Investment Update Bulls winning? 1. Big picture 2. Markets 2017 - - - PowerPoint PPT Presentation

Investment Update – Bulls winning?

Lothar Mentel

CEO & Chief Investment Officer For professional use only October 2017

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Source: Hedgeye

• 1. Big picture
• 2. Markets 2017 - thus far
• 3. Portfolio returns
• 4. Business news

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• 1. Big picture

Big picture (30 years since 1987)

2009 - 2017 stock markets – too good to be true?

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2016 ’00-03 Dot-com Bubble+Iraq Crash ‘98 Russia Crisis ’08-09 GFC & Eurozone Crisis + recovery

Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

2017

Big picture (since depth of GFC - 2009)

Investors have done very well over the past 8 years

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Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

Big picture – Global economic growth rates

Source: Goldman Sachs Economics Research, 12 Sep 2017

The global economy on the other hand has been far more pedestrian

Big picture - Cyclically adjusted stock market PE ratios

Just a QE bubble then?? No, but valuation multiples are extended relative to subdued confidence levels

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So why the doom and gloom – ‘End of cycle’ predictions?

1. QE brought double digit returns forward, when confidence was still low 2. As confidence and growth returns, QE has to turn into QT 3. If QE was tailwind to PE multiples, then QT has to be headwind 4. Last 1/3 of cycle this time just corporate earnings growth upside… 5. …or slow QT and less inflation leading to prolonged ‘Goldilocks’?

Big picture – Investor discomfort

Stronger case for equities, not great for fixed interest bonds

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• 2. Markets 2017 – thus far

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Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

2017 returns – Better than expected - again

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What I said at the spring Partner Forum

Source: Economist, 16 June 2017

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Populist’s attraction wanes, but UK scores ‘own goal’

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Brexit strategy – fuzzy?

UK business unnerved; consumers still relaxed

Source: Economist, 8 September 2017

The Queen’s opening of parliament; Source: Metro, 22 June 2017

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But approach turning more pragmatic since election debacle?

Perhaps the UK’s leading class not ready to lead the country into Brexit?

Source: FT, 18 Jul 2017

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‘Trump Scare’ in retreat

Source: Lauff.com

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‘Worry baton’ has been passed back to geopolitics

Source: Newsday.com

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Military backlash probability has risen

To be prudent was a good place to be

End Aug 2016: Rebalance back to neutral Feb 2016: Rebalance back to neutral Apr 2016: Rebalance back to neutral

Source: Morningstar, 5 Oct 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

Mid Oct: UK underweight Asia overweight Bond duration shortened June 2016: Sell down of UK

• Comm. Property

for UK gilts And UK small cap for large cap Mid Feb 2017: US underweight EZ overweight Bond duration lengthened back to benchmark June 2017 5% equity underweight Bond duration underweight Mid Sep: US equity neutral to close USD short

Growth improves and global trade (!)

Source: MRB, Sep 2017

‘Nowcast’ GDP indicators much improved over the summer

Source: Goldman Sachs Economics Research, 12 Sep 2017

Normalising rather than falling off a cliff?

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2.

Growth in China and US has been strong, not weak

Q2/3 developments 1.

Political uncertainty has returned to the UK

What has changed?

3.

UK slow down pronounced – lag of anticipated export boost to Eurozone

4.

Central banks’ concerted ‘end of QE’ message has been received

5.

Focus moved from earnings to central bank actions back to geopolitics Economic progress increasingly resilient but markets feeling vulnerable

Source x2: Tatton IM, Factset

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Concern and reassurance: Safe haven asset demand

Falling bond yields over North Korea – bond investors still don’t buy into reflation trade

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2.

No further growth stimulus from China after 19th People’s Congress

Back to slow, stable growth, but markets bound to correct or collapse 1.

European political landscape improved, Trump stalled, May on way out

Pessimists’ view (not Tatton’s central scenario)

3.

Trump disappointment will slow US, EZ economies have peaked

4.

UK’s consumers and business retreat and export boost never happens

5.

Extended equity valuations = correction; QT + Global debt mountain = next GFC

6.

… but North Korea nuclear threat still worse! Potentially end of post GFC cycle, but at least another mini-cycle

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2.

China’s president Xi will hold up growth beyond party congress in autumn

Growth will continue in autumn, markets look beyond (geo-)politics 1.

Politics don’t move markets any longer

Optimists’ view (Closer to Tatton’s longer term perspective)

3.

US growth does not need Trump stimulus

4.

UK economy propped up by resurgent Eurozone growth – with lag

5.

