Q Q U A R T E R L Y R E P O R T Q T A T T O N M A N A G E D C A U T I O U S 1

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1 Q Q U A R T E R L Y R E P O R T Q T A T T O N M A N A G E D C A U T I O U S 1

2 Calendar Performance % (years) M O D E L P O R T F O L I O P E R F O R M A N C E Q * 12 months Annualised Tatton Managed Cautious Morningstar Cautious Model Portfolio IA OE Mixed Investment 20-60% Shares peer group Cumulative Performance % Month Quarter Year-to-date Since Inception** Tatton Managed Cautious Morningstar Cautious Model Portfolio IA OE Mixed Investment 20-60% Shares peer group Past performance is not a guarantee of future performance. *Source: Morningstar. Please read the Disclosure section at the end of this document. ** The portfolio launched on 01/01/2013. The above table shows the performance of your portfolio and also the average fund performance of the Investment Association (IA) peer group benchmark that broadly matches its profile. The short-term variances in performance between these are within normally expected ranges. Due to unavailability of returns data for the currently suspended Threadneedle and M&G Property funds, we have had to extrapolate the returns of the Tatton portfolios by substituting the missing data with that of the Kames Property fund, which has historically generated very similar returns. We hope to be able to revert back to the actual data with the next quarterly report. Your portfolio, as a long-term investment, continues to be on track to achieve its objective as can be seen from its performance since inception. The table produced later in this report shows the performance of major global indices and highlights the benefit of appropriate diversification. C A U T I O U S P O R T F O L I O C H A R A C T E R I S T I C S T i m e H o r i z o n Minimum of 5 years R i s k P r o f i l e Low to Moderate P o r t f o l i o Y i e l d * * * 2.3% 3 - Y e a r S t a n d a r d D e v i a t i o n 5.3% The leading objective of this portfolio is to produce a combination of income and growth. The portfolio gives limited exposure to capital markets through a range of diversified UK and international investments and aims to achieve above inflation investment returns over the longer term. Equity (stock market) exposure will follow the respective Ibbotson strategic asset allocation risk profile target which is currently set to 43%. In the shorter-term Tatton may deviate from this by a maximum of ±12.5% (currently %) to adjust actual portfolios to prevailing market conditions. The ±12.5% comprises a maximum ±10% Tactical Asset Allocation (TAA) decision mandate and a ±2.5% buffer that allows for variation in prices, which can inadvertently drive the chosen allocation higher or lower (i.e. market drift). This portfolio is likely to be suitable for the following type of investor: A investor seeking to maintain capital over the medium to long term. An investor who is prepared to accept a lower investment return than equity markets over the longer term in exchange for trying to minimise potential losses. Someone who accepts that the portfolio will be subject to fluctuations in value. You should contact your adviser if you feel that this profile no longer matches your investment objectives or if your circumstances are likely to change. 2

3 Model Expected Return (%) Equity Asset Allocation (%) Fixed Income Property Cash Indicative Volatility range (%) Tatton Managed Cautious CPI+ 2.6% 43% 44% 0% 13% % Note: Expected Return is the long-term return projection for a Low to Moderate Risk/Cautious profile with a holding period of a minimum of 5 years as projected by Ibbotson. Volatility range is an indication of the statistically computed variation of annual returns from the Expected Return as a set and annually reviewed by the issuing Morningstar Investment Management Committee. It is based on assessments of current asset class valuations, correlations and historically observed asset class return variations for each profile. C U M U L A T I V E P O R T F O L I O R E T U R N S * Past performance is not a guarantee of future performance. *Source: Morningstar. The model portfolio launched on 01/01/2013. T A T T O N A S S E T A L L O C A T I O N Cash and Cash Proxies, 5.5% Property, 0% UK Gilts, 5.5% Global Inflation Linked, 2.5% UK Inflation-Indexed, 1% UK Corporate, 7% Global Bond, 6% UK Equity, 10.5% Europe Equity, 2.5% North America Equity, 3.5% Japan Equity, 2% Global Emerging Market Equity, 2.5% Asia Dev ex Japan Equity, 1.5% Global Equity, 0% Alternative, 0% Manager of Managers, 50% The asset allocation of the Tatton Managed Cautious Model is valid as at 30/06/16. 3

