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Our investment process An insight into our investment philosophy, framework, resources and capabilities 2 Our investment process Foreword In our presentations and client research we are receiving an increasing number of requests for more detail around how we structure our investment process. What is our approach to finding investment opportunities and building portfolios? How do we interact as a team in order to make decisions that are most appropriate for each client? These issues are important to us because we take huge pride in our disciplined and collegiate approach to working together. We believe our investment process is robust and enables us to deliver consistent returns aligned with risk profile. In turn this consistency drives our ability to provide our investment expertise in ways that are tailored to individual needs. As part of our ongoing commitment to transparency and accountability, we have written this guide to our investment process. It provides a detailed insight into what we think and how we work as well as the resources and experience behind our investment strategies. On behalf of the investment team here at Close Brothers Asset Management, I thank you for your interest in our firm and our capabilities. We hope in reading this document you will understand better how we work together on your behalf. We are honoured by the trust you have placed in us and equally understand the deep responsibility we have to deliver. Nancy Curtin Chief Investment Officer Head of Investments Our investment process Contents 04 A strong investment culture 05 Our investment philosophy 07 How we structure our investment process 08 Understanding an investor’s objectives 09 Asset allocation: strategic and tactical 12 Investment research and selection 13Equities 15 Fixed income 16Alternatives 17 Active funds 19 Passive investments 20 Investment strategies 22 Performance and risk 24 Reporting and support 26 In summary This document is intended for advisers, intermediaries, consultants and investors who wish to know more about our investment process as well as the range of investment solutions and reporting we provide. Please note that the value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. 3 4 Our investment process A strong investment culture Close Brothers Asset Management (CBAM) has a strong investment culture driven by a well-defined investment process. We believe in the importance of institutionalquality rigour and discipline to guide our decisions. Using an active and flexible approach, we seek to deliver positive real returns across all investment strategies. Investors can access our expertise through discretionary managed portfolios and a broad range of funds. We do not believe in a one-size-fits-all approach, which is why we have created a variety of investment solutions. They share a common platform and we tailor strategies to meet individual needs and risk profiles. As active managers, we seek to enhance returns and limit losses in two ways: •Asset allocation decisions, which involve adjusting the holdings within portfolios against a strategic position in order to reflect changing economic and market conditions; and •Security selection with a preference for liquid and highquality investments at an attractive price. A personal and accountable investment service Our process relies on a collegiate approach. More than 55 investment professionals work together to ensure all strategies reflect the best opportunities across asset classes and global regions. Each aspect of the investment process is informed by detailed analysis and lively debate between all members of the team. We also believe in individual accountability. That is why we assign a dedicated team to each investment mandate, which is responsible for managing the portfolio in line with its remit. We pride ourselves on our ability to deliver a highly personalised service, supported by these direct relationships. Additionally, we provide investors with the detailed information they need to understand the sources of returns and risk. We never stop asking ourselves how we can improve on what we do. We are continuously striving to refine and develop our services; and we benefit from access to leading research and innovative analytical tools. Our active management capabilities Multi-asset focus and expertise Over 55 investment professionals Global perspective Equity research Fixed income research Strategic Policy Committee Alternatives research Funds and passives research Range of portfolio solutions for investors Close Discretionary Funds Segregated Portfolio Services Our investment process 5 Our investment philosophy A diversified approach Our investment philosophy is guided by four principles: • A focus on prudent investment management; • A diversified approach; • Active investment management; and • Institutional discipline within a collegiate culture. Prudent management Many people who come to us for our investment expertise have taken a lifetime or longer to generate their capital. We understand that our core remit is to invest with a keen eye towards prudent management. As part of this process, we help investors understand the power of compounding and consistent performance. We explain how the volatility of returns falls over time and why, therefore, it is important to take a long-term view. We invest according to today’s market conditions but also within the context of a long-term strategic framework. Our asset allocation and security selection decisions focus on delivering an optimal combination of income and growth, as well as achieving a real return within an agreed tolerance for risk. We recognise that a single asset class rarely outperforms in all market conditions. Therefore, we believe the best way to deliver real returns and reduce risk is through diversification – investing across asset classes, global regions and types of investments. We invest predominantly in liquid securities because it allows us to respond to changing market conditions quickly and enables us to meet the income and drawdown needs of our investors. In order to determine the optimal combination of asset classes for portfolios, we continuously undertake an analysis of expected long-term investment returns and risk. This strategic framework provides us with a view of the appropriate balance of assets to meet different investment objectives. Active management We are also active investors and seek to add value through both tactical asset allocation decisions and individual security selection. This process involves tilting the mix of asset classes in different market conditions and then expressing our views by selecting the most appropriate investments. The purpose of tactical asset allocation is not What underpins our philosophy? Diversification Long-term horizon Prudent management A single asset class rarely outperforms. Volatility falls over time. A successful strategy is one that compounds capital consistently. We invest with a long time horizon. We are multi-asset investors. Annual performance* Volatility p.a FTSE 100 Cumulative performance* Holding period Portfolio A Portfolio B * Theoretical performance Note: The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. 6 Our investment process to fundamentally alter a portfolio’s long-term risk profile but to enhance returns and reduce losses by making adjustments to the strategic framework. Our asset allocation decisions are guided by a systematic overview of the key drivers of returns – growth, value, liquidity, currency and management – which we define as our policy framework. We analyse changes in these factors in the context of structured debate to guide the tactical decision-making process. Similarly, the security selection process is driven by our ability to identify suitable investments at attractive valuations through rigorous analysis. Institutional discipline We are a team of more than 55 professionals. More than two-thirds have 15 to 20 years of investment experience. We encourage open debate within a structured framework of daily, weekly, monthly and quarterly meetings to get the best out of this experience and to ensure we rigorously review and evaluate investment opportunities. Our investment process provides a framework for making decisions. Investment managers then tailor portfolios to meet the risk and return objectives of individual mandates. Internal risk controls help to ensure the investment approach matches the objectives. Our ability to measure and monitor risk and performance with clarity and precision gives us the information we require to carefully monitor suitability. Our guiding principles Prudent management of capital • Aim to deliver an optimal combination of income and growth for a given risk profile. • Aim to achieve positive real returns over the long term and avoid unnecessary risks. Diversified and active approach • Combine asset classes, which play different roles at different times. • Source opportunities globally and add value through asset allocation and security selection. Institutional disciplines and collegiate culture • Aim to deliver consistent risk-adjusted returns through disciplined review and evaluation • Collegiately generated views with tailored investment solutions to meet individual objectives. Note: The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Our investment process 7 How we structure our investment process We have designed our investment process to help us deliver optimal investment outcomes. It has four main components: •Risk and performance oversight and investor review. We have a proprietary risk and performance system (the Close Risk Monitoring System or RMS) and a highly disciplined internal review process. This framework helps monitor adherence to risk profiles and provides analysis of the key attributes of portfolios as well as the sources of performance. •The investor. We begin with a clear understanding of individual needs and suitability in order to define an appropriate risk profile for each investment strategy. Investors often work with an adviser to develop and articulate this understanding. •The process. We have a structured process to enhance our ability to add value to portfolios through both asset allocation