Report of the Investment Committee 2008 - St James's Place

The 2008 Annual Report of theSt. James’s Place Investment Committee

Chairman’s StatementRegular readers of this Annual Report will know that I have neverbelieved in the ability of anyone – including myself – to forecast shorttermmovements in stock prices.I ended last year’s report by saying that I had no idea what wouldhappen to markets during 2008, whether they would end higher orlower compared to the start of the year. Well we all know now that2008 turned out to be the most difficult and challenging year, from bothan investment and an economic perspective, for a generation or more.And yet as late as the end of December 2007, the press carried marketforecasts for the coming year ranging from just under 6000 to near 8000. Not one of the ‘marketexperts’ were right, demonstrating that no one expected the markets to unfold in the way theyeventually did.Indeed for the first half of the year the market registered both negative and positive months in amanner not too dissimilar from previous years. However, all this changed in late September whenfinancial markets around the world fell sharply following the collapse of Lehman Brothers asinvestor confidence evaporated.For many of us it has been the sheer speed at which events have unfolded and their global impactthat has been most disconcerting and at times worrying. I think that if anyone had written afinancial thriller and included all of the events witnessed in the last few months, literary criticswould have been justifiably scornful. The collapse or rescue of many leading financial institutions,precipitated by the financial crisis, is unprecedented and has led to sharp falls across worldfinancial markets. Undoubtedly, there will be lessons learnt from the experiences of 2008 and wewill draw on those as we continue to evolve our approach to investment management.So where does that leave us today? It is likely that almost everyone will have found their portfoliovaluations uncomfortable reading – there is no denying that even high calibre investmentmanagers have found few, if any, hiding places from the financial maelstrom.In response to current events, investors have, quite rightly, been asking the question “What actionhas St. James’s Place taken to protect my wealth during the crisis?”Whilst it is obviously not possible in a report of this nature to address individual circumstances,I believe the question posed is a good starting point for this year’s report and have addressed it in twoparts: looking at it from a corporate position and secondly, from the fund managers’ perspective.From a corporate perspective, our success to date has depended to a considerable extent on twocentral aspects of our approach to wealth management. Firstly, the emphasis we place on buildingstrong, lasting personal relationships with our clients and secondly on our distinctive and effectiveapproach to investment management.3

The strength of Partners’ relationships with their clients has meant that both are taking a longtermview which in turn has led to our business having one of the highest retention of fundsunder management in the industry – currently 95%. The advantages of this are not alwaysimmediately apparent, but, as I was reminded the other day by one of our independent fundmanagers, it has meant that he (and the other managers) has not been forced to sell investmentsfrom his St. James’s Place funds to meet investors’ redemptions. This contrasts sharply with hisother retail funds where he has been forced to sell good quality investments at depressed pricesto raise liquidity to meet client withdrawals. He went on to say that in the longer term this wouldundoubtedly increase the chances of superior investment performance from the portfoliosmanaged for us because his longer-term investment strategy had not been disturbed.As well as helping to retain funds, our relationship led business has continued to attract newinvestment into our funds, despite the tough market conditions. Again, how does this benefitexisting clients? Well once more it helps our fund managers because they continue to experiencenew flows of money into their funds which in turn, allows them to implement short-term tacticalmoves to protect longer-term strategies. For example, they can accrue these new inflows andbuild up liquidity in the funds to help mitigate short-term volatility – which many of themanagers have. It also means they can, when they feel the timing is right, use these higher levelsof cash to buy stocks in quality companies at lower prices and thus take a longer-term view fortheir investors. Again, these are actions the managers have been engaged in recently. Thisapproach has been one of the factors enabling us to deliver consistent, superior investment resultsover the longer term.So, corporately, the benefits of our advice-based ethos go far beyond creating long-termrelationships with our clients.The second part of my answer sets out how the work of the Investment Committee has helpedcreate a safer – but not, I hasten to add, risk-free – environment for our investors’ wealth.Firstly we endeavour to avoid what we see as short-term investment fashions – those investmentopportunities that carry the hall marks of potentially large gains achieved in a short space of timewith little perceived risk but that ultimately go horribly wrong. The Technology Funds of the late1990’s come immediately to mind and there have been many others such as Split-CapitalInvestment Trusts and Precipice Bonds. All have cost investors (but not clients of St. James’sPlace) dearly. More recently we have chosen not to follow other companies into launching fundsin the highly specialist areas of China, India and Russia. Their economies may be growing stronglybut their stock markets have fallen sharply by anything up to 70% this year on fears of economicfallout from the credit crisis. Our preferred approach is to concentrate on selecting high qualitymanagers and then to allow the individual fund managers to make their own judgement aboutwhich area they wish to invest in and crucially, the timing of their decision.4