4 P O R T F O L I O P E R F O R M A N C E C O M M E N T A R Y The Tatton Managed Cautious portfolio strategy returned a reasonable 2.9% over Q Despite the fear that a UK vote to leave the European Union could usher in renewed global financial turmoil, markets reacted uncharacteristically calmly. Stock markets even managed to rise above pre-vote levels on the expectation that central banks would increase their cooperation and governments would abandon fiscal austerity and instead boost their spending to help support economic growth. The Tatton portfolio outperformed the reference benchmark by 0.6% over the second quarter as some of our strongest performing funds of 2015 gave back some of their return lead over the benchmark. The best performing fund was Vanguard UK Inflation Linked Gilt Index which returned 10.2%. The worst performing fund was Old Mutual UK Mid Cap R which returned -6.7%, before it was sold towards the end of the reporting period. Since inception (1/1/13), the Tatton portfolio has returned 29.2%, which compares favourably to the 25.1% gain for the reference benchmark, while the average for the industry peer group stands at 19.9%. P O R T F O L I O A C T I V I T Y Tatton rebalanced the portfolio on 14 April, 13 May, 18 May and on 9 June Tatton did not alter the Tactical Asset Allocation, nor fund weights, but did make a number of fund changes to the portfolio during during the quarter. F U N D C H A N G E S Tatton sold Old Mutual UK Mid Cap, Woodford Equity Income and reduced the holding in JP Morgan Emerging Markets Value. Tatton bought Schroder Recovery to replace Old Mutual UK Mid Cap, GAM UK Diversified to replace Woodford Equity Income and allocated the proceeds of JPM EM Income to Dimensional EM Value and RWC Global Emerging Markets. N E W F U N D C O M M E N T S OM UK Mid Cap to Schroder Recovery - Old Mutual UK Mid Cap is a growth focused fund which has enjoyed exceptionally strong returns since we made our initial investment; growth as a style has enjoyed very strong recent returns. However, we are becoming concerned that this strong outperformance of growth over value is becoming extremely stretched (levels not seen since the tech boom), and are positioning for a mean reversion of value. Schroder Recovery is an excellent value fund which is well placed to benefit from such a reversion. Woodford UK Equity Income to GAM UK Diversified - Woodford is very cautious and bearish regarding the world economy at the moment, many of his stocks are what might be considered stable or high quality and low beta stocks. There is a concern about the valuation level of stocks with these characteristics, which have enjoyed returns which are worrying with respect to their historical returns. Alternatively value stocks have an extensive period of poor returns which are historically rare and not seen since the tech boom. Gam UK Diversified is a very contrarian approached fund looking at cheaper stocks and I believe is therefore very well placed looking forward. JPM EM Income to Dimensional EM Value - JPM EM Income was selected last year but has been disappointing. It delivered very poor returns in a period in which we had hoped it would show more resilience and since this we have had multiple meetings with the fund manager and we do not have confidence in his ability going forward. We are in the process of selling this fund down (50% this rebalance). The assets will move to Dimensional EM Value, which is following the theme mentioned above of trying to benefit from the extremely poor performance of value stocks in recent years (this trend is global not local). Oaktree was considered as this is a deep value fund but due to availability issues it was not able to be included this rebalance. 4

