INVESTMENT UPDATE. 6th January 2015 PERFORMANCE UPDATE

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1 INVESTMENT UPDATE 6th January 2015 PERFORMANCE UPDATE ASSET CLASS REVIEW RUNNING OUT OF CHOCOLATE WHAT RISK ARE YOU TAKING WITH YOUR MONEY? FINAL COMMENT PERFORMANCE UPDATE The portfolios fell in value by up to 0.55%, except for the Foundation one which grew by 0.08%. This was against the backdrop of the FTSE100 falling 2.26%. The Dynamic and Adventurous portfolios were our best performing portfolios in 2014, growing by 7.5% and 5.9% respectively. By comparison the FTSE100 grew by 0.74%. Out of 2037 individual funds that we monitor the performance on, the Dynamic Portfolio included the best and fourth best performing ones in 2014 (the Jupiter India and AXA Framlington Biotech Funds). Volatility has increased with uncertainty over the UK election, the calling of the early election in Greece and the dramatic fall in the oil price. Over the month the portfolios performed as follows against the FTSE 100:

2 PERFORMANCE UPDATE CONTINUED Adventurous Portfolio: Brief Commentary The Santa rally that we had been expecting, failed to turn up this year and the portfolio fell by 0.23% in December. However, at one stage it had fallen over 4% only to recover in the second half of the month. There is now a history of V shaped declines and subsequent rallies in global stock markets. This bodes well for future returns as it shows that there are a huge number of buyers stepping in every time markets fall saw the portfolio return 5.95%, which compares favourably to the FTSE100 which grew by 0.74%. The portfolio continues to benefit from being overweight in North America with the JP Morgan US Equity fund returning 1.92%. The Fundsmith Equity fund, in which the Adventurous Portfolio invests 7.5% in, has a bias to US Equities and is one of the top performing global equity funds. It returned a staggering 22% in The Adventurous Portfolio has a 5% weighting in Property and the two property funds that we are invested in are continuing to provide consistent positive returns in the region of 1% per month. They will provide some support if we see a future sell off in equity markets. The oil price continued to fall and is now down 50% over the last six months. Whilst this is good for the global economy in general, the sudden and continued collapse has begun to destabilise industries and countries, most notably Russia. 12% of the portfolio is invested in Emerging markets but none of this is invested in Russia. The biggest concern that we have with our emerging markets investment is the strength of the US Dollar. History shows that a strengthening US Dollar can lead to sell offs in emerging markets. However, most of our exposure is in India and China which are on strong upward trends and we are happy to keep invested in them. The looming Greek election, has heightened the volatility in stock markets (especially in Europe). European stock markets are cheap but are not displaying the same strength as North American ones. Therefore there is less money invested in Europe compared to the US Whilst there are many potential problems looming, such as the Greek and UK elections, there are many markets currently on strong upward trends. We will continue to attempt to invest more of your wealth in these markets. Performance Data

3 Balanced Portfolio: Brief Commentary The Santa rally that we had been expecting, failed to turn up this year and the portfolio fell by 0.30% in December. However, at one stage it had fallen nearly 4% only to recover in the second half of the month. There is now a history of V shaped declines and subsequent rallies in global stock markets. This bodes well for future returns as it shows that there are a huge number of buyers stepping in every time markets fall saw the portfolio return 3.65%, which compares favourably to the FTSE100 which grew by 0.74%. The portfolio continues to benefit from being overweight in North America with the JP Morgan US Equity fund returning 1.92%. Currently 19% of the portfolio is invested in North American equities and whilst we have seen the UK stock market trade sideways for a long period of time, US Equities have continued to move up. In addition over the last six months sterling has weakened against the Dollar, further enhancing returns. The Balanced Portfolio has a 10% weighting in Property and the three property funds are continuing to provide consistent positive returns in the region of 1% per month. They will provide some support if we see a future sell off in equity markets. The oil price continued to fall and is now down 50% over the last six months. Whilst this is good for the global economy in general, the sudden and continued collapse has begun to destabilise industries and countries, most notably Russia. This, together with the looming Greek election, has heightened the volatility in stock markets. Whilst there are many potential problems looming, such as the Greek and UK elections, there are many markets currently on strong upward trends. We will continue to attempt to invest more of your wealth in these markets. Performance Data

4 Cautious Portfolio: Brief Commentary The Santa rally that we had been expecting, failed to turn up this year and the portfolio fell by 0.35% in December. However, at one stage it had fallen nearly 3% only to recover in the second half of the month. There is now a history of V shaped declines and subsequent rallies in global stock markets. This bodes well for future returns as it shows that there are a huge number of buyers stepping in every time markets fall saw the portfolio return 2.76%, which compares favourably to the FTSE100 which grew by 0.74%. The portfolio continues to benefit from being overweight in North America with the JP Morgan US Equity fund returning 1.92%. The Balanced Portfolio has a 15% weighting in Property and the three property funds are continuing to provide consistent positive returns in the region of 1% per month. They will provide some support if we see a future sell off in equity markets. On a disappointing note, all of the Absolute Return funds fell for the second month in a row and detracted from the performance. We are monitoring the performance of these funds closely and may recommend changes to the portfolio shortly. We have invested in Absolute Return funds rather than conventional bond funds as well feel that bond funds do not represent good value. However, bond funds generally are performing extremely well and we might recommend a small investment in a couple of them shortly. Performance Data