But during this severe downturn we have seen no reason to replace any fund managers. All haveadhered to their stated investment style. Stamford have advised us that they continue to maintainconfidence in the managers with whom we currently work. It is the continuous and detailedmonitoring of their activities that is, we believe, a key element in enabling us to create a ‘safe’long-term investment environment for our investors.Whilst the Investment Committee, assisted by Stamford Associates, can create the structure todrive our investment philosophy, it is the individual fund managers who make the day-to-daydecisions about which particular stocks they wish to own and the timing of those investments.We create a positive environment for our managers by allowing them maximum freedom toinvest within the terms of their mandate and we are also prepared to be patient for superiorresults. But ultimately, each manager must take responsibility for the performance of theirportfolios – in good and bad markets alike.As I think back on the numerous meetings I have had with our managers this year I have beenimpressed by the consistency shown by them during these turbulent times. Unlike many otherswithin their peer group, decisions not to own banking stocks for example, have proven to be veryshrewd. Similarly some of the managers eschewed the commodity boom, dismissive of the claimthat we were in a new paradigm. Many managers took decisions to increase liquidity both beforeand during the crisis and are now able to use these reserves to buy stocks they like at verydepressed levels which will be a store of value for the future when the markets recover.Against this very testing backdrop, I have asked each of the managers of our global ManagedFunds to briefly explain what defensive action they have taken to protect, to the extent it hasbeen possible, our investors’ wealth during these turbulent times. Their views are set out in thenext section of this report. As you read their comments I think you will be encouraged thathowever challenging the markets, they have demonstrated high levels of conviction throughout.Throughout this report I have endeavoured to demonstrate that our approach to investmentmanagement is ‘all weather’ and by that I mean we have consciously striven to create a ‘safer’environment by reducing as many of the risks associated with investment as possible. Firstly byencouraging our investors to diversify their assets across the different classes according to theirrisk profile and, secondly as I said earlier, by investment manager style. The monitoring of themanagers by Stamford Associates acts as the ‘early warning’ system, further reducing the risks oflong-term underperformance.So what guidance can we give our investors on timing their investments in our funds – is it agood or a bad moment to cash in some or all of their investments and should they be making newinvestments? This comes back to the starting point of this introduction. Of course, if you knewwhen the market was at its high and when it was at its low, those questions would be easy toanswer, but the reality is that the world is so uncertain that no-one can make decisions on thebasis of short term conditions.6