5 I N V E S T M E N T R A T I O N A L E F O R P O R T F O L I O C H A N G E S We were pleasantly surprised by the calm reception of global stock markets to the Brexit vote, despite their initial falls once the outcome of the referendum was known. Markets even managed to move above their pre-vote levels, as investors took a more rational approach by not just rushing for the exit but taking a bit of time to re-assess the changed situation. While we did not expect the Leave outcome, we positioned the portfolios neutrally, meaning that we did not 'bet' clients money on either outcome of the referendum. We also focused portfolios risk counterbalancing fixed interest bond investments on the purest forms available, which in the past fulfilled their role in the most reliable fashion and did so again this time. Additionally, we took the step of substantially reducing the UK commercial property content, which we deemed both long-term overvalued and therefore particularly exposed to a Brexit vote. We reduced commercial property by up to 5% across all portfolio and altogether removed property from the Income and Cautious portfolios. The proceeds were reinvested in government bonds, which have gained in value, while property valuations have fallen. Now that we have the Referendum s result, but not the expected market upheaval, we will do as we suggested to everybody else to over the past weeks, to 'keep calm and carry on'. This approach has worked well for the Tatton portfolios, which therefore have fully participated both in the upswing in the equity markets as well as gains in the fixed interest bond markets. We will at the same time though be following the direction of policy announcements very closely, when after the initial reaction markets run out of steam and we all await more detailed plans of what the UK s and the EU s combined leaderships are planning to do to avert lasting damage from the Brexit. We continue to believe that it would not have been prudent or in line with our mandate of a highly disciplined approach to managing long-term investment portfolios against risk profiles to bet on a Leave or a Remain outcome. At the same time, we believe that we have taken adequate steps to deal with the level of heightened uncertainty and market volatility by putting portfolios onto a neutral keel and reallocating from commercial property to government bonds and UK small and mid-cap companies towards large cap equities. Regarding the UK s medium term future, it needs to be remembered that in the heat of the campaign, fears were raised which are not necessarily a true reflection of what is likely to happen. So while the Brexit decision is likely to put an additional strain on the UK s economy in the short term, much of the extent of the negative scenarios painted for this outcome during the campaign are likely to have been markedly worse than what actually lies ahead. After the end of the quarter, we have noted with interest how politicians around the world have begun to downplay any further fiscal austerity plans and have instead emphasised how government investment should now support monetary policy efforts to achieve better economic growth rates going forward. Against this backdrop we expect the current Goldilocks market environment in which both equities and fixed interest bonds gain to come to an end eventually. This would most likely be through a change from deflation fears towards a return of inflation expectations. While this is positive for growth and equities, it is the poison chalice for fixed interest bonds, which are currently not pricing in any inflation for the foreseeable future. We will therefore be closely observing further developments, as our biggest concern about lack of long-term return contributions centres around bonds. They continue to be effective in counterbalancing equity risk, but their future return potential for the coming years has now all but diminished unless our world is heading for a prolonged recessionary period not something that is widely expected. 5

6 C A U T I O U S O V E R L A Y F U N D W E I G H T S Cautious Overlay Fund ISIN Position Allocation (%) Cash Capital Cash - GBP 3 IE00B1S74Q32 Vanguard UK Investment Grade Bond Index 14 IE00B1S75374 Vanguard UK Government Bond Index Acc 11 IE00B64G4925 Dimensional Global Ultra Short Fixed Income 8 IE00B50W2R13 Vanguard Global Bond Index Fund Hedged 8 GB00B80QG615 HSBC American Index 7 GB00B40CG270 Gam UK Diversified Acc 7 GB00B45Q9038 Vanguard UK Inflation Linked Gilt Index 7 GB00B8847N17 Old Mutual UK Alpha 6 GB Henderson European Selected Opportunities 5 GB00B3VVG600 Schroder Recovery 4 GB00B703ZS07 AXA Framlington UK Select Opportunities 4 GB00BBM4VB49 Templeton Global Total Return Bond Fund 4 GB00B4SZR818 Schroder Tokyo 4 GB00B6Y7NF43 Fidelity Asia Focus W Acc 3 GB00B5M5KY18 JPM Emerging Markets Income Fund 2.5 IE00B0HCGX34 Dimensional Emerging Market Value 2.5 Total P E R F O R M A N C E S U M M A R Y O F M A J O R G L O B A L I N