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CHARITIES

CHARITY INSIGHT

AUTUMN 2017

DEVELOPING STRONG AND EFFECTIVE LEADERSHIPGuest feature: FW de Klerk 4 Effective leadership is essential to navigate change

What is microfinance? 6

Charity regulator's fundraising 8 guidelines to protect charities and boost public trust

Inspirational insights from 10 Sir Ciarán Devane

Economic and investment 11 strategy

EDITORS’ NOTE

About Charity Insight Charity Insight provides investment analysis from Davy Charities for discussion purposes only. It is not intended to constitute an offer or solicitation for the purchase or sale of any financial instruments, trading strategy, product or service and does not take into account the investment objectives, knowledge and experience or financial situation of any particular entity or person. You should obtain advice based on your own individual circumstances from your own tax, financial, legal and other advisers before making an investment decision, and only make such decisions on the basis of your own objectives, experience and resources. You may also contact a member of the Davy Charities team to discuss further any content of Charity Insight.

We are delighted to welcome you to the Autumn 2017 edition of Charity Insight.

This quarter’s edition focuses on effective leadership which was a core theme of South Africa’s former president, FW de Klerk’s recent talk in Dublin. Suzanne Keatinge CEO of Dóchas, the Irish Association of Non-Governmental Development Organisations, shares her reflections from the talk including Mr. De Klerk's experience as president of South Africa, during which he oversaw the dismantlement of South African apartheid.

We were pleased to welcome another inspirational speaker, Sir Ciarán Devane who took up the role of Chief Executive of the British Council in January 2015. Sir Ciaran took time out from his visit to Ireland to receive an honorary doctorate from University College, Dublin (UCD), and spoke to us about his perspective on successful programme delivery in the not-for-profit sector.

The concept of impact investing, whereby investors seek to generate a measurable and sustainable impact alongside a financial return, will be of particular interest to our charity and not-for-profit clients. Dasha Kuts, Investment Officer at MicroVest Capital Management LLC tells us more about the concept of microfinance which is an established asset class within impact investing. Essentially microfinance provides financial services to the working poor, who often operate in an informal and frequently poor economy.

The Charities Regulator recently published a comprehensive set of fundraising guidelines for charities. These guidelines cover a wide range of

issues relevant to charities and are intended to protect charities’ reputations and boost public trust and confidence in their organisations.

Within our Economic & Investment Focus, Investment Analysts David Finn and Keith Williamson explore some of the findings of behavioural finance. Strategies such as outlining an investment roadmap or creating a well thought out plan to meet long-term investment objectives can help investors avoid common mistakes. However, it is imperative to stick with your plan in order to reap the benefits.

Elsewhere, Investment Strategist Stephen Grissing examines the impact the stronger euro and weaker dollar has had on investment returns this year.

As always, we hope you enjoy reading this edition of Charity Insight. If you have any questions on any of the topics covered, please do not hesitate to contact any member of the Davy Charities team.

Ian Brady Head of Davy Charities

Caroline Fox Associate Director

3Charity Insight Autumn 2017 3Charity Insight Autumn 2017

GUEST FEATURE

Dasha Kuts looks at the importance of microfinancing.

06

"Leadership is about creating an authentic vision for change", says South Africa's former president, FW de Klerk. Suzanne Keatinge, CEO of Dóchas shares some reflections from his recent talk in Dublin.

4 Charity Insight Autumn 2017

Effective leadership is essential if we are to navigate change and rise up to both the challenges and opportunities. During a recent visit to Dublin, Dóchas, the Irish Association of Non-Governmental Development Organisations, had the privilege of asking former South African president, FW de Klerk, what he had learned about leadership during his time overseeing one of the most historic transitions of the 1990s – the dismantling of apartheid South Africa. Mr. De Klerk was in Dublin to raise awareness of the Global Leadership Foundation, an organisation which he founded in 2004, which aims to make available, discreetly and in confidence, the experience of former leaders to today’s national leaders.

In his open and frank exchange on 12th September, hosted by Davy, Mr. De Klerk spoke of the need for a consultative style of leadership to manage the challenges in today’s world.

“In my day leadership was mostly top-down”, he recounted. “I used to have bosses who would bang their fists on tables and point fingers to get things done! But today, effective leadership has to be about consensus building and consultation,” he

said. It is also about gathering a strong team of experts around you.

He did not pretend that the main political leaders today, both in South Africa or on the global stage, are stepping up to the plate. Asked for his view on the Security Council today, he said simply that they had to stop playing their own national politics, and start focusing on the urgent needs of tackling the root causes of conflict.

He also didn’t hold back on what he saw as a deficit of leadership and honesty that has led to the destructive rise of populism, Trumpism and indeed the dearth of conviction politicians.

However, asked about how we can tackle this deficit, he stressed there were no quick fixes. But he did keep coming back to the importance of communication: “We must communicate what we stand for in a reasonable way – with less shouting and less protest.”

Mr. De Klerk also spoke of the importance of empathy, and the need to strike a balance between seemingly conflicting realities. In his negotiations with Nelson Mandela, for example, he described how each had to put themselves in the other’s shoes.

GUEST FEATUREEFFECTIVE LEADERSHIP IS ESSENTIAL TO NAVIGATE CHANGE

FW de Klerk

Former President of South Africa

Global Leadership Foundation

FW de Klerk is founder and Chairman of the Global Leadership Foundation, an organisation that consists of 40 former Presidents, Prime Ministers and independent distinguished leaders from every continent, all of whom have left high public office. They work discreetly, in small teams, on governance and conflict issues, principally in troubled and emerging countries, to provide private, independent, peer-to-peer advice to help leaders tackle the challenges they face. GLF is fortunate to have the support of many eminent business leaders who have become donors since they recognise the significance of the Foundation’s work and the impact it has on reducing political risk and building a good climate for business.

Leadership is about creating an authentic vision for change, says South Africa's former leader, FW de Klerk Suzanne Keatinge, Chief Executive Officer (CEO) of Dóchas, shares some reflections from his recent talk in Dublin.

“We must communicate

what we stand for in a reasonable way - with less shouting and less protest.”