Can investors take comfort from history or, is it really different this time? In the next section ofthe report, the economist Anatole Kaletsky, one of our most respected journalists, provides histhoughts on the market and the economic and historical context. I hope you find his views bothinteresting and helpful.Whilst we certainly cannot predict with any certainty that the market has reached its low point,it is not unreasonable to assume that at current depressed levels investors prepared to take amedium to long-term view are likely to be ultimately rewarded.Likewise, with global stock markets at such low levels, investors thinking about cashing-in theirinvestments will crystalise once and for all what may be as yet, paper losses. The economicclimate is changing and the era of cash generating real returns is over for now because recessionin the major Western economies during 2009 is certain according to policymakers, who inresponse are cutting the cost of borrowing. The US Federal Reserve recently announced virtuallyzero interest rates and here in the UK it is not unthinkable that a similar thing could happen.Whilst this may be good news for borrowers, for savers it is the opposite and we are at the pointwhere for many people the returns they earn on their deposits, taking account of inflation andtaxation, are either zero or negative. In contrast the yield, net of basic rate tax, on the UK stockmarket is at its highest point for over 20 years at around 4.5%, reflecting current low shareprices. Again experience tells us that this is a situation that won’t last forever and that ultimatelythe intrinsic value of equities will be recognised by long-term investors.Against this changing economic landscape it is hardly surprising investors are looking for guidanceon how best to position their wealth. Longstanding clients will know that our philosophy of ‘buyand hold’ has held good over many years and there is no reason to doubt that once through thecurrent downturn, markets will resume their long upward trend. Are we near the end? No-oneknows so, once again, I will stay with tradition and make no predictions for what the coming yearmay bring. I want, however, to reassure all of our investors that we are completely focused onputting them in the strongest possible position to ride out the current storm. Regardless of theprevailing financial climate, the Investment Committee will continue to ensure the approach wehave to investment means a safer place for our clients’ wealth over the longer term.I wish you all the very best for 2009 and beyond.Sir Mark Weinberg7

Anatole Kaletsky“This time it’s different” are said to be the four most expensive words inthe English language. In every speculative mania, investors believe theyhave found something “different” from previous boom-bust cycles – andevery time this turns out to be a delusion, the bulls lose their shirts, whilethe bears get the last laugh.But is this really true? Consider the bearish sceptic who pulled out ofglobal stockmarkets when the phrase “irrational exuberance” was firstcoined. In December 1996, when Alan Greenspan used these words todescribe what was widely seen as an unsustainable bull-market, the DowJones Industrial Average stood at 6400. Today, after the worst bear marketfor 70 years, it is 9000. And comparing the present bear market with previous financial panics, wefind that investors are up five-fold in terms of the Dow and three-fold in terms of the FTSE if theybought shares in the 1987 global meltdown, when George Soros first declared that “this is 1929”.The point of these comparisons is not just to state the obvious: that panics are a better time to buythan to sell. There is a subtler point. Just as the bulls believe that every market boom is “different”and heralds unprecedented economic prosperity, pessimists think that each bear market is uniqueand portends a recession that will never end. And indeed, there usually is something different aboutevery slump. This time it’s the credit crunch and property crash; in 1992 it was 15% interest ratesand the collapse of sterling; in 1982 it was three million unemployed and 20% inflation; in 1987 itwas a one-day fall in stockmarkets which, according to statistical models, should not have occurredin a billion years. After each such unique disaster the prophets of doom declare that capitalism isdoomed, that markets will never recover, that this is a “once in a lifetime crisis” – but each timemarkets do recover, capitalism survives and investors who kept their nerve are amply rewarded.This is not to deny that several features of the present economic crisis really are exceptionally grave.The collapse of global finance triggered by the Lehman bankruptcy really was unprecedented; aswas the subsequent fall in industrial output; and the level of debts is high in many countries, thoughnot quite as daunting as generally believed. But against these unprecedented deflationary pressuresare arrayed expansionary forces that are unprecedented too: the lowest interest rates in history; thesteepest ever fall in oil prices; the biggest-ever peacetime public works programmes and tax cuts;and a willingness to print money without limit by the central banks. And behind theseunprecedented policies, two unprecedented long-term trends continue to push the world economyahead: the integration into the world capitalist system of 3 billion new producers and consumers inAsia and former communist countries; the truly global division of labour created by costlesscommunications, cheap transport and free trade.8

