Investors Chronicle Roadshow report

By Investors Chronicle, 12 July 2011

Over 600 people attended our summer roadshows in the final week of June, despite sweltering temperatures on the day of the London event. They heard presentations from leading providers of exchange-traded funds, covered warrants, retail bonds, estate planning advice and funds.

Roadshows are free to attend, and our next ones will be held in late October in London, Birmingham and Edinburgh. You'll find full details, including dates, venues and subjects, at www.icroadshow.co.uk. In the meantime, here's a summary of the presentations at the June events, including links to the complete presentations in PDF form.

David Patterson, db x-trackers

Much recent press comment about exchange-traded funds has been inaccurate. David Patterson explained how db x-trackers, a unit of Deutsche Bank, uses swap-based or synthetic replication to mimic the performance of an underlying index, with particular reference to emerging markets.

He pointed out that all db x-trackers products are covered by Ucits III regulations, and that in terms of the amount of collateral held, they go beyond these regulations. While synthetic ETFs do introduce an element of counterparty risk, they also generally provide smoother tracking, especially of large indices with many constituents.

Mr Patterson ran through the many fundamental economic attractions of emerging markets before explaining the MSCI family of indices, which serve as the benchmarks for most emerging-market investors. Data from Bloomberg suggests that many active fund managers struggle to beat these benchmarks, despite their higher costs.

Exchange-traded products can also be used to play commodities, either through ETFs (which track an index) or exchange-traded commodities (ETCs, which track individual commodities). One problem with commodity tracking is the 'roll yield', whereby the need to constantly roll over futures positions results in the introduction of substantial tracking error. This can be partially alleviated using db x-trackers' "booster" methodology, or substantially eliminated by buying trackers that hold the physical commodity rather than a futures position. In practical terms, that means precious metals, which are relatively easy to store.

Michael Johnson, London Stock Exchange

For investors who are used to equities, bonds can be confusing at first. The aim of this presentation was to demystify the asset class and introduce some of the features of the Order Book for Retail Bonds (Orb), introduced by the LSE in February 2010.

A bond is basically an IOU. You lend the issuer money for a fixed period of time, during which the issuer pays you interest, known as a coupon, and then redeems your original capital at maturity. Issuers can be governments, companies or entities such as the European Investment Bank. Unlike a share, where the market price effectively includes the rights to dividends declared but not yet paid, bond prices are quoted 'clean'. You have to pay the seller any interest accrued separately, and there are various conventions for calculating this.

Bond investors are generally not interested in a company's growth prospects. Their concern is only its ability to meet its obligations. Credit rating agencies score issuers on their ability to do so, although you should bear in mind that ratings can change quite dramatically over time. Riskier issuers are generally obliged to pay higher coupons.

Bond trading in the past has been characterised by very large minimum denominations, but denominations on the Orb are generally much smaller - as low as £1 for gilts. There is extensive issuer and bond information available on the Orb website, although to actually trade you'll still need to use a stock broker, and you'll probably have to do it by telephone, too.

Obi Nnochiri, St James Place Wealth Management

For many investors, making a will is the limit of their inheritance tax preparations. It shouldn't be - especially if the will is a simple 'mirror image' one, whereby each half of a married couple pledges their share of the assets to the other. That's because while inter-spousal transfers are exempt from inheritance tax (IHT), the tax burden on the surviving partner's estate can become considerable.

When it comes to estate planning, simple is usually best. Convoluted structures are likely to be expensive to set up and HM Revenue and Customs (HMRC) may take an unsympathetic view of them. Start your planning early, and you're less likely to need to resort to complex techniques. The simplest step is just to use your annual individual savings account allowance in full.

One easy way to keep assets out of your IHT estate is to use the generous tax reliefs available on enterprise investment schemes and venture capital trusts. Another is to give money to your children and grandchildren while you are still alive - you can give away up to £5,000 a year, although you must survive for another seven years. A way around the 'seven-year' rule is to make a gift out of surplus income, although to do this you must be able to demonstrate that this is not affecting your standard of living.

Trusts remain a key tool in estate planning, as money placed in trust is deemed to be outside of your estate for IHT purposes. They are also a good way of exercising some control, via the trustees, over how the money is spent, especially where the beneficiaries are children or young people.

There are also ways to pay less tax while you're still alive, such as using an investment bond to defer income. This is useful if you are a higher-rate taxpayer now, but expect to be a lower-rate payer once you retire.