5Charity Insight Autumn 2017

He considered what Mandela had to achieve for his own supporters to bring them along with him, and Mandela had to do the same for him. This became the basis on which they were able to negotiate – and ultimately – compromise in order to bring about the dismantling of apartheid. Mr. De Klerk was awarded the Nobel Peace Prize, jointly with Mandela, in 1993, for his efforts.

It was refreshing also to hear of Mr. De Klerk's strong belief in an active and strong civil society, including networks like Dóchas. To him, civil society remains a vital pillar of a free democracy, together with a free press and an independent judiciary. “Civil society needs to be the conscious of the nation”, he said, and “the pebble in the shoe” of governments.

However, in taking on this responsibility, civil society needs also to take a good strong look at itself in order to develop and

communicate an authentic vision of change that will inspire and motivate people. It also needs to be willing to compromise, not just protest, he cautioned.

It was striking that a man who has done so much – taken the decision to release Nelson Mandela from prison, and then led a government that ended apartheid – could remain so humble. His humility and decency did not escape the participants at the Dóchas event. And when asked what has inspired him to keep going, the answer came strong and clear – a heart-felt conviction about the importance of justice, justice, justice.

For more information on joining the International Council, go to: www.g-l-f.org

Dóchas is the Irish Association of Non-Governmental Development Organisations. For more information, go to: www.dochas.ie

DAVY CHARITIES | Guest Feature

WARNING: The opinions expressed in this article are the views of the author and do not reflect the views and opinions of Davy.

Global Leadership Foundation

Pictured (from left to right): Brian McKiernan, Group Chief Executive Davy, FW de Klerk, and Suzanne Keatinge, CEO, Dóchas Ireland


WHAT IS MICROFINANCE?

While microfinance is often regarded as a relatively new concept that arose in 1980s Bangladesh, it is in fact well-established, even in Ireland. Jonathan Swift was an early pioneer who lent small amounts to “poor industrious men” in 18th century Dublin. As borrowers had no credit history and no collateral, each borrower had to find two guarantors who would be liable for any arrears. This model proved highly effective with very few defaulting loans.

Today a staggering two billion people lack access to basic financial services, which often contributes to a never-ending poverty trap. These people usually have no credit history, live in very remote areas or have such low incomes that they are unable to get any type of financial product. Many have great potential and good business ideas but no access to credit.

Microfinance institutions (MFIs) seek to plug that gap by providing tailored financial services to the working poor, who often operate in an informal and frequently vulnerable economy. Well-established

underwriting methodologies which take account of non-traditional stores of value are used to offer customized loans in these under-banked markets. Very often a loan from an MFI is the borrower’s first formal loan which allows them to build a credit history. This way MFIs promote financial inclusion and empower borrowers. Depending on regulatory environments, MFIs can also offer savings. Women are a key clientele of most microfinance programmes, accounting for the majority of MFI’s customers in Asia, Africa, and Latin America. From humble beginnings, the microfinance industry is estimated at $60 -100 billion USD in total loan portfolio.

Microfinance is an established asset class within a movement known as impact investing, where investors seek to generate a measurable and sustainable impact alongside a financial return. Pope Francis recently applauded efforts by impact investors to “turn to financial institutes which will use their resources to promote the economic and social development of impoverished people and communities through investment funds aimed at

Dasha Kuts is an Investment Officer for the European and Asian regions for MicroVest Capital Management, a for profit US based asset management firm which invests in under-served and unbanked markets. Dasha joined the investment team in 2012 and draws on a wide range of finance and international development experience including assisting the United States Agency for International Development (USAID) and the Russian Microfinance Center. She earned an M.A. in Economics and Finance from Johns Hopkins University and also holds a B.A. in International Business from Towson University.

Dasha Kuts

Investment Officer for MicroVest Capital Management


satisfying basic needs associated with agriculture, access to water, adequate housing and reasonable prices, as well as with primary health care and educational services.”

My Story As an eager 18-year-old student who travelled alone to America from Russia with limited resources, I have first-hand knowledge of being financially excluded. I was unable to apply for any student aid or loans. I was, however, fortunate that my father’s business partner agreed to be my guarantor, which enabled me to obtain a visa and to study in the US. I very much appreciated his faith in me, which prompted me to never be late on any payments. My studies have afforded me fantastic opportunities, for which I remain immensely grateful. As a result of my experience and a desire to advance financial inclusion, in 2012 I was drawn to a microfinance fund manager called MicroVest.

MicroVestMicroVest is a US-based asset management firm, with approximately $400 million USD in assets under management. Since its foundation in 2003, MicroVest has disbursed over $1 billion in loans and investments in institutions, providing financial services to the underbanked. Relatively unique in the asset management world, but critical in impact investing, is the fact that MicroVest is owned by three non-profit organizations.

The key requirements for working at MicroVest are threefold: (1) a demonstrated commitment to Social Justice; (2) world-class financial skills; and (3) significant emerging markets exposure. Put another way, MicroVest hires people who could be working at large banks but would rather use their talents for social good, while covering countries and regions where they have a deep personal connection.

As part of the investment team, I have conducted due diligence visits at the offices of MFIs in 20 different countries. In addition to a rigorous diligence conducted at the offices and branches of the MFIs, I have also met hundreds of borrowers, visiting their homes and businesses. I have seen firsthand how these entrepreneurs use small loans to build sustainable livelihoods for themselves and their families. Many stories continue to resonate: a Kyrgyz student who used his first microloan to build a bakery and a clothing line and a Tajik woman who opened an orphanage and a yoga studio for children.

These human connections and inspiring stories are the main reasons why I continue to be excited working in this dynamic industry.

WARNING: The opinions expressed in this article are the views of the author and do not reflect the views and opinions of Davy.

DAVY CHARITIES | What is Microfinance?

“I have seen firsthand

how these entrepreneurs use small loans to build sustainable livelihoods for themselves and their families.”


CHARITY REGULATOR'S FUNDRAISING GUIDELINES TO PROTECT CHARITIES AND BOOST PUBLIC TRUST

The Charities Regulator has published a comprehensive set of fundraising guidelines for charities which aims to enable trustees to protect their charities’ reputations, and boost public trust and confidence in their organisations. The guidelines, which were launched by the Minister for Rural and Community Development Michael Ring on 28th September, establish a clear infrastructure for charities raising funds from the public.

