INVESTMENT UPDATE. 8th September 2014

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1 INVESTMENT UPDATE 8th September 2014 PERFORMANCE UPDATE ASSET CLASS REVIEW MOMENTUM WHAT RISK ARE YOU TAKING WITH YOUR MONEY? FINAL COMMENT PERFORMANCE UPDATE Stock markets were all up over the month, with the exception of Japan. The fastest growing stock markets (momentum) are Brazil, India and the USA. On top of healthy gains in stock markets, bonds also made some impressive gains with inflation-linked UK government bonds rising over 5%. This appears to go against the general reduction in commodity prices that we saw over the month. We are very pleased that the portfolios grew over the month by between 1.17% and 2.24%: The percentage held in equities remained the same although exposure to the UK and Europe was reduced and exposure to the US and emerging markets increased over the month within some of the portfolios. The equity exposure is as follows: Foundation 29% Cautious 51% Balanced 69% Adventurous 89% Dynamic Equity 98%

2 PERFORMANCE UPDATE CONTINUED Adventurous Portfolio: Brief Commentary Over the last month the portfolio produced a positive return of 1.94%, outperforming against the benchmark. Equity markets were all up over the month, with the exception of Japan. Stock markets seemed to digest the increasing role of the Russian military in the Ukraine as good news, which is the opposite of what happened when the crisis first emerged. When the conflict first escalated, stock markets (especially European ones) fell. This was due to the fact that trade sanctions were imposed with Russia which have the result of reducing global growth and increase the possibly that some European economies will go back into recession. However, the European Central Bank reacted last week by lowering interest rates and by increasing the amount of money in circulation (more money in circulation and low interest rates are good for stock markets). We therefore saw some strong returns in August (mainly in anticipation of this announcement). North America and Emerging Markets are the regions with the best momentum and exposure has been increased to both regions at the expense of the UK and Europe. The two best performing funds were the Jupiter India (up 6.45%) and the JP Morgan US Equity Income (up 3.15%). The only fund to fall during the month was the Neptune Japan Opportunities Fund which fell 0.84% (it is still up over 20% over the year). The Jupiter India fund was only added in early July and has grown by over 10% since. This is a clear success story of how picking investments that are showing superior momentum can reward investors. The investment in the two UK commercial property funds continues to do well, with gains over the month of 1.14% and 0.96%. Overall we are positive that the upward trend in global equity markets will continue to enhance our wealth during the remainder of Performance Data

3 Balanced Portfolio: Brief Commentary Over the last month the portfolio produced a positive return of 1.34%, outperforming against the benchmark. Equity markets were all up over the month, with the exception of Japan. Whilst we saw strong growth in equities, we also continued to see funds that invest in larger dividend paying companies, outperform those that invest more in smaller companies. This can be seen by looking at the relative performance and dividend yield of the Invesco Perpetual High Income fund (High Dividend paying UK companies), the FTSE100 (big companies)and the Jupiter UK Growth Fund (smaller companies). Fund Yield 6 month Performance Invesco Perpetual High Income 3.23% 3.57% FTSE % 1.45% Jupiter UK Growth 0.50% -2.07% Exposure to bigger companies has already been increased in the portfolio and we may further increase it in due course. The balanced portfolio is constructed with a blend of funds which individually could be classified as high or low risk but together produce a suitable portfolio for a balanced risk investor. By allowing access to higher risk funds in the portfolio, we have benefitted by the small 2.5% investment in the Invesco Perpetual Hong Kong & China fund which has grown by 11.15% in the last 6 months. This is the best performing fund in the portfolio over 6 months and second best over the last year. Performance Data

