FUNDSTALK ISSUE JUNE 2018 INVESTMENT NEWS AND INSIGHT FROM SCOTTISH WIDOWS START

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1 ISSUE 02 FUNDSTALK JUNE 2018 INVESTMENT NEWS AND INSIGHT FROM SCOTTISH WIDOWS 1 WELCOME TO FUNDSTALK An introduction from our Head of Fund Proposition 2 FUNDSTALK: BITESIZE Some of this edition s key insight at a glance 3 INVESTMENT MARKETS OUTLOOK Politics is the main cause of market uncertainty 4 WHY VOLATILITY MATTERS IN RETIREMENT Iain McGowan looks at retirement and volatility risk 5 FOCUS ON FUND MANAGERS Ezra Sun of Veritas Asset Management explains his investment process 6 Q&A With Asset Allocation Director Gavin Stewart START

2 IN THIS ISSUE WELCOME TO FUNDSTALK ANDREW COLQUHOUN Senior Asset Allocation Manager WELCOME TO THE SECOND EDITION OF FUNDSTALK. WE RE ONLY HALFWAY THROUGH 2018 AND THIS YEAR HAS ALREADY BEEN AN EVENTFUL ONE FOR THE INVESTMENT MARKETS AND FOR SCOTTISH WIDOWS. IAIN MCGOWAN Head of Fund Proposition, IS&E After an unusually long period of uninterrupted growth, volatility returned to financial markets in the first quarter of the year with equity, fixed income and currency markets all feeling the effects of rising political tension and central banks beginning to turn their attention to rising inflation. However, the outlook for global economic growth remains robust and, as our senior economist Andrew Colquhoun points out in this issue, while some asset valuations remain high we believe the return of volatility is not, in itself, a cause for concern for investors in accumulation. The start of 2018 has also brought several changes at Scottish Widows. We successfully launched Retirement Portfolios to meet the growing demand for investments specifically for people in pension drawdown. We launched dripfeed drawdown to increase the options available to advisers by adding more flexibility over how clients can make withdrawals using Retirement Account. Work is also continuing to review the arrangements for managing 109bn of Scottish Widows assets following the decision to terminate our partnership agreement with Aberdeen Asset Management. Sticking with the theme of volatility, this issue looks at why volatility poses particular problems for clients in drawdown and taking regular withdrawals. Each issue of FundsTalk will bring you an interview with the manager of one of our selected external funds to provide an insight into their investment process and their view on their area of expertise. This issue features an interview with Ezra Sun, head of Asia at Veritas Asset Management and manager of the Veritas Asian Fund. He says continued economic growth in the region means Asian equities are now a must have rather than a nice to have asset class and says despite being underweight in technology stocks it will continue to be one of the big drivers of growth. Closer to home, this issue also features an explanation of the asset allocation process that sits behind Scottish Widows multi-asset fund ranges. If you have any feedback on this edition or anything you d like to hear more about, please get in touch. Iain McGowan Head of Fund Proposition, IS&E EZRA SUN Fund Manager and Head of Asia, Veritas Asset Management GAVIN STEWART Asset Allocation Director

3 1 FUNDSTALK: BITESIZE Positive market outlook but political noise features strongly 3 The four elements that make up the DNA of Veritas Asset Management READ ARTICLE READ ARTICLE 2 Markets have seen a resurgence in volatility time for your income drawdown clients to factor this in 4 Q&A Our dedicated Asset Allocation team s philosophy and process READ ARTICLE READ ARTICLE INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS.

4 INVESTMENT MARKETS OUTLOOK POLITICS REMAINS A KEY FACTOR FOR FINANCIAL MARKETS IN 2018, AS RISING TRADE TENSIONS AND THE ONGOING BREXIT NEGOTIATIONS ADD AN ELEMENT OF UNCERTAINTY TO THE INVESTMENT OUTLOOK, SAYS ANDREW COLQUHOUN, SENIOR ASSET ALLOCATION MANAGER. Markets began 2018 on an upbeat note, buoyed by the strongest outlook for the world economy since the global financial crisis. In recent months, many stock markets have become more volatile as investors perceive increased financial, political and economic risks but the base case remains fairly benign and the economic outlook remains broadly resilient. However, many risk asset valuations still look high. MARKET FOCUS Markets are increasingly focused on the prospect of tighter monetary policy from global central banks, as economies run out of spare capacity and inflationary pressure starts to emerge. Jitters over inflation, and a sharperthan-expected rise in interest rates, seem to have contributed to the stock market sell-off at the end of January. So far this year, yields on 2-year government bonds have risen around 0.3% in the UK and 0.6% in the US the two major economies where central banks have actually started to raise policy rates. Higher interest rates on risk-free government debt make risky assets less attractive, other things being equal. We expect that markets will continue to focus on inflation and wage rises for clues on whether rates might rise more quickly and undermine risk asset valuations further. Through a series of trades in 2017, Scottish Widows is positioned for a faster rise in interest rates than markets had expected. We will maintain our position but keep it under review. Political risk, in various forms, is rising up investors agenda. One key area is international trade. The US raised tariffs on steel and aluminium imports from a number of countries, including China, in March, with China then retaliating against some US metals and agricultural products. The range of goods affected by higher tariffs so far is a tiny proportion of global trade, and both the US and China have signalled their openness to further negotiation to address the underlying issues. Yields on 2-year Government bonds have risen about 0.3% in the UK and 0.6% in the US BONDS RISEN

5 However, markets have to factor in an increased if still small risk of a negative outcome that could, in the worst case, have a significant negative effect on global activity akin to the trade wars of the 1930s. Scottish Widows does not expect a significant escalation in trade tension to undermine the global economy, but we believe the topic warrants continued close monitoring. "FANGs" Global and in particular, US stocks were driven higher in 2017 by technology firms, including the American FANGs (Facebook, Amazon, Netflix and Google). However, the political and regulatory environment for technology stocks has become more challenging in Facebook is mired in allegations about abuse of users data, while President Trump has publicly criticised Amazon s business practices and impact on small retailers. This increased political noise has already had an impact on the sector s valuations and the debate over regulation of the sector seems likely to continue. Eurozone political risk came back onto investors radar in March after Italy s election saw gains for Eurosceptic parties, the Five Star Movement and the Northern League. Both parties produced potentially expensive tax and spending policies during the election that could see Italy run up against European fiscal rules. At the time of writing, the two parties were on the verge of forming a coalition government which could complicate efforts to reform the Eurozone led by Germany s Chancellor Merkel and France s President Macron. Italy s high public debt and weak growth constitute a relatively weak economic backdrop for the political drama. The prospect of a coalition government has seen the spread of yields on Italian debt over German debt push up towards 2%, as investors price in some risk of a less favourable outcome. BREXIT The Brexit process remains a key driver for UK markets. The pound has strengthened so far this year as the UK and the remaining EU countries manage to reach agreement on key elements of the exit process, decreasing investor concerns over a disruptive, abrupt loss of access to EU markets for British firms. However, it has fallen back against the US dollar in recent weeks. UK stocks have lagged behind their global peers for much of the year so far, despite the relative resilience of the UK economy. However, the benchmark FTSE 100 index outperformed other developed markets in the March selloff, partly because it is relatively light on technology stocks and is therefore insulated from the effect of weakness in that sector. We expect Brexit will remain a key factor in the outlook for UK markets over the rest of THE POUND HAS STRENGTHENED SO FAR THIS YEAR AS THE UK AND THE REMAINING EU COUNTRIES MANAGE TO REACH AGREEMENT ON KEY ELEMENTS OF THE EXIT PROCESS NEXT ARTICLE INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS.

6 WHY VOLATILITY MATTERS IN RETIREMENT HEAD OF FUND PROPOSITION, IAIN MCGOWAN, SAYS INVESTORS IN RETIREMENT NEED TO PAY ATTENTION TO VOLATILITY RISK. The increase in equity market volatility since the start of the year is a timely reminder that short-term market movements are a fact of life for investors and advisers. Before turbulence returned to financial markets in February, many global stock markets had experienced almost nine years of strong growth, culminating in 15 consecutive months of uninterrupted growth. While no one enjoys going through a market correction, investors who are still accumulating have the opportunity to weather changing market conditions. In fact, changeable markets can work in favour of investors making regular contributions, as the effect of pound cost averaging can boost investment returns over the long term. However, the growing numbers of people choosing income drawdown as a way of accessing their pension savings face completely different priorities. Once people move from accumulation to decumulation, market falls are no longer a temporary inconvenience or an opportunity to invest at lower prices. Instead, preserving capital becomes a priority, as a significant drop in the value of a pension pot can have a negative impact on its ability to sustain an individual s chosen level of income in retirement. Since the introduction of pension freedoms, the number of people choosing drawdown has shot up. In 2013 only 6% of people who started to take an income from their pension chose drawdown. The latest figures from the Association of British Insurers (ABI) show that by the end of 2017 this had increased to 58%. In 2013, 22,000 new drawdown contracts were taken out but this had risen to 149,000 in Many of these investors have modest sums invested. The average size of a new drawdown pension in 2016 was 76,600 and, without any other sources of income in retirement, this new wave of drawdown investors remains vulnerable to a downturn in financial markets. But given the historically low market volatility in 2017, combined with strong equity market returns since 2009, investors may be over-confident that equities will continue to grow at the same robust rate we have seen in recent years, while others may have failed to consider the risk of volatility entirely.

7 SEQUENCE RISK POORLY UNDERSTOOD If investors fail to take account of the potential for volatility and market declines while they are taking an income, it can have a serious impact on their pension aspirations. Some drawdown investors have been attracted by the ability to withdraw lump sums and are yet to decide how they want to take the rest of their income. However, the latest UK Insurance and Long-term Savings: State of the Market report from the ABI shows the average number of withdrawals per drawdown customer has been steadily increasing, while the average amount withdrawn has been falling, suggesting that many people are choosing drawdown to take income. These investors will find their ability to sustain the level of income they have chosen may be put under pressure if they experience market volatility. If drawdown investors are withdrawing money when their fund value is falling, this effectively locks in the loss of value, unlike in accumulation, when the fund has a chance to recover from the fall. A SMALL REDUCTION IN A DRAWDOWN FUND S ABILITY TO SUSTAIN A CHOSEN LEVEL OF INCOME CAN HAVE SERIOUS KNOCK-ON EFFECTS, REDUCING A FUND S LIFESPAN BY MONTHS OR EVEN YEARS. Investors who do not adjust the rate of withdrawal will then see the expected life of their fund reduce at a faster rate, as a proportionately smaller and ever shrinking fund maintains a fixed level of income. And it is not just the level of volatility that can be damaging, it s when it happens. The sequence of returns is one of the most important factors that can influence the sustainability of a drawdown fund. Negative returns in the earlier years of retirement for a client who s taking withdrawals could have a lasting and detrimental impact on their pension pot and the amount of withdrawals that can be taken. If negative returns of the same magnitude occurred later in retirement or after several years of positive growth, it would have a far smaller impact. Many people reaching age 65 can expect to live for another 20 years or more, so a small reduction in a drawdown fund s ability to sustain a chosen level of income can have serious knock-on effects, reducing a fund s lifespan by months or even years. Equity markets in 2018 have seen a resurgence of volatility since the period of tranquil growth seen in It is too early to say if this is a blip, whether volatility is returning to its longer-term average or a part of a larger change in market sentiment. But it should help to remind that investors choosing income drawdown need to consider more than inflation, longevity and how much and how often they want to take withdrawals. Negative returns in the earlier years of retirement for a client who s taking withdrawals could have a lasting and detrimental impact on their pension pot. NEGATIVE RETURNS Equity markets in 2018 have seen a resurgence of volatility since the period of tranquil growth seen in RESURGENCE OF VOLATILITY References: Credit Suisse annual Global Investment Returns Outlook FCA Retirement Outcomes Review FCA Data Bulletin 11 ABI UK Insurance and Long-Term Savings: State of the Market 2018 NEXT ARTICLE INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS.

8 FOCUS ON FUND MANAGERS EZRA SUN, FUND MANAGER AND HEAD OF ASIA, VERITAS ASSET MANAGEMENT IN THIS ISSUE OF FUNDSTALK, WE ARE PLEASED TO INTRODUCE A NEW FEATURE CALLED FOCUS ON FUND MANAGERS. AT SCOTTISH WIDOWS, WE TAKE A RIGOROUS APPROACH TO SELECTING AND MONITORING THE FUNDS WE MAKE AVAILABLE TO OUR CLIENTS. WE WANT TO TAKE THE OPPORTUNITY TO INTRODUCE YOU TO SOME OF THE MANAGERS WE CHOOSE TO PARTNER WITH. Ezra Sun is Head of Asia and manager of the Veritas Asian Fund. Working with a team of Hong Kong-based analysts he aims to identify long-term growth trends and invest in companies that are poised to benefit from them. As Sun explains it, there are four key elements that make up the DNA of his firm, as well as the process behind the Veritas Asian Fund. The first is a focus on real return: growing capital, and working to protect that capital for shareholders. The second is an insistence on investing in quality companies. When selecting investments, the team looks for strong fundamentals at the company level, as well as identifying long-term themes at the macroeconomic level which will benefit these companies. In addition, the fund also includes a small number of cyclical and special situations holdings. Third, the Fund invests in a focused portfolio of large-cap growth stocks; the top five sector weightings accounted for 80% of net assets as of 31 December, Finally, Veritas prides itself on its culture of partnership, both within the fund management team and the firm as a whole. Additionally, Sun told us: We work with clients who share our long-term investment view, and we see that as a partnership as well. We had the opportunity to sit down with Sun and talk about his outlook for Asia. He told us: Asian markets are facing volatilities, but the long-term growth story is stronger than ever. Consumer spending is healthy; urbanisation and technologies, such as electric vehicles, big data, robotics, and AI are driving growth; there s a high savings rate; and investment in R&D is robust. For instance, China has one of the highest rates of new patents. Due to the size of the country, there s also the potential for scalable higher growth and profits. But China s not the only story. In India, for example, structural reforms, such as GST (the Goods and Services Tax), are helping with the chronic budget deficit and are supportive of long-term growth. SO HOW DOES THE VERITAS ASIAN TEAM S INVESTMENT PROCESS BENEFIT SHAREHOLDERS? We believe the Fund is a vehicle for investors to get exposure to the best of Asian companies, says Sun. We want to convey our conviction and passion about the opportunities in the Asian markets. It s time people stop looking at Asian equities as a nice to have and more of a must have asset class.

9 The economic sectors the Fund tends to favour are those that integrate any number of growth trends. For example, compared to its MSCI Asia ex-japan benchmark, the Fund is underweight information technology, which at first glance may seem surprising. But Sun explains: We think tech is the driver behind not only the IT sector, but other areas of the economy that are leveraging technological advancements to realise growth the healthcare industry is a great example. True, we are underweight IT overall; we re less enthused about equipment makers, for example. But we re very positive on the applications of IT in other areas, such as life sciences. One of our top 10 holdings is Jiangsu Hengrui Medicine, an innovative company in China that is investing a lot into R&D and developing an impressive pipeline that we think will result in long-term structural growth. Consumer stocks are another area where we see larger growth themes converging. Our top holding as of the end of 2017 was CP All, a chain of convenience stores in Thailand operating under the 7-Eleven brand name. This company benefits from so many of the changes taking place in Asia: urbanisation, consumer spending, changing demographics. For example, with takeaway coffees and other beverages now becoming commonplace in Asia, this means higher margins. What s more, the stores bring in elements from a number of economic sectors. They act as pick-up points for ecommerce deliveries and most act as local agents for banks, as Thai banks cut branches and move more towards digital these local shops are really a microcosm of what s happening in the larger economy throughout Asia. We think what s happening is very exciting a network of growth that is integrated and inter-connected, as more entrepreneurial, innovative businesses emerge. Sun is based at Veritas in London, but the Asia team has three analysts on the ground in Hong Kong, to go out and meet with companies throughout the region. It s the best of both worlds, he says, having field knowledge and access, alongside the global perspective from London. Of the 38 Veritas employees, 24 are full partners in the firm. Sun says: That means our interests are completely aligned with those of the investors, supported by active management, strong belief in our philosophies and processes, and our capital working alongside that of our clients. We re driven by wanting to develop trust with investors and delivering on our promises of real return and growing capital. WE THINK TECH IS THE DRIVER BEHIND NOT ONLY THE IT SECTOR, BUT OTHER AREAS OF THE ECONOMY THAT ARE LEVERAGING TECHNOLOGICAL ADVANCEMENTS TO REALISE GROWTH Ezra Sun has been with Veritas Asset Management since Prior to joining Veritas, Ezra was Director of Investment Management and Investment Leader Asia at Newton Investment Management. Ezra holds B.A. and M.A. degrees from Nankai University in China, and was a research student at Cambridge University. NEXT ARTICLE INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. PAST PERFORMANCE IS NOT AN INDICATOR FOR FUTURE RESULTS.

10 Q&A WITH ASSET ALLOCATION DIRECTOR GAVIN STEWART WE SPOKE WITH GAVIN TO LEARN MORE ABOUT THE TEAM S INVESTMENT PHILOSOPHY AND PROCESS. AT ITS HEART, ASSET ALLOCATION IS THE PRACTICE OF SELECTING AND APPLYING A COMBINATION OF INVESTMENT ASSET CLASSES, SUCH AS EQUITIES, FIXED INCOME OR COMMODITIES, TO A PARTICULAR PORTFOLIO. THE AIM IS TO PRODUCE THE STRONGEST POSSIBLE RETURN FOR THE LEVEL OF RISK THAT S APPROPRIATE FOR THAT PORTFOLIO S INVESTORS. Scottish Widows asset allocation decisions are made by its dedicated team of five investment professionals. This team was formed in 2015, with its individual members selected for their specific knowledge and skillset, bringing a depth of experience in such areas as pensions, equities, fixed income, economics and alternative investments. The team is managed by Asset Allocation Director Gavin Stewart. What s the Asset Allocation philosophy at Scottish Widows? Our philosophy drives the asset allocation approach we follow and for that reason it s fundamental to the whole investment process. At the simplest level, we believe that long-term returns in multi-asset portfolios, including those in our lifestyling propositions, are driven primarily by asset allocation decisions. We use multi-asset funds because the diversification provided by a portfolio invested across a number of asset classes increases the probability of getting the best possible results for our customers. Another focus we have is a belief in passive equity investments. In our view, active stock-picking funds do not tend to give a sufficient return for the level of risk undertaken when they are used as components of multi-asset portfolios. Therefore, where we have an equity component in a portfolio, we believe that over the long term the overall risk-reward balance is improved by focussing these investment exposures in passive equity funds. However, some of our portfolios have exposure to active fund management in certain other asset classes, including fixed income, if we believe that value will be added. Overall, the team makes the strategic and policy decisions for our investment range as we look to secure the best results for our customers. As part of this, the team chooses the management style, fund type, asset classes and mix that they believe are best suited to the risk profile of each portfolio. They choose the most appropriate asset-class combinations by reviewing expected returns of asset classes, based on models of historic long-term performance, and the correlations of these asset classes by correlation, I mean how these assets are likely to interact with each other. The team uses data and analysis from specialist companies, such as Moody s, to help with these decisions, while the day-to-day management of the funds we select is outsourced to fund-management companies. As we all work together at our divisional head office, the team s analysis and discussion happens on a daily basis. We also have a more structured dialogue on market developments and a run-through of team members views on a fortnightly basis.

11 The Scottish Widows process operates primarily on two levels longand medium-term allocation. How do these processes work in practice? Following the launch of a portfolio range, the long-term strategic exposures are periodically reviewed by the Asset Allocation team, because we want to re-examine whether there are opportunities to adjust the portfolios to improve potential returns over a 5- to 10-year timeframe, or even longer, as investment markets, valuations and other factors evolve. We tend to undertake these reviews every one to two years. Our long-term return assumptions for each of the different asset classes are the crux of this analysis, as we stress-test our portfolios under different market scenarios. And what are the steps involved in medium-term allocation? While the long-term strategic allocation is the main determinant of the performance of our multi-asset funds, we also believe that there may well be significant medium-term opportunities to create value. We continuously consider adjustments to a portfolio s investment weighting based on our view of the relative valuations and the performance prospects of individual asset classes over a 1.5 to 5-year timeframe. Overall, we are working to answer questions such as: is the asset class significantly undervalued compared with other classes or its own history? And does this make it an appealing prospect for the medium term? It s not a case of us looking to exploit small bumps or anomalies within markets; the opportunity has to be substantial in order for us to analyse and then effect a change. I must note that we look to ensure the funds keep their risk profiles following these reviews and that we aim to make only modest adjustments where possible. This is because the costs associated with implementing allocation adjustments can be significant. If the long-term review leads to a proposal for a shift in asset allocation, then potential changes will be presented to our Unit-Linked Investment Management Committee or ULIM for short. ULIM supervises the governance of the insurance business s unit-linked funds, and provides oversight and signoff for the fund changes if the committee concurs with the Asset Allocation team s rationale, assumptions and conclusions for each recommendation. LONG-TERM STRATEGIC ASSET ALLOCATION (5-10 YEARS OR LONGER) MEDIUM-TERM ASSET ALLOCATION (18 MONTHS 5 YEARS) ASSET ALLOCATION TEAM RECOMMENDATION Recommend long-term strategic asset allocation using input from Moody s Analytics Recommend medium-term asset allocation based on analysis of the relative value of asset classes COMMITTEE APPROVAL Approval by Unit Linked Investment Management Committee (ULIM) Approval by Insurance Investment Strategy Committee (IISC) Long-term strategic asset allocation Medium-term house view asset allocation PORTFOLIO BENCHMARK Q&A INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS.

12 When a potentially viable investment idea arises, how does it progress further? The Scottish Widows Premier Pension Portfolio Funds have a third level of allocation. What does this entail? Proposals for allocation changes are comprehensively analysed by the team before being taken further. Part of this review will of course encompass consideration of the risk and return profiles of the targeted funds. The next step is authorisation. As with the long-term allocation proposals, the medium-term adjustments require approval. Decisions are presented to the Insurance & Wealth Investment Strategy Committee (IWISC) for a decision. The committee is comprised of senior members of the Insurance & Wealth Division. Another interesting facet of this authorisation process is that, in certain cases, approval can give flexibility for future adjustments within strict pre-defined parameters but without the requirement for further reference to the committee. IMPLEMENT ANALYSE MEDIUM TERM ASSET ALLOCATION DISCUSS In addition to the process outlined above, the Premier Pension Portfolios look to capture tactical, short-term opportunities in investment markets. Rather than undertaking short-term moves directly, the Premier Pension Portfolios invest in a tactical asset-allocation fund that s run by one of our third-party asset-management partners. Momentum and sentiment indicators are crucial to the fund s tactical approach, and it operates within well-defined parameters that are fixed by Scottish Widows. Performance is monitored by ULIM and IWISC. And by using a third-party manager for tactical allocation, we limit transaction costs and minimise any operational cash holdings within a fund as this could be a hindrance to portfolio returns. If approval is forthcoming, the Fund Mandate team then instruct our underlying fund managers to make the adjustments required and monitor the subsequent delivery of the change. APPROVE Approved medium-term allocation ideas become an element of our house view. Q&A INVESTMENT MARKETS AND CONDITIONS CAN CHANGE RAPIDLY AND, AS SUCH, THE VIEWS EXPRESSED IN THIS UPDATE SHOULD NOT BE TAKEN AS STATEMENTS OF FACT NOR BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. FORECASTS ARE OPINIONS ONLY, CANNOT BE GUARANTEED AND SHOULD NOT BE RELIED ON WHEN MAKING INVESTMENT DECISIONS. Scottish Widows Limited. Registered in England and Wales No Registered office in the United Kingdom at 25 Gresham Street, London EC2V 7HN. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number /18