“These guidelines will protect the reputation of each charity and assist charity trustees to run their organisations effectively, avoiding difficulties in respect of fundraising activities, and complying with their legal duties,” Charities Regulator Chief Executive John Farrelly said.

The guidelines cover a wide range of issue such as: donors and donations, responsibilities of trustees, management and fundraisers, and financial transparency and accountability. They are based on the principles of respect, honesty and integrity, with transparency and accountability.

They set out clear steps to ensure all charity fundraising:

π Respects the rights and dignity of donors, beneficiaries and the public;

π Occurs in an honest and truthful manner where fundraisers act with integrity and do not misrepresent the charity, its need for funds, or how they will be applied;

π Operates in an open, frank and honest way ensuring that transactions, operations, information and communications are easily understood by donors and the public alike.

The regulator will monitor how trustees apply these guidelines within their specific charity. “The guidelines would be a key benchmarking document which the Charities Regulator would use when seeking assurance from charities, when carrying out monitoring visits and, where required, when carrying out formal investigations,” Farrelly said.

“As with all our work, the Charities Regulator will ensure we are balanced and proportionate in our actions,” he said.

“As a responsive regulator we will ensure

“These guidelines will protect the reputation of each charity and assist charity trustees to run their organisations effectively, avoiding difficulties in respect of fundraising activities, and complying with their legal duties.”

Charities Regulator

www.charitiesregulatoryauthority.ie


“As with all our work, the Charities Regulator will ensure we are balanced and proportionate in our actions.”

DAVY CHARITIES | Charities Regulator

a ‘right touch’, proportionate and targeted approach using our dedicated procedures for receiving solicited and unsolicited information.”

Charities in Ireland range greatly in terms of their size and activities. The trustees of each charity should consider and decide how best to apply these guidelines to their particular circumstances, Mr Farrelly said.

“We will require the trustees of each registered Irish charity to be able to explain and justify their approach to fundraising from the public, particularly if they decide not to follow good practice as set out in these guidelines,” Mr Farrelly said.

The regulator engaged in extensive consultation as part of the process of drawing up the guidelines. In February 2016, it established a Consultative Panel on Charitable Fundraising at the request of the Tánaiste and then Minister for Justice and Equality Frances Fitzgerald. Its membership included people from the legal, fundraising and charities sector. As part of their deliberations, the panel engaged in a national consultation process during the Autumn of 2016 to get the public’s views on fundraising.

The panel’s report was also launched by Minister Ring at the September launch, which was presented to the Charities Regulator in June. Among its recommendations were that there should be a measured approach to charitable fundraising which should, in the first instance, consist of guidelines produced by the regulator. It recommended that the efficacy of these guidelines should be reviewed within three years of their issue.

The fundraising guidelines are the latest in a series of guidance documents produced by the regulator. In July, guidelines were produced on the responsibilities of trustees and internal financial controls.

Further guidance documents will be published in the coming months as part of the work to support good governance, management and administration in Irish charities.

Charities Regulator Launch

Pictured at the launch of the Charities Regulator’s fundraising guidelines were (from left to right) Charities Regulator Chair Patrick Hopkins, Minister for Rural and Community Development Michael Ring, and Charities Regulator Chief Executive John Farrelly. Photo: Marc O’Sullivan


“...collaborate to make the greatest impact, have clarity of strategy and act as you say while remaining ambitious.”

INSPIRATIONAL INSIGHTS FROM SIR CIARÁN DEVANE

Sir Ciarán Devane took up the role of Chief Executive (CEO) of the British Council in January 2015. Devane has focused on ensuring that all stakeholders understand and value the contribution that soft power, cultural relations and the British Council makes to security, prosperity and influence.

Prior to this, Devane was Chief Executive of Macmillan Cancer Support from 2007 to 2014. He transformed the scale and impact of the charity, both on a standalone basis and in collaboration with other organisations. He also raised its profile as an authoritative voice on cancer and on health matters, leading to Macmillan being the UK’s ‘Brand of the Year’ in 2014.

Sir Ciarán Devane, who received an honorary doctorate from University College, Dublin (UCD) during his trip to Ireland, spoke to us about his perspective on successful programme delivery in the not-for-profit sector.

Some insights particularly resonated and echoed at the session included:

π Clarity: Clarity of strategy is key and growth tends to naturally follow.

π Talking about what you do: As well as doing brilliant work, it is very important to talk about it as this will maximise impact.

π Collaboration: The key tenet to Macmillan’s success is collaboration, with their best allies being other health charities. Leveraging partnerships can make a significant difference.

π Authenticity: Stay consistent to your values; Behaviour is crucial to everything, all else will follow.

π Ambition: Institutions of all types should be stronger and aspire to be better.

π Empowerment: As a leader, it is imperative to empower your team to work with you and match skills accordingly.

In summary, collaborate to make the greatest impact, have clarity of strategy and act as you say while remaining ambitious.

“Clarity of Strategy is key and growth tends to naturally follow”

One of Sir Ciaran Devane’s Chief Executive of the British Council reflections when running a successful non-profit. Pictured recently in Dublin is Sir Ciaran with Donnchadh Ó Mórdha, Associate Director, Davy Charities

Sir Ciarán Devane

CEO of the British Council


ECONOMIC AND INVESTMENT STRATEGYAs Brexit negotiations continue in the background, cracks are beginning to appear in the UK economy as uncertainty around the UK's future relationship with the EU remains high. UK consumers continue to be squeezed as currency-induced inflation continues to outpace wage growth.

Investment Strategy

The Psychology of Investing 12

Investing Counter Cynically 16

In the News 18

Currencies: Stronger Euro takes its Toll on Returns 20


David Finn

Investment Analyst

Keith Williamson

Investment Analyst

THE PSYCHOLOGY OF INVESTING

No one sets out to make a bad investment. Yet people make them all the time. One reason is that we underestimate the extent to which emotion can affect our decisions. Another is we become overconfident in our ability to predict the future and often rely on gut feeling rather than logic.

