INVESTMENT UPDATE 3rd June 2015 

PERFORMANCE UPDATE

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ASSET CLASS REVIEW

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SPOTLIGHT ON JUPITER UK GROWTH FUND

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WHAT RISK ARE YOU TAKING WITH YOUR MONEY?

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FINAL COMMENT

PERFORMANCE UPDATE 

The portfolios had a fantastic month growing between 1.21% and 2.52% in May. The highest risk Dynamic Equity portfolio rose the most, whereas the lowest risk Foundation portfolio rose the least.

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The 1 year performances of the portfolios are strong – up by between 7.67% and 18.44%, with the “Dynamic” and “Adventurous” growing the most. By comparison the FTSE100 has grown by 5.73%.

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The election of a Conservative majority has benefitted the portfolios as UK equities moved significantly higher. Sterling, after rising initially, has fallen back and has thus not affected our overseas investments.

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The trend-following portfolios have some of their largest weightings in equities, taking advantage of the strong upward trend in stock markets.

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Over the month the portfolios performed as follows:

Adventurous Portfolio: Brief Commentary The Adventurous portfolio had an outstanding month, returning 2.12% compared to the benchmark return of 1.10%. The best performing funds were those that invest in UK Equities, with the Jupiter UK Growth fund growing an exceptional 7.45% and the HSBC FTSE250 fund growing by 4.89%. UK equities have certainly benefitted by the surprise Conservative majority. Sterling could have strengthened significantly due to the Conservatives being elected and this would have decreased the value of our overseas investments. However, after an initial surge it fell back and our overseas investments generally rose. The Neptune Japan Opportunities fund returned 3.22% and the Jupiter India fund grew 3.56%. We are particularly pleased about the Jupiter fund as it had fallen over 7% last month. It is now up over 33% in the last year. Only the Invesco Perpetual Hong Kong & China fund produced a negative return over the month but is still up over 30% over the last year. Whilst the continued talk of a Greek exit is providing a head wind for some equity markets, the overall trend in equities remains positive and the portfolio is benefitting from its overweight exposure to them.

Performance Data – Adventurous Portfolio

Balanced Portfolio: Brief Commentary The Balanced portfolio had an outstanding month, returning 1.68% compared to the benchmark return of 0.56%. The portfolio is up over 7% year to date which is very pleasing. The best performing funds this month were those that invest in UK Equities, with the Jupiter UK Growth fund growing an exceptional 7.45% and the JOHCM UK Dynamic fund growing by 3.40%. UK equities have certainly benefitted from the surprise Conservative majority. In addition the Neptune Japan Opportunities fund returned 3.22%. This is the top performing fund in its sector over the last three years and the strong performance from this fund has really helped to boost returns. Even though we only have 5% of the Balanced portfolio invested into it, it has risen by over 30% and therefore increased the value of this portfolio by 1.5% approximately over the last year. 10% of the portfolio is invested in Property and these funds continued to produce positive returns over the month, but slightly less than previous months. All three of the Absolute Return funds shook off last month’s disappointing returns and posted strong positive returns this month. We are looking for these funds to grow more than the average bond fund which they are beginning to do. Only the Invesco Perpetual Hong Kong & China fund produced a negative return but is still up over 30% over the last year. Whilst the continued talk of a Greek exit is providing a head wind for some equity markets, the overall trend in equities remains positive and the portfolio is benefitting from its overweight exposure to them.

Performance Data – Balanced Portfolio

Cautious Portfolio: Brief Commentary The Cautious portfolio is beginning to outperform against its benchmark, returning 7.67% compared to the benchmark return of 6.40% over the last year. The main reason for this is that bonds are starting to underperform other asset classes and our Cautious portfolio has removed exposure to bonds whilst most cautious portfolios remain rigid in their allocation to bonds and are thus beginning to suffer from this lack of flexibility. In place of investing in Bonds, we have selected four Absolute Return funds. Whilst they had a disappointing month last month, May saw them all make a positive return between 0.25% and 1.11%. The best performing funds this month were those that invest in UK Equities, with the Fidelity Index UK fund growing by 2.45% and the Invesco Perpetual High Income fund growing by 3.18%. UK equities have certainly benefitted by the surprise Conservative majority. The Balanced and Adventurous portfolios invest more in higher risk UK equity funds and they achieved higher returns over the month. The aim of the Cautious portfolio is to provide steadier returns and to not lose as much money when markets take a down turn. Therefore we prefer these more defensive funds for the Cautious portfolio. 15% of the Cautious portfolio is invested in Property and these funds continued to produce positive returns over the month, but slightly less than previous months. We still like Property as an asset class not only for the good steady returns but also the diversification that it brings. No funds produced a negative return over the month and we remain happy with the current composition of the portfolio. Whilst the continued talk of a Greek exit is providing a head wind for some equity markets, the overall trend in equities remains positive and the portfolio is benefitting from its overweight exposure to them. Performance Data – Cautious Portfolio

