Investment Update Bulls winning? 1. Big picture 2. Markets 2017 - - PowerPoint PPT Presentation

Investment Update – Bulls winning? 1. Big picture 2. Markets 2017 - thus far 3. Portfolio returns 4. Business news Lothar Mentel CEO & Chief Investment Officer October 2017 For professional use only Source: Hedgeye 1

1. Big picture 2

Big picture (30 years since 1987) 2009 - 2017 stock markets – too good to be true? 2017 2016 ’08 -09 GFC & Eurozone Crisis ’00 -03 + recovery Dot-com Bubble+Iraq Crash ‘98 Russia Crisis Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing 3

Big picture (since depth of GFC - 2009) Investors have done very well over the past 8 years Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing 4

Big picture – Global economic growth rates The global economy on the other hand has been far more pedestrian Source: Goldman Sachs Economics Research, 12 Sep 2017

Big picture - Cyclically adjusted stock market PE ratios Just a QE bubble then?? No, but valuation multiples are extended relative to subdued confidence levels

Big picture – Investor discomfort So why the doom and gloom – ‘End of cycle’ predictions? 1. QE brought double digit returns forward, when confidence was still low 2. As confidence and growth returns, QE has to turn into QT 3. If QE was tailwind to PE multiples, then QT has to be headwind Last 1/3 of cycle this time just corporate earnings growth upside… 4. …or slow QT and less inflation leading to prolonged ‘Goldilocks’? 5. Stronger case for equities, not great for fixed interest bonds 7

2. Markets 2017 – thus far 8

2017 returns – Better than expected - again Source: Morningstar, 9 October 2017 Note: Past Performance is no guarantee for future returns. Index returns 9 do not take into account the cost of advice and the cost of investing

What I said at the spring Partner Forum 10

Populist’s attraction wanes, but UK scores ‘own goal’ 11 Source: Economist, 16 June 2017

Brexit strategy – fuzzy? Source: Economist, 8 September 2017 UK business unnerved; consumers still relaxed 12

But approach turning more pragmatic since election debacle? The Queen’s opening of parliament; Source: Metro, 22 June 2017 Perhaps the UK’s leading class not ready to lead the country into Brexit? 13

‘Trump Scare’ in retreat Source: FT, 18 Jul 2017 14

‘Worry baton’ has been passed back to geopolitics Source: Lauff.com 15

Military backlash probability has risen Source: Newsday.com 16

Mid Sep: To be prudent was a good place to be US equity neutral to close USD short Mid Feb 2017: June 2017 US underweight Mid Oct: 5% equity EZ overweight UK underweight June 2016: underweight Bond duration Asia overweight Sell down of UK lengthened back Bond duration Comm. Property to benchmark shortened for UK gilts And UK small cap for large cap Bond duration Apr 2016: underweight Rebalance back Feb 2016: to neutral Rebalance back to neutral End Aug 2016: Rebalance back to neutral Source: Morningstar, 5 Oct 2017 Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

Growth improves and global trade (!) Source: MRB, Sep 2017

‘ Nowcast ’ GDP indicators much improved over the summer Source: Goldman Sachs Economics Research, 12 Sep 2017 Normalising rather than falling off a cliff?

What has changed? Q2/3 developments 1. Political uncertainty has returned to the UK 2. Growth in China and US has been strong, not weak 3. UK slow down pronounced – lag of anticipated export boost to Eurozone 4. Central banks’ concerted ‘end of QE’ message has been received 5. Focus moved from earnings to central bank actions back to geopolitics Economic progress increasingly resilient but markets feeling vulnerable 20

Concern and reassurance: Safe haven asset demand Source x2: Tatton IM, Factset Falling bond yields over North Korea – bond investors still don’t buy into reflation trade 21

Pessimists’ view (not Tatton’s central scenario) Back to slow, stable growth, but markets bound to correct or collapse 1. European political landscape improved, Trump stalled, May on way out No further growth stimulus from China after 19 th People’s Congress 2. 3. Trump disappointment will slow US, EZ economies have peaked 4. UK’s consumers and business retreat and export boost never happens 5. Extended equity valuations = correction; QT + Global debt mountain = next GFC 6. … but North Korea nuclear threat still worse! Potentially end of post GFC cycle, but at least another mini-cycle 22

Optimists’ view (Closer to Tatton’s longer term perspective) Growth will continue in autumn, markets look beyond (geo-)politics 1. Politics don’t move markets any longer 2. China’s president Xi will hold up growth beyond party congress in autumn 3. US growth does not need Trump stimulus 4. UK economy propped up by resurgent Eurozone growth – with lag 5. QE unwind no different to rate rise - US$ weakens on rising inflation 6. Corporate earnings on steady growth trajectory Steady economic normalisation continues despite politics 23