This is often simply down to how our brains work. We are familiar with the imprudent strategy of buying high and selling low, yet investors do it again and again. Looking back over many centuries there are numerous examples of really

clever people making bad investment decisions.

For example, the father of neo-classical economics, Adam Smith, reportedly lost a large part of his wealth investing in the South Sea Bubble in the 1700s, and John Maynard Keynes, who was an avid speculator, saw most of his personal wealth wiped out as a result of the 1929 Wall Street Crash. More recently in the run up to the global financial crisis, many people became overconfident, greed overcame fear, and numerous investors took on excess risk and leverage just before the crash.

2013 Behavior GapCC


“How I got here is pretty simple in my case. It's not IQ, I’m sure you'll be glad to hear. The big thing is rationality. I always look at IQ and talent as representing the horsepower of the motor, but that the output - the efficiency with which that motor works - depends on rationality.” Warren Buffett, Fortune Magazine, 1998

What to watch out forA relatively new field of academic study called behavioural economics examines why, despite all the lessons from the past, investors tend to repeat the same mistakes. The initial findings suggest that our brain is simply not designed to make rational financial decisions or navigate complex financial markets.

These findings are critical to understanding how the market works. Traditional finance theory is built on the assumption that we have perfect information and that market participants are rational. However, we know this is not how the world or the market behave.

From IQ to RQ The genesis of behavioural economics can be traced back to the 1970s, when Nobel Prize winning psychologists Daniel Kahneman and Amos Tversky conducted an influential series of experiments that became known as Prospect Theory. Their work showed that people tend to make decisions based on intuition rather than logic, and that the psychological impact of losing on an investment is about twice as strong as making a profit.

They also found that being rational and intelligent are not one and the same. Previously the view was that IQ was the single measure of an individual’s intelligence. We now know that there are several other forms of intelligence, some of which are more important than IQ when making investment decisions.

In their 2016 book 'The Rationality Quotient', Keith Stanovich, Richard West

and Maggie Toplak devised an intelligence test aimed to quantify an individual’s ability to think rationally called the Rational Quotient (RQ) test. This test measured people’s ability to make good investment decisions. Through empirical research, the authors showed that RQ is a much better indicator of an individual’s capacity for good judgement and decision making than traditional intelligence measures, including IQ. Warren Buffett explains it as IQ being the horsepower of an engine, but RQ is the actual output.

Does it vary by nationality or by gender?There have also been a number of studies to determine if there are any specific characteristics, whether cultural or gender based, that make some investors more successful than others. A recent study by asset managers Fidelity, which analysed 8 million accounts by gender, showed that women’s investments tend to outperform men’s. It found that in general,

“women tend to hold a more long-term, conservative view with their investments; fewer women were fully invested in equities. By comparison, men were 35% more likely to make stock trades”. The study also found that women were more willing to accept expert advice.

A recent global study by wealth manager Credit Suisse showed that cultural background also impacts investor behaviour. The study showed that Anglo-Saxon investors tend to tolerate the greatest losses, Germanic investors are the most patient, while African investors tend to be the most impatient.

DAVY CHARITIES | The Psychology of Investing


THE PSYCHOLOGY OF INVESTING

How the brain trips us upAlthough this field of study is relatively new, it acknowledges that people are not perfect. It also looks to explain how we actually make decisions, make mistakes when processing information and why we do not always act rationally.

The hope is that if we are aware of our own

inherent biases we can try to avoid some of the pitfalls of investing. There are two types of behavioural biases to be aware of - cognitive errors and emotional biases. Cognitive errors arise when an investor is unable to analyse information properly or has incomplete information. Emotional biases illustrate how impulse, intuition and feelings result in decisions being made.

Table 1: Behavioural biases

Cognitive errors Emotional biases

Hindsight bias: We tend to have selective memories when it comes to remembering successes and forgetting mistakes. Our recollections of the past tend to be influenced by our current preferred beliefs, which lead us to think we were more accurate than we actually were.

Overconfidence: This emotional bias stems from having unwarranted faith in your abilities. It leads us to overestimate returns and underestimate risk when we make predictions. Towards the end of a market cycle, investors will have experienced several years of strong performance, some of which may be attributable to their own ability. This leads some to take on more risk, leaving them overexposed at exactly the wrong time.

Illusion of control: This occurs when investors believe they can influence outcomes, which is rarely the case in practice. Investors who exhibit this behaviour tend to trade excessively and hold a large portion of their portfolio in the shares of their own company. Investors need to understand that a successful investment strategy is based on probabilities and not certainties.

Loss aversion: People prefer avoiding losses than achieving gains. Loss aversion can lead investors to sell winners too early in order to lock in gains. On the other hand, if investors fear losses they may actually take on greater risk to make up for initial losses. This approach can lead to over-trading which increases transaction costs. If your portfolio is well diversified, it is highly probable that there will always be a portion that is down.

Anchoring: This is when investors remain anchored to the initial price they paid for an investment. They may be unwilling to sell the stock below the purchase price, even if new information suggests the value is likely to continue to deteriorate. To avoid anchoring, investors must understand that past prices and old information provide little or no guidance on the future potential of the company.

Endowment bias: This is the belief that people attribute more value to things merely because they own them, even when there is no cause for this attachment. Investors tend to stick with certain assets because of familiarity and comfort, even if they are inappropriate or become unprofitable. A common example of this is a tendency to buy more domestic shares due to familiarity with the companies. So

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: Dav

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Ways to mitigate against behavioural biasesBy better understanding how our brains operate and why we make bad decisions, we can try to eliminate some of the human biases that tend to fail us as investors. Although understanding biases does not automatically mean you will avoid mistakes, it should help improve your chances of success. One way to deal with these biases is to set out a structured rules-based approach to investing. Some of the rules we think can assist include:

π Have a plan: Implementing a financial plan with your adviser will help set a clear roadmap for what you are trying to achieve. This is a fact finding exercise that determines critical details such as net worth, spending and saving trends, and investment objectives. Questions that should be considered include: how much might you need to fund your retirement?; what do you want to leave behind?; and who do you want to leave it to? Answering these questions will help determine the optimum investment strategy for you. Only if your goals, ambitions or circumstances change should you deviate from this plan. This reduces the risk of making a rash decision.