and security selection. Our culture values collaboration and respect for each individual’s expertise. •The portfolio. Based on the views generated by our asset allocation and investment selection processes, our dedicated investment managers tailor portfolios to meet specific investor needs and risk profiles. This approach creates individual accountability within a framework of shared investment ideas. We then aim to deliver a range of detailed investment reports and valuations to ensure both our investment strategies and our performance are transparent and easy to understand. These reports act as supporting material in review meetings with investors and advisers, with the review process tailored to the Close investment service. Please read the section “Investment strategies” on pages 20 and 21 for further descriptions of our various investment services. Integrated investment process Investor objectives Investment process Disciplined and rigorous Overseen by Chief Investment Officer Investor, adviser and CBAM Adding value 1 Asset allocation Systematic framework “GVLCM” * 2 Investment research and security selection Qualitative + quantitative disciplines Investor reviews Investor and Close Close RMS system and internal review: • Monitoring objectives are being met. • Portfolio characteristics are aligned with risk profile. • Evaluating sources of value add. With investors: • Investment reports. • Meetings to review strategy and performance. • Interaction tailored to the Close service. •C lear understanding of investor needs and suitability. • Determine appropriate risk profile. • Agree appropriate investment strategy. Dedicated portfolio manager or team Views customised for risk profile and investment service Our focus is on meeting investor needs throughout the process *GVLCM = growth, value, liquidity, currency and management 8 Our investment process Understanding an investor’s objectives In order to determine the optimal investment strategy for each investor, we begin by defining their return expectations in the context of how much risk they are willing and able to take. There are many issues to consider, including financial circumstances, the capacity to absorb losses, and the level of comfort with investing in financial markets. Other objectives include the timing and need for income over capital growth. Our approach is most appropriate for longer-term investors and is not suitable for those with a short-term timeframe or trading orientation. Some investors work with their investment managers directly to establish appropriate investment objectives and risk tolerances. Others work with an adviser to determine a suitable investment approach. We recommend everyone has a financial plan (one they develop themselves or with an adviser) to ensure goals and risk tolerances are appropriate and reviewed as their circumstances change. We develop investment strategies that align with the specific needs of each investor. Please read the section “Investment strategies” on pages 20 and 21 for further descriptions of our various investment services. Putting investors first • Other funds or sources of income •Future expenditure • Tax situation • Capacity for loss • Return and income needs • Frequency of withdrawal and other cash flow needs • Investable capital in context of overall wealth • Time horizon Attitu de to • Willingness to take risk • Investment experience • Age Investor risk ents uirem req ial ec Sp Obje ctiv es stances m u c cir ial c an n i F • Assets and liabilities • Tax, allowances, protection • Ethical considerations • Currency • Jurisdiction • Cross-asset considerations • Stock and sector preferences Our investment process 9 Asset allocation Strategic asset allocation main developed markets of the UK, US, Europe and Japan but we may also include exposure to emerging markets. We believe the best way to achieve strong risk-adjusted returns is through the right level of diversification. Our objective is to provide investors with a broad range of investments that are likely to have a low correlation in terms of performance. We believe that selecting the optimal asset allocation is the most important factor driving long-term returns. Hence the foundation of our investment approach is based on identifying the most effective combination of asset classes that, over the long term, are expected to achieve the best possible return for a given level of risk. This is the long-term Strategic Asset Allocation (SAA) which we have designed for each risk profile. We look at each market and use ‘optimisation models’ built specifically for Close Brothers by Moody’s Analytics in order to better understand the projected risk-return trade-offs of various investment scenarios. The asset class combinations we use to build our models are shares, bonds (government and corporate bonds) and alternatives (see chart below), which all contribute to performance in different ways. Note that the value of investments in each of these asset classes and the income from them may fall as well as rise and is not guaranteed. An investor may get back less than the original amount invested. Equities tend to offer the best opportunities for generating long-term capital growth as well as income but also carry a greater degree of risk. Within equities, our focus is on the Investment asset classes: return versus risk Fixed income securities such as corporate and government bonds can help to diversify portfolio returns away from equities, while also providing a reliable source of income although it can come at the expense of capital growth. For example, in the past government bonds have been considered less risky than equities. However, when yields are low they may not offer protection against inflation or capital losses if interest rates rise. Our allocations to alternative investments tend to be a smaller proportion of portfolios, and our selections are driven by fundamental analysis and bottom-up security selection. We focus on liquid, alternative investments such as property, infrastructure, commodities and absolute return funds. Investors with a higher risk tolerance tend to have a larger allocation to equities and alternatives and more international exposure. Conversely, those with a lower risk profile tend to have a larger allocation to fixed income. Depending on individual investment mandates, we usually orientate portfolios towards an investor’s domestic currency to reduce the effect of foreign exchange fluctuations. Therefore, exposure to international securities is usually lower in more conservative strategies. For all investments, our decisionmaking process includes a review of currency risk as part of the investment rationale for each asset class and security. Please note that different portfolios may reflect different points along the efficient frontier* and therefore different strategic asset allocations and ranges of tolerances around this allocation. Strategic asset allocation: optimal mix Risk Profile 4 Balanced Risk Profile 5 Growth Alternatives Shares Lower Bonds Cash Risk Cash Potential returns Return Higher Risk Profile 3 Conservative Risk Lower Bonds Alternatives Shares UK gilts UK inflation-linked Corporate bonds Absolute return Commodities Real estate Infrastructure UK US Europe (ex UK) Japan Emerging markets Cash Bonds Alternatives Higher Shares We worked with Moody’s Analytics to develop our long-term Strategic Asset Allocation for each risk profile *N ote: the ‘efficient frontier’ is a concept of modern portfolio theory which defines a set of ‘optimal’ portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected returns. 10 Our investment process Tactical asset allocation We use a broad range of inputs at our SPC meetings, including: There can be prolonged periods when asset class returns deviate from their long-term trends. Therefore, we need to be willing to be active investors from both an asset allocation and security selection perspective. We arrive at tactical asset allocation decisions through our quarterly Strategic Policy Committee (SPC) meetings. •Our proprietary asset allocation model, which looks at the relative attractiveness of different asset classes based on valuation, earnings and macroeconomic factors. It provides an assessment of relative returns across equity markets as well as a valuation comparison of equities versus bonds. The committee is chaired by our Chief Investment Officer and attended by all senior investment professionals. These meetings are complemented by an ongoing discussion of key economic and market trends. •A systematic evaluation of market and economic data taking into consideration changes in growth, value, liquidity, currency and management (the current economic, market and policy landscape). We call this our GVLCM framework. This analysis drives our scorecard ranking. For our funds and house-aligned segregated portfolio strategies, additional oversight is provided by the weekly MAC (Multi Asset Committee) meetings which discuss and review the tactical weightings. The purpose of tactical asset allocation is to enhance returns and minimise losses by making adjustments to the strategic framework. When making decisions, we aim to tilt portfolios to reflect prevailing market conditions, but not in a way that would alter a strategy’s risk profile fundamentally. •Input from leading research strategists. They share their investment outlook and asset allocation recommendations with the investment team, ensuring we benefit from a diverse and broad perspective and exchange of views. •Structured presentations from CBAM investment managers on key themes. We believe these wide and disciplined inputs (see overleaf for more detail) provide the basis for a robust challenge and review process. SPC members discuss overweighting and underweighting individual asset classes using all these inputs and their judgement before arriving at an agreed view. The latter forms the basis of our SPC conclusions. The role of the Strategic Policy Committee We believe that risk assets should be favoured when: • Economic growth is improving; • Liquidity conditions are benign; The final application of this decision is at the discretion of the investment team or manager. In other words, we combine collegiately-generated investment