D I C E S Asset Class Index June Q YTD 2015 FTSE 100 (UK) 4.7% 6.5% 6.6% -1.3% FTSE4Good 50 (UK Ethical Index) 3.4% 5.0% 2.0% -5.3% Equities Dow Jones Euro-Stoxx 50 (Euro-Zone) 1.9% 2.1% 1.2% 1.1% Standard & Poors 500 (USA) 9.2% 10.2% 14.5% 7.3% Nikkei 225 (Japan) 6.4% 9.5% 5.8% 15.0% MSCI All Countries World 7.9% 7.9% 10.4% 1.6% FTSE Gilts All Stocks 5.6% 6.2% 11.4% 0.6% Bonds IA Sterling Corporate Bond Index 2.0% 3.4% 5.8% 0.2% Barclays Global Aggregate Bond Index 12.1% 10.6% 20.1% 2.5% Goldman Sachs Commodity Index 9.0% 21.1% 21.1% -29.0% Commodities Brent Crude Oil Price 8.9% 34.9% 46.9% -31.2% LBMA Spot Gold Price 18.5% 14.8% 36.7% -6.3% Inflation UK Consumer Price Index (annual rate) 0.0% 0.2% 0.1% 0.20% Cash rates Libor 3 month GBP 0.1% 0.2% 0.3% 0.6% Property UK Commercial Property (IPD Index) 0.0% 1.1% 2.2% 13.8% * Source: Morningstar, all returns in Pounds - Sterling ( - GBP) 6

7 B R E X I T R A I S E S U N C E R T A I N T Y B U T G L O B A L E C O N O M Y R E M A I N S R O B U S T The second quarter of 2016 will be remembered as the time when the UK voted to leave the European Union. The vote has raised uncertainty levels among investors and it initially appeared to harm the outlook for both the global economy and the prospect of companies growing their earnings. On the surface, Brexit seems to have increased the fear that the global economy, particularly the UK and Europe, could enter a mild recession by the end of the year. One may think this would be unhelpful, but markets finished Q2 in strong fashion, even moving above their pre-vote levels. Of the 42 global indices we regularly track, 30 assets ended Q2 positively, while just 12 finished in negative territory. The biggest faller appeared to be Italian banks, which came under pressure because of concerns over the rise in non-performing loans and the perhaps insufficient levels of capital those banks have set against those loans. Notwithstanding those general market gains, the biggest impact for UK investors during the 2 nd quarter was undeniably the devaluation of the UK s currency. Against a basket of other global currencies, the Pound devalued by around 10% in the immediate aftermath of the Brexit vote. While this has made overseas summer holidays 10% more expensive, it has also made UK investors overseas investments 10% more valuable in -Sterling terms. It is possible that Sterling could continue to fall but this weakness would help companies that export as it allows them to make their products more price competitive for overseas buyers or increase the Sterling value of their overseas revenues. This combined with the weakness of the Pound has in turn made UK companies and other financial assets attractive for overseas bargain hunters, which explains the demand for UK equities despite the deterioration of the short term UK economic outlook. The fact that equity markets generally saw healthy gains, can partly be explained by the knowledge that as a direct consequence of less political predictability global bond yields have now fallen to unprecedented low levels in the UK as low as 0.75% p.a. even for maturities of 10 years (time for which the coupons are fixed). This clearly helps increase the relative attractiveness of equities by virtue of their dividends. The top performing assets over the quarter were the still recovering commodities, with oil rising c35% in GBP terms. Silver and gold also experienced solid rallies, rising 21% and 15%, respectively again 10% of which was the -Sterling devaluation alone. While the full implications of the Brexit vote may not be known for some years, it would appear that both political and economic uncertainty in the short-term has risen. This could have a negative effect on domestic activity levels, especially amongst businesses who may delay hiring and investment. It is therefore probable that the UK enters a mild recession, but there are a number economists that believe the UK will avoid such a scenario, but growth may be lower than it would otherwise been. As already indicated above, another significant impact of Brexit has been in UK government bonds, where prices have risen substantially in anticipation of further monetary easing to counter negative economic consequences of the Brexit negation uncertainties. This drove the yield on the benchmark 10-year Gilt down sharply to as little as 0.75%. For context, they notes at the beginning of the year close to 2% and started the quarter at 1.4%. As anticipated, the Bank of England has indicated that it will support the UK economy by cutting rates we anticipate a 0.25% reduction and the introduction of a new asset purchase programme, which would most likely arrive in August. However, we advise that it is worth remembering that the UK accounts for just 4% of worldwide GDP, so an isolated UK recession is unlikely to cause a global recession, as economies in the US and China look to be reasonably robust and central banks around the world stand ready to provide assistance, if necessary. We remain reassured by the recent resilience of emerging market equities. 7