4 Cautious Portfolio: Brief Commentary Over the last month the portfolio produced a positive return of 1.17%, performing roughly in line with the benchmark. Equity markets were all up over the month, with the exception of Japan. The two best performing funds were Fundsmith Equity (up 2.84%) and JP Morgan US Equity Income (up 3.15%). They both benefitted from the current outperformance and momentum in US equities. The only fund to fall during the month was Absolute Insight which fell 0.13%. The investment in the three UK commercial property funds continues to do well with gains over the month of 1.14%, 0.96% and 0.68%. Property funds are currently provided good stable returns for the portfolio but we do have to monitor them carefully due to the more illiquid nature of property and if we see them start to fall then we may have to recommend selling. Overall we are positive that the upward trend in global equity markets will continue to enhance our wealth during the remainder of Performance Data

5 Dynamic Equity Portfolio: Brief Commentary Over the last month the portfolio produced a positive return of 2.24%, outperforming against the benchmark. The portfolio has now been running for over a year and has significantly outperformed. North America and Emerging markets are the regions with the best momentum and the portfolio has good exposure to both regions, with 23% of the fund being invested in North America and 18% in emerging markets. The two best performing funds were Jupiter India (up 6.45%) and Axa Framlington Biotech (up 8.88%). However, exposure to Japan and Europe provided a headwind for the fund with the Neptune Japan Opportunities Fund the worst performer down 0.84% (it is still up over 20% over the year). The Axa Framlington Biotech fund deserves special mention as it has been included in the portfolio at outset and has been one of the best performing funds in the country (but also one of the most volatile), growing by 37% since we launched the dynamic portfolio in August We have 5% of the portfolio invested in it and therefore it has contributed 1.85% of the 12.07% return so far. Whilst the momentum is with us, we still want this fund included in the portfolio. Overall we are positive that the upward trend in global equity markets, together with having more of the portfolio in the regions/funds that are displaying strong momentum, will continue to enhance our wealth during the remainder of Performance Data

6 Foundation Portfolio: Brief Commentary Over the last month the portfolio produced a positive return of 1.24%, outperforming against the benchmark. Equity markets were all up over the month, with the exception of Japan. Each of the four main sectors that we invest in - bonds, equities, property and Absolute Return - produced good gains over the month. The best performing fund was the M&G Index Linked Bond fund which grew an impressive 4.99%. This was followed by the JP Morgan US Equity Income fund which rose 3.15%. It is unusual that the top two funds were a bond and equity fund but is as a result of the fact that the ECB has lowered interest rates and also increased the money supply in its economy. We are extremely pleased with how this portfolio is performing as it is providing returns significantly over cash but without taking excessive risks. Performance Data

7 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. Overview The Bad news is Good news theme that we have seen much of over the last few years has been the main talking point this month. The bad news is that Putin continues to threaten the Ukraine and, despite the ceasefire which has been announced, his objective of creating a bigger Russian Empire remains. The war in Ukraine has hurt European stock markets the most and we had seen them drop considerably due to the imposition of sanctions which has hurt the European economy. However, this bad news led to the European Central Bank (ECB) pumping more money into the European economies. This led to a surge in European stock markets and they are now back to nearly the level they were before the Ukrainian crisis took centre stage. The chart below shows the ECB s balance sheet (the higher it is, the more money they have pumped into the economy): As you can see it increased after the banking crisis in 2008 and then again in 2011/12. Some economists blame the current economic problems in Europe - low growth, possible deflation and high unemployment - to the fact that Europe has contracted its balance sheet over the last few years whereas by comparison America has increased theirs to help stimulate the economy. The ECB has now promised to increase from the current 2 trillion back up to around 2.7 trillion. This announcement led to a surge in European stock markets (see section on Europe) and helped other stock markets higher too. US Verdict: A new high and the upward trend remains consistent Last month we wrote: The one year chart of the US stock market is below and you can see that the upward trend remains intact with frequent pullbacks to the trend (red) line occurring. This new pullback is consistent with previous ones and the rhythm is therefore consistent making us believe that the market will break into new highs before the end of the year.

8 The chart below is now the updated one and you can see that it has already made a new high. UK Verdict: Back up to the top of the range-will we break to new highs this time? We are back to the peak which we saw in May 2013 and if we break above it this time then the market should surge higher, similar to what it did in January 2013 when it broke the ceiling at Europe Verdict: Europe has bounced back The blue line below represents the top 50 European companies and the green line represents the biggest US companies:

9 As you can see Europe was most affected by the Ukrainian crisis which is demonstrated by the blue line pulling back much more significantly than the green line. However, it also bounced back much more dramatically due to the announcement by the ECB that it will increase the money supply. Japan Verdict: still in its range (same as previous months) The Japanese stock market is still consolidating last year s strong gains and is trending sideways. We are still expecting the market to move higher but are waiting patiently for the breakout to occur. Emerging Markets Verdict: Strength is returning Each month we rank the 20 equity markets in terms of their performance over the last month - we refer that as momentum. This time last year Brazil, India and China were ranked bottom of the table. This month Brazil and India are top and China is climbing rapidly. Clearly there has been a change in momentum with emerging markets breaking through. However, not all emerging stock markets are doing well and if we had invested in Russia in April 2011 then we would have suffered a 36% loss:

10 Bonds Verdict: Inflation linked bonds soared in August We hold two inflation-linked bond funds in the foundation portfolio and last month the UK one especially soared higher: Commodities Verdict: Agricultural Commodities are falling Despite the surge in inflation-linked bonds (shown above), there does not appear to be any corresponding surge in commodities. Last month we showed how oil was stable and this month the chart below shows how the value of agricultural commodities is falling:

11 MOMENTUM One of the intelligent investment strategies that we employ is the use of momentum. Momentum simply means that you invest more money in those stocks/asset classes that have performed the best over a certain period of time. But does it work? Does it mean that we are investing more money in those asset classes that are more expensive i.e. gone up the most and less money in those asset classes that are cheap? There has been much research on momentum and some of the best has come from the Cass Business School in London. They back-tested various momentum investment strategies between 1993 and 2011 across nearly every asset class and identified the best and worst performing components of each asset class over the past 12 months. For example, they looked at developed stock markets by examining the performance of 24 different developed countries stock markets and invested money only in the top 25% of countries. This process was repeated over and over again. The results they found were extremely positive with the momentum process outperforming the simple buy and hold approach considerably (buy and hold is simply the normal investment approach where you just buy every stock market). The table below shows the outperformance: Annualised Return (%)-Buy and Hold Annualised Return (%)- Momentum Momentum outperformance % DEVELOPED EQUITIES EMERGING MARKET EQUITIES BONDS COMMODITIES PROPERTY % 20% 81% 235% 24%

12 Therefore if we take just the developed markets, a simple buy and hold investment return would have generated 6.09% whereas if you applied a momentum approach you would have increased this return to 10.66% which is a 75% increase. Many of the most successful and largest hedge funds apply variants of a momentum strategy. Whilst we have been using this strategy on the portfolios, we have started to increase its use. This can be seen by the increase in exposure to India recently, as well as the increase in exposure to Property earlier this year. The use of momentum has to be monitored as momentum does have a downside as it can mean that when markets do fall, sometimes the ones that have grown the fastest also fall the most at the onset of a downturn. This is not always the case but happens more times than not. Therefore we have to build the portfolios with a combination of intelligent investment solutions.

13 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 of our portfolios? As our investment philosophy follows a trend 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 we have experienced. This is because during bad investment periods our 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 Cautious Balanced Balanced Adventurous Adventurous Dynamic Equity * Dynamic Equity * Foundation * Foundation * By comparison, the UK Stock Market FTSE 100 has a volatility of 9.53 over 1 year and since launch and Emerging Market Equities 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.

14 FINAL COMMENT August proved to be a good month for the portfolios. This was mainly due to the fact that the ECB decided to lower interest rates and pump more money into the economy (or certainly the expectation of them doing this as the announcement was officially made in September). The upward trend in stock markets therefore remains and we must remain bullish, despite all the problems that the world seems to be facing. The momentum factor is also beginning to work for the portfolios and we have increased the portfolios exposure to momentum over the last few months. This has led to an increase in exposure to the USA and emerging markets (not Russia though). 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. All figures and charts are provided by Financial Express.