π Set the rules of engagement: Once you have agreed a plan, set out a defined investment strategy. In wealth management circles this is a formal document called an investment policy statement (IPS). An IPS helps define important elements when building a portfolio, such as your personal tolerance for risk or losses and your time horizon.

π Invest counter cyclically: Do not make the mistake of being too risk averse when assets are attractively valued or taking on too much risk when things are expensive. Arguably this is the biggest failing of investors’ emotional biases. The largest returns tend to be generated at the start of an investment cycle. This may mean investing when your intuition tells you not to. The same is true towards the end of a cycle. This is often the time investors make the mistake of taking on excessive risk (see David Hillery's article on 'Investing counter cyclically' on pages 16 & 17).

π Do not over trade: Numerous studies have shown that studying your portfolio too often can cause overtrading which may lead to poor investment outcomes. Set a rule of scheduling periodic checks, and establish the ground rules for when to make changes and when to leave your portfolio alone.

π Diversification: As much as we all only want to pick winners, in practice this is impossible to achieve. Experienced investors understand that each asset or stock in a portfolio plays a different role. Quite often the worst performing asset in any one year tends to be one of the strongest in the next.

π Stick with the plan: Setting a rules-based approach is only good if you stick with the plan. Following agreed rules can eliminate some of the mistakes investors are prone to making.

“Implementing a financial plan with your adviser will help set a clear roadmap for what you are trying to achieve.”



One way to remove the emotional bias of taking on more risk at the peak of the cycle is to invest counter cyclically. At Davy, we spend a lot of time trying to ascertain where we are in the economic, business and investment cycle as we believe this is critical to managing money successfully. If we understand the stages of the cycle, we can determine when we

should take on more risk and which asset classes and sectors tend to perform best at each of these stages.

The Davy Economic & Business Cycle Indicator (see Figure 1) was constructed using the most timely financial variables in terms of predictive power. These indicators have successfully predicted

INVESTING COUNTER CYCLICALLY


David Hillery

Senior Investment Strategist

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1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

Recession Bear Market TIMER

1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 2015

PeakPeak

PeakPeak

Figure 1: Davy US Economic & Business Cycle Indicator

RECESSION BEAR MARKET TIMER

DAVY CHARITIES | Investing Counter Cyclically


Figure 2: Asset performance across the cycle, 1990-2017

Early Mid Late Recession

Property 66.1%

Property 59.5%

Hedge Funds55.8%

Government Bonds11.8%

Global Equities 43.1%

Hedge Funds50.2%

Commodities25.8%

Hedge Funds-11.4%

Hedge Funds35.8%



Commodities-13.3%




Property -16.2%

Commodities4.9%

Commodities14.4%

Property 7.0%

Global Equities -33.4% So

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the cycle peak in the past four major recessions dating back to the mid 1970s. The cycle can be broken into four distinct stages:

π Early: This is the beginning of the economic recovery with a movement from negative to positive economic growth. Economic policy is lenient which is supportive of the business environment. This period is defined by credit expansion and rapid profit growth. We tend to see an outperformance of risky assets like property and equities as the economic recovery takes hold.

π Mid: The business atmosphere is beginning to normalise. Central banks move away from emergency policy and there is further credit expansion. Growth levels should move towards a peak and activity indicators reach equilibrium levels. Consumption picks up at a greater rate than firms’ capacity. Continued positive returns are expected across risky assets.

π Late: Growth begins to moderate as the economy reaches full employment. Corporate earnings continue to grow but not to the same extent as in the earlier stages in the cycle. Consumer spending begins to fall and companies

hold excessive inventory. Coupled with a deterioration in profit margins and tightening credit we eventually see the economy dip into recession. We expect higher volatility and performance of risk assets to moderate.

π Recession: This is the final stage of the cycle. The economy slows, production and employment figures drop and we see a fall-off in performance in a number of major assets with the exception of bonds. Demand from firms and households are low, so there is no fundamental driver of the real economy. Margins become tighter and it is unlikely that firms will have positive profits. Cash and bonds are prudent investments at this stage to offer downside protection.

Identifying where we are in the economic cycle can help mitigate against investors’ tendency to take on most risk just at the top of the cycle. Today our indicator suggests that we are not yet at the peak. But the supernormal returns achieved in the early part of the cycle are behind us and return expectations should be lower going forward. As a result, in the coming years investors may not be rewarded for taking on additional risk as returns tend to be lower later in the cycle. This is extremely important for asset allocation decisions and to avoid the buy high, sell low phenomenon.

Based on asset class performance returns since 1990

WARNING: Past performance is not a reliable guide to future performance. The value of investments and of any income derived from them may go down as well as up. You may not get back all of your original investment. Returns on investments may increase or decrease as a result of currency fluctuations.


IN THE NEWS

JACKSON HOLEInvestors were hoping that the annual Economic Symposium held in Jackson Hole, Wyoming this past August, would give central bankers an opportunity to outline some of their future monetary policy plans. The event for global central bankers and policy makers is keenly watched by investors. This time around many hoped that US chair of the Federal Reserve, Janet Yellen would provide guidance on how she plans to tackle the problem of below-target inflation while also further raising interest rates. Or that European Central Bank (ECB) President, Mario Draghi would hint when the ECB would begin tapering its stimulus programme. However, both tactically avoided the pressing issues and instead focused on stressing the importance of the financial regulation introduced in response to the financial crisis. Draghi also discussed the importance of free trade and how to make it more inclusive, while taking a strong stance against populistic movements that have risen across the US and European Union (EU) recently.

TRUMP'S TROUBLESThe string of departures from President Trump’s administration since taking office has become alarming. 14 top officials have resigned or been dismissed from the White House. Some of the more high profile departures include Anthony Scaramucci, lasting only 10 days as communications director, and chief strategist Steve Bannon, who was thought to be the mastermind behind Trump’s presidential campaign. As the president struggles to get any of his campaign promises enacted, allies are becoming increasingly important. The next challenge for Trump will be to get his recently announced tax reform plan passed into legislation. Pressingly, Trump has stated that he is willing to shut down the government by breaching the debt ceiling if Congress does not approve funding for the border wall between the US and Mexico. Meanwhile, many chief executive officers (CEOs) have distanced themselves from Trump’s advisory council.

