MRM's Tom Desborough

Tom Desborough gives an insight into a week at MRM, giving all the gossip from his working week while highlighting what news has interested MRM over the past seven days.

This week has once again seen Europe dominate the headlines, as Fitch Ratings downgraded Greece’s credit rating, while yesterday evening Moody’s slashed the ratings of 16 Spanish banks, as well as Santander’s UK arm. Facebook will have certainly been at the forefront of people’s minds too, with today’s flotation valuing the company at $104bn, a record value for a US company on the day of its market debut.

There’s big news today from residential property fund manager Hearthstone Investments, as it receives FSA approval to launch the UK’s first regulated residential property fund. This will be the first time UK investors will have access to the largely untapped asset class through an authorised fund. “At over £4 trillion, residential property is the largest asset class in the UK – bigger than UK equities and commercial property combined” says Christopher Down, chief executive of Hearthstone.

Ashcourt Rowan has appointed Cofunds to deliver its adviser platform proposition. The platform which will have three distinct segments, that clients with differing requirements can choose from , is due to go live in September.

In other client news, Seasame Bankhall Group (SBG) has integrated the Mortgage Brain sourcing engine to XPLAN from IRESS, its new practice management system.

Finally, I would just like to give a little recognition to Michael Taggart who proved his ten-pin skills with four consecutive strikes, at MRM’s bowling night out earlier in the week, a stark contrast to my abysmal final score of 58 points!

With the regulatory deadline fast approaching, MRM’s Dan Sherville looks at how KIIDs might affect the industry and what the responses from asset management groups have been so far.

By 1 July 2012, the Key Investor Information Document (KIID) will have replaced all simplified prospectuses, to provide investors with a clear two-page explanation of the process, risks and nature of each UCITS fund distributed in Europe, in an easy to understand manner.

Following the recent financial crisis, there has been a drive to provide clearer and transparent information about investment products directly to investors. A KIID is a factsheet-style document, with an industry standard layout, that describes what a fund does, the investment risk, charges and past performance. Come 1 July 2012, it will be mandatory for every potential investor to receive a KIID before they can invest in a fund.

The new regulations are intended to make it easier for investors to compare funds from different providers, but reports from fund groups are that it hasn’t been that easy to implement so far. Fund managers will be required to translate every KIID into the language for each country in which it will be available – which is proving to be more challenging than originally thought. Due to the spatial restrictions, a two-page English document can end up much longer when translated into different languages.  According to Alex Harding, director of product development at fund manager BlackRock, “the challenge is trying to get white space in the English version to accommodate the translations – there can be a 40% increase on English text for a German translation. You can get into a costly loop of cutting to size and re-translating those parts”.

J.P. Morgan managed to launch its 18,000 KIIDs on 16 April “well ahead of the July deadline” according to Jon Griffin, head of fund services for Europe at J.P. Morgan Asset Management.  Similarly, Schroders has gone live with its range of KIIDs despite concerns that the cost of implementing the new documents could be twice that of the simplified prospectuses. And despite the cost, Noel Fessey, managing director of Schroder Investment Management Luxembourg, believes that the new regulation is “perhaps the most controlled document the fund industry has ever seen.”

Chris Traulsen, director of fund research for Europe and Asia at Morningstar, believes the KIID is a good thing for investors. “The KIID is at least a step in the right direction to providing investors with a clear and simple presentation of information that is pertinent to the investment decision,” he says. Similarly, according to a Kneip survey of European asset managers last year, ‘around two-thirds of managers said it would bring increased comparability of products and greater ease of understanding, as well as better disclosure.’ Nonetheless, the European Commission announced yesterday that is planning on introducing KIIDs across all investment products. With BNP Paribas Security Services estimating the cost of producing each KIID at €1,500, this could become a serious operational and budgeting exercise for smaller fund management groups.

So with just seven weeks to go until KIIDs become a legal requirement, Martin Bock from RBC Dexia points out that this should be about “taking a completely fresh look at how investment strategies are explained.” He adds: “Today’s asset managers operate in a competitive environment and investors have a wide choice of funds. KIIDs that are easy to understand and investor-friendly should also be considered as a powerful marketing weapon. Distributors will rely on the document to encourage investors to subscribe to the fund. In our view, good ‘key investor information’ contributes to the attractiveness of the fund for investors. Furthermore, with transparency and investor protection the watchwords of many national and European regulatory bodies, the clearer an asset manager is about the fund and its objectives the better.”

