a “pile it high and sell it cheap” basis. What is perhaps less widely known is that they had an internal motto of "YCDBSOYA" (You Can't Do Business Sitting On You’re a**e)
Tesco’s true success though over the last 90 years has been their ability to adapt to market demands and customer circumstances to stay ahead of their competition. The “pile it high” has now been replaced as customers seek increased value, increased diversity in the products they buy and the ability to shop wherever they want whenever they want.
In 2002 Tesco stunned the markets by buying 850 convenience shops in the UK. The scale of it allowed them to capture an immediate increase in market share, and as a result they really caught the rest of the industry out.
A little known fact though is the extent of Tesco’s innovative use of technology to improve their business. It was one of the first to build self-service tills and use cameras to reduce queues. It is also widely believed to be the only UK grocery retailer to make a profit from its internet shopping business.
It is this ability to diversify their business and use technology that has given Tesco the edge. I wonder what Tesco’s market share would be now without research into queues or internet shopping? Where would they be without the 850 convenience shops which we all use so often?
My lament is simple really. In Financial Services why do we not embrace technology in the same way as retailing and why is diversity so frowned upon? We are rightly proud of our technology and of the deal we have done with AEGON which enables us to further invest in it to improve our service.
Perhaps if our competitors spent less time frowning on diversity and more time thinking as Tesco do about the customer and not being wedded to the past the industry would move forward in much the same way as grocery shopping has.