Tatton’s central case: Neutral but with buying opportunities Growth resilient, but susceptibility to shock risk high 1. Steady economic momentum supports further earnings growth 2. Equity valuations higher than confidence suggests thus vulnerable to shocks 3. Slowdown on geopolitics should just prove a blip as long as China and US aligned 4. UK rates likely to rise 0.25% back to 0.5% in Nov - but then unlikely to rise further 5. QE worked by bringing asset returns forward = less returns potential left Resilient growth, QT, N. Korea, Trump (reforms), EZ recovery = downside and upside risks! 24

…or as commented on CNBC the other day: 25

Vanguard’s changed fixed interest return projections 26

Vanguard’s changed equity return projections 27

Central case Less concerns over global growth More concerns for UK and Chinese economies Q4/17 focus has shifted back to geopolitics Took £-Sterling gain to close US$ underweight position 28

3. Portfolio returns 29

Tatton Managed Balanced (Inception – 30/09/2017) 160 Tatton Managed Balanced 5050 IMA Mixed 2060 and IMA Mixed 4085 Morningstar Balanced 150 140 130 120 110 100 Investment Name Cumulative Return Annualized Return Tatton Managed Balanced 54.98% 9.67% 5050 IA Mixed 2060 and IMA Mixed 4085 41.74% 7.62% Morningstar Balanced 46.53% 8.38% Source: Morningstar, 30 September 2017; Note: Past Performance is no guarantee for future returns. Returns provided are Net for Fund Fees and Gross of Tatton IM Fees (Management and Trading)

Tatton Balanced 2017 year to 30 September Source: Morningstar, 5 October 2017; Note: Past Performance is no guarantee for future returns. Index returns do not take into account the cost of advice and the cost of investing

1-9/2017 Investment returns – Tatton Managed vs. Morningstar Tatton Managed (Overlay) Year-to-Date Since Launch 1 Jan 2013 3 yr Advisory Relative to Advisory Relative to Tatton Tatton Annualised Model model Model model Volatility 1.9% 2.5% -0.6% 32.3% 32.6% -0.3% 4.8% Defensive Cautious 3.6% 3.4% 0.2% 45.7% 41.5% 4.2% 5.5% Balanced 5.9% 4.9% 1.0% 55.0% 48.8% 6.2% 6.3% Active 8.2% 6.0% 2.2% 64.4% 59.1% 5.3% 7.6% 9.9% 7.0% 2.9% 70.1% 65.9% 4.2% 8.7% Aggressive Global Equity 12.2% 7.0% 5.2% - - - - Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

1-9/2017 Investment returns – Tatton Managed vs. IA peers Tatton Managed (Overlay) Year-to-Date Since Launch 1 Jan 2013 3 yr Relative to Relative to Tatton IA Sector Tatton IA Sector Annualised IA IA Volatility 1.9% 3.4% -1.5% 32.3% 26.6% 5.7% 4.8% Defensive Cautious 3.6% 4.8% -1.2% 45.7% 41.0% 4.7% 5.5% Balanced 5.9% 5.6% 0.3% 55.0% 42.0% 13.0% 6.3% 8.2% 6.5% 1.7% 64.4% 50.9% 13.5% 7.6% Active Aggressive 9.9% 7.2% 2.7% 70.1% 52.1% 18.0% 8.7% Global Equity 12.2% 7.2% 5.0% - - - - Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges

1-9/2017 Investment returns – Tatton Core vs. IA peers Tatton Core (Overlay) Year-to-Date Since Launch 1 Jan 2013 3 yr Relative to Relative to Tatton IA Sector Tatton IA Sector Annualised IA IA Volatility 2.3% 3.4% -1.1% 34.1% 26.6% 7.5% 4.5% Defensive Cautious 4.1% 4.8% -0.7% 45.8% 41.0% 4.8% 5.5% Balanced 6.1% 5.6% 0.5% 54.8% 42.0% 12.8% 6.4% 8.2% 6.5% 1.7% 65.3% 50.9% 14.4% 7.7% Active Aggressive 9.9% 7.2% 2.7% 71.0% 52.1% 18.9% 8.8% Global Equity 11.9% 7.2% 4.7% - - - - Source: Morningstar, 5 October 2017 Note: Past Performance is no guarantee for future returns. Model portfolio returns shown do not take into account the cost of advice and platform/DFM charges