strategies with tailoring to meet individual objectives. As a result, all investors benefit from the discipline of a centralised approach with the personal attention and customisation they require. • Valuations are not excessive; and • Event risk or other risks are benign and/or falling. Strategic Policy Committee (SPC) conclusions Equities Fixed Interest Alternatives Cash ++ OW + UW N UW UW -Equities: FI: - - US - Overweight & high conviction UK – Neutral, stock specific Japan – Neutral, hedged Europe – UW reviewing Industrials Asia – Dollar Asia Equity Sector Underweight OW - UK Corporate IG UW - Sovereign UW - Duration Alternatives: Cash: - - Underweight Bottom up driven Absolute Return Funds Property and Infrastructure VUW Commodities Underweight Cash Fixed Interest Sector OW 1. Corporate IG OW 2. Industrials OW 2. Inflation Prot. N 3. Technology OW 3. Corporate HY N 8. Materials UW 8. Govt Bonds UW 9. Telecoms UW 9. Duration UW 10. Utilities UW 6.7 Equities - Bear-Bull conviction indicator Most Bearish 0 Neither Average 1. Health Care Most Bullish 10 3 1 1 4 1 2 11.27 8.3% 7.1% 3.97 8.2% 0.7% 16.32 0.68 1.00 -0.9% 0.1% 50.50 -2.74 57.30 -7.00 SENTIMENT Volatility index Call/put ratios Flows to equities MOMENTUM Distance to 50 dmav Distance to 200 dmav % of shares above 50 dmav Earnings momentum MACROECONOMICS PMI Consumer confidence/ current 19.55 4.01 13.80 1.99 17.52 10.9% 0.0% 3.85 12.8% 8.9% 8.90 12.76 11.22% 1.32 19.13% Now 2 1 3 3 2 2 4 2 4 4 Bond ranking Bond 10yr Government bond yield 10yr IG Corp OAS 10yr HY Corp OAS 10yr Breakeven Equity ranking 3 3.02 3.7 4 4 2.75 1.75 2.4 4 2 2 1 4 1 4 1 2 2.87 3.72 2.54 51.58 -17.00 1.71 1.19 3.55 1.41 53.90 -11.70 -0.3% 5.3% 44.00 -1.83 21.12 0.96 1.00 1.8 2 3 1 1 2.5 1 1 4 4 2 2 2 2 2 4 20.12 2.3 3 2 2 2 3.47 1.73 4.20 2.21 52.87 78.00 0.62 0.02 56.60 39.70 -6.6% 0.2% 12.44 -1.62 28.26 1.04 2.00 31.3% 17.2% 1.61 16.6% 11.4% 8.24 19.19 11.27% 1.56 0.42% Now 0.00 Management 2.69 1.16 4.04 2.14 2.6 2 4 3 3 3 4 Currency 56.50 81.20 -0.7% 5.0% 44.60 -0.13 3 4 1 2.11 13.65 2.45 16.24 Liquidity 3 3 14.7% 3.5% 17.35 1.52 -24.00 2 2 3 2.14 11.0% 11.1% Value 15.22 2 1 1 2 USA SPX index Score 10 YR avg Growth 15.24 6.54% 2.36 3.95% Now 1.20 Are0.03policies conducive to investment return? 1.0 1 1 41.70 Is currency additive, neutral or detractive? 50.76 Are central banks 25.18 supportive of liquidity? 1.62 7.25 1.57 21.35 Do earnings visibility justify value? 2.5 3 3 1 2 1 3 1 3 4 4 4 1 4 4 1 1 3 3 1 Is growth improving? Japan NKY index Score 10 YR avg Risk Currency Value Liquidity Value Growth Systematicevaluation review Systematic Inputs plus judgement. Reviewed daily, weekly, monthly and quarterly. 3.10 1.53 3.89 1.74 50.44 -15.40 23.61 4.12 12.81 1.57 14.20 Europe SX5E index Score 10 YR avg Global Framework 3 4 2 3 UK UKX index Score 10 YR avg 12.98 34.99% 1.73 15.25% Now 09/02/2014 VALUATION Multiples P/E 12m forward P/E relative to 10 yr avg P/B next FY est. P/B relative to 10 yr avg Profitability ROE-% Growth EPS g 2FY EPS g 3FY Yield Dividend Yield next FY est. Upside Market weighted Simple average EQUITIES Proprietary screen Proprietary screen Proprietary model Cash Alternatives EM Japan Europe US UK Equities Equities Fixed Income V U/W U/W O/W V O/W V U/W = Very Underweight U/W = Underweight N = Neutral O/W = Overweight V O/W = Very Overweight N Reduce risk where trends are deteriorating and/ or value is excessive Increase/Maintain risk in response to improving economic, liquidity and policy trends Asset allocation allocation scorecard Asset Our investment process 11 12 Our investment process Investment research and selection We are active investors not just from an asset allocation perspective but also in terms of security and fund selection. In addition to our tactical asset allocation process, we seek to add value through the process of selecting individual investments. We look across asset classes to identify the most attractive opportunities. All investment managers have both portfolio and analytical responsibility, and contribute to the investment selection process. They are supported by research teams dedicated to finding opportunities in equities, fixed income and alternatives. Many of the portfolios we manage are invested directly in individual securities but we also have expertise in external fund selection. As a result, we can also offer multimanager (fund of fund), active and passive strategies. A structured decision-making process In line with our collegiate approach, we hold regular research meetings. They provide an opportunity to debate new investment ideas, confirm our security selection and listen to the views of external specialists. The output from these meetings is a broad range of investment ideas – the Close Brothers Core Universe. They appear in portfolios in different ways depending on: •Mandate profile. We manage tailored strategies and funds, and offer different investment approaches in the structures we use to express our views: (1)Direct: mostly in individual securities across all asset classes; (2) Managed: mostly in actively managed third-party funds; and (3) Passive: through passive vehicles. •Opportunity. Depending on market conditions and the investment remit, we invest in third-party funds to access certain specialist areas where we do not have the expertise in house. Directly invested and managed mandates also use passive securities if there is a compelling reason to access a lower-cost market exposure. •Investor needs. Investors in our DMS and DMS-Bespoke services (see page 20) may have certain restrictions, tax considerations or portfolio construction needs that influence the selection of individual investments. Our comprehensive research capabilities guide our investment strategies. A robust process, set out on the following pages, backs all decisions. Investment selection Equities Fixed income Alternatives Potential for growth and income Look for capital protection, income and safety: • Sovereign • Investment grade Diversify stock and bond exposure • Commodities • Property • Infrastructure • Absolute return funds Return on capital and income Source opportunities on a global basis: direct, active funds and passive. The value of investments may go down as well as up and is not guaranteed. Our investment process Investing in equities Equity approach We seek to identify mispriced opportunities in the global equity markets in order to add value over the long term. The equities we own typically have a combination of the following characteristics – improving return profile, shareholder alignment, quality bias and an attractive valuation. We believe in free cash flow as a generator of long-term equity returns. Our focus is on companies with large global franchises, a strong commitment to governance, respect for their shareholders and high-quality management teams. We also prefer businesses in industry sectors that can benefit from one or more growth themes driving today’s global economy. Additionally, we look for equities that can deliver both income and growth. Bear in mind the value of equities can go down as well as up and you may get back less than you invested. Equity team We combine fundamental research with screening tools to uncover opportunities. Our research takes a disciplined, cohesive and inclusive approach that incorporates the views of both our analysts and investment managers working together in an open and transparent way. 13 well as 14 investment managers who are also sector specialists. These pools of expertise come together in sector investment teams, which review existing investments and generate new ideas. All investment managers contribute to the process by putting forward ideas to review or leading the review with support from the equity research team. We divide analytical responsibility across global industry sectors. Our research analysts produce detailed sector reviews as well as ongoing analysis of core stocks held in portfolios, competitor analysis and new ideas. The team presents its research pipeline to investment managers each week. The pipeline reflects the needs of investment managers for types of exposures in portfolios and often also the themes developed at our quarterly SPC meetings. Some ideas are top-down or sector driven but we review all of them from a bottom-up perspective to validate their potential contribution to portfolio returns. Our senior Head of Research has 22 years of experience and is responsible for ensuring all aspects of the equity research process are aligned as well as chairing all review meetings. From a regional perspective, we focus on global sectors within the main markets of the UK, US and Europe as well as selected opportunities in Japan and Asia. Typically, we gain exposure to emerging market equities through third-party funds (in line with the selection processes described on pages 17 to 19). Our research capability comprises six research analysts with a combined experience of more than 50 years as Equity approach Improving profile We are looking for persistence of returns in, primarily, liquid large-cap stocks with strong balance sheets and improving returns for investors. Shareholder aligned We like equities where management is clearly incentivised for shareholders and where dividends or stock buybacks are a regular feature of corporate policy. Quality bias We like businesses with excellent management in industries with high barriers to entry and well-established franchises. Attractive valuation We are patient investors and believe in waiting to buy quality at an attractive price. 14 Our investment process Equity process Our quarterly Strategic Policy Committee meeting is the open forum where our investment teams discuss tactical asset allocation and equity trends. From this meeting as well as from regular discussions between investment managers and analysts, we establish a working agenda for research. We also use two CBAM proprietary screens to filter our universe of around 1,300 global, investible stocks. Our value-based screen combines the Gordon Growth model with consideration of a company’s profitability, growth and quality relative to the rest of the market. This screen identifies companies that look cheap relative to their intrinsic values when adjusted for growth, risk and profitability measures. It enables us to determine whether earnings and enterprise value multiples reflect the underlying prospects of the potential investment. Our income screen comprises 11 variables that score companies based on a combination of valuation, risk profile, profitability and yield. Both screens play a role in highlighting possible areas for further research and help to narrow our investment universe. The screens have been back-tested for their validity in a wide range of markets. We use these screens and the input and judgement of investment managers to reduce our investible universe to a core stock list of around 350 stocks on which we focus our fundamental research capabilities. At any given time, our higher-conviction Close core universe (stocks we own or might want to own) might consist of 100 names. We undertake fundamental research using quantitative and qualitative techniques, including analysing businesses and financial statements in detail. We meet over 300 company management teams every year in order to evaluate their quality and assess their strategic intent. We also use an expert network of industry specialists to supplement our fundamental research through one-to-one meetings. This access helps to improve our understanding of the sector dynamics or product potential of the companies of interest. We build detailed financial models, and value shares using investment tools, typically comprising conventional ratios as well as discounted cash flow analysis. We then compare our financial models with the market consensus. For example, the Credit Suisse HOLT tool informs us about what is being discounted in share prices and growth rates, so we can see how our own forecasts and assumptions differ. This approach enables us to quantify the upside opportunity we forecast for investments. It also allows us to compare our analysis of balance sheets to check on the structural health of a company. Our overall security selection is also informed by detailed sector reviews, which help us to understand companies in the context of important trends and changes, margins and valuations, and the outlook for revenue and/or pricing growth within sectors and subsectors. We assign all stock recommendations a price or total return target, which we measure against an assessment of the perceived risks. We monitor the performance of all ideas on an ongoing basis against our investment criteria. Equity research process Proprietary screens Qualitative Coherent strategy Management execution Competitive advantage Shareholder aware Sector tailwind Screen for attractive price relative to growth and risk Quantitative + Improving, superior ROCE Strong balance sheet Free cash flow generation Sustainable or improving earnings Progressive dividends and policy Value works over the longer term Not overpaying is critical to positive investment returns Growth >20% returns Medium term Beta agnostic P Income Predictable income Well covered dividend Lower beta Proprietary screens to identify value. Research for quality. Our investment process Investing in fixed income Fixed income approach We invest in the fixed income markets predominantly to provide portfolios with an element of certainty and safety through assets that can generate predictable cash flows with relatively low volatility. Therefore, “risk reward” is the mantra that we apply to all investment decisions. We look for security of principal and income as well as transparency, liquidity and predictability. Our decision-making process is always predicated on meeting these objectives. We want to capture opportunities and control risk. So as economic and market circumstances change we review our strategic bond allocations and adjust them accordingly. We invest for all economic conditions. When yields are high and expected to fall we aim to lock in these rates. As yields rise we aim to roll all cash flows into more attractive rates. The focus of our research is on sovereign debt and highquality corporate bonds in the main developed markets. From time to time, we look at high-quality unrated debt that we believe will gain an investment grade credit rating. Additionally we invest in inflation-linked securities to hedge against inflation and help mitigate interest rate risk. Bear in mind the value of fixed income can go down as well as up and you may get back less than you invested. Fixed income team Our Head of Fixed Income is supported by six investment managers and analysts with extensive experience of investing in the government and corporate bond markets. They comprise the fixed income investment committee, which is responsible for identifying and assessing opportunities. This group meets formally each month to discuss the latest market events, investment ideas and economic data relevant to our positions. The fixed income committee also plays a key role in the quarterly SPC meeting, which reviews overall bond market dynamics and the key macroeconomic drivers of bond investing such as interest rates, liquidity, inflation and central bank policy as well as yield curves and credit conditions. Fixed income process At the start of our process, we use filters to narrow the investment universe from the many thousands of bonds available. Our assessment covers a variety of factors depending on the market: •For government bonds we consider the macroeconomic environment (interest rates, growth and inflation), yield curves, supply, breakeven rates, trading trends and index readjustment. •For corporate bonds we consider macroeconomic conditions, credit ratings, issue size, liquidity, yield analysis, call features, spread dynamics, horizon analysis and default risk. The availability of cash flow to service the debt is a key driver of our corporate bond selection. In line with our core investment objectives of prudently growing wealth over the long term, we focus on finding safe, high-quality and liquid bonds. Factors to consider when investing in the fixed income markets Income yield Credit spreads and volatility Market liquidity 15 Credit rating Investment idea Shape of the yield curve and interest rate expectations Duration Inflation expectations and breakeven yields Macroeconomic conditions 16 Our investment process Investing in alternatives work to produce this research is undertaken outside of this forum in terms of: Alternatives approach • Meeting management teams and visiting companies; We identify alternative investment opportunities through bottom-up, fundamental research. Our allocations are driven by finding attractive and liquid investments that meet our criteria. We look for opportunities that are exposed to different value drivers and risks than the other two pillars of our multi-asset portfolios – equities and bonds. Our team is continually on the hunt for new areas in which to invest, where the security itself or cash flows of the underlying investment have a low correlation with equities or economic conditions, or both. Exposure to these markets can improve diversification and help to reduce maximum drawdown in times of market turmoil. The ultimate objective is to improve risk-adjusted performance. Please note that all market investments may fall in value as well as rise and are not guaranteed. Hence our investment philosophy is appropriate for longer-term investment. Alternatives team We have a team of six who are responsible for undertaking research for the wider business in the area of alternative investments. Our universe covers property, infrastructure, renewables, commodities, leasing and convertibles. The team comprises some of our most experienced investment managers at CBAM who have a strong interest in identifying attractive alternative investments. Their research efforts are supplemented by our manager research and passive instruments teams, which identify external managers pursuing more absolute return types of strategies or passive instruments giving us exposure to commodities in the form of a liquid security. A formal meeting is held each month to which all investment professionals are invited to review the latest research and investment updates. The majority of the • Debating the pertinent issues with third-party analysts; • Attending conferences; • Reading sector-specific websites and literature; • Valuing assets and setting price targets; and • Writing research notes. Alternatives process The team draws on economic insights from other internal resources, such as the SPC meetings, to add to its own rigorous bottom-up security selection analysis. Just as cash flow forms the heart of the equity and bond investment process, it plays the same role within the directly invested alternatives process. We look at cash flow forecasts, the variability of cash flows (risk), economic sensitivity, interest rate sensitivity, specific risk, asset backing and leverage, diversification benefits and positive characteristics (such as inflation protection) to build a comprehensive picture of the investment. Some ideas come down to valuing a series of cash flows (which have varying degrees of certainty), while others are based on a macroeconomic assessment. For example, the behaviour of commodity prices requires an understanding of the market environment as well as an analysis of supply and demand trends. When selecting alternative investments, we focus on liquid and quoted securities. From time to time, we use absolute return managers or passives in our alternatives allocation. These assessments are carried out by our manager research or passive instruments team (please see the research processes on the following pages). Sources of uncorrelated returns Property Infrastructure Commodities Bottom-up selection process Absolute return strategies Our investment process Investing in active funds Active funds process Active funds approach We invest in active funds for two reasons: (1) to access markets where we do not have the expertise in house; and, (2) for portfolios where the investment remit is limited to investing in third-party managers. We look for managers with an investment process that is repeatable and easy to understand, and where past performance is aligned with their process and style. Importantly, we like managers who share our own philosophy for delivering strong riskadjusted returns. We insist on an open and honest dialogue and will not invest in managers where we cannot conduct adequate due diligence. We ask managers to visit CBAM and present their capabilities to our investment team. A rigorous and robust research programme greatly increases the likelihood of identifying investment managers that can outperform over the medium to long term. Bear in mind that the value of units can go down as well as up and you may get back less than you originally invested. Active funds team Multi-manager investing is one of our core strengths and we have first-rate access to managers from all over the world. We have a dedicated team of six professionals led by a multi-manager professional with more than 20 years of experience as an institutional consultant. The team meets monthly to approve the CBAM core manager buy list. Our fund selection process combines quantitative and qualitative inputs and our dedicated manager research team spend their time researching and selecting funds. From a potential universe of 10,000 funds, the team narrows the search to a focused group that warrant further analysis. Interviewing fund managers is integral to this process and the team meets more than 400 managers each year. Our own investment managers often form a core part of the team allowing us to benefit from the added value of “managers interviewing managers”. Meanwhile, we use the Close Score, our proprietary quantitative scoring system, which looks at factors of risk and return and consistency over time to help identify potentially attractive managers. Further due diligence enables us to check that the organisation, investment philosophy and process are aligned with ours and meet the highest standards. Our ongoing fund selection and monitoring process comprises four stages: •Identification. We look for funds we believe are the best in their sectors or regions across all asset classes. Our research covers funds with varying styles so that we can construct portfolios with different objectives and risk profiles. Ideas come from a variety of sources including industry contacts, conferences or direct approach. We also collect data on more than 10,000 funds and use the Close Score to provide a quantitative assessment of risk, return and consistency over multiple time periods. Manager research • Experience • Conferences • Direct approach • The Close Score (proprietary screening) Identification • Identify changes that impact performance • Formal review of Close Score 17 Monitoring Review Approval • Monthly meetings • Due diligence questionnaire • Formal approval • 400 manager meetings a year • Identify manager skill: people, philosophy, process • Look for explainable performance Our investment process •Approval. We discuss new funds at a monthly meeting, where the team has the opportunity to raise any concerns. We usually meet with a manager multiple times and complete a due diligence questionnaire before bringing the idea for approval. Once any outstanding questions are answered satisfactorily, and if we are happy with the manager’s process and performance, we add the fund to our core list. •Monitoring. Monitoring is a continuous process, which identifies any changes in a fund that could be detrimental to future performance. Factors include staff leaving, a change in investment process or corporate action at the fund management house. We also formally review the Close Score on a monthly basis and make sure performance is consistent with the fund’s philosophy and process, with any anomalies resolved by further analysis. Available universe of managers Quantitative screens In-depth due diligence Core list The end result is our core list of around 120 funds across asset classes, style and region. Our investment managers can then select those they believe will best meet the objectives of their portfolios. A diverse range of funds, such as absolute return, commodity and property funds, may be used to achieve less correlated sources of returns. We also have access to specialist funds that may not be available to non-institutional investors. Fund research and portfolio analysis Fund analysis Research report 10 ,00 0 Manager selection Portfolio analysis 40 0 •Review. We spend the bulk of our time meeting fund managers. We aim to identify manager skill by assessing the people, investment philosophy and process. Yet ultimately we are looking for explainable and repeatable performance. Understanding when a manager’s style should outperform or underperform helps us to avoid overreacting to short-term performance patterns. 12 0 18 Our investment process 19 Investing in Passives Our investment process Our investment approach •Assessment. The team conducts due diligence on potential new instruments against our investment criteria in order to increase the pool of available opportunities. We replace existing vehicles when we find more efficient alternatives. This process combines quantitative and qualitative criteria and results in instruments receiving one of three classifications: –Approved (available for investment); –Not investible; and –Wait list (not investible at present due to size, liquidity, or track record and awaiting further review). The investment process is comprised of three components: We use passive investments to access low-cost market exposure or for portfolios where the remit is to invest principally in passive securities. Our passive security selection process focuses on identifying the most costeffective and liquid index trackers that also have, in our evaluation, low counterparty risk. The universe comprises index trackers and both exchange-traded instruments and notes. Passives often provide the most effective way to invest in shorter-term tactical opportunities that complement our core active long-term holdings. Investing in these products may expose investors to additional risk, for instance, risk if the product’s counterparties fail. Researching passive investments We have a dedicated specialist researching passive investments; with additional support provided by the heads of equities and fund research. A monthly committee meeting provides risk oversight by reviewing the approved list of investments, approving any new instruments and evaluating due diligence. We make the core list of passive securities available to all investment managers, with a clear explanation of cost, tracking error and liquidity considerations. Low st co tra c u id l iq t er of pa ty rt y Plen ris k or err ng ki Lo w Key to investing in passives* y Low co un Index trackers need to track their index, over time at low cost and with negligible counterparty risk. *Investing in these instruments may expose you to additional risk. For instance, you may be at risk if the counterparties fail. The team prepares a data pack for all potential investments that includes information from industry sources, the fund’s prospectus, index providers, instrument providers and market data providers. •Monitoring. Continuous monitoring ensures the pool of instruments continues to meet our criteria; and that it is performing in line with expectations and within acceptable parameters. In addition, monitoring ensures instrument providers are healthy and that unnecessary counterparty risk is kept to a minimum. We highlight any deterioration in investment flows, liquidity, tracking error, tracking difference, size or NAV premium/discount. •Selection. From the available pool of investments, we select instruments which meet the requirements of our due diligence process. Our judgements are based on a range of factors including cost, liquidity, index methodology, counterparty risk, tracking error, correlation with existing portfolio instruments and seasonality. Most passive instruments combine structural elements from funds, traded equities, structured products and index swaps. Accordingly, our selection process encompasses evaluation from multiple perspectives including fund research, equity research, index methodology, trading behaviour and legal structure. 20 Our investment process Investment strategies Investors can access our investment expertise in a variety of ways – through discretionary portfolios in our DMS, DMS‑Bespoke and MPS services as well as a range of funds. Discretionary Management Service (DMS) Our Discretionary Management Service (DMS) is most suitable for investors, financial advisers and intermediaries seeking consistent performance across a range of riskrated strategies. It is the closest and most accurate reflection of the Close investment view in a segregated portfolio format. Our DMS offering is available for investors with in excess of £100,000 to invest. If investors are working with a financial adviser, they conduct an investment suitability review. Advisers select the most appropriate DMS strategy according to each investor’s risk profile. In addition, we have the ability to tailor income payments. This facility enables advisers to choose a drawdown schedule that matches the income needs of their investors. Our strategies can also accommodate ethical, moral and workplace restrictions and manage capital gains tax if requested. Alternatively, investors can have a direct relationship with our DMS investment manager and adviser support team. We also offer a range of comprehensive portfolio tools. They include detailed portfolio breakdowns and analytics that demonstrate alignment with individual risk profiles. Investors also receive tailored reporting including access to our online portal, which provides detailed and up-to-date portfolio valuation information including transaction details. DMS-Bespoke Service Our DMS-Bespoke Service is suitable for investors with in excess of £500,000 to invest who are looking for a higher degree of customisation. Bespoke portfolios can accommodate a range of individual needs – from any ongoing requirements to draw a regular income to full tax considerations and any ethical restrictions. Through a suitability review with investors, our investment managers establish the appropriate risk profile and preference for income and capital growth. We have internal guidelines for each risk tolerance but we can also accommodate wider risk bands within a given risk profile, if agreed with the investor. Please note that performance in DMS-Bespoke can be different between investors with similar risk profiles owing to the customised approach. A common platform – a range of investment solutions 1 Asset allocation 2 + Security selection Strategic Policy Committee (SPC) • Key macro variables. • Economic issues and asset class themes. • Policy implications: over and underweight by asset class. Drives tactical asset allocation decisions Fixed income Core universe of researched investments Equity Alternatives } Discretionary portfolios Discretionary funds Our DMS and DMS-Bespoke offerings Directly managed, fund of funds and passive Our investment process Managed Portfolio Service (MPS) Our Managed Portfolio Service is a discretionary, actively managed service for private clients. There are four different risk profiles to suit a range of client needs. Through MPS, clients have access to professionally managed portfolios invested solely in third party funds with a global outlook. There are four strategies in the range to suit different risk appetites and target returns. Investors can choose whether to focus on capital growth or income, or a combination of the two depending on requirements. Clients have the flexibility to switch between portfolio strategies if their circumstances or objectives change. Investor relationship We offer a direct relationship between investor, advisers and dedicated investment managers. In DMS-Bespoke we provide each investor with a Personalised Investment Policy Statement (PIPS), which we review periodically to reconfirm our understanding of personal circumstances and align this with the chosen risk profile and investment strategy. 21 The fund range is constituted as an umbrella UCITS Unit Trust, Close Discretionary Funds (“CDF”), with sub-funds for each investment strategy across a range of approaches. As these are pooled vehicles and we cannot customise the strategies. As with our DMS offering, the funds have an aligned asset allocation and security selection for a given risk profile. Our family of funds are available in three forms: •Close Portfolio Funds. Invested primarily in individual securities, underpinned by our research and security selection expertise. •Close Managed Funds. Our ‘multi-manager range’, which is invested in third-party active funds, underpinned by our active manager selection process. •Close Tactical Select. This lower-cost option reflects our asset allocation views but invests in cost-efficient passive instruments and is underpinned by our disciplined passive security selection process. We can provide individual or family-level investor reporting, detailed quarterly valuations and access to our online portal, which provides up-to-date information. The review process includes face to face meetings where performance and strategy are reviewed with the investor(s) and, where applicable, a board of trustees or advisers. Other services Close’s range of funds For more information about any of these product or service offerings, please contact your CBAM investment manager or adviser. We also offer a range of funds with different risk and return profiles. Typically, these are accessed through an adviser, who will recommend the risk profile and appropriate fund according to an investor’s suitability. We also offer an Inheritance Tax planning service (“CITS”) that affords a further enhancement to portfolio planning by seeking to offer Business Property Relief on a portion of an investor’s assets. One investment engine, multiple solutions Segregated Portfolio Services Funds Managed Portfolio Service (MPS) Discretionary Management Service (DMS) Diversified Income & Income Plus Income Plus (Diversified Income) Income Plus (Diversified Income) Conservative Conservative Conservative Balanced Balanced Balanced Growth Growth Growth Direct, Multi-Manager, Passive (CDF) Fixed Income 22 Our investment process Performance and risk Our benchmark of success is delivering positive real returns for a given level of risk, in the context of a changing market environment. We assess our performance against market indices and compare our risk and return rankings with peer benchmarks. In our DMS-Bespoke service we offer a customised benchmark or other comparative measure. Investment oversight Our performance and risk oversight involves regular reviews to assess whether portfolios remain in line with their objectives. The most extensive review takes place at the quarterly Investment Review Committee meetings, which are chaired by our Chief Investment Officer and attended by our Chief Executive Officer and Heads of Compliance, Distribution and Client Service. This meeting comprises a full and highly detailed review of the performance, risk and alignment with stated mandates of all CBAM investment portfolios and strategies. The quarterly process is supplemented by additional reviews. RMS codifies agreed investment mandates and allows us to evaluate portfolios across detailed characteristics. It provides the up-to-date information investment managers require to assess the risks and performance associated with each portfolio. By understanding what is driving returns, we can align the risk mandates more accurately with reference to past long-term performance. We can also undertake stress tests for a range of market scenarios to understand how our investments might perform through different market conditions. We have proprietary technology for measuring and monitoring performance and risk called the Close Risk Monitoring System (RMS). This powerful tool supports our investment solutions and provides a framework for suitability governance. Our risk system Close RMS is a powerful investment and risk tool designed for our managers and for oversight • Assessing portfolios across a range of risk and portfolio analytics. • Ensuring performance, risk and suitability are aligned with the mandate. • Understanding sources of return. RMS Outlier One Pager - as at 30/06/2014 Client Code Client Name CAM003 J Q & A R Campbell's Settlement Client Risk A Manager RH Analytics: Score Category 66.25 Category 4 Asset Allocation Client Size £124,831 Volatility - Concentration Yield 11.25 0 Severe Portfolio 0 Age score Low 0 15 0 Significant Profile mismatch? 19 18 - 39 38 - 23 22 27 26 31 30 35 34 42 43 76.25 87.5 98.75 66.25 31/10/2013 31/12/2013 31/03/2014 30/06/2014 Risk Return Scatter (Volatility) 1yr 1yr Region CAM003 Mthly Rt n (lhs) 4% 2yrs 2yrs Currency ARC Growth Mthly Rtn (lhs) ARC Growth Cum Rtn (rhs) 14% Risk Rtn 1yr tD CAM003 5% 6% Mgr12% Avg 12% 9% HNW Avg 11% 8% BM10%8% 6% CAM003 Cum Rtn (rhs) 110 3yrs 3yrs 3m Performance (Annualised Return) 108 3% 4yrs YtD 4yrs 5yrs 5yrs 12m 106 Start 2% Start Annualised +2% 104 Cumulative +3% 1% ARC High 0 12m low 15 14 Cumulative Performance 1yr Turnover Position 0 Slight Too Low 11 10 - Asset allocation Performance Volatility Concentration Drawdown Turnover Yield and income objectives Duration Contribution Performance 40 Flag Reason Rolling Risk Score Measurement factors Client Objective GRO RMS confirmed +4% 102 WMA +5% 0% UK Equities +6% 100 8% 6% 4% US Equities ## 2% -1% Equities World ## Gilts 98 ## 0% CPI 2011 -2%Plus 0% 96 2% Cash Plus ## -3% 6% 8% CAM003 94 QtD YtD Benchmark ARC 4% Risk & Volatility CAM003 Manager Average HNW Average 1yr tD Start tD 10% 1yr Start 3yrs -1.1% 2.2% 1.5% 1.8% 5.5% 3.7% 5.1% 12.4% 11.4% 25.9% 54.3% 49.2% 12.9% 25.4% 21.5% 47.0% 76.2% 67.2% -0.3% 2.3% 8.0% 37.7% 18.7% 56.0% 5.8% 8.8% 7.7% 6.3% ARC Cautious WMA Conservative TR* BM 5yrs tD Year to Benchmark Mgr Avg HNW Avg 3yrs tD QtD Performance CAM003 Manager Average HNW Average vs. 4% Volatility (annualised standard deviation) RPI Plus ## 8.5% 10.7% 10.6% 9.5% 5yrs 5.6% 9.1% 8.7% 7.5% Score 0 Reason Score 11 5.6% 9.3% 8.9% 7.8% 12m volatility is either a downside outlier Reason against the manager average or lower than expected ARC Growth Asset Allocation Range 0% 10% 20% 30% 40% 50% 60% 70% 80% 60%-100% 90% 100 % Manag er HNW Average CAM003 CAM003 Manag er HNW Average 0% 10% 20% 30% UK Equities AA CAM003 Manager HNW Average Score 5 1 2 3 4 5 6 7 8 9 10 RMS internal monitoring dashboard UK Equities 12.1% 38.9% O/S Equities 40.6% 42.9% 35.6% 29.6% 40% O/S Equities Fixed Interest 39.7% 10.4% 50% Fixe d Interest Commo dities 60% Multi A sset Commodities 0.0% 0.4% 19.0% 70% Pro perty/Alts Multi Asset 0.0% 0.2% 1.6% 80% 90% 100 % Cash Property/Alts 0.0% 0.1% 2.9% Cash 7.6% 6.9% 5.2% Equity-like Risk 53% 88% 85% 6.0% 40 14 Top 10 Name UK (GOVT OF) 2.5% INDEX-LINKED 17/07/2024 ARTEMIS GLOBAL SELECT ACC NEWTON ASIAN INCOME W NET INC NOVARTIS AG CHF0.50 REGD Capital Account RIO TINTO PLC ORD 10P AGEAS INSURANCE ABERDEEN ASSET MANAGEMENT ORD 10P MELROSE INDUSTRIES ORD GBP0.00111818181 Income Account 18 25 27 26 31 Other Wgt 39.67% 15.12% 13.28% 8.48% 7.03% 4.98% 3.75% 3.64% 3.53% 0.53% 12m Perf 0.40% 3.36% -4.81% 19.68% 15.86% 7.95% 18.57% - Gain / Loss +11.6% +2.5% -13.1% +5.9% 0.0% -1.3% -3.9% +11.6% -1.4% 0.0% Test 12 month Commission Rate 29 Size of Client No. of Positions 21 Singletons Last Trade Window 33 Yield Age 37 Capital Gains (£ value) 41 Capital Gains (% percentage) CGT Restricted Unrestricted Detail 0.0% £124,831 10 Risk Score 0 0-6m 2.5% 65 0 0 15 0 £3,834 3.2% Summary client suitability report Our investment process 23 Understanding risk is an integral part of our portfolio construction and review process. Adherence to mandate restrictions is the responsibility of the investment management team and is monitored independently by our Chief Investment Officer and risk and compliance team. Detailed portfolio summaries We assess the suitability of portfolios across a range of criteria including: • Asset allocation •Performance •Volatility •Concentration •Drawdown •Turnover • Yield and income objectives •Duration •Contribution •Aggregate performance reports for intermediaries who have more than one investor with us and wish to analyse how their clients are performing within and across risk profiles, with detailed reporting analytics. We use these measures to test the alignment of portfolios against mandates and suitability parameters. These tests are available daily and reviewed formally on a quarterly basis. We have qualitative tolerance bands for each strategy and actively aim to assess whether any portfolio has fallen outside them. Our risk management system (Close RMS) enables us to generate detailed information about performance and risk: •A summary of performance and risk against a range of selected or customised indices relevant to the mandate. •Aggregate performance reports for families who wish to see consolidated reporting at the family and individual level with detailed analytics. To assist advisers and their clients we have produced a separate “Guide to Risk” document. The objective of this guide is to ensure that advisers understand how we map our investment products and solutions to key risk and return objectives. Range of investor and adviser support materials Investor summary Intermediary report Consolidated family summary 24 Our investment process Reporting and support Our discretionary investment managers build close working relationships with investors and their advisers as well as with intermediaries. We view it as our responsibility to provide clear information about the investments we manage to everyone involved. Tailored communications We believe in clarity and transparency of reporting, delivered in a timely way and personalised to reflect the investment service. We operate on the principle that investors should be able to understand how their strategies are aligned with their risk and return objectives. •Quarterly valuations with a clear breakdown and summary of our asset allocation and market views. We also confirm our understanding of objectives and risk tolerance each quarter. Three core values support our commitment to reporting: •Readable. We aim to make our reports comprehensible in terms of how we are positioning a portfolio within the current market environment. At the heart of what we aim to do is to deliver a personal investment service. Investors receive a range of tailored communications in print and online depending on their investment service. They include: •Quarterly Investor Insight: our key investment strategy publication prepared by our Chief Investment Officer, which outlines our investment views and any changes to the asset allocation framework. •Annual tax reporting to support our investors’ other advisers, such as their accountant or tax adviser. •Holistic. We want investors to understand performance clearly over different time periods, as well as asset allocation breakdowns. •Monthly factsheets for our fund range showing key performance and holdings along with a review of economic and market trends. •Detailed. We share a detailed breakdown of underlying holdings and review the rationale for key changes to portfolio strategy. •Online access to investor level portfolios and valuations through our client portal. •Annual reports for our fund range that summarise past performance and investment strategy. Range of investment updates Quarterly investment publication Monthly fund factsheets Investor Insight Quarterly investment views – July 2014 An elongated recovery Following a weak first quarter, conditions in the world economy have improved over the past two months. We believe the recent pattern of economic growth suggests the recovery could take longer than is typical for this phase of the business cycle. Equity valuations are looking stretched and we believe further gains must come from real earnings growth. This theme is central to our investment strategy. The next investment phase is likely to favour security selection as the key driver of returns. We will be looking for companies with revenue and earnings trajectory that can justify further price gains. Since becoming more cautious over the first quarter, we have put money back to work in equities. We like four sectors in particular – consumer discretionary, healthcare, technology and industrials. In fixed income we have a preference for credit over sovereign debt with a relatively short duration. Please note that reporting will be tailored according to your requirements and investment service. Weekly updates Our investment process In addition, CBAM has developed a range of more detailed reports for investors and intermediaries who want to better understand the characteristics underlying strategies. We can generate these reports for individual investors, a group of investors or aggregated for families. Our senior investment managers are always pleased to meet their investors and advisers as required and outlined by each service offering. They are also available to discuss any portfolio or market issues when requested by an investor or adviser. In addition, our Chief Investment Officer and investment managers produce investment updates if and when there is a substantial change in investment strategy or to give comfort on how we are navigating challenging market conditions. Additionally, we hold quarterly investment seminars to outline our investment views and strategy. Our approach to client service 25 Award winning reporting Online portal for investors Quarterly valuations for investors Page 4 of 17 YY Market Commentary Asset Allocation Account No: DIC005 Account No: DIC005 MRS B M DICKSON Valued on: 31 December 2014 PORTFOLIO BY ASSET TYPE We ensure investors have access to the views of the investment team and understand what is happening in their portfolios with full transparency. We also provide a wide range of initiatives that support our clients. They include next generation planning, family philanthropy, family education seminars and family business events. ASSET TYPE VALUE (£) FIXED INTEREST UK EQUITIES OVERSEAS EQUITIES PROPERTY CASH TOTALS PORTFOLIO BY GEOGRAPHICAL REGION GEOGRAPHIC REGION UNITED KINGDOM NORTH AMERICA INCOME (£) WEIGHT 30,606 47,944 9,680 5,251 0 28 % 41 % 23 % 4% 3% 4.2% 4.5% 1.6% 4.7% 0.0% 2,588,150 93,481 100 % 3.6 % VALUE (£) INCOME (£) 1,685,151 68,732 65 % 455,914 9,680 17 % 727,056 1,072,280 596,170 110,975 81,670 WEIGHT EUROPE 106,000 6,000 4% ASIA PACIFIC 120,708 4,621 5% JAPAN GLOBAL TOTALS MRS B M DICKSON YIELD 37,291 0 1% 183,087 4,448 7% 2,588,150 93,481 100 % 2014 was a year of economic divergence, marked by the re-emergence of geopolitical tensions and a sharp drop in global energy prices. Overall global growth remained below the pre-crisis trends and inflation was subdued, impacted by falling oil prices. The US broadly returned to economic normality and growth, after a disappointing Q1, exiting very liquid policies and preparing for interest rate hikes. Taking a cue from the economy, both the US Dollar and US equities performed very well throughout 2014. The UK followed suit. However, the British economy’s ties with Europe have somewhat constrained the pace of the recovery and kept interest rates at record low levels. Europe remained subdued, with the German economy clearly decoupling from the rest of the Eurozone. Markets have been expecting the European Central Bank to proceed with quantitative easing, picking up the baton from the US, a theme which could very well develop in 2015. Decoupling was the theme in emerging markets as well, as all major emerging economies followed different paths to economic development and produced very different returns on their financial assets. During the last quarter of the year, US and Japanese equities continued on a steady upward trajectory. Q4 saw a sharp fall in commodity prices (West Texas Crude Oil fell 39%) and a stronger Dollar which augmented returns for Dollar denominated assets of foreign investors. October was a month of particular volatility, mainly on European growth worries, but markets rebounded strongly shortly after. Central banks have remained mostly dovish, citing dangers of deflation and below-potential growth while the International Monetary Fund (IMF) downgraded global growth 0.1% to 3.3% for 2014. In Sterling terms, US equities maintained their leadership, with the S&P500 rising 9.2% for the quarter. Japanese stocks rose 8% but a depreciating Yen reduced Sterling returns to 1.2%. European stocks fell 0.51% as did the FTSE 100 returning -0.25%. Despite good performance by China, global emerging markets lost 0.6% as commodity exporters were a drag on overall performance. Gilts gained 6.3%, with yield on the 10 year bond falling below 2%, ending the year at 1.78% and driving supernormal returns for fixed income investors. Sterling gained 0.1% versus the Euro and lost 4% versus the US Dollar. The Euro fell 4% versus the Dollar. Increased US energy independence coupled with diminishing oil demand, amidst a Chinese slowdown and Saudi Arabia’s desire to maintain its market share, have resulted in a sharp fall in energy prices. As a result, global energy and material sectors underperformed in Q3, while consumer discretionary and information technology benefitted from the trend. We estimate that cheaper energy has provided an additional $900 billion boon for global consumers, albeit taking a toll on global capital expenditure. As expected, the Federal Reserve has exited quantitative easing policies maintaining a fairly dovish stance. Markets have been predicting a rate hike in the middle of 2015, although the Fed has repeated that an interest rate rise would be data-driven. US Q3 GDP rose 5% on an annualised basis, as increased military expenditure, “Obamacare” related expenses and consumption - the latter a result of low energy prices - contributed to increased output. Employment numbers have continued to show evidence of a strong labour market and an increase in average wages. UK output grew 3% (annualised) in Q3. The Bank of England maintained record-low interest rates, citing lower energy prices and weakness from Europe. The central bank lowered its inflation projection for the next three years below the 2% threshold, while considering evidence of wage growth not to be inflationary but keeping pace with productivity. The housing market has shown signs of cooling, as mortgage lending conditions have become tighter. European markets have had a tumultuous third quarter, as German macroeconomic data hit a “soft patch” in October. Markets were largely unperturbed by bank stress test results but they have been expecting the ECB to proceed with quantitative easing to fight off the spectre of deflation and reboot growth, following announcements by ECB Chairman Mario Draghi. However, better economic data out of Germany after mid-November and discord in the central bank’s governing council have delayed such a decision, which could be a catalyst for equity returns going forward. Page 1 of 17 Performance Summary Valuation of Investments Account No: DIC005 Account No: DIC005 From: 01/10/2014 To: 31/12/2014 MRS B M DICKSON PORTFOLIO NAME ACCOUNT TYPE Example MAIN START VALUE 30/09/2014 (£) END VALUE 31/12/2014 (£) STOCK/CASH IN/OUT (£) 2,519,055 2,588,150 0 2.8 % 2,519,055 2,588,150 0 2.8 % Indices total return from 30/09/2014 to 31/12/2014 UK Gilts - FTSE All Gilts 2,994.53 UK Bonds - BarCap Non-Gilts 239.36 UK Equities - FTSE All Share 5,417.89 Europe - FTSE Europe ex UK (£) United States - S&P 500 (£) Japan - Topix (£) 3,183.42 249.69 TWRR* OVER PERIOD 6.3 % 4.3 % 5,449.09 0.6 % 352.71 350.14 -0.7 % 2,214.84 2,419.88 9.3 % 10.19 10.32 1.3 % Asia - FTSE Asia ex Japan (£) 689.10 710.75 Rest of World- FTSE World ex UK (£) 350.70 370.93 3.1 % 5.8 % Source: Bloomberg Your Portfolio is being run on a Balanced mandate with a Medium risk appetite If the above profile is incorrect or you wish to revise it then please annotate and return the section titled "Investment Profile" at the back of this report. * For explanation of TWRR calculations please see the 'Notes' section. MRS B M DICKSON HOLDING STOCK DESCRIPTION Valued on: 31 December 2014 BOOK COST (£) CURRENT PRICE 50,400 101,063 105.75p £124.62 54,921 CURRENT PERCENTAGE VALUE OF TOTAL (£) (%) GROSS INCOME (£) GROSS YIELD (%) FIXED INTEREST CORPORATE BONDS 50,000 CVC CREDIT PARTNERS EURO OPPORTUNITIES LTD 100,000 FIDELITY INTERNATIONAL 7.125% 13/02/2024 GBP Includes 321 days accrued interest of £6,266.10 50,000 LONDON STOCK EXCHANGE 4.75% 02/11/2021 Includes 59 days accrued interest of £387.09 50,000 MORRISON SUPERMARKET 3.5% JULY2026 Includes 157 days accrued interest of £746.60 50,000 SCOTTISH WIDOWS 5.5% 16/06/2023 Includes 198 days accrued interest of £1,491.78 100,000 TRANSPORT FOR LONDON 3.625% 15/05/2045 Includes 230 days accrued interest of £2,284.25 50,000 WILLIAM HILL 4.25% GTD BDS 05/06/2020 GBP Includes 26 days accrued interest of £151.79 FLEXIBLE 70,000 229,238.53 ABERDEEN INVESTMENT ABST RTN BD D GROSS INC NAV LEGAL & GENERAL DYNAMIC BOND I INC FIXED INTEREST TOTAL 52,875 130,886 2.0 4.8 2,500 7,125 4.7 5.4 £110.34 55,557 2.1 2,375 4.3 47,039 £92.38 46,937 1.8 1,750 3.7 50,094 £107.63 55,307 2.1 2,750 5.0 100,037 £110.01 112,294 4.3 3,625 3.2 48,717 £97.63 48,967 1.9 2,125 4.3 73,576 99.92p 69,944 148,479 67.305pXD 154,289 2.7 1,944 2.8 6.0 6,412 727,056 27.7 30,606 4.3 42,796 £22.33 44,660 1.7 2,680 6.0 49,776 £13.88 41,655 1.6 2,587 6.2 674,326 4.2 UK EQUITIES OIL & GAS 2,000 ROYAL DUTCH SHELL 'B' ORD EUR0.07 BASIC MATERIALS 3,000 BHP BILLITON ORD US$0.50 Page 3 of 17 Page 5 of 17 Supporting Clients Value added services Family Entrepreneurship: Future Leaders Family Philanthropy: Trustee Development Programme Family Education & Investment seminars Family Research & Events: Family Business Roadshow Family Reporting: new valuation reports which report on the Family level for our DMS-Bespoke service 26 Our investment process In summary Principles of how we invest The disciplines we have put in place help us to drive strong investment returns aligned with defined risk profiles. They also allow us to maintain high levels of client satisfaction and retention as evidenced in our annual client surveys. In addition, a collaborative and stimulating investment environment supports continuity in the investment team. Our distinctive character resides in the following: •We are inherently conservative and longer term in our outlook. •We recognise the importance of delivering against investor expectations and strongly empathise and appreciate that: –This is an investor’s hard-earned capital. –We need to devise investment strategies: • at an appropriate level of risk, and • with a keen eye to navigating downside risk. •We believe the best way to do this is through a diversified portfolio approach. •Our investment strategies are the product of a disciplined and rigorous investment approach. Institutional quality investment management Our institutional investment management is characterised by the following: •Depth of experience: we are an experienced team, with two-thirds of our investment professionals having at least 15 to 20 years of investment experience. •Breadth of talent: we have more than 55 investment professionals working together in a highly collegiate environment, which helps to leverage this talent and experience. •Rigour: we believe in discipline and rigour in the evaluation of market opportunities, which ultimately means adding value or excess return through our investment decisions. •Customisation: we work together to shape the best portfolio strategies, which can then be tailored for a given risk profile and investor need. •Excellent risk and performance oversight: we have built a comprehensive range of tools to help ensure we are delivering against investor objectives and to monitor that portfolios are suitably aligned with investor risk profiles. Continuous search for improvement We never stop asking ourselves how we can improve the disciplines and interactions we have as investors. We aim to evolve and refine our service and benefit from access to leading research and innovative analytical tools. Part of improving is listening to and acting on feedback from investors. In our annual Bespoke client survey* conducted independently with a sample size of around 33% of the client base each year, responding investors provided the following assessment of our services: • An exceptionally high client satisfaction level of 96%. •98% of clients indicated satisfaction with their dedicated investment manager. •95% of clients would be likely to recommend Close Brothers Asset Management Bespoke to friends and family. In addition, the research indicated that clients choose Close Brothers primarily because of the direct relationship they have with their investment manager and their high level of confidence in our investment service. Through client research, we seek feedback on how we can improve. We also engage in regular team reviews to challenge ourselves in thinking about how we can provide a more personal service. We encourage feedback and would be delighted to hear your views. *The RFi HNW Bespoke results above are from the most recent survey in 2014. Our investment process Close Brothers Group Established in 1878, Close Brothers Group (CBG) is a specialist financial services group engaged in banking, securities and asset management activities. CBG is listed on the London Stock Exchange and is a member of the FTSE 250. CBG has maintained a strong capital position and a conservative leverage ratio. Both are comfortably ahead of all applicable regulatory requirements. Close Brothers Asset Management Close Brothers Asset Management (CBAM) is an asset management firm (part of CBG). We focus on providing investment management and financial planning advice to a broad range of principally UK investors, both onshore and offshore. They include private individuals and families, advisers and intermediaries representing investors, private business owners as well as charities and institutions. As a firm, we pride ourselves in the delivery of specialist expertise and building long-term relationships. Our values are based on several core principles: • Our word is our bond. • It is our duty to be conscientious. • We do the right thing by those who put their trust in us. • We stand firm for a prudent and conservative approach. These values underpin our approach to asset management. We focus on the robustness of our investment process and the expertise and dedication of experienced investment managers. Our overriding aim is to deliver agreed outcomes for investors, through a combination of institutional style investment management combined with a personal and comprehensive approach to service. Why Close Brothers? Close Brothers Group Close Brothers Asset Management Our service A trusted brand – Long term stability A focus on private individuals and families Personal and bespoke • Longevity: founded in 1878 • Conservatism: strong balance sheet • Stability: FTSE 250 company • Families and their advisers • Institutional management • Strong performance • Direct access to your team • Customised to your needs • Relationship service “If Close Brothers carry on as they are – I am there forever. Thank you for what you have done for us as a family.” Source: RFi Independent Survey Report, November 2013. 27 28 Our investment process Contact information We invite you to meet members from our team of more than 55 investment professionals. They are core to the investment services we provide and look forward to engaging with you directly. Our investment team For more information about our investment services, we would be delighted to have you contact: Nancy Curtin Chief Investment Officer Head of Investments T. 020 7426 4357 E. [email protected] Penny Lovell Head of Private Client Services T. 020 7426 6247 E. [email protected] Understanding risk The value of investments and the income from than may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Past performance is not a reliable indicator of future results. Exchange rate fluctuations may have an adverse effect on the value of non-UK investments. Investments may not be suitable for everyone and you should only invest for the longer term. Some investments (e.g. small companies) may be less readily realisable than others. Inflation can erode the value of your investments over time. Important information Unless otherwise indicated, all information and opinions expressed in this document are those of Close Brothers Asset Management and are accurate as at September 2015. Close Brothers Asset Management is a trading name of Close Asset Management Limited (Registered number: 01644127) and Close Asset Management (UK) Limited (Registered number: 02998803). Both companies are part of Close Brothers Group plc, are registered in England and Wales and are authorised and regulated by the Financial Conduct Authority. Registered office: 10 Crown Place, London EC2A 4FT. VAT registration number: 245 5013 86. Close Brothers Asset Management 10 Exchange Square Primrose Street London EC2A 2BY www.closebrothersam.com CBAM3303 Our investment process 02.11.15 EXP 30.11.16