QE unwind no different to rate rise - US$ weakens on rising inflation

6.

Corporate earnings on steady growth trajectory Steady economic normalisation continues despite politics

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2.

Equity valuations higher than confidence suggests thus vulnerable to shocks

Growth resilient, but susceptibility to shock risk high 1.

Steady economic momentum supports further earnings growth

Tatton’s central case: Neutral but with buying opportunities

3.

Slowdown on geopolitics should just prove a blip as long as China and US aligned

4.

UK rates likely to rise 0.25% back to 0.5% in Nov - but then unlikely to rise further

5.

QE worked by bringing asset returns forward = less returns potential left Resilient growth, QT, N. Korea, Trump (reforms), EZ recovery = downside and upside risks!

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…or as commented on CNBC the other day:

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Vanguard’s changed fixed interest return projections

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Vanguard’s changed equity return projections

Less concerns over global growth More concerns for UK and Chinese economies Q4/17 focus has shifted back to geopolitics

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Central case

Took £-Sterling gain to close US$ underweight position

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• 3. Portfolio returns

Tatton Managed Balanced (Inception – 30/09/2017)

Source: Morningstar, 30 September 2017; Note: Past Performance is no guarantee for future returns. Returns provided are Net for Fund Fees and Gross of Tatton IM Fees (Management and Trading) Investment Name Cumulative Return Annualized Return Tatton Managed Balanced 54.98% 9.67% 5050 IA Mixed 2060 and IMA Mixed 4085 41.74% 7.62% Morningstar Balanced 46.53% 8.38%

100 110 120 130 140 150 160

Tatton Managed Balanced 5050 IMA Mixed 2060 and IMA Mixed 4085 Morningstar Balanced

Tatton Balanced 2017 year to 30 September

Source: Morningstar, 5 October 2017; Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

1-9/2017 Investment returns – Tatton Managed vs. Morningstar

Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

Tatton Advisory Model Relative to model Tatton Advisory Model Relative to model 3 yr Annualised Volatility Defensive 1.9% 2.5%

• 0.6%

32.3% 32.6%

• 0.3%

4.8% Cautious 3.6% 3.4% 0.2% 45.7% 41.5% 4.2% 5.5% Balanced 5.9% 4.9% 1.0% 55.0% 48.8% 6.2% 6.3% Active 8.2% 6.0% 2.2% 64.4% 59.1% 5.3% 7.6% Aggressive 9.9% 7.0% 2.9% 70.1% 65.9% 4.2% 8.7% Global Equity 12.2% 7.0% 5.2%

• Tatton Managed (Overlay)

Year-to-Date Since Launch 1 Jan 2013

1-9/2017 Investment returns – Tatton Managed vs. IA peers

Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

Tatton IA Sector Relative to IA Tatton IA Sector Relative to IA 3 yr Annualised Volatility Defensive 1.9% 3.4%

• 1.5%

32.3% 26.6% 5.7% 4.8% Cautious 3.6% 4.8%

• 1.2%

45.7% 41.0% 4.7% 5.5% Balanced 5.9% 5.6% 0.3% 55.0% 42.0% 13.0% 6.3% Active 8.2% 6.5% 1.7% 64.4% 50.9% 13.5% 7.6% Aggressive 9.9% 7.2% 2.7% 70.1% 52.1% 18.0% 8.7% Global Equity 12.2% 7.2% 5.0%

• Tatton Managed (Overlay)

Year-to-Date Since Launch 1 Jan 2013

1-9/2017 Investment returns – Tatton Core vs. IA peers

Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

Tatton IA Sector Relative to IA Tatton IA Sector Relative to IA 3 yr Annualised Volatility Defensive 2.3% 3.4%

• 1.1%

34.1% 26.6% 7.5% 4.5% Cautious 4.1% 4.8%

• 0.7%

45.8% 41.0% 4.8% 5.5% Balanced 6.1% 5.6% 0.5% 54.8% 42.0% 12.8% 6.4% Active 8.2% 6.5% 1.7% 65.3% 50.9% 14.4% 7.7% Aggressive 9.9% 7.2% 2.7% 71.0% 52.1% 18.9% 8.8% Global Equity 11.9% 7.2% 4.7%

• Tatton Core (Overlay)

Year-to-Date Since Launch 1 Jan 2013

1-9/2017 Investment returns – Tatton Tracker vs. IA peers

Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

Tatton IA Sector Relative to IA Tatton IA Sector Relative to IA 3 yr Annualised Volatility Defensive 2.8% 3.4%