How should investors react to this tug-of-war between unprecedented deflationary andexpansionary forces? In the long-term, capitalism has survived far worse crises than this one: forexample, the galloping inflation of the 1970s. Contrary to conventional wisdom, inflation is muchharder to cure than deflation. Recall the political and financial pain of Margaret Thatcher’s 20%interest rates, doubling of VAT and mass public-sector layoffs. In comparison, the zero interest rates,tax cuts and government subsidies demanded by today’s conditions make political leadership easy. Inthe year ahead these anti-deflation policies will certainly be adopted on a global basis and economicrecovery will eventually follow.Less clear is how fast these events will move. In the short term there will surely be more bad newson profits and unemployment, but how much of this misery has already been discounted in marketprices will only be known with hindsight. Near-zero interest rates will boost economic activity andasset values at some point; but credit paralysis makes the timing of this process impossible to guess.What we do know for sure is that financial crises are a natural feature of the capitalist system. Wealso know that after every crisis, financial markets and the real economy eventually recover. Inresponse to apocalyptic claims that this crisis is different from every other and that this time the skyreally will fall in, investors should consider the words of Yogi Berra, the US baseball coach whoreflected on some equally unprecedented disaster on the sports field: “At times like this, it pays toremember that there’ve always been times like this.”9

Stamford Associates 2008Report to the Investment CommitteeDear Sirs,We are pleased to provide our report for 2008, reviewinginvestment manager–related activity across SJP’s funds over theyear. Your investors do not need us to state the obvious, namely that2008 was unprecedented, for the reasons already covered at greatlength by the wider press. The substantial share price declinesacross global equity markets, as well as the price collapse of otherfinancial assets, represent an extremely painful experience forinvestors. However, it is important to differentiate between theconsequences arising from realising an investment at a loss and amark to market price adjustment that may only turn out to betemporary.At the time of writing, global equity markets declined some 30% to40% over the year in local currency terms. Ultimately, investorsare rightly concerned about capital preservation in the long runand, therefore, it may be of little comfort that a number of yourinvestment managers achieved favourable returns relative to themarket, albeit still recording significant declines in capital values inan absolute sense.Conversely, stock market volatility, i.e. intra-day share pricefluctuations, has been at unprecedented high levels, demonstrating thefickle nature of the market in response to a wide range of externalinfluences – the credit crunch, housing market concerns, commodityprice fluctuations, government interventions, the temporary ban onshort-selling, de-leveraging, bail outs and bankruptcies.As noted in our half year report to June 2008, our views of yourinvestment managers are not influenced by short term investmentresults. This is particularly relevant in the current marketenvironment where snap-shot investment results can be significantlyand randomly impacted, for good or bad, by volatile share pricemovement at the end of the reporting period. These results simplydo not reflect the managers’ longer term investment theses nor dothey reflect the fundamentals of many of the underlying businessesin which the managers are invested.10

STAMFORD ASSOCIATES 2008 REPORT TO THE INVESTMENT COMMITTEEWe formulate our views on our understanding of the manager’sinvestment processes and the content as well as the transactions wewitness in the portfolios. Your investment managers usually take uplong term investment positions and ultimately the success of theirjudgements is a function of two key decisions – when they make aninvestment and when they sell it. In practice there is rarely, if ever,in terms of share price movements a straight line between the twoand, in recent months of course, it has only gone one way.However, the fact that many of your investment managers arenursing significant unrealised losses does not, in itself, make theinvestments inappropriate or wrong. In our view, it is more likely tomean that their investment theses has been delayed and may haveyet to play out.Your investment managers typically construct their portfolios fromthe bottom up by focusing on individual companies. They tend to bevaluation sensitive with an absolute return orientation to the stockselection process. They are not market timers and/or momentuminvestors. They typically allocate capital to quality companies whichthey believe are attractively valued, often have misunderstoodprospects and are therefore offering attractive risk/rewardcharacteristics in the medium to long term. Our assessment of theunderlying portfolios, together with frequent dialogues with themanagers, confirms that they are applying their investment disciplineson a consistent basis.At this juncture we derive considerable comfort from the fact thatthe great majority of their portfolio holdings appear relatively cheapon the basis of fundamental measures such as price to earnings,price to book, price to cash flow, etc. Furthermore, the managers’recent portfolio turnover has been relatively low, reflecting theirbelief that there is substantial inherent value to be unlocked in duecourse when more normal market conditions return. In addition,we understand from the managers that there will be many newinvestment opportunities arising from the current marketdislocations and we are optimistic that they are appropriatelypositioned to take advantage of those.11