Dynamic Equity Portfolio: Brief Commentary The Dynamic Equity Portfolio once again produced a strong monthly return outperforming the benchmark by 1.04% in May. The portfolio is now up an incredible 18.44% over the last 12 months, which compares favourably to the FTSE100 returning just 5.73% (including dividends but no charges). The “momentum” part of the portfolio produced good returns after a mixed month last month. The Axa Framlington Biotech fund grew by an incredible 8.69% and the Jupiter India fund by 3.56%. The one disappointment was the Newton Asian Income fund which fell 2.53%. In addition to the poor performance over the month, the fund manager has resigned and we will therefore seek an alternative to this fund. All four of our main momentum funds have produced returns above 30% over the last year and this is the reason why the portfolio has performed so well. We will continue to use “momentum” as part of the investment strategy for this portfolio. The resounding Conservative victory led to UK equities rising significantly this month, with the Jupiter UK Growth fund growing an exceptional 7.45% and the HSBC FTSE250 fund growing by 4.89%. These funds invest in smaller UK companies which have benefitted the most from the election. The Dynamic Equity portfolio should continue to produce excellent returns as long as global stock markets continue to grow. However, we must be aware that this portfolio will suffer if we see a correction in equity markets as it will always invest 100% in equities.

Performance Data – Dynamic Equity Portfolio

Foundation Portfolio: Brief Commentary The portfolio rebounded this month after a small fall last month. It gained 1.21% and is now up a healthy 8.76% over the last year. All asset classes and funds grew over the month, with the exception of the Standard Life Global Index Linked fund which fell by 1.21%. The resounding Conservative majority lifted UK equities with the Woodford Equity Income and Invesco Perpetual High Income funds growing 3.51% and 3.18% respectively. These are both relatively defensive equity funds but both have been performing very well. We would also expect these two funds to fall less than the average fund if we indeed did see a stock market correction due to their defensive nature. 20% of the portfolio is invested in bonds and there is a higher than normal volatility being displayed by them. This could signal the start of a correction which would potentially see the average cautious client suffer some negative returns over the long run. The Foundation portfolio is built on diversification and will continue to hold bonds, but the weighting was reduced over the last year in order to increase the allocation to property. 15% of the Foundation portfolio is invested in Property and these funds continued to produce positive returns over the month, but slightly less than previous months. Overall, we remain positive that the Foundation portfolio will continue to make good positive gains but are concerned that bonds may fall and slow the rate of growth of the portfolio.

Performance Data – Foundation Portfolio

ASSET CLASS REVIEW When building a portfolio, we constantly review each asset class in order to see if they are trending downwards, upwards or just consolidating before their next major move. From this review we attempt to put more of our clients’ wealth in those assets that are either trending upwards, or are consolidating but look like trending upwards shortly. This section therefore will give you an insight into our current thinking as we have highlighted the current charts that look interesting. US EQUITIES Verdict: The US is still displaying one of the most consistent uptrends but the rate of growth is slowing The chart below is of the main US stock market and what is most striking is the strong and consistent uptrend. However, the last 6 months shows that the trend line (the solid red line) appears to be rising less rapidly. This is not a cause for concern but perhaps an opportunity for other stock markets to catch up.

UK EQUITIES Verdict: The UK stock market liked the Conservative majority. The FTSE250 is perhaps the best chart to show the strength of the UK economy as it consists of much smaller companies than the FTSE 100. As you can see it was beginning to show signs of returning to a strong upward trend before the general election but from May it has risen rapidly. This shows that the UK economy is in good shape and that the Conservative victory was good for our wealth.

