As many of you will know, one of the most popular and respected conferences is the Morningstar Investment Conference. Held in May each year this is now only just a month away and we have 10 FREE passes to give away!

The conference is a high level event attended by many of the countries most influential, financial planners and advisers, fund managers and investment professionals. As the role of the paraplanner gets increasingly established in the framework of top financial planning firms, paraplanners themselves also need to ensure they are as knowledgeable as possible.

Having attended for the last couple of years I can say that for me this event has been an excellent way to listen, in detail, to some of the leading funds managers (Anthony Bolton, Robin Geffen, Sanjeev Shah, Richard Burton) and to hear them explain their thinking on the current and future economic climate and their justification for some of the decisions they have made.

During the two-day forum, some of the country’s leading fund management and investment professionals will deliver thought-provoking insight and analysis on topics including: what future for UK equity income in an era of dividend cuts?; ETFs and their future in Europe; opportunities in the emerging markets; the impact of the forthcoming general election on the UK investment industry.

To view the full agenda click here.

The event aims to deliver education and practical knowledge from those at the forefront of money management; open discussions with high-profile speakers on their ideas, concepts and presentations; and new information with actionable takeaways.

When: 11th and 12th May, 2010

Where: Park Plaza Riverbank London, 18 Albert Embankment, London, SE1 7TJ

How to Register for a Free 2-day Pass: Please email Priya.shinh@morningstar.com with your contact details and state ‘Paraplanner.com’ in the subject line. Only 10 passes are available on a first come first served basis so hurry.

This is a fantastic event, so if you want to really understand the thinking of some of the countries leading fund managers along with a deeper insight into the current economic climate (and all for free) make sure you request a pass.

Dividends, it is generally agreed, are a good thing. Indeed, the majority view is that the more the better. Long term research by Barclays, Credit Suisse, Société Générale and Professor Jeremy Siegel all provide convincing evidence that the bulk of equity returns over the long term, five years and more, actually comes from dividends, growth in dividends and from reinvesting dividends.

On the basis of these data then it should be a straightforward process to construct a market beating portfolio. Simply buy a collection of the highest dividend paying shares and away you go. Indeed, for many investors over the last decade that has been a winning strategy. A number of professional money managers made great careers running high yield funds; until 2008 and 2009 that is. The last two years have been very painful for income funds with catastrophic falls in 2008 for many and lacklustre returns in 2009 when market recovered very sharply.

To the detached observer these events simply proved the validity of stock market aphorisms like “There’s no such thing as a free lunch” “You can’t beat the market” or “Higher returns only come with higher risk”.

To understand better why income and yield funds have been so disappointing over the last two years it might help to do a little analysis on what exactly a high yield share is. Yield is the product of two figures divided together. The top line is the dividend a company pays, usually expressed in pence per share. That number is then divided by a second figure, the share price, to calculate the yield. Although they are related there is no direct correlation between the two except through the yield calculation. It might therefore make sense to look at each figure separately to see how they originate and what they are telling us.

A dividend is the amount of money a company feels it can afford to pay out to its shareholders after it has paid all its creditors and invested enough to sustain and grow the business. Although it represents a cash payment of several tens or hundreds of millions of pounds it is invariably referred to in pence per share. The figure is set by the board in relation to the reported earnings per share and by what the company has paid in the past. Determination of the dividend may also be impacted by the board’s view of the future. A particularly worrisome outlook may persuade the directors to leave the dividend unchanged, cut it or reduce it.

Alternatively, the board may be so confident in the future of the company it might want to send a signal to the market that things are great, and are going to get better. An earnings per share figure is, more or less, simply a record of what the company has done and does not send a message about future prospects. Even though two of the options open to the board are reducing or not paying a dividend in practice boards are reluctant to do this and will often pay the same dividend as the previous year even when its financial circumstances might indicate otherwise.