Hearthstone Investments, the specialist residential fund manager, has received FSA approval to launch the UK’s first regulated residential property fund.

The TM Hearthstone UK Residential Property Fund, due to soft launch this summer with a full roll out planned for September 2012, will for the first time give investors access to the £4trn residential property market though an authorised fund.

Structured as a PAIF (Property Authorised Investment Fund), the fund will be open to a range of investors, from individuals with ISAs and SIPPs to large scale institutional pension schemes. The minimum investment for retail share classes is £1,000 and the fund permits regular savings.

The fund will be managed by leading residential property fund managers David Gibbins and Lucy Hawkins, who will aim to track the House Price Index by investing in private rented sector housing across the UK.

The business is currently working with major house builders to seed the fund with an initial portfolio of around £30-£50m. As well as acquiring existing build stock, the team will work with developers to support future acquisitions from new residential developments, contributing positively to UK housing supply in a time of rapidly rising demand.

Hearthstone’s target for the fund is £250m in the first 24 months of it going live, rising to potentially more than £1bn in the longer term as the adoption of residential funds becomes more widespread.

Earlier this year, leading estate agency and property services provider the Connells Group, a wholly owned subsidiary of Skipton Building Society, acquired a 25 per cent strategic stake in Hearthstone Investments plc.

Commenting, Christopher Down, founder and chief executive of Hearthstone Investments said: “At over £4 trillion, residential property is the largest asset class in the UK – bigger than UK equities and commercial property combined. Despite this, there have been no authorised funds in the sector, and most investors have been offered little choice other than direct ownership of bricks and mortar. Hearthstone’s fund platform will correct this anomaly, offering both retail and institutional investors the same investment options in residential as they have in other asset classes. FSA approval for our first fund is a significant step forward in enabling us to do this.”

-Ends-

- New Gilt-backed structured investment offers a potential 8.25% annual return up to a maximum 49.50% return after six years, linked to the performance of the FTSE 100

- Investors will receive their initial capital back unless the FTSE closes more than 50% below starting level at maturity

London, 17 May 2012: Barclays has today announced the launch of a Gilt-backed FTSE 100 Autocall, offering investors the opportunity to receive a return significantly above current deposit rates.

The investment, collateralised using Gilts, may appeal to investors seeking to diversify their counterparty exposure.

Investors will receive the rolled-up return on the first anniversary where the FTSE 100 is at or above the starting date of the investment. For example, if the Index is at or above its start rate on its first anniversary, investors will receive 8.25%; if this occurs on the second anniversary, investors will receive 16.5%, and so on up until 49.50% on the sixth and final year.

If after six years the investment has not delivered its stated return, investors will receive their initial capital back unless the Index is more than 50% below its starting level, in which case capital will be reduced 1:1 in line with the performance of the Index.

Barclays is taking orders on this investment up until 1 June 2012, with strike date on 11 June 2012.

Commenting, Lisa Chaudhuri, UK Investor Solutions, Barclays, said: “With the market reacting to fresh concerns over the future of the Eurozone pushing volatility higher, in recent days we have been able to secure an attractive potential return for this popular genre of investment. This investment is collateralised using UK Gilts, a first for Barclays in this space and another sign of our commitment to offering investors solutions tailored to meet their needs and address their potential concerns. Should the market fall continue the starting date in June could prove to be an attractive entry point.”

Sesame Bankhall Group (SBG) today announces that it has integrated the Mortgage Brain sourcing engine, ALL NEW MortgageBrain, to its new Practice Management System, XPLAN from IRESS.

This integration is one of the most advanced in the market. It is the first time that Mortgage Brain has made the full functionality of its mortgage sourcing capability, including producing Key Facts Illustrations (KFIs), available online using web services through a Practice Management System. The XPLAN user interface has been enhanced to drive the mortgage sourcing functionality, giving advisers a consistent experience throughout the system – bringing substantial benefits in ease of use and reduced training requirements.  