5 Dynamic Equity Portfolio: Brief Commentary The Santa rally that we had been expecting, failed to turn up this year and the portfolio fell by 0.55% in December. However, at one stage it had fallen nearly 5% only to recover in the second half of the month. There is now a history of V shaped declines and subsequent rallies in global stock markets. This bodes well for future returns as it shows that there are a huge number of buyers stepping in every time markets fall saw the portfolio return 7.50%, which compares favourably to the FTSE100 which grew by 0.74%. The portfolio continues to benefit from being overweight in North America with the JP Morgan US Equity fund returning 1.92%. Nearly a quarter of the portfolio is invested in US Equities and this is one of the reasons why the Dynamic portfolio has grown so well since launch. The best performing fund for the month was the AXA Framlington Biotech fund which grew by 2.48% and finished an incredible 45% up over the year. We featured this fund in last month s investment update and there is an allocation of 5% to the fund. Out of 2037 funds that we monitor the performance on, this was the fourth best performing one in The best performing fund in the whole of the UK was the Jupiter India fund, and you have a 2.5% investment in it. To pick two out of the top four performing funds in 2014 is something we are quite proud of. The oil price continued to fall and is now down 50% over the last six months. Whilst this is good for the global economy in general, the sudden and continued collapse has begun to destabilise industries and countries, most notably Russia. This, together with the looming Greek election, has heightened the volatility in stock markets. We feel that the biggest gainers from a falling oil price will be India and Japan (both significant net importers of energy) as well as some of the world s biggest companies which will see a reduction in costs due to cheaper energy costs. We may recommend increasing exposure to some of the world s biggest companies at the expense of some of the momentum funds (generally higher risk ones) that have been underperforming recently. Performance Data

6 Foundation Portfolio: Brief Commentary December saw a small rise in the portfolio of just 0.08%. However, it was down at one stage by 1.5% and managed to rally back in the second half of the month saw the portfolio return 5.64%, which compares favourably to the FTSE100 which grew by 0.74%. We are extremely pleased with how this portfolio has performed since we launched it. The portfolio is essentially a lower risk diversified portfolio that can invest a maximum of 30% in equities. The balance is invested in Bonds, Absolute Return funds and property. The concept behind it is that during a period of difficult investment conditions, there is hopefully always one asset class going up so if we see a fall in one then some of the losses could be offset by another. Whilst Equities and Absolute return funds have had a quiet year, Bonds and Property have performed strongly. The portfolio continues to benefit from being overweight in North America with the JP Morgan US Equity fund returning 1.92%. The two property funds are continuing to provide consistent positive returns in the region of 1% per annum. In addition the M&G Index Linked fund grew by 1.6% and is up 18% over the year. Whilst we are expecting stock markets to advance in 2015, there is probably going to be a lot more volatility due to the commencement of interest rate rises in the UK and US. This could also affect our bond investments. We are therefore monitoring the performance of the portfolio very closely and will make recommendations to change it if we are concerned that there is a higher chance of suffering losses from any of the individual constituents. 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 - Volatile times ahead? December has been dominated by the discussions over the price of oil, which has fallen every month since the end of June, when it was at $115 a barrel; that is a decline of nearly 50% and it shows little sign, thus far, of slowing down. Relative to the 75% fall in 2008, we could easily see a price somewhere in the 40 s. The big issue is whether this is good news or bad for the global economy. As we are witnessing, almost daily, prices at the pumps for fuel are leaving us with more in our wallets for other things. This therefore stimulates those economies that import oil - mostly the developed ones - and will in turn lead to higher economic growth. However, the fall in the oil price has been down to a ramping up of supply, mainly fuelled by US companies borrowing cheaply and investing in new sources of oil production. These companies will be able to pay back their debt as long as oil stays above a certain price. There is therefore a risk that some debts will be defaulted on if the oil price stays this low or falls even further. This could upset the American economy considerably. We are therefore in a glass half full or half empty investment conundrum. US Verdict: houses the World s best technology companies The US is home to some of the leading innovators in technology such as Google, Microsoft, Amazon and Apple. In addition it is home to some of the best technological companies in the fields of Robotics, Biotech and artificial intelligence. After the technology crash between , the technology laden Nasdaq index is nearly back up to its all-time high: The US is currently are most preferred investment region partly due to the fact that it is a global leader in technology.