EUROPEAN EQUITIES Verdict: Greece about to exit the Euro? Whilst we cannot predict if Greece is going to exit the Euro, the Greek stock market does not like this uncertainty. After a two year rally, the stock market has fallen back to its previous lows and has lost 60% in sterling terms over the last year. The good news is that other European stock markets have moved significantly higher over this period which appears to demonstrate that if Greece did exit, then the rest of Europe will not be as affected as it would have been if Greece had left a few years back.

JAPANESE EQUITIES Verdict: Our preferred Japanese fund is flying! As the Japanese stock market surges higher, our preferred Japanese fund has grown by 34% over the last 12 months. Our strategy of being able to pick future “winning” funds is also paying off as this fund is the best performing one in the sector over three years:

EMERGING EQUITY MARKETS Verdict: Why do most investor make little money out of Emerging Markets? There is a general perception that emerging markets are riskier and therefore the potential returns should be significantly higher. However, we also know that the potential losses can also be much higher and therefore we should only invest in emerging markets if we have a suitable strategy. Most advisers recommend their clients to buy a general emerging markets fund that splits money across different regions in order to diversify. Our strategy is to only invest in those regions if they are displaying an upward trend and then to put more money into them if they are on a very strong upward trend. This has led us to invest in India and Hong Kong/China recently and our two preferred funds have considerably outperformed the average “Emerging Markets” fund:

In fact over the last two years the average fund (red line) has not made any money due to them investing in Russia and Brazil as well as India & China. However, our portfolios have benefited from our “Trend Following” strategy by avoiding Russia & Brazil. BONDS Verdict: Bond yields turn higher The chart below is one of the most important charts that potentially could affect our wealth. It is the interest rate that the US Government has to pay to borrow money and is what “investment professionals” term the risk free rate. Essentially when you lend money to the US Government you expect to get your money back after 10 years together with the interest each year. All other asset classes are priced against this so if equities are paying 5% dividends and the “risk free” rate is 1.6% then equities are attractive and will probably go up in value. As you can see the interest rate has been going up this year and is providing some short term volatility to stock markets. If the rate goes above 3% then equities may not be as an attractive investment which could be the catalyst for a short term correction in stock markets. We will be watching this carefully.

COMMODITIES Verdict: The price of food is still falling The chart below shows the price of a basket of ingredients that go into our weekly supermarket shop such as corn, sugar, coffee etc. As you can see it has continued to fall this year and has hit the lows seen in the last ten years. This is good news for consumers as it means inflation will remain low which in turn is good for the global economy.

CURRENCIES Verdict: The election result saw sterling move higher but then fall lower Immediately after the general election result, sterling moved significantly higher as markets reacted to the news that a more business friendly government had won an overall majority. This saw sterling move from 1.52 dollars to the pound to 1.58 dollars. However, it proved only to be a short term spike as it has subsequently moved back down. A rising sterling is bad for our wealth as it reduces the value of our overseas investments and we did fear that a Conservative majority would have caused sterling to spike and our wealth to fall. This fear was proved to be short lived.

SPOTLIGHT ON THE JUPITER UK GROWTH FUND We have been receiving feedback on what to include in the Investment Update and one of the suggestions is to spotlight some of the funds that our portfolios are invested in. This month we look at the Jupiter UK Growth fund managed by Steve Davies. What’s the performance been like? Exceptional. The chart below shows that over the last year the Jupiter UK Growth fund has more than doubled the performance of the average fund in its sector:

If we compare the annualised return of the fund against the sector over the last ten years, you can see that it significantly outperforms when markets go up but underperforms when markets go down:

We therefore consider this fund to be a higher risk than others and look to invest in it when we are seeing a strong upward trend in UK equities. Why has the fund outperformed? Steve Davies was appointed as co-fund manager in 2013 and then sole fund manager this year. He has been working as an analyst on the fund since 2007 and has kept the same investment philosophy as the previous manager. He is also manager of another similar Jupiter fund since January 2012 which is also performing very well. We believe that the key to the success of the Jupiter UK Growth fund is the ability of the Jupiter team to analyse recovery stocks. These are essentially stocks that have fallen a lot but have started to display a turnaround in performance. These stocks typically offer very good potential rewards but also have a larger than average chance of going down significantly. Jupiter have so far been able to pick the more successful recovery stocks and hence we have seen the outperformance. A good example of one of their successes is the purchase of Dixons Carphone Plc (a merger of Dixons and Carphone Warehouse) which has increased by 50% over the last year. Should the fund continue to perform well? The key reason behind the success of the fund is the fund manager’s ability to make good stock picking decisions which we believe Jupiter, as a team, are very good at identifying. If we continue to see a recovery in the UK economy, which we believe will be the case, this fund should perform well. However, we are also aware that it will fall more in a correction and therefore it is only suitable for our medium to higher risk clients.

WHAT RISK ARE YOU TAKING WITH YOUR MONEY? One of the most important factors that affect the returns on your portfolio is the risk that you are taking. Our objective is to reduce the risk of your portfolio during the bad times and increase it during the good times, so that we protect your wealth in the bad investment periods and you remain invested and benefit from the good investment periods. If this is achieved successfully then the overall risk to your portfolio will reduce and your losses will be minimised during the bad times. But how do we measure the risk that you are taking? The best measure is something called volatility. This is simply a measure of how much your portfolio moves on a daily/weekly basis. For example, if a portfolio grows by 10% in a month and then falls by 5% the next it is much more volatile than a portfolio that grows by 2.5% in each of the two months. So what are the risks in our portfolios? As our investment philosophy follows a trend-following investment strategy you should expect volatility to increase after a strong period of stock market returns. Over the last year the volatility of our portfolios is significantly higher than their Benchmarks. However, over an investment cycle you should expect the volatility to be close to the Benchmarks, which is what we have experienced. This is because during poor investment periods investment volatility should be much lower and this will offset the higher volatility seen during good investment periods.

Broom Consultants Investment Portfolios

1 Year Volatility

Volatility Since Launch

Benchmark Funds

1 Year Volatility

Volatility Since Launch

Cautious

3.16

5.07

Cautious

3.26

6.56

Balanced

3.85

7.48

Balanced

3.47

7.37

Adventurous

4.68

10.31

Adventurous

4.37

10.69

Dynamic Equity

6.28

5.97*

Dynamic Equity

5.51

6.32*

Foundation

3.05

2.87*

Foundation

1.76

1.82*

By comparison, the UK Stock Market FTSE 100 has a volatility of 8.08 over 1 year and 14.88 since launch and the Emerging Market Equities Benchmark has a volatility of 10.10 over 1 year and 19.86 since launch. *Please note that the Foundation and Dynamic Equity portfolios launch date was different to the Cautious, Balanced and Adventurous.

FINAL COMMENT

The UK election result proved that forecasting is an extremely tricky business to be in. The odds of a Conservative majority were tiny and a Labour minority with the SNP was the most likely outcome. UK equities moved significantly higher the day after the result but we feared that sterling would strengthen as overseas investors moved money to the UK as they perceived the economy to be safer under a Conservative government. This would have led to our overseas equity investments falling. Whilst sterling initially strengthened it subsequently fell back and our overseas investments did not fall. The outcome of the UK election once again proves that so called “experts” fail miserably in their forecasting abilities. This applies to economists and many investment “experts” as well. By following trends and having a robust investment philosophy such as ours, we can attempt to move more of your wealth into those markets that are displaying the strongest trends and move out when they are weak. We believe that this is the best way to manage money rather than making guesses (forecasts) on what is going to happen.

Broom Consultants Limited Sterling Court, 4 Gresham Road, Brentwood, Essex. CM14 4HN Tel No. 01277 202222 www.broomconsultants.com

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Please note that this document does not constitute a recommendation. It is intended only to provide you with a guide to how Broom Consultants manages client money. The past is not necessarily a guide to future performance. The value of any investments can go down as well as up and you may not get back the full amount invested. Taxation is subject to change and you may have to pay tax on any gains. The Broom Consultants portfolios are unlikely to exactly mirror our clients portfolios due to the timing of the initial investment and the speed of response to our fund switch recommendations as well as the effect of charges. The figures above therefore assume a client invested on the launch day and have responded immediately to our recommendations. All figures and charts are provided by Financial Express.