Much is made of the dividend cover. This is the difference between the earnings per share figure and the dividends per share. Typically boards and investors like a figure of around two or more as this provides some scope for maintaining the dividend even if the company has a bad year. In practice these days the many distortions to profits from exceptional and or non-recurring items often makes the earnings figure a poor guide to what the company can pay out to its shareholders. A better understanding can be gained from analysis of the cash flow statement, although that too can be fraught with issues around lumpy capital expenditure and corporate activity.

The dividend that a company actually pays is thus a complex blend of what the company can afford and what the directors think is appropriate given the current business conditions.

In contrast the directors have no control over the share price. That said directors now are all acutely aware of the requirement to inform the market if they believe current consensus forecasts are more than five percent adrift from what they think will happen. In essence share prices are set by “Mr Market” as sagacious investor Warren Buffet calls it. All the available data is collected and assessed by existing and potential holders of the stock to discover the most accurate price for the shares. Except in periods of extreme market dislocation exactly half the market will think the shares too expensive while the other half will view them as too cheap. Share prices can therefore best be viewed as an opinion while a dividend is very definitely a fact. The question is what happens when we divide a fact by an opinion. Surely, it must just be another opinion.

And that is where income and yield funds run into problems. High yielding stocks are trying to balance the conflict between the fact of the last dividend payment and the opinion of the market over the size of the next dividend. In many cases, especially over the last few years, the market opinion that a dividend will be cut, or reduced, has been correct. Even when that downside has been priced in a dividend cut usually triggers a further fall. And that is painful for funds that hold the shares. In practice the effect is compounded because income and high yield funds will migrate to stocks that, on paper, offer a high yield and ignore stocks where the income is safer, but smaller. In effect what is happening is that dividends are being valued by price and these funds over-invest in shares whose income has a low value; in many cases for good reasons.

Investors buying conventional tracker funds ignore share prices when they invest. So what happens if we ignore the price of dividends? Why don’t we use some other measure to assess them? The simplest way to do that is to rank companies by the gross cash dividend they pay out. In other words you measure dividends by volume rather than price.

When we compare a portfolio constructed in this way we see a lot of similarities with a conventional portfolio ranked by market capitalisation. After all a company paying out several billion pounds in dividends is hardly likely to be lurking in the Small Cap sector. It is therefore no surprise to see that companies like Vodafone and BP that constitute the largest companies in the market are also the largest dividend payers. Moreover, assessing dividends in this way gives an excellent mechanism for determining how much of each stock a portfolio should hold. Using each company’s contribution to the total income of the market provides a logical basis for calculating portfolio weights.

Using dividend data in this way provides a neat riposte to Oscar Wilde’s accusation that some men know the price of everything and the value of nothing. It is more important to know the value of dividends than their price.

Article written by Rob Davies, Managing Director of Fundamental Tracker Investment Management Ltd and reproduced with kind permission of IFA Life

As most of you will be aware, it’s always been important to us to try and provide some additional information or an added insight for paraplanners in order to help us all to be as knowledgeable and efficient in our work as possible.

To help with this T Bailey, who have been a supporter of this site for a long time, have agreed to their OBSR ‘A’ rated Growth Fund manager Jason Britton, to run a feature for the next few weeks where readers of the site will be allowed to ask him questions about his fund or how he manages a fund or perhaps fund management in general.

T Bailey have are also going to be running a number of (easy) competitions with prizes so if you would like to win a prize, please enter.

We hope you find this useful so send in as many questions as you would like and we will get Jason to answer as many as possible for you.

Martin

Introduction to Jason Britton

Jason Britton is the Chief Investment Officer and Fund Manager at T. Bailey.  Jason has worked with the T. Bailey funds since their launch in 1999 and is an Oxford mathematics graduate and ACA with over 15 years’ experience in the financial services industry.  Jason’s main speciality is advanced quantitative analysis to help monitor and assess the ever-increasing universe of investment funds from which T. Bailey can choose when constructing portfolios.

In the coming weeks we will be opening up an ‘Ask Jason’ forum where you will have exclusive access to communicate with Jason and pose any question that you would like to hear his opinion on.  Whether this be his opinion on asset allocation or what the markets will do next, this is your opportunity to interact with T. Bailey’s Chief Investment Officer and Fund Manager so make sure you don’t miss out!

