JP Morgan UK DynamicMay 2016

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ContentsContents

About Us ................................................................3 Working with advisers ............................................................3 Working with providers ..........................................................3 Ratings ...................................................................................3

IA UK All Companies ..............................................4JPM ........................................................................5JPM UK Dynamic Fund ...........................................6 FundObjectives&Targets ......................................................6 InvestmentPhilosophy&Process ...........................................6

Past&CurrentPositioning/Strategy ......................9Performance ........................................................10Summary&Evaluation ........................................11

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About Us

Established in 2004 RSMR provides research and analysis to firms working across the UK’s personal financial services marketplace.

Our work is completed with total impartiality and without any conflict of interest and delivered to a high professional standard by a team of experienced and highly qualified people.

Working with advisersWe provide specialist research, analysis and support to a diverse range of financial advisers and planners helping them to deliver sound advice to their clients backed by rigorous and structured research and due diligence.

The main regulatory body in the UK, the FCA, states that personal recommendations made by advisers should be ‘based on a comprehensive and fair analysis of the relevant market’ and this has led to closer scrutiny of the whole advice process. Our solutions are designed to help advisers meet these challenges whilst recognising that advisory firms require a range of flexible options that best meet their own business needs and those of their clients.

Working with providersWe work with all the leading fund groups, life and pension companies and platform operators across the financial services sector offering straight forward and pragmatic advice to help add value and improve their business performance and efficiency whilst treating customers fairly in line with FCA requirements.

RatingsOur innovative range of ratings are now recognised as market leading and cover a broad area of investment solutions including single strategy funds, SRI funds, Multimanager and multi-asset funds, and investment trusts. Our familiar ‘R’ logo is now recognised as a trusted badge of quality by advisers and providers alike and a ‘must-have’ when selecting funds. Our ratings are founded on a strict methodology that considers performance and risk measures but places a greater emphasis on the ability of fund managers to continue to deliver performance in the years ahead based on our in-depth face-to-face meetings with fund managers across the globe.

We understand financial services and we will work alongside you to deliver tailored solutions that are right for your clients and your business.

We are: Experienced. Professional. Trusted.

Thedata and information in this documentdoesnotconstitute advice or recommendation. We do notwarrant that any data collected by us, or supplied by any third party is wholly accurate or complete and we will not be liable for any actions taken on the basisof the content or for any errors or omissions in the content supplied.

All opinions included in this document and/orassociateddocumentsconstituteourjudgementasatthe date indicated andmay be changed at any timewithoutnoticeanddonotestablishsuitability inanyindividual regard.

©RSMR2016.Allrightsreserved.

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IA UK All Companies

The IA UK All Companies sector comprises funds which invest at least 80% of their assets in UK equities which have a primary objective of achieving capital growth.

The UK stock market is still one of the largest and most efficiently run, it is well understood and offers access to a huge variety of companies as well as providing the ability to reduce currency risk by holding sterling assets. Although the UK economy is gradually reducing its global influence in GDP terms, with the rise of the new emerging economies, it still has access to some of the world’s leading companies and brands. Over time, the UK may gradually become a smaller part of an investor’s portfolio as other markets increase in importance but for the time being should remain a core part of a UK investors overall holding.

Like most other markets the UK saw a large fall in January and a modest recovery to the end of March. April was more stable and May was similar with many investment decisions being deferred until after the vote on our European status. The reasons for the market movements in quarter one were varied but the effects in the UK were possibly more volatile because mining and energy stocks form such a large percentage of the main benchmark index and these stocks saw the sharpest falls and recovery in the first quarter as a reappraisal of the resources and energy sectors took place globally. The economy remains in good shape with the latest GDP figures suggesting growth of 0.6% in the last quarter of 2015 which was ahead of forecasts. This has been led by the service sector which has shown a 12th consecutive quarter of growth, up 2.8% year on year from the previous January. The

main gains have been made in IT and professional services with financial services losing share since the financial crisis. There are still some causes for concern however as the current account deficit reached a new post war high in the final quarter of 2015 of £33bn or 7% of GDP indicating we borrow heavily from the rest of the world. The main reason for the increase has been a loss of earnings from overseas assets, possibly reflecting global weakness.

As a core part of a UK investor’s portfolio, the range of funds in the All Companies sector often see the highest levels of inflow over a typical investment cycle. The range and choice in the sector is large with 285 funds in the sector and a disparity of return of over 36% between the top and bottom performing funds over one year. The average return over one year has been -7.76% (to 23rd May 2016) which has been reflective of market concerns on global growth and in the case of the UK specifically the vote on Europe. The JPM UK Dynamic fund has outperformed the sector average during this period.

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J.P. Morgan Asset Management (JPM) are part of JPMorgan Chase & Co, which provides retail banking, investment banking and asset management services across the world with a history which spans more than 150 years.

Their clients are investors around the world — including private individuals, corporations, pension funds, foundations, government bodies and charities and they look to offer expertise across every key investment class and every economic region

JPM believe that nothing beats local knowledge and so they have investment teams networked across more than 15 cities across the world, connected by investment hubs in London, New York, Tokyo and Hong Kong.

JPM have current assets under management of £1.2 trillion as at 31 March 2016.

JPM

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JPM UK Dynamic Fund

Managers Jon Ingram John Baker Blake Crawford

Structure ICVC

IASector UK All Companies

Launch Date October 2000

FundSize £167m (as at 31 May 2016)

Fund Managers and team

Jon Ingram – Managing Director

Jon is a portfolio manager and head of the Dynamic team within the JPMAM European Equity Group. An employee since 2000, Jon was previously an analyst within the Dynamic team and prior to this, a quantitative investment analyst in the currency group. He obtained an M.Eng (Hons) in Natural Sciences (Metallurgy) from Oxford University and is a CFA charterholder.

John Baker – Managing Director

John is a portfolio manager within the Dynamic team of the JPMAM European Equity Group. An employee since 1994, John was previously an assistant on the UK Retail Funds desk, now part of the European Equity Group. Prior to this, he was an administrator in the Life & Pensions department at Save & Prosper. John obtained a B.A. in European Studies, French and Italian from University College Cork, Ireland and a Diploma in Business Studies from University College Galway, Ireland. He is an Associate of the Institute of Investment Management & Research.

Blake Crawford – Vice PresidentBlake is a portfolio manager within the JPMAM European Equity Group. An employee since 2008, Blake sits within the Dynamic team contributing to all investment strategies run by that sub-team, but with a particular focus on their OEIC range. He currently co-manages both the JPM UK Dynamic and JPM Europe Dynamic Ex-UK funds and previously worked at Man Investments and the Bank of England. Blake obtained a BSc in Economics from the University of Bath, is a holder of the Investment Management Certificate and is a CFA charterholder.

There are also two other members of the Dynamic Team; portfolio manager Anis Lahlou-Abid and investment assistant Alex Whyte.

The team have worked together for a number of years and have remained stable in terms of the core personnel. One feature of the whole team is the longevity of the roles they have had within JPM. All the members of the team have worked at JPM for the majority of their investment

careers. The three portfolio managers have been at JPM for a significant portion of their careers which indicates a team that are comfortable working together and have been successful within the criteria set by JPM and relative to their peer group. There is a well-defined process which they work within, but they have enough flexibility to add their own flair to the running of the portfolios.

The Dynamic team work as a sub team within the European Equity group and are part of the European behavioural finance team. The managers view themselves as part of a Pan European investment research and management team and run the dynamic strategy across a number of different European and UK mandates. In total the Dynamic team run close to $6bn of assets. There are three other teams Core, Style and Small/Mid cap all of which integrate within the overall European Equity behavioural finance team.

There has only been one recent significant change – at the beginning of 2016 Malcolm Smith took over as Head of the European Equity Group following a decision by previous head (Michael Barakos) to take a step back from this role to go back into investing leaving Malcolm to run the Behavioural Finance Group. Malcolm was previously the head of the European Equities Client Portfolio Management team and was therefore an internal appointment. Prior to that Malcolm was a Managing Director at BlackRock Asset Management.

FundObjectives&TargetsThe stated objective is defined as maximising long term capital growth by investing in UK equites. The specific return they target is to be 5% ahead of the FTSE All Share over the longer term. This target represents the concentrated nature of the portfolios and the unconstrained style of management. The managers also target tracking error limits between 5-10% of the benchmark. In reality this varies over time but falls at around 7-8% on average over the longer term.

InvestmentPhilosophy&ProcessThe investment philosophy starts with the belief that markets are inefficient and this results in anomalies over time which the fund managers can exploit. The managers combine this belief with behavioural analysis that indicates these inefficiencies will be persistent because they are natural behavioural biases that remain in place for a long time. The conclusion from this set of beliefs is that they can best exploit these anomalies by investing in attractively valued high quality stocks with positive momentum which can outperform the market.

The portfolios are run by the Dynamic team and the three managers work as a team and interact with the rest of the

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European equity group primarily through their morning meeting when they run through the news flow on a pan European basis starting with the UK – this meeting includes the UK mid and small cap teams. They exchange information on which earnings releases have caused movements in earnings looking at both upgrades and downgrades. This meeting is at the beginning of the day to cover any releases on the 700-900 stocks in the universe but there is also interaction during the day as additional information becomes available.

There is no specialisation in the team and no sector responsibilities. On a day to day basis the Dynamic team allocate stocks between them for analysis, based on consideration of earnings revisions on stocks in the portfolio, and on other stocks of interest which are outside of consensus expectations. Each stock will be allocated to a member of the team and Jon Ingram as head of the desk will act as a co-ordinator of this process.

They tend to meet very few companies – they don’t think there is much value in meeting large and mega cap management as this is covered by a number of analysts internally and externally. They will rely on the knowledge and input of the wider team members to provide any information and feedback from these meetings if necessary. They do meet with small and mid-cap management if they are coming into the office but this is not part of the main day to day activity. They can also speak to the small and mid-cap team if they need advice in this area.

The process is based on bottom up stock selection and, whilst external factors are taken into account, they never take priority in the analysis process. The managers will have macro views which are taken into consideration at stock level, but they would not rule out a stock in a poorly performing sector simply based on the macro economic backdrop.

The core of the analysis process looks at three key factors:

• Value • Quality • Momentum

These three styles of investment have been integrated over time – initially the fund focussed more in Value and Momentum with Quality being added in 2012. The styles are viewed as complementary and together offer a sensible filtering process for stocks that enter the potential universe. The momentum or direction of earnings revisions is one of the most important factors in selecting stocks and running the fund. Value and Quality factors are also clearly important but they tend to change relatively slowly compared to momentum factors.

Value measures are more quantitative in nature and are based on P/E, P/B and P/NAV as well as the free cash flow yield, which are looked at from the point of view of being cheap or expensive on an absolute basis. When identifying attractively valued stocks the team look at how the stock is valued relative to the market and its peers. They also ensure that the underlying company is fundamentally sound, i.e. that the stock is not cheap for a good reason.

Quality reflects their requirement for high levels of return on invested capital over time, strength of balance sheet and cash flow. They like companies that can finance growth from internal resources and don’t like companies that come to market looking for additional equity financing, or have a change of net assets on the balance sheets implying that they have an increasing inventory without sales being evidenced, and so are overstating revenues. Quality implies a level of earnings sustainability allied to a sensible capital allocation discipline and consistent profitability.

Momentum – perhaps the most dynamic aspect – looks to identify and analyse why there have been earnings revisions upwards or downwards, and whether these moves are likely to be persistent. It may be that there is a structural change going on that they can identify or cost reductions and efficiencies that are improving margins all of which may offer a persistent move in earnings. Equally, low quality earnings upgrades need to be identified so they can be can be discounted, for example interest charges or changes in taxation that tend to be one off rather than sustainable (foreign exchange is another example). Other factors which are taken into account in this process include external factors such as macro influences, management changes or corporate activity.

It is not necessary for all the stocks in the portfolios to have all three of the Quality, Value and Momentum characteristics, but they would generally need at least two of the factors to be in place with the other element looking to improve. In aggregate the team need the portfolio to have better than market value, quality and momentum characteristics overall, but individual stocks may fall below this on one aspect, although they are more than likely to be on an improving trend.

The research process will use both internal and external sources of information to derive the data for stock analysis. The information is collated from information sources such as Bloomberg and Factset, and is then put into proprietary analysis programmes. They will also use brokers who are familiar with how JPM focus on earnings revisions and can provide them with ideas for this analysis. Consensus data is looked at as a basis for this research allowing them to consider the level of interest that they would have in a stock, for example a move from an analyst to go from below

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consensus to consensus is of little interest but a move away from consensus is valuable as it is a noticeable divergence. More qualitatively they will have a good feel for the analysts that they believe have strong insights in certain sectors which adds to this analysis. They will look at as many views on a company as possible, as nothing should be discounted.

PortfolioConstructionParametersThe JPM behavioural investment process has been in place since 2000, and is the backbone of the philosophy that the investment managers use in constructing the portfolios. They intend to make use of the anomalies in the way that other investors react to the economic environment and where we are in the economic cycle. This means that the dynamic portfolio process is active and can have a relatively high conviction, high turnover approach to investing.

The fund has to abide by UCIT rules and has an internal monitoring procedure which ensures that any sector or stock biases are brought to the manager’s attention. The fund has no constraints over active stock positions nor do they target sector exposures (although the fund can hold no more than 35% of its assets in any one sector). It typically holds in excess of 40 stocks, and invests across all market capitalisation ranges.

The holdings in the portfolio typically vary between 0.5% and 5% in absolute terms with the size of the position depending on factors such as liquidity and volatility. There are no formal liquidity constraints but the managers will consider liquidity when deciding the weighting of a stock.

The typical tracking error for the fund is 5-10% but the fund will be run on an aggressive basis which means it has a relatively high turnover profile – over the past two years this has been close to 250%.

The market capitalisation position is variable over time depending on the opportunities in the market and the best ideas in the portfolio and is always a function of individual stock decisions. At the moment the portfolio is slightly overweight to small and mid- cap stocks but there are no market cap parameters, and provided there is liquidity in a stock they are not constrained on weightings. The managers can participate in IPO issuance although this is rare and not significant in the fund.

The fund Beta tends to be close to one, which is not unusual for the sector but it maintains a high active share. Cash is not used as an investment tool and if there is a significant build-up of cash they will equitise it by buying futures on the market.

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Past&CurrentPositioning/Strategy

The portfolio has made very few significant changes to its positioning over the last twelve months. Moving into 2016, they were underweight in areas such as energy and oil and gas which was not surprising given the earnings revisions associated with these companies. At present they are largely overweight domestically biased companies.

An example of this domestically biased strategy can be seen in the overweight they have held in the housebuilding sector over the last three years. When they first set up this holding, the sector had shown strong valuation support (on a price book value they were all trading below 1x) but the real flag to them was a change in the momentum signals coming from the sector after the economy moved to a firmer footing coming out of recession, particularly in the small local housebuilding firms which led the revival. Additional factors included the demographic pressure of an increasing population and lifestyle changes (single parent families) which was a positive, plus an undersupply of housing stock at the time. Development land prices had come down in value allowing builders to make greater margin when converting land – this dynamic is still in place although the valuation criteria has changed with most stocks now above 1 on a price to book basis, but equally the quality factor for the companies has also improved with housebuilders showing greater capital discipline by concentrating on profitability and cash flow management, as well as returning this to shareholders. Exposure in housebuilders has changed over the period but core holdings are those with more exposure to the wider middle market so Bellway/Persimmon and Taylor Wimpy are backed but they have moved out of those with a higher net worth / London bias such as Barclay group whose focus is top end development (they felt that this stock also had a more specific Brexit risk and was similar to British Land which was a sale they made this year for the same reasons – the slowdown in the London and South Eastern high end property market).

The fund will change position based on evolving information, with the retailer Next being an example of this. After the first profit rumours then warnings from the company the team felt that this was more a slowing of the use of credit facilities as opposed to top line growth issues, but they began to re-evaluate the holding. Their initial concerns heightened following a downgrade of earnings expectations but they felt this was mainly the result of the poor weather in the early part of the year, which affected trading conditions. They decided that this was not necessarily a permanent change and therefore needed to be assessed over a longer term as it could reverse should weather improve. The management of Next have also been excellent in giving investors conservative forward guidance, leaving room for potential upgrades. On this occasion it proved to be an incorrect assumption so they

sold the shares on the second profits warning. They tend not to ignore the first set of downgrades but this example illustrates that even if momentum is the strongest signal in the three factors it can be moderated by the other two, which was initially the case with Next. This in turn makes them reflect on other holdings such as M&S, JD Sports and Debenhams. At the moment their analysis indicates that M&S has a greater value potential whilst Debenhams have improving quality factors.

In 2016, we have seen a stabilisation in commodity prices, which has been reflected in stability in the earnings of mining companies with companies getting earnings upgrades. The team have a modestly overweight position in this area, adding Anglo American and Glencore whilst already holding Rio Tinto. They missed the start of the rally in March with Glencore rising from 70 to 110 pence per share before they bought in which was a result of their process in that they only buy stocks when earnings also reflect this upward change and not on pure price movements. They wouldn’t take advantage of a bounce that wasn’t supported by earnings and similarly they will only look to sell if earnings downgrades occur.

Best ideas are selected on the strength of revisions and valuation metrics with investments made based on their current views on risk and what are the best options for earnings revisions. At present there is a reducing risk appetite, hence the addition of mining stocks in 2016. They are prepared to add several stocks from a sector if they are all showing the right characteristics and there will always be opportunities for stock additions even in periods of economic deceleration, such as UK is experiencing now, as stocks that undergo structural changes or improving earnings positions come to the fore.

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Performance

The portfolio has consistently outperformed comparative funds over the last five years, and if we were to look at data going back to inception in 2000 it would have had equally strong returns.

The portfolio is concentrated and more aggressive than some of the sector peers but offers diversification from the benchmark with a high active share. The Dynamic process means that the fund performs well in periods of momentum but may initially miss the inflection point before earnings upgrades come through.

The lower weightings in energy and resource stocks have helped the portfolio, until very recently, as they suffered heavily in the commodity related downturn in 2015. 2016 had a difficult start to the year and the fund underperformed the benchmark over the first quarter. This is a relatively short period and reflects the overweights in general retailers which underperformed and some stock weakness in media such as ITV, and in financial services. More generally the fund will tend to lag inflection points in markets as adjustments occur to analyst evaluations of company profitability but as these trends gather momentum the fund will tend to outperform peers.

JPMUKDynamicversusIAUKAllCompaniesSectoraverageover5years.

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Summary&Evaluation

The management process at JPM for the Dynamic range has been in place for some time and although there have been some tweaks to this it is the consistency of this process that has delivered the strong returns over time. The basis for this has always been the behavioural approach to investment which looks to take advantage of the inherent biases that exist in investor’s reactions to news flow and the inefficiencies that exist in markets. The core of the team are very experienced investors who have worked together for a number of years in the same company and environment using a consistent investment process. This process is firmly based on three factors Value, Quality and Momentum with momentum being the strongest of the indicators in selecting stocks for the portfolio. All three factors need to contribute to the evaluation but not equally or at the same time, which gives them the flexibility to add stocks at an earlier stage of improvement if the evaluation is positive.

The portfolio will always offer a concentrated investment option with an aggressive approach to stock usage reflecting in a relatively high turnover for the sector. The managers increasingly feel this is the right approach for an economic environment where it will be increasingly difficult to find returns in the shorter term. Holding the index or being less active in a low growth low return environment may prove to be negative for the UK investor.

We recognise this fund is not suitable for all investors but it does have a broad capitalisation range and will deliver something different to the core benchmark-driven UK holding, providing broader diversification with a more focused portfolio. The combination of an experienced management team and a well-defined process should in our view contribute to strong returns over the longer term.

Ken Rayner Investment Director RSMR May2016

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Contents

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