INVESTMENT UPDATE. 7th October 2016 PERFORMANCE UPDATE

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1 INVESTMENT UPDATE 7th October 2016 PERFORMANCE UPDATE ASSET CLASS REVIEW PREDICTING THE FUTURE WHAT RISK ARE YOU TAKING WITH YOUR MONEY? FINAL COMMENT PERFORMANCE UPDATE September again proved to be a good month for our portfolios. They all advanced by between 0.36% and 0.70% (see below). This is on top of June, July and August s strong gains. Stock markets moved higher despite the uncertainty surrounding Deutsche Bank and the rumour that they will need to be bailed out. UK Property funds appear to have turned the corner and are re-opening. UK bonds and defensive equities fell over the month and this proved to be a headwind for the portfolios. The monthly performance of the portfolios is shown below:

2 Cautious, Balanced and Adventurous Portfolios: September was another month of low growth and low inflation. US GDP growth is now running at 1.2% with inflation at 1.1%. The comparable numbers for the euro area are 1.6% and 0.2%; for Japan 0.8% and -0.5%; for China 6.7% and 1.3% and for the UK a robust post-brexit 2.2% and 0.6%. A notable event during the month was concern surrounding Deutsche Bank in the wake of a demand by US regulators that it pays $14 billion to settle claims related to the sale of mortgage backed securities. In addition, it has been reported that 10 hedge funds have taken significant money out of the bank and this has caused investors to fear that the bank will be forced to request a bailout. The share price has halved this year. Despite this, global stock markets have remained firm and the trend following component of the portfolios has been fully invested, thus harvesting the gains. The summer months tend to produce the lowest stock market returns, but this summer has been the exception to the rule. We now enter a period in which stock markets tend to outperform and October has certainly started this way with the FTSE100 moving above the 7000 barrier for the first time since We do hold some cash in the portfolios and are considering where to invest it. The infrastructure fund that we have earmarked for the lower risk portfolios is now open and we may initiate a position this month. For the Adventurous risk portfolio, we are considering an investment in a gold mining fund but with its recent poor performance, that is still under review. We are therefore reassessing if the long term upward trend is still intact before investing. In addition, we may add an emerging market fund to the Adventurous portfolio to increase diversification and take advantage of the recent strong performance in this asset class. Dynamic Equity Portfolio: Despite the uncertainty surrounding one of the world s biggest banks, stock markets continued to advance. This helped the portfolio grow by 0.62% this month. Higher risk equity funds are beginning to outperform with the L&G Global Technology and Jupiter India funds growing by 2.99% and 2.33% respectively. The portfolio will hold some funds that we classify as momentum funds. These are funds that have strong recent performance and history has proven that momentum tends to outperform when we have strong advances in equities. We are beginning to see this occur with emerging markets, smaller companies and technology all posting strong returns. When building the portfolio, we also invest in funds that buy quality companies. These companies demonstrate strong cash flow, a history of increasing dividends and generally produce more stable returns. From time to time, such as now, they fall out of favour as our defensive UK equity funds all fell over the month proving to be a headwind to the portfolio. We are not unduly concerned by this but we will continue to assess the holding in the Invesco Perpetual High Income Fund as it has recently underperformed. This may be switched into an alternative momentum fund. Foundation Portfolio: The portfolio grew by 0.36% this month. The defensive UK equity funds all fell but this was more than compensated for by the holdings in the global equity fund (Fundsmith) and the two Trend Following funds. Strangely the best performing fund and worst performing fund were both UK Government bonds with the inflation linked bond fund growing by 2.06% and the normal gilt fund falling 1.49%. Property Funds There are some property funds held outside of the above portfolios which was as a result of the funds being suspended for trading following Brexit. Both Standard Life and Henderson have announced that they will reopen their property funds this month due to the fact that property prices have stabilised. We will thus be making a decision on whether to reduce our holdings in both funds shortly.

3 ASSET CLASS REVIEW This section will give you an insight into our current thinking and we have highlighted the current charts that look interesting. This month we have focused on what is happening in Europe. European Banks - the biggest risk to the global economy The big issue now is the banking system. European banks never really took enough measures after the financial crisis to improve capital adequacy and that is coming back to haunt them. Our image of the German economy and in particular Garman banks is they are completely rock solid, so it takes a lot to persuade us they might be in trouble. Yet it has become increasingly hard to ignore that something very nasty is developing at Deutsche Bank, which was once seen as Europe s strongest financial institution. Its shares have been in free-fall, with the share price falling by over 90% since May Rarely do shares see the light of day after a decline of such magnitude. The trigger for the latest bout of weakness is supposedly the $14bn fine by the US Department of Justice for miss-selling mortgage backed securities, almost equal to the current market capitalisation of the whole company, but the real reasons are more deep rooted than that. Whether the ECB, Chancellor Merkel or the company itself can come up with a solution remains the current great imponderable. By contrast American banks are performing much better and the charts below show how the share price of how Citigroup (one of Americas largest banks) have performed over the last 5 years compared to Deutsche Bank: Banks are a vital part of the global economy as they provide liquidity. The collapse in the share price of Deutsche Bank is a worrying sign that the European economy is struggling.