Competition week 1

AMAZON VOUCHER COMPETITION FOR PARAPLANNERS – FOR YOUR CHANCE TO WIN A £25 AMAZON VOUCHER PLEASE ENTER BELOW

Nottingham based T. Bailey explain the investment strategy that works best for them:

For your chance to win a £25 Amazon voucher please read the text carefully below and answer the two questions shown at the end of the article.

Why do we believe in fund of funds?

Our preferred strategy is investing in a portfolio of funds, rather than investing directly in shares, bonds or other securities.

We believe this reduces risk while producing superior long-term returns. Which, of course, is the dream scenario for any investor. It also gives us flexibility and freedom.

In a more traditional model, all of a fund’s money is controlled by only one or two managers. The managers choose which stocks to invest in; but their scope is usually limited to a fairly constrained area or asset class. They can also be prone to invest in a particular style – their personal one or that of their company – which may not be universally appropriate.

But T. Bailey’s multi-manager funds allow our fund managers to put money into a diverse range of asset classes and funds. Eggs, therefore, can reside in a greater number of baskets. And the most apposite management style, as well as the best funds, can be selected.

Fund of funds v. manager of managers.

We’ve expressed our preference for a multi-manager approach to investing, but why did we choose fund of funds rather than manager of managers?

Well, the latter – often run by institutional investment houses – can be unwieldy because of the contracts that have to be put in place. Given the volatility of the market, we’d much prefer the ability to act rapidly and decisively. Fund of funds gives us that ability.

Fund of funds have the added advantage of giving us access to certain investments that are unavailable to retail investors. With a wider choice at our disposal than a direct client would have. And we can make investments more cheaply, too.

These general advantages of fund of funds should be considered in conjunction with T. Bailey’s rather more specific advantage: its skilled investment team. Ever-vigilant, our team aims to calculate the optimum combination of funds that should perform best together.

Competition Questions:

1. Where are T. Bailey Based:

A: Nottingham

B: Northampton

C: Norwich

1. What is the preferred investment strategy at T. Bailey

A: Manager of Managers

B: Fund of Funds

C: Direct property investing

To enter please send your name and address along with your answers to both questions by email to martin@theparaplanner.com. We will then forward all the entries on to T Bailey on your behalf.

GOOD LUCK !

By entering this competition, you agree to be bound by the following Terms and Conditions:

1. No purchase is necessary and only one entry per person, per draw will be allowed.
2. One prize of a £25 Amazon Voucher, per draw (i.e. four prizes in total) is available to the winner, who will be selected from random from all correct entries received.
3. No cash substitution will be available.
4. The competition is open to UK residents aged 18 and over, except employees of T. Bailey Asset Management Ltd, its associates, their families or anyone connected with the competition.
5. For inclusion into the week 1 draw, entries must be received no later than 15 January 2010.

For inclusion into the week 2 draw, entries must be received no later than 22 January 2010.

For inclusion into the week 3 draw, entries must be received no later than 29 January 2010.

For inclusion into the week 4 draw, entries must be received no later than 5 February 2010.

1. The four draws (one per each of the above weeks) will be made on 20 February 2010 with the winners being notified immediately and their names published online at www.theparaplanner.com.
2. The promoter will not accept liability for lost or delayed entries. Proof of entering is not proof of receipt of entry. No correspondence in connection with the competition will be entered into and the decision of T. Bailey Asset Management Ltd is final.
3. The winners agree to the promoter’s use of their name, address and photograph in relation to the promoter’s publicity material.
4. The promoter’s contact details are: T. Bailey Asset Management Limited, 64 St. James’s Street, Nottingham, NG1 6FJ.

We are doing very well today – our league is 15th overall!!! Above some very big fund managers and Stockbrokers. And the CSA. Take from that what you will.

Members:

• Matthew Barnard
• James McDowell
• Alex Ottowell…

Your portfolios are not showing any positions for some reason? James, you have done 6.05% so would lead our leaderboard!! Do you all know why it is not showing a position and therefore no growth. You could be pushing us up towards the £5000 prize.