 Following on from SBG’s recent announcement of its integration of the Avelo Exchange Portal, this latest development will provide advisers with a fully integrated Mortgage advice process within XPLAN, as well as access to IRESS’ extensive financial planning platform.

Sesame Bankhall Group’s Head of Adviser Technology, James Stevenson says: “Mortgage Brain is extending its online functionality specifically for SBG, which is great news for our customers. This is the first time that Mortgage Brain has enabled online mortgage sourcing and KFI production through the user interface of a third party Practice Management System, a feature that will save advisers valuable time and resources.”

Mark Loosmore, Business Development Director at IRESS comments: “Integrating the Mortgage Brain platform into our XPLAN product will give our users access to the Mortgage Brain Sourcing Engine through the XPLAN user interface.  The integration means users get the full rich Mortgage Brain functionality, but online, with a user interface consistent with the rest of the XPLAN system.”

Mortgage Brain CEO, Mark Lofthouse, adds: “We are pleased to be extending our relationship with SBG, whilst also adding another significant integration partner in IRESS. This latest development extends our mortgage sourcing web services offering to include the provision of online KFIs via a Practice Management System for the first time, making our online solution one of the most functionally rich in the market.”

London, 15^th May 2012: Having already grown significantly over the past decade, dividend payments in the US technology sector are set to accelerate as companies increasingly embrace the concept of rewarding long-term shareholders, according to ClearBridge Advisors, a subsidiary of Legg Mason.

Peter Vanderlee, co-manager of the Legg Mason US Equity Income Fund, says only 17.9%* of technology companies in the S&P 500 paid a dividend in July 2002. By the end of 2011, this figure had increased to 53.5%*. Moreover, out of the 31 companies in the S&P 500 that have initiated a dividend since 2010, eight are technology stocks.

“There has been a philosophical change in Silicon Valley over the last ten years,” Vanderlee says. “Paying a dividend is no longer necessarily a sign your best growth days are behind you. Indeed, now it’s more likely to reflect financial strength as increasing numbers of technology companies embrace the concept of dividends as a way to reward long-term shareholders.”

For the technology businesses themselves, Vanderlee says paying a strong dividend is attractive as it can help them increase and diversify their investor pool. “For example, when Microsoft increased its dividend by 25% in September 2011, it saw a surge in its share price,” he says.

Vanderlee currently has a 3.23%** weighting to Microsoft in his portfolio. He also has 2.95%** invested in Apple, which he believes will grow significantly in the coming years following the announcement that the technology giant will issue a dividend to investors in July, having not paid one since 1995.

“The Apple dividend announcement is a sign of the times and we expect to see significant growth in the future. The company is sitting on a lot of cash at the moment – at the end of March 2012 it was at $110bn, and it continues to generate ample free cash flow. We expect the company to increase its dividend meaningfully going forward.”

In addition to Microsoft and Apple, Vanderlee holds an additional eight technology companies in his portfolio and is confident that the sector will perform well in the long term. “The tech sector is experiencing strong dividend growth – up 23.5%* in the fourth quarter of 2012 – and we expect these healthy increases to continue for the sector in the future,” he says. “Balance sheets remain robust and companies are extremely cash rich. The sector remains one of the lowest yielding in the S&P 500, however; it is currently yielding 1%* compared to the S&P 500 average of 2%. It is also the stingiest when it comes to paying dividends and its low pay-out ratio of 15.1% is well below the average for the S&P 500.”

Vanderlee partly attributes this low ratio to the fact that many tech companies hold their cash offshore and are unwilling to repatriate it. “Repatriation is very expensive under the current tax regime in the US,” he says. “The technology sector is already primed for healthy dividends but if there was a change in repatriate tax law it would allow companies to pay more significant dividends in the future.”

Ashcourt Rowan plc, the AIM-listed investment and wealth management specialist, has appointed Cofunds to power its adviser platform proposition.

To be piloted over the summer before a full roll-out to advisers and clients in September, the new platform will be branded and marketed under the Ashcourt Rowan name, with the business outsourcing services to Cofunds.

The decision, made following a comprehensive review of the market and a competitive pitch process, is part of a wider change management programme introduced by Group CEO Jonathan Polin last year. The programme, which has already seen the business overhaul its advice and service proposition, has been put in place to ensure Ashcourt Rowan is well positioned to prosper pre- and post- the introduction of the RDR.