4 Italian stock market in trouble The charts below compare the performance of the Italian stock market with the S&P 500 (main US stock market): As you can see the S&P 500 is close to a new all-time high, whereas the Italian stock market has been declining over the last few years.

5 The Euro is still strong against Sterling though Whilst the above looks extremely worrying, an investment in the European stock market would have returned nothing over the last year for Europeans but has returned nearly 18% in Sterling. This is because the Euro has strengthened considerably over the last year against Sterling as the chart below shows: These positive returns (albeit from currency) is the main reason why we still have some exposure to European stock markets. However, exposure is limited due to the fact that other stock markets are performing better and have momentum behind them. Europe struggles but the UK is doing well Whilst Europe is struggling the UK has initially shrugged off the fear of leaving Europe with the FTSE 100 moving above the 7000 level and close to a new all-time high: A lot of the gain has come from the FTSE 100 companies benefitting from a weak Sterling but as we mentioned last month, the UK economy appears to be doing much better than what we feared might happen after the Referendum vote. Sterling has become a strong indicator for investor opinion and as we continue to see Sterling fall, we continue to see investors become more nervous about the UK economy, and the impending divorce with Europe. On the flip side, the weakening Sterling is certainly providing a tailwind for UK multinationals, which dervive a large portion of their revenues from business activity abroad. These favourable conditions continue to support stock market growth within the FTSE 100. Although we continue to hold an overweight position on UK equity, we continue to review our portfolio positons given current market sentiment.

6 Leicester City will never win the Premier League PREDICTING THE FUTURE The two sides drew 2-2 this evening, giving a remarkable victory to the Foxes after they started out as 5,000-1 outsiders for the Premiership title. Many experts predicted Leicester would be relegated this year. The Independent, 2 May 2016 Remain will definitely win the EU Referendum UKIP leader Nigel Farage has almost conceded defeat in the EU Referendum seconds after polls closed. You Gov's latest poll shows a win for Remain, while already the Pound has surged as the likelihood of a Remain win grows. Daily Star, 24 June 2016 Conservatives will not gain a majority in the General Election With the latest polls showing Labour and the Conservatives still neck and neck, and with talk of coalitions, minority governments and deals in darkened rooms doing the rounds, no one is sure what will happen after the polls close at 10pm tomorrow. -The Independent, 6 May 2015 Experts have a terrible track record of predicting the future, yet they continue to try. Predicting the future is never more prevalent than in the fund management industry, but research has time and again proven that the results from so called experts are poor. Professors Thomas and Clare from the Cass Business School (who both sit on WM Capitals investment committee) found that a randomly selected portfolio of stocks, picked as if by monkeys, posted better returns than a tracker fund. This paper became known as Monkeys beat Fund Managers. Our investment philosophy does not try to predict the future, but instead uses a series of signals to decide as to whether an investment is made. The philosophy therefore replaces as much as possible of the subjective element of making investment decisions, with an objective element, in which tried and tested formulas are used. The biggest objective influence is Trend Following. Quite simply we look at whether a stock market is above or below the trend, and increase or decrease exposure to it via our Trend Following funds. An example of this in action recently is the position in the FTSE 100 prior to Brexit. If we had correctly predicted Brexit, we would almost certainly have predicted that the stock markets would fall. However, the trend following signals told us that we should be invested on the 1 st June (pre-brexit), as well as 1 st July (post-brexit). In the chart below, the trend line is the red line and the FTSE 100 is the black line. You invest when the black line is above the red line. In addition, you only look at the signal once a month, which ensures that short term falls are not enacted upon i.e. the two sharp falls during June. By adopting this strategy, you have benefited from the post-brexit move higher.

7 WHAT RISK ARE YOU TAKING WITH YOUR MONEY? One of the most important factors that affect the returns of 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. In essence, we protect your wealth during bad investment periods and keep you fully invested to ensure you benefit from 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 has been 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 which 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 Cautious Balanced Balanced Adventurous Adventurous Dynamic Equity * Dynamic Equity * Foundation * Foundation * By comparison, the UK Stock Market FTSE 100 has a volatility of 7.90 over 1 year and since launch and the Emerging Market Equities Benchmark has a volatility of over 1 year and since launch. *Please note that the Foundation and Dynamic Equity portfolios launch date was different to the Cautious, Balanced and Adventurous.

8 FINAL COMMENT Global stock markets are continuing their progress despite all the uncertainties that we are faced with, including the demise of Deutsche Bank. Europe is clearly struggling but returns for UK investors invested in European stock markets have been strong due to the Euro appreciating significantly. Our trend following signals have therefore identified Europe as a region to invest in as returns for UK investors have been good, but it also limits the amount invested due to the fact that other regions are outperforming. We believe that our portfolios are well positioned to benefit from any further fiscal stimulus in the global economy. We appear to be in the perfect scenario for equities, in which economic data is progressing but not too fast to cause a jump in interest rates. Broom Consultants Limited Sterling Court, 4 Gresham Road, Brentwood, Essex. CM14 4HN Tel No Authorised & Regulated by the Financial Conduct Authority 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. As from the middle of 2016, the portfolios have been run on a discretionary basis by WM Capital Management. All figures and charts are provided by Financial Express.