On the subject of prizes. I think we should all agree that individual portfolio wins, you keep a prize. If we win something as a league it will be split equally amongst the members of the league – so if you have not joined, JOIN!!!!

There is now a paraplanner league running on the JP Morgan Fantasy Fund Manager site which has been set up by Peter Smith-Round (thanks Peter).  To join in the fun just go here, sign up and then search for the league which is called ‘theparaplanner.com’.

This is a very interesting article (with good links) from Morningstar in the US. In the investment industry, we think risk equals standard deviation. Therefore, risk can be measured, and the amount of risk we take can be controlled. It’s a nice, clean way to fit risk into our models. If clients can handle more risk based on their answer to our “risk tolerance” questionnaire, we just turn the dial, and increase their allocation to equities. The problem is that when real people, in the real world, think about risk, I am almost positive they don’t ever use the term standard deviation. Can you imagine a client losing sleep because they are thinking about the high level of standard deviation in their portfolio?

Real people lose sleep because they are worried about not having the money to fund their most important goals. They lose sleep thinking about not having the money to send kids to collage or retire. To real people, risk equals not meeting their financial goals.

We are measuring their tolerance for fluctuation, while they are worried about running out of money.

Now, maybe you can make the claim that standard deviation (using Monte Carlo analysis) is one way of quantifying the possibility clients have of not reaching their goals. However, if you use a “risk tolerance” questionnaire WITHOUT the context of the client’s goals, how would you know?

There is a broad spectrum of approaches to risk profiling. How far along the spectrum should advisers go in turbulent times, asks Cathi Harrison of Para-Sols?

One of the most striking and interesting aspects of financial services I have noticed is the huge variations that can still be found between firms and the way they operate.

The Financial Services Authority’s nirvana is that a consumer can go to 10 different IFAs and come out with the same advice or thereabouts.  The likelihood of this happening is slim, however, and if it were to happen I would feel it was a sad day for financial services.

Advice may differ between firms, but so does the personality of each firm, its style, approach and method. And these can also vary greatly between advisers at a single firm. That is because they are human, not robots.

The wide spectrum

One of the biggest range of differences I have noticed lies in the approach firms take towards risk profiling and asset allocation. The two ends of the spectrum are very different.

At one end is the pick-a-number camp in which the client rates their own perceived attitude to risk by allocating it a number between one and five or one and 10, for example.

At the other end of the spectrum is the method of questioning the client to within an inch of their lives, followed by a thorough analysis of their psyche and innermost dreams and fears in order to come out with… a number between one and 10. Between these two extremes lies any number of methods.

In turbulent times

During these exceptionally turbulent times, IFAs have felt clients’ wrath more than ever over their asset selections and fund choices. A few advisers will have selected funds that have performed relatively well but they will not be basking in the praise and adoration of their clients. At best, they may be met with apathy. As one adviser puts it: ‘When it goes right, the credit goes to the client. When it goes wrong, the adviser will soon hear about it.’

The effects of this seem to be to have pushed advisers ever further down their preferred profiling route. The one-to-five group, worried that even such a simple approach did not work – and tired of endless ear-bending from disgruntled clients –now find that the majority of their clients fit into one of just three categories: defensive managed, balanced managed or cautious managed.

The super analytical advisers will now go even further in their analysis, also taking into account the client’s parents’ investment history (and shoe size). But, joking aside, recent events appear to have pushed these extremes even further apart. How far should advisers go when looking at a client’s attitude to risk?

Risk profiling approaches

Should the client just pick a number? This is not as terrible an option as the critics may perceive. At the very least it enables the adviser to gauge their client’s gut reaction to risk. However, this approach is by no means comprehensive enough to constitute a full analysis of someone’s risk profile.

A few questions can be added about the client’s experience and knowledge to date, to gauge how they may understand the definition of being a ‘three out of five’. The adviser could then add a few more questions to test the client’s understanding of the risk-return rule.