HURRICANE HARVEY HITS HARDHurricane Harvey, the strongest storm to hit the US since 2004, left untold damage in the state of Texas. The economic cost of the hurricane is estimated to be in the tens of billions and up to 500,000 people are seeking some sort of federal assistance. This natural disaster is likely to have long-term effects on the region. Following the hurricane, petrol prices have hit a two-year high while oil prices have dropped. Approximately 45% of the US oil refinery activity is located around the gulf coast so the energy sector has been severely impacted. The devastation caused by Hurricane Katrina in New Orleans in 2005 cost an estimated $160 billion and 47% of those costs were covered by insurance. It is thought that only 27% of the damage caused by Hurricane Harvey will be covered by insurance, so the cost from this hurricane is likely to be higher and the recovery slower.


DAVY CHARITIES | In the News

NORTH KOREAAt our annual conference last year, former Barack Obama adviser, Mona Sutphen, warned of the risks North Korea posed. On 4th July North Korea launched, for the first time, a two-stage intercontinental ballistic missile (ICBM). North Korea’s leader, Kim Jong Un called it a “package of gifts” for the US on its Independence Day. Trump responded to the launch by saying that “they will be met with fire and fury like the world has never seen”. The United Nations (UN) Security Council imposed new sanctions on North Korea for its continued missile testing and violations of UN resolutions. It is widely believed that the economically damaging sanctions will do little to deter the North Korean government which is determined to remain nuclear. Since the initial test, North Korea has launched two additional intercontinental ballistic missiles.

BREXITThe European Chief Negotiator, Michel Barnier has warned British officials to “get serious” on the Brexit negotiations and that he is “concerned” about the progress of the talks to date. Although the UK will leave the EU in March 2019, the terms of exit remain undecided. The UK had hoped to conduct negotiations on divorce and trade in tandem, but the EU insists that no negotiations on trade deals will take place until the divorce details have been finalised. It is hoped that “sufficient progress” will be made by October when the EU Council Summit takes place.

In an attempt to inject some urgency into talks, the UK government has issued a number of negotiating papers, including a paper on the judicial arrangement following Brexit and the nature of the border between Northern Ireland and the Republic. The former of these papers confirmed that the UK would leave the jurisdiction of the European Court of Justice (ECJ) and proposed a mechanism similar to the European Free Trade Association (EFTA) court that governs the European Economic Area (EEA) agreement to take its place.

GERMAN ELECTIONIn Germany, Angela Merkel was elected chancellor for her fourth consecutive term. However, the victory came at a price. Merkel’s centre-right Christian Democratic Union (CDU) party and its Bavarian sister party, the Christian Social Union (CSU), won 33% of the vote making them the largest parliamentary group, however this is down from 41.5% in the last election in 2013.

The election will be remembered as the first time a right-wing party has emerged in German politics since the Second World War with Alternative for Germany (AfD) securing 13% of the vote. The AfD is an anti-immigrant, anti-euro party that was formed in 2013 and has gained in prominence by capitalising on the resentment of Merkel’s handling of the 2015-16 refugee crisis and the arrival of more than a million refugees in Germany. It remains unclear at this stage the impact that AfD’s recent success will have, in particular on Europe’s ability to integrate further. Merkel will now devote her attention to forming a coalition in the coming months. It is expected that the coalition will include CDU/CSU, the liberal Free Democratic Party (FDP) and the Greens. The so-called "Jamaica coalition".


CURRENCIES: STRONGER EURO TAKES ITS TOLL ON RETURNS

Five years ago Mario Draghi delivered his famous “whatever it takes” speech in London. Since then the euro has been on a rollercoaster ride, but today sentiment towards the European economy and the common currency is the best it has been since before the global financial crisis.

Year to date the euro has appreciated approximately 13% against the US dollar. The good news is the strength of the euro can be traced back to better-than-expected economic data on the continent. Unemployment is falling, consumer and business confidence is rising, and overall the economy looks the most robust since before the euro debt crisis in 2011. Europe’s unemployment rate fell to 9.1% in July, its lowest level in eight years. Potential political headwinds have also disappeared following the Dutch and French elections where far right candidates failed to win overall majorities. And even though the far right in Germany entered Parliament for the first time in almost 60 years, Angela Merkel remains as Chancellor in Germany.

Momentum swings in favour of the euro over the last 10 months can be broadly explained by two events. Firstly, President Donald Trump’s election in November 2016. The euro depreciated by almost 4% versus the dollar in the two weeks following the presidential election on the back of Trump’s

pro-growth spending plans. However, there was a reversal in momentum as investors lost confidence in the Trump administration’s ability to carry out these plans. This coincided with Emmanuel Macron’s victory in the French presidential election in May; the euro was valued at $1.12 prior to his election. Since the French election the euro has surged to $1.20, and pressure remains on the US dollar as speculators have amassed the ‘largest net-short position on the dollar in more than four years.’

Euro remains undervaluedDespite its recent appreciation, the euro is still approximately 12% undervalued versus the dollar at 1.18, based on the Organisation for Economic Co-Operation and Development (OECD) measure of purchasing power parity (PPP) fair value is 1.34 (See Figure 1). However, through a wider lens the euro’s recent strength should be seen in the context of where it was just a few years ago. Since 2014 the euro has tumbled from 1.40 all the way down to 1.05, so the recent movements are just somewhat a reversal of this, moving back towards fair value.

Strong euro The impact on European investor’s returns has been significant. In dollar terms, global equities are up over 14% year to date, but

“Despite its recent appreciation, the euro is still approximately 12% undervalued versus the dollar...”