8 UK Verdict: One of the worst performing stock markets Whilst the FTSE100 only gained 0.74% in 2014, the FTSE Small Cap (this is a better indication of how our economy is doing as it represents more companies that rely solely on the UK economy) fared little better: The poor stock market performance in the UK is despite strong economic growth (GDP is expected to be 2.6% in 2014 and unemployment has declined for 25 months in a row). What is hurting our stock market performance is the uncertainty of the next election as it may fail to produce a clear winner. In addition a referendum on the EU seems likely, causing overseas investors to remain wary of investing in the UK. Europe Verdict: Greece collapses again Over the last nine months the Greek stock market has nearly halved in sterling terms: The main reason for this is the fact that an early election has been called which might put in power the left wing party. They would put Greece s status in the euro back into question and if Greece does actually leave then the contagion from this could hurt other European economies and stock markets. We therefore remain wary of investing too much in European equities.

9 Japan Verdict: A difficult year but much promise ahead In sterling terms the Japanese stock market (Nikkei 225) fell by 0.54% in This was after a strong gain of 26% in However, our preferred fund for investing in Japan made a gain of 5.38% by comparison: Whilst Japan has done very little over the last year, we believe that it is in a period of consolidation after the strong gains of 2013 and will break higher in You can see that since May there has been a steady increase. Emerging Markets Verdict: India v Russia Investing in Emerging markets is fraught with difficulties. Money can flow quickly into and out of countries and political uncertainty can cause markets to be extremely volatile saw the rise of the Indian and the fall of the Russian stock markets to extreme levels:

10 By following a trend investment principle we can hopefully avoid big declines in individual markets and invest some wealth in those markets that are going up the most. Bonds Verdict: Great value if the economy sinks again but poor value if it continues to grow If you gave the UK Government your money for the next 30 years, you will receive an income of just 2.5% per annum. Whilst this is higher than most bank accounts, we expect interest rates over the next 30 years to normalise and move back up to the 5% level. If this does occur then the value of the 30 year UK Government bonds will fall significantly. It is for this simple reason that we do not particularly like conventional UK Government bonds. However, they have surprised most investors and have been performing well over the last year. Commodities Verdict: Oil price collapses The chart below shows the oil price over the last ten years: This collapse is very similar to the one in However, the circumstances behind it are very different as 2008 was caused by a global economic recession. Whilst the sudden collapse does cause damage to some countries and industries, we believe that in the medium term this will be very positive for global stock markets as consumers will have more money to spend on goods and companies energy costs will fall. Currencies Verdict: A surging dollar There has been a clear change in direction of the US Dollar as over the last year it has surged higher, breaking the previous lower high. If we look at the twenty year chart, it is evident that the dollar could surge much higher and this is one of our reasons as to why we like US equities so much.

11 RUNNING OUT OF CHOCOLATE Well that got your attention! The world could be running out of chocolate, leading confectioners have warned, as soaring demand continues to outpace the lagging rate of production, pushing up the price of chocolate. The chart below shows how over the last three years the cocoa bean has risen in price from under 1400 to nearly 2000 per tonne (over a 40% increase): As this future year unfolds, the gap between how much Cocoa the world wants to consume and how much it can produce will swell to 1 million metric tons, according to Mars and Barry Callebaut, the world s largest chocolate maker. By 2030, the predicted shortfall will grow to 2 million tons. And so on. Why is this happening? The obvious answer is that demand is increasing, with chocolate now entering more and more products. The picture left says it all. (If you have had any, please let us know what they taste like!) Then there is supply, which due to disease, drought, rapacious new markets and the displacement of cocoa by more-productive crops such as corn and rubber, is not able to keep up with demand. There is a great saying in the commodity market world that the cure for high prices is high prices. This means that as a crop increases in price more farmers produce it which in turn increases supply and eventually the commodity falls in price. The cycle then starts again as more farmers substitute that crop for another and supply falls and prices rise again.

12 However, the supply of cocoa is proving to be slightly different as a disease called Frosty Pod Rot has ruined about a third of the world s cocoa crop, while a drought in Ivory Coast and Ghana -- which account for 70pc of global cocoa production -- has hurt farming in West Africa. Relatedly, cocoa farmers have started looking for more lucrative means of income, such as corn and rubber production. And just to finish on some really depressing news for the chocoholics out there, London chocolatier Marc Demarquette says that the 1 chocolate bar will be a thing of the past and John Mason of the Ghana-based Nature Conservation Research Council said that in 20 years, chocolate will be like caviar. It will become so rare and expensive that the average Joe just won t be able to afford it. 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 *

13 By comparison, the UK Stock Market FTSE 100 has a volatility of 9.22 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 The Santa Rally failed to materialise this year but 2014 saw most asset classes rise and all of our portfolios make a profit. We appear to be in a scenario in which there are some very strong positive trends such as India and the US stock markets but also some very negative trends such as oil and Russian equities. Whilst we believe that 2015 will see some good returns, partly due to the falling oil price, we also feel that there will be more volatility than 2014 due to the uncertainty surrounding the UK election, the probable increase in UK and US interest rates and the possible removal of Greece from the Euro. The best way to keep your money safe if markets fall significantly and to attempt to generate higher returns if markets continue to rise is to analyse trends and momentum. 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.