For example: ‘If you invested £100,000, which of these ranges would you feel comfortable with your investment falling into at the end of 12 months: a) £95,000-£105,000; b) £90,000-£110,000…’

The adviser could also consider adding a few questions about decision making, the speed with which the client tends to make their decisions and their propensity for regret at those choices.

That has quite quickly added up to a lot of questions.

Willingness versus need

The answers to these questions only give you an indication of the maximum risk the client is willing to take. The question then needs to be answered of how much risk they need to take.

This is a concept that is rapidly being incorporated by advisers. It involves looking at the clients assets versus what they hope to achieve and determining some kind of required growth yield to meet that objective. To do this, some form of cash flow planning is often needed, which can be done using expensive, complex, time-consuming but super-accurate software or a basic, internally designed spreadsheet – or a huge range of methods in between.

This results in a well-rounded profile of the risk tolerance and risk level that it is necessary for the client to take. The pitfalls are that it can take far too long, the results of each area could contradict one another and it will probably still result in picking a number between one and five.

Ready for asset allocation

Once the risk profile is determined and you know whether the client is moderately adventurous or cautiously balanced or a number four, that can be incorporated into the asset allocation.

Each firm will have its own risk-profiling procedure with which it is comfortable, based on the level of importance it attaches to the process. It is interesting to see how firms have moved further along the scale towards detail in light of recent events. If only there was a way of knowing which method works best.

Cathi Harrison is founder/owner of Para-Sols and this article was first published in New Model Adviser.

I was lucky enough to be able to attend the Morningstar Investment Conference this year and it again confirmed my opinion that this is for me one of the most worthwhile conferences of the year.For those that don’t know the conference is two days of intensive presentations discussion and debate by some very high profile figures within the investment world and included alongside this are a couple of sessions presented by Morningstar analysts giving insight into their latest developments and explaining the methodology they use when researching funds. If you regularly use Morningstar’s statistical research or their fund ratings then having this insight allows you to better understand how they have given the fund the rating they have and what they have done to arrive at that decision.

One of the main benefits of the conference is that the fund managers who present are invited. Morningstar stress that the speakers are not paid to speak, in addition they are not there to ‘sell’ their new fund which therefore means as a delegate the fund managers presentations are focussed much more on their style, their methodology for stock selection, their processes and their justification for doing what they are doing and taking the approach that they are.

There were some very interesting speakers this year including Richard Buxton (Schroders) Sanjeev Shah (Fidelity) and Stephen Snowden (Aegon) amongst others. They were all very different, they all operated in a different space and all provided a great insight into their thoughts, their style how they work and what they believe will happen over the next few months and years.

By being able to listen to the fund managers you are also able to get some idea of how they think, you are able to start to understand what they have done previously, how much they use technical analysis and what other influences they have on the selection of the stocks in their portfolios.

The conference was also very interesting not least because of the current economic climate. We have just seen the stock market increase by over 30% in recent months are there was much discussion about whether this means the recovery to is on its way or whether this is just an opportunity for some shareholder to get rid of stock they don’t want.

For any paraplanner who wanted to get a better understanding of Morningstar’s methodology or wanted to have the opportunity to listen to and question leading fund managers this was a fantastic conference and one which I would recommend to you for next year.

 As many of you will recall I was privileged to be invited to the Morningstar Conference last year and was very, very impressed with both the organisation and content.

The conference was extremely well organised and also extremely well attended. It was also beneficial from the point that it was not attended solely by IFAs. There were many professionals there from many different branches of Financial Services. There were IFAs (and Paraplanners) present but in addition there were Fund Managers, Investment Researchers, Product Providers, Discretionary Fund Managers and many more. The great thing about this conference was that it gave me a fantastic insight into numerous different people’s thoughts about the future for different asset classes and types of investments and also a good feeling for how the Morningstar research teams work and how best to research funds and construct portfolios.

The agenda and dates (12 – 13 May 2009 in London) of this years Morningstar Conference have now been released and looking at the list of speakers they have managed to put together I think this promises to be at least as good as last year.