Stephen Grissing

Investment Strategist



when converted into euros, returns are little more than 3% (See Figure 2). Given the recent weakness in the dollar, investors could be tempted to dump their US dollar assets. This would be a rash move in our opinion. All one has to do is to think back to the questions about the future of the euro that persisted during the euro debt crisis. Almost the entire economics community believes there are still many structural problems with the Eurozone and if the union will survive without further fiscal integration, which some nations may decide is too high a price to pay for Eurozone membership.

Secondly, to invest in some of the key trends taking place in the world today, investors often need to invest in US companies. This is particularly true in areas such as technology and biotechnology where US companies are world leaders. We believe the question is not whether one should hold any dollar assets, but how much. In our portfolio construction process we guide investors to remain diversified and not be over exposed to specific currency movements.

Figure 1: EUR/USD PPP

EUR/USD EUR/USD OECD PPP

Sour

ce: B

loom

berg

0%

20%

40%

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100%

Sept 1

6

Oct 16

Nov 16

Dec 16

Jan 17

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ch 17

Apr 17

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June 17

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Aug 17

Sept 1

7

100%

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240%

FAAMG* S&P 500 S&P 500 Tech

27/0

3/14

27/0

5/14

27/0

7/14

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9/14

27/1

1/14

27/0

1/15

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27/0

7/17

0.7

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

SX7E/SXXE Index German 10 year yield

12/2

015

04/2016

08/20

16

12/2

016

04/2017

08/20

17

3.02%

0.16% 0.29%

-4.71%

-6.55%

-13.27%

-17%

-12%

-7%

-2%

3%

8%

Global Equities EUR IG Bonds EUR Govt Bonds Global Govt Bonds HFRI Commodities

EURUSD OECD PPP EURUSD

0.95

1.05

1.15

1.25

1.35

1.45

2002

2004

2006

2008

2010

2012

2014

2016

FAAMG, S&P 500 & S&P 500 Tech performance rebased

% of total market capitalisation

.70

.60

.40

.50

-.20

.30

.10

.20

-.10

.00

WARNING: Forecasts are not a reliable indicator of future performance.


Sour

ce: B

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Figure 2: Euro strength has dampened asset class returns

0%

20%

40%

60%

80%

100%

Sept 1

6

Oct 16

Nov 16

Dec 16

Jan 17

Feb 17

Mar

ch 17

Apr 17

May

17

June 17

July 17

Aug 17

Sept 1

7

100%

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FAAMG* S&P 500 S&P 500 Tech

27/0

3/14

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7/14

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27/1

1/14

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1/17

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7/17

0.7

0.75

0.8

0.85

0.9

0.95

1

1.05

1.1

SX7E/SXXE Index German 10 year yield

12/2

015

04/2016

08/20

16

12/2

016

04/2017

08/20

17

3.02%

0.16% 0.29%

-4.71%

-6.55%

-13.27%

-17%

-12%

-7%

-2%

3%

8%

Global Equities EUR IG Bonds EUR Govt Bonds Global Govt Bonds HFRI Commodities

EURUSD OECD PPP EURUSD

0.95

1.05

1.15

1.25

1.35

1.45

2002

2004

2006

2008

2010

2012

2014

2016

FAAMG, S&P 500 & S&P 500 Tech performance rebased

% of total market capitalisation

.70

.60

.40

.50

-.20

.30

.10

.20

-.10

.00

GLOBAL EQUITIES EUR INVESTMENT GRADE BONDS EUR GOVT BONDS GLOBAL GOVT BONDS HEDGE FUNDS - HFRI COMMODITIES

22 Charity Insight Autumn 201722 Charity Insight Summer 2017

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We've also giving it a new name. myDavy will be the easy way to access your Davy account online, helping you view and manage all of your investments in one place, wherever and whenever you want – in a completely secure environment.

* The ‘Voice of the Client’ survey was conducted between May and June 2017 with a large representative sample of the Davy Private Client base.

23Charity Insight Autumn 2017 23

MARKET DATAPrice Return (%) 2012 2013 2014 2015 2016 YTD to 29/09/2017

Equities (euro)

MSCI World 11.2 18.8 17.3 8.3 8.5 2.1

S&P 500 11.4 24.0 26.9 10.5 12.8 0.6

EuroStoxx 600 14.4 17.4 4.4 6.8 -1.2 7.4

FTSE 100 8.9 11.7 4.3 0.1 -1.2 0.1

Eurostoxx Banks 12.0 25.9 -4.9 -4.9 -8.0 17.6

Iseq 17.1 33.6 15.1 30.0 -4.0 5.6

Nikkei 225 7.8 23.0 7.0 20.4 7.4 -1.4

MSCI Emerging Markets 13.1 -9.1 8.7 -7.5 11.9 12.1

US Technology 11.1 20.8 34.7 16.1 15.4 12.6

Facebook -32.5 96.5 62.7 49.4 13.3 32.7

Apple 29.0 0.9 56.9 6.2 13.4 18.9

Amazon 42.3 52.1 -11.3 142.5 14.3 14.6

Microsoft 1.0 34.0 41.5 33.0 15.4 7.1

Alphabet 7.6 51.6 7.8 63.3 4.9 9.8

Equities (local currency)

MSCI World 16.4 29.6 10.4 2.6 9.6 13.0

S&P 500 13.4 29.6 11.4 -0.7 9.5 12.5

EuroStoxx 600 14.4 17.4 4.4 6.8 -1.2 7.4

FTSE 100 5.8 14.4 -2.7 -4.9 14.4 3.2

MSCI Emerging Markets 13.9 0.9 2.5 -8.0 7.1 21.3

Eurostoxx Banks 12.0 25.9 -4.9 -4.9 -8.0 17.6

Iseq 17.1 33.6 15.1 30.0 -4.0 5.6

Nikkei 225 22.9 56.7 7.1 9.1 0.4 6.5

US Technology 13.1 26.2 18.2 4.3 12.0 26.0

Facebook -30.0 105.3 42.8 34.1 9.9 48.5

Apple 31.4 5.4 37.7 -4.6 10.0 33.1

Amazon 44.9 59.0 -22.2 117.8 10.9 28.2

Microsoft 2.9 40.1 24.2 19.4 12.0 19.9

Alphabet 9.5 58.4 -5.4 46.6 1.9 22.9

Global Sectors (local currency)