Alexandre Chessé, Société Générale

The use of leverage was the central theme of this presentation. Mr Chesse focused on three products in particular: covered warrants, turbos and Super10s.

Covered warrants are the most established of the trio, although the number in issue in the UK is still very much less than in France, where there are over 13,000 issues. Warrants allow the investor to take a position in indices, individual stocks, currencies or commodities. They can be bought and sold on the stock market through a broker, and are free of stamp duty. Prices are set by the provider, which makes its money from the bid-ask spread. Their upside is open but the potential losses are limited to the initial amount staked. Returns in covered warrants come from two sources: time value and intrinsic value. Time value decays with the passage of time, since there is less scope for the price to move in your favour, and reaches zero at expiry. Intrinsic value depends on how close the price of the underlying investment is to the 'strike price' of the warrant; if it is above the strike (in the case of call warrants), the product is deemed to be "in the money" and its intrinsic value is the difference between the value of the underlying asset and the strike price.

Turbos are similar, but are available on a narrower range of assets. They have no time value - all the return comes from the intrinsic value, which is a geared multiple of the movement in the underlying asset. Turbos are also subject to 'knock-out' - if the price of the underlying dips below a certain level, you lose your money.

Super10s are also listed products, but have more in common with spread bets or fixed-odds bets. They pay out a fixed return - £10 - if specific conditions are met. These can be 'stay high' (an index remains above a certain level), 'stay low' (an index remains below a certain level) or range (index remains between two levels).

Keith Ashworth-Lord, Premier Sanford DeLand

Keith is the manager of the Buffettology UK fund. As its name suggests, it follows a similar investment discipline to to that used by the legendary US investor Warren Buffett. The central tenet is that the investee companies, and not the stock market, are the key source both of economic value and risk.

Consequently, a great deal of care is taken when choosing investments. Mr Ashworth-Lord and his team look for a strong franchise with pricing power, low debt, transparent financial statements and conversion of most or all of accounting profits into free cash flow. It is cash flow, discounted back to present value at an aggressive hurdle rate, that forms the basis of investment decisions.

Like Mr Buffett, they plan to hold investments for long periods, selling only when regulatory requirements compel them to, or to meet redemptions, or because a better opportunity arose. The fund currently has close to £2m invested, including around £760,000 supplied by Mr Ashworth-Lord and his co-founders. Investee companies include engineering group Renishaw and toy-maker Hornby.

In terms of price performance, the fund has managed to overcome the dilution caused by getting invested, although Mr Ashworth-Lord attributes this as much to good fortune as investment skill.

Previous devotees of the 'business perspective investing' approach included the economist John Maynard Keynes, Mr Buffett's investment partner Charlie Munger, and Bill Ruane, who managed the Sequoia fund for almost forty years. All achieved returns well ahead of the market, although some did endure periods of underperformance along the way.

Dominic Picarda, Investors Chronicle

There's a technology that's been around a few hundred years, but still has the potential for growth and great returns. It's printing - specifically, the printing of money. Dominic's contention is that the first two rounds of quantitative easing in the US have achieved precious little beyond prolonging bubbles in the stock and commodity markets, and that - in the case of equities - even this is merely a cyclical bull market within the context of a secular bear market that began with the end of the dot-com boom in 2000. He expects that further stimulus will eventually be deemed necessary.

Where should one invest against such a gloomy backdrop? One key growth arena is likely to be emerging markets; in past 'lost eras' such as the 1970s, then-growth markets like Hong Kong and Japan did very well, and today's emerging markets are likely to repeat the trick.

Another is defensive sectors, which have a better track record than growth shares during bear markets. For this reason, he prefers food retailers and tobacco to cyclicals like general retailers and engineers. The ShareMaestro model, which uses dividend yields in relation to gilt yields and inflation expectations, suggests that pharmaceuticals, food retailers and tobacco shares are undervalued at the moment, while property is overvalued.

Dominic remains a gold bull, having recommended buying the yellow metal at Roadshows going back to 2008, in some instances at prices well below the current levels. He continues to favour entering the market when the price dips back towards is 34-week moving average and thinks gold will eventually clear $2,000 per ounce.

A somewhat contrarian call is UK gilts, which have modestly outperformed their German brethren since the autumn. Waning risk appetites and a harsh austerity programme are likely to be supportive of gilt prices going forward.

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