STAMFORD ASSOCIATES 2008 REPORT TO THE INVESTMENT COMMITTEEIn such turbulent times we consider it critical to keep a cool headand to avoid ill considered reactions. We do not generally quoteinvestment gurus and we are also not fans of sound bites. However,we consider that whoever first said “buy low, sell high” was offeringsome very sound advice. This fundamental investment principle ispertinent at three levels:1. At the portfolio level all indications are that your investmentmanagers are prepared to stay with portfolios that they considerto be lowly valued with substantial upside potential;2. At the manager level we consider it appropriate to retaininvestment managers who happen to be experiencing short termcyclical underperformance if we believe that they are likely toadd significant long term value;3. At the fund level we are advising our clients to avoid knee jerkreactions away from depressed equities and corporate bonds infavour of cash and gilts as this will lock in significant capitallosses. Clearly this is inevitable if an individual has a need torealise capital in the short term.Our ongoing manager monitoring role remains critical to retainingconfidence in your investment managers, in particular within thecurrent economic and equity market environment. Declining marketshave a direct impact upon investment managers’ profitability and,ultimately their viability in business terms. Therefore is also importantfor us to focus upon non-investment issues such as their business plans,resources and morale.In such turbulent times we are pleased to report that the St. James’sPlace investment manager platform has been extremely stable overthe year. Oldfield Partners and Thornburg Investment Managementwere appointed as co-managers of the St. James’s Place High OctaneFund in April, and we have the utmost regard for the key investmentprofessionals, namely Richard Oldfield and Vin Walden. At the sametime, Invesco Perpetual was appointed to the St. James’s PlaceCorporate Bond Fund, and we view Paul Causer and Paul Read, thetwo Henley-based portfolio managers, as being in the same mould as12

STAMFORD ASSOCIATES 2008 REPORT TO THE INVESTMENT COMMITTEENeil Woodford, albeit, of course, in respect of bonds rather thanUK equities. Barclays Global Investors were appointed to the newSt. James’s Place Alternative Assets Fund in August and the expertisethat this manager brings to this investment proposition is arguablysecond to none.In conclusion, there appears to have been a negative correlationover the year between stock market volatility and investmentmanager activity. We derive considerable comfort from this becauseit is consistent with our belief that your investment managers andtheir portfolios are well placed to deliver favourable investmentresults going forward, both in an absolute and relative sense.We hope that this report provides reassurance regarding the robustnessof the St. James’s Place investment management platform and we verymuch look forward to serving investors and the Partnership to ourbest ability in 2009.Stamford Associates LimitedDecember 200813

Report on the St. James’s PlaceProperty Portfolios 2008In common with most other types of investment, 2008 was a poor year for UK CommercialProperty. Few in the market expected that the fall in capital values starting in 2007 wouldaccelerate in 2008; most property investors thought the first half of the year would be difficult, withrecovery perhaps starting in the third or fourth quarter. How wrong that turned out to be. Thefallout from the credit crunch proved much greater than expected. The unavailability of credit,combined with falling residential values and the onset of a recession in the UK economy combinedto decimate the commercial property sector. These, together with valuation difficulties as dealsbecame few and far between and declining rents, led to a fall in capital value of 31.5% from thepeak in August 2007. In November 2008, IPD recorded the largest ever fall in one month of5.1% since the launch of the Monthly Index in 1987.Initial yields are now approaching 8% compared with 4.6% in 2007 and 9.1% in the early 1990’s.2008 investment volumes are down to about 55% of the 2007 total at £21bn. Development is at astandstill and occupier demand continues to fall. Surprisingly few property companies failed duringthe year but those that are heavily borrowed will struggle in 2009.In the midst of this turmoil one might have expected that the quality of the St. James’s Placeportfolio would have helped it to perform a bit better than the market generally. As it transpires, thishas not been the case, despite the inherent quality of the portfolio, longer lease lengths and lowervoids than average. Overall, the portfolio has fallen broadly in line with falls in market values.Despite the present gloom, there are some glimmers of light. Commercial property, as an assetclass, has been proven to be a sound investment in the longer term and, as the UK economyemerges from recession, returns will pick up. In addition to the longer than average lease lengthand low voids, the SJP portfolio has above average rental growth prospects due to the policy ofbuying prime stock in the period 2005 to 2007 which should benefit returns as the sector recovers.There are signs that private investors have returned to the auction room as a source of directproperty in response to the fall in prices. One consequence of the sharp fall in the value ofSterling is that UK assets are now more affordable for overseas buyers. In the short term, valuersare unable to accurately price property until the volume of deals picks up. It is also likely that, asthe UK recession bites, more businesses will fail, increasing the number of voids and exercisingfurther downward pressure on rents. However, notwithstanding the short term pressure onvalues, at current prices commercial property is becoming attractive and, whilst transactionvolumes are likely to remain low until credit and investor confidence returns, property is likely toreward patient investors over the medium to longer term.K.M. Goulborn FRICSDecember 200814

Investment ManagerCommentariesThe following updates provide the views of the managers of our global and balanced Managedfunds, explaining the action they have been taking in 2008 to protect as far as possible, andposition the investment they manage for our clients whilst recognising the dramatic falls seen inall asset classes has meant that absolute returns have been disappointing.Richard PeirsonSJP/AXA Framlington Managed FundIn recent months, as the credit crisis widened and deepened and economicgrowth slowed everywhere, we have adopted a cautious stance towardsindividual investments. We now hold more cash and bonds than we have heldhistorically, to reflect the uncertain outlook, and within bonds we only owngovernment bonds, UK Gilts and German Bunds. The UK Gilts have aslightly shorter duration but the German Bunds are long dated, reflectinggreater confidence in that country's finances compared to the UK.The UK economy looks to be one of the weakest of the major developed economies and wehave reduced our weight there. In addition, within the UK our focus has been on companieswith overseas rather than domestic earnings. New investments have been in companies thatshould have defensive characteristics, but in nervous markets, and with an increasingly poorearnings outlook, finding such companies has not been easy. Pharmaceuticals is one largedefensive sector we have added to and are now very overweight. We have avoided newinvestment in small companies which have higher specific risk and are very difficult to buy andsell in the current market circumstances. Our focus within the existing portfolio is on ensuringthat the companies we own have sufficient capital to trade through this difficult economic andfinancial background.15

Andrew GreenSJP/GAM ManagedWe have continued to witness high levels of volatility in worldwide financialmarkets but with the authorities continuing to take proactive steps to addressboth the current financial crisis and the developing recession, markets may havebegun to show some tentative initial signs of wanting to establish a pause in thecollapse of values seen in 2008. Throughout the year we have maintainedliquidity at around 17-20%. In addition, one quarter of the fund was invested inthe Japanese market with a corresponding exposure to the Yen, which we havegradually hedged back into as Sterling has weakened, which has helped recent performance.In addition, in the previous two years, we specifically reduced small company content of theportfolio and built up holdings like Deutsche Telekom in Germany and Bristol Myers in the US.This action together with our positioning in pharmaceuticals has also provided support. Acombination of these three factors has helped us avoid the very worst of the sell-off to date butnonetheless the portfolio has been impacted by the routing of those stocks that are perceived tohave a recovery bias, but in the subdued environment we are entering, those situations offering ameasure of growth and stability will become increasingly valued.16

Neil WoodfordSJP/Invesco Perpetual Managed Fund2008 has been difficult for the UK economy, the stockmarket and for our fund.Although the fund fared relatively better than the FTSE All-Share index in thistime period, it is always disappointing to report negative returns to our investors.At the start of this year, we felt that the fund’s bias toward defensive sectors wasappropriate for the deteriorating economic conditions which we were expectingover the next 18 months. Defensive sectors, such as electricity andpharmaceuticals, featured prominently in the fund as we felt that their defensive business models –low volatility of returns and ability to grow earnings, cashflows and dividends – placed them in agood position to navigate their way through the difficult times. Holdings such as electricity companyBritish Energy and pharmaceuticals company AstraZeneca performed well for the fund and helped toprotect clients’ assets in 2008, as did our decision to avoid banks and consumer-facing sectors, wherewe felt there was further downside in individual stocks within those sectors of the market.17

Alex StanicSJP/Newton Managed FundThe Portfolio has altered some of its positioning over the year to reflect thedeteriorating economic environment. The biggest sector change over the yearhas occurred in healthcare, which has moved from a large underweight to arelative overweight. The sector’s defensive characteristics of strong balancesheets, low debt and good cash flow generation should be rewarded in thecurrent investment environment.From a regional perspective, we have reduced exposure to emerging markets such as South Africa,Russia and Brazil and repatriated the returns to the US and Japan. This will have reduced some of therelative risk in the portfolio. Also exposure to the cyclical basic materials sector has been reduceddramatically over the year. The Portfolio maintained its exposure to the telecommunications sector inthe anticipation that this would prove defensive. Unfortunately, the sector was not as defensive as weanticipated although we remain positive on the companies that we hold. The Portfolio has remainedunderweight in western banks over the year and we prefer to hold stocks in companies withrelatively low debt and strong cash flows whose valuations we believe are attractive on a medium tolong-term view.18

Nick PurvesSJP/Schroder Managed FundWhilst it is always disappointing to have to report falling unit prices, theUK equity portfolios that Schroders manages for St. James’s Place have beenoutperforming in this environment. We look to purchase shares in businessesthat are trading at a significant discount to their intrinsic value, which weestimate by calculating what we believe to be the ‘normalised’ earnings of abusiness. There are, of course, times when our calculations of intrinsic valuemay prove to be wrong. The fact that this risk exists is exactly why we will onlypurchase a security if it trades at a significant discount to conservative estimates of intrinsic value.We believe this approach offers investors some defence against permanent capital loss and is whathas kept us away from the mining sector and, until recently, the banks. This has resulted in theportfolios falling less than the wider market.Furthermore, we are prepared to be patient for value to be realised. For instance, we boughtsignificant positions in the out-of-favour pharmaceutical names around 18 months ago. This movehas been favourable in recent months as pharmaceuticals have rallied on the basis of their lowvaluations and relatively defensive profit streams.19

John HodsonSJP/THSP Managed FundWe entered the period of the credit crunch with a defensive posture, havingsold a number of large holdings during the first half of 2007 as the growth ofenthusiasm for risky assets in general, and the emergence of private equitybids for many large corporates in particular, led to a reduction inopportunities in the market for long term investors. Some of our biggerholdings – such as Alliance Boots and BAA – were bid for by leveragedoperators, and others – such as Verizon, TeliaSonera and CVS – became tooexpensive to continue to hold. As a consequence our cash weighting rose.We also reduced our direct exposure to emerging markets. We have been a long term enthusiastfor the superior growth prospects of the emerging economies, but became concerned about themania which gripped some parts of the investing public, and sold our China related stocks at highprices in the autumn of last year.THS has always believed in the principles of investing in companies with strong balance sheets.While growth in earnings is a crucial component of our excitement about equities, it is just asimportant to make sure that the companies we invest in have the strength to survive in difficultenvironments. Dividends are also vital, providing around two-thirds of the total return oncommon shares over long periods of time. Two characteristics of many of our holdings aretherefore strong balance sheets and reasonable dividend yields, which have clearly helped theperformance of the funds over the period. It is vital not to pay too much for shares as value canbe destroyed by paying too high a multiple of earnings, whether in terms of paying too much forgrowth, or paying a high multiple of earnings temporarily flattered by the economic cycle. Adiversified portfolio of modestly valued shares reduces this risk.Currency risk is one of the greatest faced by investors, as has been clearly highlighted to UKbased savers during this year while Sterling has declined sharply in value against most of ourmajor trading partners. Running a reasonable overweight position in the Euro zone has helpedparticularly, as well as holding some of our liquidity position in US Dollars. We have significantlysold down our Japanese equity holdings over the past two months as the resurgent Yen hasappreciated sharply against both Sterling and the Dollar.As we approach the end of the year, with most of the world’s developed stock markets down by40% or more on the year, equities are now discounting a very poor future economic climate, andwe have begun to slowly invest some of the funds’ liquidity.20

Bernie HornSJP/Worldwide Managed FundDuring 2008 I constructed the portfolio to include certain defensive positionsincluding utilities, consumer staples, telecommunications and niche-marketfirms. This strategy was implemented to offset more cyclical investments incredit, construction, and materials. Defensive investments were valued basedon the stability of their cash flows. In general, the defensive holdings protectedvalue; specifically Japanese holdings helped moderate risk and benefited from astrong Yen.In the first quarter of 2008, the fund’s sell discipline generated sales of investments at loftyvaluations that proved well timed. As the difficult year progressed, portfolio companies werescrutinized to determine vulnerabilities to potential cash flow declines or re-financing difficulties.As a result of these efforts, the fund reduced exposure to investments in materials, consumerdiscretionary, financials, and industrials – these portfolio changes preserved capital. Despite suchefforts, the market crash that rolled from sector to sector had a negative impact on fund resultsbut I believe strongly that valuation declines have overshot the fundamental values of thecompanies held within this portfolio, this, in fact, creates strong buying opportunities.With risks present in the current environment, I will hold those investments that show thepotential for dramatic increases when markets return to normal levels. Notwithstanding this view,the fund will remain nimble enough to make changes to avoid further capital declines and to takeadvantage of undervalued opportunities in the evolving global landscape.21

Ian McVeighSJP/Cautious Managed FundJupiter fund managers have taken a variety of steps to mitigate the effects of thefinancial and economic crisis over the last year. We held a strong bias towardstriple-A rated bonds within the bond portfolio before the credit crisis began inmid 2007. This boosted performance as investors, worried by the sudden lackof liquidity, sought out higher quality assets. As the crisis unfolded, however, welooked for opportunities in lower-rated debt where spreads had reachedhistorically attractive levels.With regard to the fund’s UK equity holdings, we continued our very underweight position inUK bank stocks which we have held since mid-2007. This has been a significantly positivecontributor to the performance of the UK portfolio amid the credit crunch and the bail-out of highstreet banking names. In the European portfolio, Alex Darwall’s style has ensured a concentrationon companies with global operations, strong balance sheets and better prospects for growth thantheir peers. Elena Shaftan sharply reduced exposure to Russian equities, from almost 70% in May to30% and cut exposure to cyclical stocks such as oils and materials as commodity prices began tofall. The rebalanced portfolio now holds more defensive sectors e.g. pharmaceuticals and telecomsand has increased the cash level to above 20%.The portfolio’s overall structure, with its significant exposure to short dated bonds, has also helpedto mitigate the worst impact of weak global stock markets so far in 2008.22

Members of the St. James's Place Wealth Management Group are authorised and regulated by the Financial Services Authority.The St. James's Place Partnership and the title `Partner' are the marketing terms used to describe St. James's Place representatives.St. James's Place UK plc: Registered Office St. James's Place House, Dollar Street, Cirencester, Gloucestershire, GL7 2AQ, United KingdomRegistered in England Number 2628062www.sjp.co.ukSJP975-VR6(01/09)