The Group, which has over £4bn of assets under management and advice and in excess of 65k individual clients, will use the new platform to assist with the central servicing and engagement for clients, allowing them ease of access and transparency on all of their investments.

The new platform will have three distinct segments that clients with differing requirements can choose from. An entry-level execution only proposition will be available exclusively for existing clients who do not need or want further advice; a service for investors who don’t need ongoing financial advice but want Ashcourt Rowan’s insight and guidance in their decision making; and a full advice segment.

Commenting, Jonathan Polin said: “The development of a central platform proposition for our advisers and their clients is an important step forward for Ashcourt Rowan as we look to continue to develop and grow the business pre- and post- the introduction of the RDR.

“By combining the systems and technology of Cofunds with the first class advice and guidance on offer through our advisers and experts, I believe we are putting in place a modern and market-leading financial planning proposition that will create real value for clients and enable us to fulfil our ambitious plans for the future.”

Martin Davis, CEO of Cofunds added “Ashcourt Rowan is one of the leading players in our industry, so being selected to power their advisory proposition after a rigorous due diligence process is a big endorsement of Cofunds.  We’ll be working closely with Jonathan and his team to ensure they get the most out of their new platform and look forward to further developing our close relationship.”

London, 9th May, 2012: Emerging market high-yield debt offers one of the most exciting opportunities in the emerging market (EM) asset class, as long as investors understand the country-specific risks, according to Legg Mason subsidiary Western Asset Management (Western). 

Robert Abad and Matthew Graves, members of Western’s emerging markets team, say that, in the midst of near-unprecedented volatility in 2011, EM assets under management versus the JP Morgan series of EM debt indices increased by a ‘staggering’ 41%.

While investors have increasingly been drawn to the asset class as a result of the fundamental improvement in EM sovereign credit quality, the managers point out that inflows have surged just as the asset class’s customary performance driver has lost steam, leading market participants to seek yield and return across an evolving set of opportunities in the EM debt market.

“The transformation in the sovereign credit quality of much of the emerging world left it well positioned to deal with the aftermath of the crisis, and its performance since 2008 represents a structural break with a volatile past,” says Graves. “However, the expansion in the asset class has occurred precisely as the traditional driver of returns – sovereign spread compression – has largely run its course. As a result, market participants have looked to EM local currency and corporate credit markets of the much broader EM universe to find additional sources of yield and total return, helping to facilitate the rapid development of these segments of the market.”

With this process firmly in train, Abad and Graves point out that EM high-yield investors – unlike their US counterparts – must contend with a spectrum of risks that vary from country to country. “Familiar risks for a traditional HY investor still matter in emerging markets but in many cases these can be trumped by social and political factors,” says Abad. “This has important implications for assessing risk across issuers. Given most EM economies’ greater sensitivity to fluctuations in the global business cycle, a purely bottom-up approach fails to address important vulnerabilities of the asset class at a country and macro level.

Indeed, the team at Western believe it may be misguided to assume that the combination of EM domiciles and high yield ratings will result in a market that looks and function like a faster-growth version of the US high-yield market. “It is much more complicated than that,” says Graves, “because EM investors can’t take for granted the fundamental underpinnings of the US legal system, which have enabled the US HY market to function as it does. These factors vary and in some cases are not even present across EM countries.”

However, this should not lead investors to dismiss the asset class, Western argues. “Quite the contrary,” says Abad. “We see the asset class as one of the most exciting potential opportunities in EM as long as the particular country context specific to each investment is properly understood.” Graves adds that while several factors have driven growth in this asset class, the development of a framework to manage exposure over a full market cycle, from peak to trough, has lagged the development of the market itself. “For the patient and disciplined investor, this disconnect represents a compelling potential opportunity,” he says.

Looking at the prospects for EM high yield, the duo remains constructive over the long term but cannot discount the possibility that 2012 could prove another challenging year.

“Within the EM corporate space, we believe there will continue to be a strong technical bid for higher-yielding, quality assets,” says Abad. “This should translate into more demand for credits best positioned to continue deleveraging, with the balance-sheet strength to weather external shocks.”

Currently the team at Western prefers B and BB-rated exposure to Latin America, with an emphasis on upstream oil and gas producers in South America, and telecom/media operators in Mexico and the Caribbean. The EM team is avoiding areas where corporate governance issues are likely to arise and remains underweight certain countries within Asia such as China.

London 10^th May Small-cap stocks typically outperform in low GDP growth environments so current conditions should not present major headwinds, according to Lauren Romeo, manager of the £187.53m* Legg Mason Smaller Companies Fund.

Looking back as far as the Second World War, smaller companies in the US have beaten their large-cap counterparts in 95% of years where the US economy grew at 2.6% or less.

Meanwhile, while margins in the large-cap space have peaked, the situation is very different in Romeo’s favoured part of the market.

“There are still 100 to 150 basis points of incremental margin expansion for small caps to get back to prior peak levels,” she says. “If the economy continues on its slow but hopefully steady upward trend, we believe incremental sales growth will drive further operating leverage and hence margin improvement.”

With larger companies also struggling to grow organically in tough economic conditions, many may look to merger and acquisitions to expand, creating further opportunities for small caps, Romeo argues. She points out that corporate balance sheets in the US are as healthy with net debt as a percent of total assets at historical lows, one factor that could set the stage for increased M&A activity.

“Large caps will try to supplement slowing organic growth with acquisitions and the small-cap universe has historically provided a great hunting ground,” she adds.

Given favourable data coming out of the US, Romeo expects the recent rally to continue, with small caps generally performing very well after difficult periods. Since the Russell 2000 index launched in 1978, there have been 17 small-cap corrections of more than 10%. In the subsequent six and 12 months, average returns from smaller companies were 30% and 48% respectively, suggesting more to come from the asset class.

So far this year, Romeo says the fund has largely kept pace with the rallying Russell 2000 – with 11.84%* over Q1 against 12.44%* from the benchmark – despite lower-quality companies leading the way.

The fund’s gains were largely due to further investments in cyclical companies in areas like consumer discretionary, technology and materials last year when economically sensitive parts of the market were out of favour.

“One of the things that gave us confidence when we were buying was almost every company management team with whom we met, even in cyclical industries, was telling us headlines were much worse than actual business conditions,” she says. “When these same companies reported better than expected 2011 results and modestly more favourable 2012 outlooks during the first quarter of 2012, it validated what they had been saying and drove economically sensitive stocks higher.”

After a quarter of low-quality stocks leading the small-cap rally, Romeo believes quality companies are set to regain leadership.

“Within the small-cap universe, quality companies, as measured by the highest returns on invested capital, trade at a significant valuation discount relative to lower quality small-caps.” she says.  A similar situation exists for small-cap quality companies compared with large cap quality.

Katy Moore gives an insight into a week at MRM, giving all the gossip from her working week while highlighting what news has interested MRM over the past seven days.

This week saw the 2012 Queen’s speech which contained, according to some observers, style but not much substance. In case you missed it, here is a handy guide to all the key points. The ongoing troubles in Europe have also been brought back to the fore following the elections at the weekend, which saw Francois Hollande win the French Presidency. Time will tell if these new developments help or hinder the recovery…

In other news, Nucleus’ David Ferguson was the latest platform celebrity to undertake an hour of questioning on Twitter, courtesy of New Model Adviser. David put in a sterling effort, answering four times as many questions as previous Twinterviewees (according to some statistics!). If you missed it, you can see the full transcript here.

GLG’s Pierre Lagrange was at the SALT Investor Summit in Las Vegas this week to discuss the issues facing global investors. His comments – as lively as ever – can be seen here.

Next week sees the much anticipated IPO of Facebook and as a result technology investment is very much at the forefront of investors’ and managers’ minds. Experts from FundExpert.co.uk and Ashcourt Rowan are particularly vocal on this topic, so please let us know if you would like to speak to someone further on this.

Last night saw the 2012 Headline Money awards – always a thoroughly enjoyable evening. A few of us were flying the MRM flag and the reports coming back are that the evening did not disappoint. For a full list of all the night’s winner, click here.

At MRM HQ we are finishing the week in an even better mood than usual following the news that we’ve won a new client. More details on this will follow in due course – watch this space…