MSCI World Energy -1.8 15.5 -9.5 -22.4 25.9 -6.9

MSCI World Materials 8.1 4.0 -0.1 -12.7 21.9 11.5

MSCI World Industrials 14.5 32.5 5.2 -1.0 11.5 13.1

MSCI World Consumer Disc 23.6 40.3 7.8 6.9 1.8 10.5

MSCI World Consumer Staples 10.0 19.2 10.6 7.7 1.4 5.1

MSCI World Health Care 14.7 34.3 21.7 7.3 -7.8 14.6

MSCI World Financials 25.1 27.5 7.4 -1.3 10.2 9.3

MSCI World IT 12.8 28.0 18.8 4.7 8.9 25.4

MSCI World Telecoms 1.2 28.2 2.0 3.8 4.2 -2.8

MSCI World Utilities -2.0 9.2 18.8 -6.3 4.1 8.1

Government Bond Yields (%)

US 1.8 3.0 2.2 2.3 2.4 2.3

Germany 1.3 1.9 0.5 0.6 0.2 0.5

UK 1.8 3.0 1.8 2.0 1.2 1.4

Japan 0.8 0.7 0.3 0.3 0.0 0.1

Ireland 4.5 3.5 1.3 1.2 0.8 0.7

Italy 4.5 4.1 1.9 1.6 1.8 2.1

Spain 5.3 4.2 1.6 1.8 1.4 1.6

Portugal 7.0 6.1 2.7 2.5 3.8 2.4

France 2.0 2.6 0.8 1.0 0.7 0.7


Source: All data is sourced from Bloomberg as at market close 29th September 2017 and returns are based on price indices in local currency terms, unless otherwise stated.


Price Return (%) 2012 2013 2014 2015 2016 YTD to 29/09/2017

Bond Performance (%)

JPM Global Govt Bonds 4.1 -0.5 8.5 -1.0 2.2 0.2

iShares Eur Corp Bond 7.6 -0.9 5.8 2.4 2.9 0.2

Bloomberg Eur Govt Bond 9.4 2.6 8.1 -1.7 1.9 0.2

Commodities (in USD)

Bloomberg Commodity Index -1.1 -9.6 -17.0 -24.7 11.4 -3.5

Gold 7.1 -28.3 -1.4 -10.4 8.1 11.5

Brent Crude Oil 3.5 -0.3 -45.6 -35.0 52.4 1.3

WTI -7.1 7.2 -45.9 -30.5 45.0 -3.8

Natural Gas 12.1 26.2 -31.7 -19.1 59.3 -19.3

Sugar -16.3 -15.9 -11.5 5.0 28.0 -30.6

Platinum 10.4 -11.0 -11.9 -26.2 1.3 1.0

Wheat 19.2 -22.2 -2.6 -20.3 -13.2 9.9

Corn 8.0 -39.6 -5.9 -9.6 -1.9 0.9

Silver 9.0 -35.8 -19.3 -11.9 15.0 4.6

Hedge Funds (in USD)

HFRI Fund 4.8 9.0 3.4 -0.3 0.5 5.1

Property (in USD)

S&P Global Property 31.3 3.7 13.6 0.1 4.9 11.9

Currency Rates

EUR/USD 1.32 1.37 1.21 1.09 1.05 1.18

EUR/GBP 0.81 0.83 0.78 0.74 0.85 0.88

EUR/JPY 114.46 144.73 144.85 130.64 122.97 132.92

GBP/USD 1.63 1.66 1.56 1.47 1.23 1.34

GBP/EUR 1.23 1.20 1.29 1.36 1.17 1.13

USD/JPY 86.75 105.31 119.78 120.22 116.96 112.51

Interest Rates

Euribor 3 month 0.19 0.29 0.08 -0.13 -0.32 -0.33

Libor GBP 3 month 0.52 0.53 0.56 0.59 0.37 0.34

Libor USD 3 month 0.31 0.25 0.26 0.61 1.00 1.33

Central Bank Rates

European Central Bank 0.75 0.25 0.05 0.05 0.00 0.00

Bank of England 0.50 0.50 0.50 0.50 0.25 0.25

Federal Reserve 0.25 0.25 0.25 0.50 0.75 1.25

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This information is summary in nature and relies heavily on estimated data prepared by Davy as well as other data made available by third parties and used by Davy in preparing these estimates. There can be no assurance that the entities referred to in the document will be able to implement their current or future business plans, or retain key management personnel, or that any potential investment or exit opportunities or other transactions described will be available or consummated. Statements, expected performance and other assumptions are based on current expectations, estimates, projections, opinions and/or beliefs of Davy at the time of publishing. These assumptions and statements may or may not prove to be correct. Actual events and results may differ from those statements, expectations and assumptions. Estimates, projections, opinions or beliefs are not a reliable guide to future performance. In addition, such statements involve known and unknown risks, uncertainties and other factors and undue reliance should not be placed thereon. Certain information contained in this document constitutes ‘forward-looking statements’, which can be identified by the use of forward-looking terminology, including but not limited to the use of words such as ‘may‘, ‘can‘, ‘will’, ‘would‘, ‘should’, ‘seek’, ‘expect’, ‘anticipate’, ‘project’, ‘target’, ‘estimate’, ‘intend’, ‘continue’ or ‘believe’ or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results, the actual outcome may differ materially from those reflected or contemplated in such forward-looking statements. There can be no assurances that projections are attainable or will be realised or that unforeseen developments or events will not occur. Accordingly, actual realised returns may differ materially from any estimates, projections, opinions or beliefs expressed herein. Economic data, market data and other statements regarding the financial and operating information that are contained in this Update, have been obtained from published sources or prepared by third parties or from the partners, developers, operators and sponsors involved with the properties and entities comprising the Investment. While such sources are believed to be reliable, Davy shall have no liability, contingent or otherwise, to the user or to third parties, for the quality, accuracy, timeliness, continued availability or completeness of same, or for any special, indirect, incidental or consequential damages which may be experienced because of the use of the data or statements made available herein. As a general matter, information set forth herein has not been updated through the date hereof and is subject to change without notice. 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