• 0.6%

34.0% 26.6% 7.4% 4.6% Cautious 4.7% 4.8%

• 0.1%

43.1% 41.0% 2.1% 5.7% Balanced 6.2% 5.6% 0.6% 52.4% 42.0% 10.4% 6.8% Active 8.2% 6.5% 1.7% 63.7% 50.9% 12.8% 8.2% Aggressive 9.9% 7.2% 2.7% 73.3% 52.1% 21.2% 9.1% Global Equity 11.6% 7.2% 4.4%

• Tatton Tracker

Year-to-Date Since Launch 1 Jan 2013

Tatton fund selection – good, perhaps too cautious on the bond side

Fund selection performance – 2017

Source: Morningstar, 12 Sep 2017

Tatton AIM Portfolio - Experience to 29 September 2017

Sources: Nucleus, Factset, Tatton, Bloomberg Inception date – 20/10/2016

Index Inception Difference YTD Difference Tatton AIM 29.5% 25.6% FTSE AIM 23.0% 6.5% 20.2% 5.5% FTSE All Share 10.0% 19.5% 7.8% 17.9% FTSE Small Cap 17.3% 12.2% 13.4% 12.2% FTSE 250 13.6% 15.8% 12.4% 13.3%

Tatton AIM Portfolio – Holdings and activity (29/09/2017)

Sources: Nucleus, Factset, Tatton, Bloomberg Inception date – 20/10/2016

Name Date Ergomed PLC 28/09/2017 Appscatter Group Plc 05/09/2017 Nexus Infrastructure Plc 11/07/2017 Premier Technical Services Group PLC 12/06/2017 CareTech Holdings PLC 12/06/2017 Ebiquity Plc 12/06/2017 1 PM Plc 05/06/2017 Ramsdens Holdings PLC 14/02/2017 Additions to the Portfolio Since Inception

Name Date Sold Date Bought % Sold Return IQE plc 28/09/2017 19/12/2016 19% 239% Scapa Group Plc 12/06/2017 19/12/2016 17% 67% Burford Capital Limited 24/05/2017 24/10/2016 34% 90% IQE plc 24/05/2017 19/12/2016 34% 84% Ideagen PLC 24/05/2017 19/12/2016 41% 30% Focusrite PLC 24/05/2017 24/10/2016 30% 72% Safestyle UK Plc 24/05/2017 19/12/2016 100% 4% K3 Business Technology Group PLC 24/05/2017 24/10/2016 100%

• 54%

RedT Energy PLC 24/05/2017 03/01/2017 100% 3% CVS Group plc 31/03/2017 19/12/2016 100% 5% Sirius Minerals Plc 28/03/2017 19/12/2016 100% 10% Positions Sold or Reduced

Name % Held Return Price Contribution Mkt Cap (£m) PE FY1 1 PM Plc 2.3% 12.0% 0.5 £ 0.3% 42 £ 6.8 ABCAM PLC 2.6% 30.7% 10.2 £ 0.8% 2,093 £ 33.2 Appscatter Group Plc 1.7% 3.7% 0.7 £ 0.1% 44 £

• Breedon Group PLC

2.5% 27.1% 0.9 £ 0.7% 1,233 £ 21.1 Burford Capital Limited 2.9% 119.9% 10.4 £ 2.9% 2,155 £ 14.0 CareTech Holdings PLC 2.3%

• 0.7%

4.0 £ 0.0% 310 £ 11.9 Cello Group plc 2.5% 30.5% 1.3 £ 0.8% 137 £ 16.0 Clinigen Group Plc 2.8% 45.2% 10.7 £ 1.1% 1,288 £ 22.2 Ebiquity Plc 2.2%

• 4.2%

1.1 £

• 0.1%

89 £ 11.2 Eckoh plc 2.6% 31.8% 0.5 £ 0.7% 130 £ 31.4 ECO Animal Health Group plc 2.5% 25.1% 6.3 £ 0.6% 413 £ 31.8 EMIS Group plc 2.0% 1.2% 9.2 £ 0.0% 583 £ 20.1 Ergomed PLC 2.9% 11.5% 1.8 £ 0.3% 78 £ 31.8 Finsbury Food Group plc 1.7%

• 11.7%

1.1 £

• 0.3%

142 £ 10.9 Focusrite PLC 2.1% 61.4% 2.7 £ 1.8% 156 £ 19.1 Fulcrum Utility Services Limited 2.0% 3.7% 0.5 £ 0.3% 89 £ 12.8 Gattaca plc 1.8% 1.7% 3.0 £ 0.0% 96 £ 8.9 GB Group PLC 2.9% 50.0% 3.7 £ 1.3% 563 £ 30.9

Name % Held Return Price Contribution Mkt Cap (£m) PE FY1 Gooch & Housego PLC 2.8% 46.1% 14.2 £ 1.2% 341 £ 30.5 Ideagen PLC 2.5% 21.9% 0.8 £ 1.2% 164 £ 19.4 Idox plc 2.1% 6.2% 0.6 £ 0.3% 262 £ 15.5 IQE plc 3.1% 228.3% 1.2 £ 4.3% 841 £ 38.4 Johnson Service Group PLC 2.6% 38.9% 1.5 £ 0.9% 541 £ 17.5 Joules Group Plc 2.4% 24.1% 2.7 £ 0.7% 232 £ 24.6 Nexus Infrastructure Plc 3.1% 3.0% 1.9 £ 0.1% 73 £ 10.4 OPG Power Ventures Plc 0.8%

• 61.2%

0.2 £

• 1.5%

99 £ 10.8 Plastics Capital plc 2.1% 7.0% 1.2 £ 0.2% 46 £ 10.0 Premier Technical Services Grou 3.3% 47.8% 1.8 £ 1.1% 190 £ 20.9 Ramsdens Holdings PLC 4.1% 82.9% 1.7 £ 2.1% 54 £ 11.4 Renew Holdings plc 1.9%

• 3.9%

4.1 £ 0.0% 272 £ 12.8 Restore plc 2.8% 42.2% 5.2 £ 0.9% 598 £ 23.8 RWS Holdings plc 2.6% 40.4% 4.0 £ 1.0% 910 £ 28.6 Scapa Group Plc 2.4% 46.2% 4.4 £ 1.3% 690 £ 26.8 XLMedia Plc 3.2% 70.0% 1.4 £ 1.7% 297 £ 13.9 YouGov plc 2.4% 21.1% 2.8 £ 0.6% 301 £ 26.2

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• 4. Business news

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What an experience – great new and bigger perspective!

35 investor presentations in 5 days – Exec trusting each other blind No more “ Tatton – Who?” – DD so much easier! We are still in control – with access to institutional capital Bought back my 50% sell down – committed!

IPO - TAM Plc

We are only just getting started!

Asset growth: +£1.2 billion over the last 12 months

276 277 286 305 347 400 485 535 625 741 843 970 1,055 1,175 1,281 1,343 1,426 1,544 1,616 1,700 1,80 1,928 2,003 2,040 2,070 2,090 2,200 2,204 2,342 2,400 2,470 2,440 2,514 2,670 2,725 2,928 3,132 3,240 3,314 3,413 3,461 3,513 3,633 3,768 3,883 3,995 4,098 4,116 4,196 4,279 4,440

200 400 600 800 1,000 1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800 3,000 3,200 3,400 3,600 3,800 4,000 4,200 4,400 4,600 4,800

£ Million

Tatton IM Assets under Management

Tatton Assets under Management in £ Million

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Not standing still

• Tatton Core (Blended) DFM portfolio funds

Business news

DFM charging level for MM funds!

Risk/OCF Tatton Core Brewin’s Jupiter SEI Premier Liberation Cautious 0.59 0.95 1.48 1.05 1.31 Balanced 0.64 0.94 1.63 1.10 1.37 Active 0.71 1.01 1.73 1.15 1.44

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Not standing still

• Tatton Core (Blended) DFM portfolio funds
• MoneyFacts 2017: DFM of the Year!
• MiFID -10% reporting rule: Yes we can!
• More non - Paradigm Partner firms every month
• F. FundsNetwork, James Hay, AJ Bell

Business news

We are only just getting started!

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Need to come away from current annual Morningstar changes

Risk profile benchmarks – reverting to Ibbotson concept

…you may have noticed this?

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Need to come away from current annual Morningstar changes

• Ibbotson was relabeled Morningstar and turned TAA
• Equity and cash allocations moved to edges of risk profiles (DT, FE)
• Morningstar/Ibbotson has become competitors proxy portfolio
• Returning to Ibbotson’s more static concept – risk profile aligned
• 10 year Ibbotson average, instead of annual Morningstar TAA
• Equity allocations returning to 25 / 45 / 60 / 75 / 90 / 95 (still +/-10%)

Risk profile benchmarks - reverting to Ibbotson concept

Focused on competing with peers, not copying Morningstar

Compliance Note

Important Information This document is solely for the use of professionals and is not for general public distribution

Tatton Investment Management Limited is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No.

• 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow,

Cheshire, SK9 3ND.