The annual Morningstar Investment Conference is a focused event which offers individuals specific investment knowledge and skills to use when serving their clients. Delegates can gauge the views of experts on underlying investment strategies as well as economic, market and sector issues that play such an important role in the process of helping clients to build a strategy to meet their all important life goals.

You can find the agenda here

http://media.morningstar.com/uk/CONFERENCE/AGENDA/2009_Agenda.pdf

Morningstar only invite speakers who they believe are among the top experts in their field. None of the guests are here to sell to you: they are here to provide objective and clear insight on the key issues you are faced with today – enabling you to provide the right investment advice.

Speakers include:

*Alistair Mundy – Investec Asset Management

*Dr Sandy Nairn – Edinburgh Partners Ltd

*Dan Hanbury – River & Mercantile

*Darius McDermott – Chelsea Financial Services

*Habib Subjally – First State Investments

*John Rekenthaler – Morningstar

*Marcus Brookes – Cazenove Capital

*Mark Niznik – Artemis Investment Management Ltd

*Nick Cann – Institute of Financial Planning

*Paul Spencer – Rensburg Fund Management

*Peng Chen – Ibbotson Associates

*Richard Buxton – Schroders

*Richard Titherington – JPMorgan Asset Management

*Sanjeev Shah – Fidelity

*Stephen Snowden – Old Mutual Asset Managers (UK)

Each year, the event has grown, but the focus remains the same: creating a valuable experience for professionals looking to enhance their business, advance their industry, and improve services delivered to investors.

In addition to this Morningstar have kindly offered readers of The Paraplanner a discount on the regular price.

The Full Price for both days is £200 and Morningstar are offering you the chance to attend for £180 by using the code PP1.

Alternatively if you just want to attend for one of the days, the full price of which is £125 you can do so for £105 by using the code PP2.

This promises to be a fantastic couple of days and is highly recommended for anyone (not just Paraplanners) who has any involvement with the research and selection of funds and the construction of investment portfolios.

Fund Legal Name:  Newton Phoenix Multi-Asset FundManager:  Phil Collins, BNY Mellon Asset Management

Initial Charge:  4.00%

AMC:  1.50%

Launch Date:  11 April 2003

IMA Sector:  Cautious Managed

Performance YTD:  -4.72%

Annualised Standard Deviation:  6.34%

Annualised Sharpe Ratio:  0.09

Aim:  The fund aims to achieve long-term capital growth in excess of benchmark cash returns from a balanced portfolio diversified across a range of asset classes.

Commentary:  The fund pursues a diversified asset approach in order to deliver returns in excess of cash but with bond-like levels of volatility.  The fund targets a return of at least 2% above cash over a rolling 3-year period.  It invests across a broad range of asset classes including commodities, hedge funds, private equity, property, equities, bonds and cash.

The Newton Multi-Asset Fund combines a broad spread of differently correlated asset classes in such as way as to maximise returns while minimising volatility.  While the fund manager is free to adjust the Fund’s allocation in response to market conditions, in practice such changes are unlikely to be either frequent or dramatic, as Newton does not attempt to forecast the next ‘fashionable’ asset class or sector.  This approach tends to limit the transaction costs associated with frequent trading while maintaining consistent, low volatile returns throughout the investment cycle.

Funds that offer exposure to multiple asset classes continue to prove popular with investors looking for a safe haven in present market conditions.  Such ‘Cautious Managed’ funds range from those offering exposure to equity, fixed interest and cash to funds providing exposure to alternative assets in addition to exposure to the traditional asset classes. Some of these ‘Cautious Managed’ funds have delivered disappointing returns in the past year.

Although the Newton Phoenix Multi-Asset Fund has been hit by recent losses (-4.72% YTD), it’s losses are a fraction of those suffered by rivals such as Investec Cautious Managed (-6.35% YTD), AXA Cautious Managed (-8.08% YTD) and New Star Managed Distribution (-13.93% YTD).  Therefore, Newton’s asset allocation strategy and multi-asset approach, although currently falling short of ‘cash plus returns’, continues to shield investors from substantial losses during the current market turmoil.