8 The US continues to benefit from still solid consumer spending and further improvements in the labour market. While in China, we have seen a stabilisation of growth on the back of increased stimulative measures from the government and on a slowing of capital outflows. The Chinese economy continues to make solid and impressive progress towards the government s growth target for 2016, even as it makes the transition towards higher domestic consumption. We remain optimistic that global economic fundamentals will show further improvements in 2016 and a stronger growth trend will develop next year. As noted above, both the US and China look sound, while the European Central Bank is standing behind growth in the Eurozone with its asset purchase programme. There is an increased expectation among economists that Japan will supplement its large quantitative easing programme with an additional 10 trillion ($98 billion) government infrastructure investment programme to boost growth, which would be equivalent to 2% of Japanese GDP. The rebound in commodity prices gives us the hope that growth expectations in emerging markets could rise. However, should political risks re-emerge, then the positive markets sentiment of late could quickly evaporate. We believe that the current economic backdrop remains moderately supportive for financial markets and we could even see equities gently move higher, should fundamentals improve as we expect over the next few years. Disclosure The portfolio returns presented in this document are for information purposes only and should be regarded as indicative of the returns individual clients will have achieved with their actual investment portfolios, which are managed in the same respective investment style and risk profile. While client portfolio returns are expected to be very similar to the returns shown here, they may differ as a result of new monies having been introduced by the client, or withdrawn from the portfolio and/or the specific fee charging arrangements agreed between the client and the adviser. The performance does not account for the differences due to the limitations of a particular platform. Past performance is not a guide to future performance. Please be aware that adjustments to previously reported data can occur. The value of your investments and the income from them can fluctuate and it is possible that investors may not get back the amount they invested. Please note that the performance data does not reflect the performance experienced by clients in the Scottish Friendly Assurance Onshore Bond (Nucleus only) nor the Nucleus Pension APP (Appropriate Pension Plan). All returns are calculated in -Sterling and are shown after fund charges, but before all other fees, like platform, Tatton (DFM) and adviser charges. The Tatton Portfolios launched on 01/01/2013. The Income Portfolios launched on 05/12/2014. The period covered in this update is from 01/01/ /6/2016. The charts, data and related performance calculations shown within this report is sourced from Morningstar and is valid as at 30/06/16. Asset Allocation: Operational cash of 2% is required by the platform to cover costs and charges; any additional amount is for strategic purposes. *** Portfolio yield is calculated as the rolling 12-month yield. I M P O R T A N T I N F O R MA T I O N Tatton Investment Management Limited is a trading style of Cambridge Investments Limited which is authorised and regulated by the Financial Conduct Authority. The value of your investments and the income from them can fluctuate and it is possible that investors may not get back the amount they invested. The information in this document does not constitute investment advice or a recommendation for any product and you should not make any investment decisions on the basis of it Old Broad Street, London EC2N 1AR. Tel: