FC Quarterly Review - Q2 2022-V1.3

Quarterly Investment Report Flying Colours Core Discretionary Management Service Q2 2022

Introduction Welcome to the first Flying Colours Investment Management Limited Quarterly Investment Report. This new report is one of the additions to a suite of new communicational tools, to bring you closer to your investments and your Flying Colours Advice Limited Financial Adviser, as well as providing you with an insight into economic market conditions and how your investments are performing. In this edition, we have covered the following: • Market review • Portfolio performance • Fund and asset allocation • Why we remain invested in volatile markets • Portfolio holdings I hope you find this report useful, and I would add that your Flying Colours Financial Adviser is available to answer any questions you may have about this update or about the Flying Colours Core Discretionary Managed Portfolios in general. Yours sincerely Guy Myles Chief Investment Officer 2 Flying Colours Quarterly Investment Report - Q2 2022

Market Review Q2 2022 We look at the key events and drivers for markets in the second quarter of 2022 and where we believe they will go in Q3. Inflation was a key driver for financial markets in the Equities second quarter of 2022. There were very few hiding places as both equity and bond/fixed income markets Many of the developed markets have seen the worst were down significantly. first half of the year for 50 years and in Q2. US equities fell by 9.1%, European stocks 8.7% with the UK Stagflation is a word you may have heard recently. performing slightly better with only a 5% drop. This is a world of low economic growth, high inflation, something we have not seen since the 1970s, which Emerging market equities were collectively down by the Central Banks are very concerned about. The UK 4%, however, this was buoyed by Chinese equities headline inflation hit a multi-decade high of 9.1%, rebounding 14% during the quarter, the only real driven by rising goods, especially food and energy highlight in what has been a tough quarter for equities, prices, both of which the UK is heavily reliant on caused by the sell-off due to the fear of a recession. imports of. Fixed Income The only positive is unemployment is at a record low, alongside a high number of open job opportunities. Bonds and fixed income are usually inversely correlated During stagflation, this is usually the opposite, to equities, with bonds often being a safer haven during therefore, we are experiencing a new element that periods of increased volatility and a sell-off in equity has not been seen previously. markets. However, rising inflation and the “pricing in” of further interest rate rises has negatively impacted Central Banks in both developed and emerging the fixed income market. markets are raising interest rates to try and combat high inflation. This measure is not unusual but has UK Government bonds, commonly known as Gilts, fell a negative impact. Borrowing costs increase, cost 7.4%, whilst US Treasuries ended the quarter down by of living is significantly up, which places a dent in 3.8%. It was the riskier end of the fixed income market consumer confidence and spending, which then raises that saw the highest losses with high yield bonds falling further fears of a recession. 11%. These bonds are debt issued by companies who have a higher risk of default and pay a higher rate of The pound is currently weaker against other interest. With recession fears growing, the chance of currencies. This is good news for UK exporters, but as them defaulting increases, which has impacted them previously stated, for a nation that imports much of its during the quarter. energy and food supplies, this has a negative impact. It also means it is more costly when travelling abroad Positive Outlook for holiday or work, as the pound is worth less against the likes of the US dollar and Euro. A key positive to the falls in both equity and bond markets during 2022, is bond yields and equity The US dollar has increased in strength significantly valuations are becoming more attractive. since the Russian invasion of Ukraine. It has been nearly 20 years since it was this strong, gaining Other than a fleeting period during the COVID almost 9% against a basket of major currencies since pandemic, they have not been this appealing since the war began. the financial crisis in 2008/09. Whilst our portfolios have struggled to deliver a positive return in this market, we are outperforming our peers and associated benchmarks over the medium to long term. We will continue our research to look at undervalued assets we can purchase in our portfolios, to take advantage of these attractive assets. Flying Colours Quarterly Investment Report - Q2 2022 3

Portfolio Performance We utilise Investment Association (IA) sectors as benchmarks to measure how we have performed. These are used by our peers and are widely used across the fund management industry. The ones selected are the closest to our asset allocation, therefore providing a good indication as to how we have performed. They also act as indicators of specific market and asset performance. Core Portfolio Performance 35.0% Core Defensive 30.0% Core Conservative 25.0% Core Balanced 20.0% Core Growth 15.0% Core Growth Plus 10.0% Core Aggressive 5.0% 2017 2018 2019 2020 2021 2022 0.0% -5.0% -10.0% Cumulative Performance 3 Months 6 Months 1 year 3 Years 5 Years FC Core Defensive -4.6 -7.4 -6.5 3.6 11.6 IA Mixed Investment 0-35% Shares -6.1 -9 -7.9 -0.6 4.1 FC Core Conservative -5.4 -7.6 -5.9 6 15.6 IA Mixed Investment 20-60% Shares -6.4 -9.6 -7.1 3.1 8.8 FC Core Balanced -6.3 -7.8 -5.4 8.2 18.9 50:50 IA Mixed Investment 20-60 & 40-85 -6.9 -10.2 -7.1 6.1 13.8 FC Core Growth -7.2 -8.2 -5 9.8 21.7 IA Mixed Investment 40-85% Shares -7.4 -10.9 7.2 9.1 18.8 FC Core Growth Plus -7.6 -8.4 -4.9 10.1 22.4 50:50 IA Mixed Investment 40-85 & Flexible -7.2 -10.6 -7.1 10.4 19.8 FC Core Aggressive -7.8 -8.4 -4.7 10.1 22.8 IA Flexible Investment -7.1 -10.5 -7.2 11.5 20.7 YTD & Calendar Year Returns YTD 2021 2020 2019 2018 2017 FC Core Defensive -7.4 1.8 8 8.5 -1.1 4.7 IA Mixed Investment 0-35% Shares -9 2.6 4 8.8 -3.4 5 FC Core Conservative -7.6 4.6 7 11.3 -2.9 7.3 IA Mixed Investment 20-60% Shares -9.6 6.3 3.5 12.1 -5.1 7.2 FC Core Balanced -7.8 7.6 5.9 13.3 -4.1 9.3 50:50 IA Mixed Investment 20-60 & 40-85 -10.2 8.7 4.5 14 -5.6 8.6 FC Core Growth -8.2 10.5 4.4 15.6 -5.5 11.4 IA Mixed Investment 40-85% Shares -10.9 11.1 5.5 15.9 -6.1 10 FC Core Growth Plus -8.4 11.7 3.5 16.6 -6.2 12.4 50:50 IA Mixed Investment 40-85 & Flexible -10.6 11.2 6.3 15.8 -6.4 10.6 FC Core Aggressive -8.4 12.8 2.2 17.7 -6.8 13.4 IA Flexible Investment -10.5 11.4 7 15.6 -6.6 11.1 Source: Morningstar Direct Quarterly Investment Report - Q2 2022 4 Flying Colours

Fund and Asset Selection In what has been both a volatile and tough quarter for financial markets, the focus was to maintain risk levels, mitigate losses and outperform our designated benchmarks. Core Defensive & Core Conservative That said, they have still played their part in minimising risk and losses. However, its higher equity content Even our primary cautious portfolios were hampered by presence in Europe, Far East and US has impacted the the markets. Our holding in Royal London Short Term returns, but we have maintained an overweight (higher Fixed Income returned 0.12%, being the only positive than the sector average and our peers) position in the performer. Our positions in overseas Government UK, which we feel will perform better in the long term. bonds (iShares Overseas Government Bond Index) fell by 0.45% and local currency based emerging market Core Growth & Growth Plus Government bonds (L&G EM Government Bond Local Currency) fell by 0.10%. These portfolios have been hit harder with a higher equity exposure (Growth 79% and Growth Plus 86.2%) The Core Defensive fell by 4.6% in the second quarter, than the more risk averse Balanced, Conservative and compared to its benchmark (IA Mixed Investment Defensive Portfolios. The Growth Portfolio fell by 7.2% 0-35% Shares where the constituents will have an just outperforming its benchmark, which showed a fall equity holding of 0-35%), which showed a fall of -6.1%. of 7.4%. Unfortunately, Growth Plus underperformed its Our equity holding at the end of June 2022 was 21.8%, index with a fall of 7.6% compared to the benchmarks, hence the reason we utilise this benchmark. It is worth which fell by 7.2%. mentioning, the sector figure is an average, not the worst performer, therefore, we have outperformed One of the major factors for the under-performance the average and have maintained risk levels within was our exposure to gold mining in the Blackrock Gold & the portfolio. General Fund (Growth 4.9% and Growth Plus 5.4%). This sector has seen a significant sell off and has resulted in The Core Conservative has a higher equity content, the fund posting a loss of 19.34% for the quarter. This therefore, it has a different benchmark. Our equity is in sharp contrast to Q1 where the fund rose by 9.1%, holding is 41.1% and as equity markets were harder further demonstrating the volatility in the markets. hit, the performance is reflected with a fall of 5.4%. The benchmark (IA Mixed Investment 20-60% Shares) Core Aggressive was down by 6.4% again, being the average return. Our UK equity exposure, is higher than other developed Our highest risk and equity-based portfolio returned markets such as the US, and this ensured the risk and a fall of 7.8% for the quarter and this was an under- losses were significantly better than the sector. performance against its benchmark (IA Flexible Investment), which showed a fall of 7.1%. With very Core Balanced limited cash and bond positions, the portfolio is going to more volatile than the others in the range. Again, its This portfolio aims to achieve a balance between risk and exposure to the Blackrock Gold and General Fund (5.8%) return. Equity exposure is typically around 60% (60.1% alongside emerging markets and US holdings did impact as of 30th June 2022) and uses a composite benchmark the returns. (a 50:50 split between IA Mixed Investment 20-60 & 40- 85% Shares, as these best fit our objectives and risk of Our overweight position in the UK has assisted in the portfolio) which returned a fall of 6.9% compared to maintaining our risk level and reduced the losses. We are the fall in the Core Balanced portfolio of 6.3%. hopeful this will benefit us further in the future, and we can look to acquire assets that are undervalued to assist Like its cautious counterparts, they share the same in future returns. carefully selected bond holdings, but have less exposure. Flying Colours Quarterly Investment Report - Q2 2022 5

Why we remain invested in volatile markets Financial planning advice is designed to align your money with your life goals and help manage your money in such a way as to minimise the chances of something happening, which would result in your financial objectives not being achieved. This might sound obvious, but so many people take All these views were included in our bond and equity poor financial decisions when it comes to saving portfolios and have contributed to our long-term and investing. Therefore, this is why quality financial record of beating our benchmarks. We are confident planning is so important is one of the reasons why that we can continue to be a step ahead, however, we Flying Colours was founded. do not believe we will always be correct. Investing is difficult and even careful analysis and experience can As a fund manager, it is our responsibility to decide lead you to, what turns out to be, the wrong decision. which investments we feel will perform and which ones to buy and sell. For example, we currently do not favour The framework of investing is to rely on the underlying the US equity market, as we believe that it is skewed asset markets to produce returns. Over time towards certain companies, which remain overvalued. expansion in global populations, improved productivity and the transfer of technology and know-how to For this reason, we are significantly underweight emerging markets will create global GDP growth in US equities (our exposure is less than our and this feeds directly into rising asset prices. The peers across the sectors where our portfolios are relentlessness of this process is why it is always likely represented) but why do we not sell out completely? that given enough time a fully invested portfolio will The rationale for this is because we are controlling rise in value. risk and avoiding what we consider to be the largest risk to any portfolio. In our opinion, managing risk is If you sell out completely from asset markets and are more important than seeking returns. wrong, there is a chance the asset price will never fall again to this level. This will force you to buy back at Over the last few years, we have had a strong record of a higher price and this loss is permanent. This loss predicting changes before they are recognised by the can easily be 10-15%, which is far more than our risk market overall. Examples of these are that: budget. For this reason, we will never sell completely out of any asset class but rather move around the • we identified that inflation would be a problem; edges to improve returns. • that growth style investing was about to under- Our goal is to outperform our benchmarks by 1.5- perform; and 2.5% per annum. We can do this without taking the enormous risk of selling out completely. This gradual • the UK equity market overall was likely to outperform process delivers large benefits over time without the the US market. need to take extreme risk. 6 Flying Colours Quarterly Investment Report - Q2 2022

Core Portfolio Breakdown Core Defensive Core Conservative ● Bonds 66.25 ● Bonds 48.75 L&G Short Dated £ Corporate Bd Idx I Acc 13.3 L&G Short Dated £ Corporate Bd Idx I Acc 9.3 Vanguard U.S. Govt Bd Idx £ H Acc 12.15 Vanguard U.S. Govt Bd Idx £ H Acc 6.65 BlackRock Corporate Bond 1-10 Year D Acc 10 BlackRock Corporate Bond 1-10 Year D Acc 8 L&G Global Inflation Linked Bd Idx I Acc 9.7 L&G Global Inflation Linked Bd Idx I Acc 7.2 iShares Overseas Govt Bd Idx (UK) D Acc 8.4 iShares Overseas Govt Bd Idx (UK) D Acc 8.4 iShares UK Gilts All Stks Idx (UK) D Acc 7.7 iShares UK Gilts All Stks Idx (UK) D Acc 5.7 L&G EM Govt Bond Lcl Ccy Index I Acc 4.65 L&G EM Govt Bond Lcl Ccy Index I Acc 3.5 7.7 ● UK Equities 0.9 ● UK Equities 14.45 HSBC FTSE 250 Index C Acc 6.8 Vanguard FTSE UK All Shr Idx Unit Tr£Acc 3.15 Fidelity Index UK P Acc 11.6 HSBC FTSE 250 Index C Acc 1.7 Fidelity Index UK P Acc 9.6 ● Cash & Money Market 2 8.65 Cash 4.8 ● Cash & Money Market Royal London S/T Fxd Inc Enh Y Acc 4.8 Cash 2 Royal London Short Term Fixed Inc Y Acc 1.1 Royal London Cash Plus Y Acc 3.35 1.1 Royal London Enhanced Cash Plus Y Acc 3.3 ● European Equities 2.95 2.1 Fidelity Index Europe ex UK P Acc 2.95 ● European Equities 2.1 2.5 Fidelity Index Europe ex UK P Acc 5.5 ● US Equities 2.5 5.5 Vanguard U.S. Eq Idx £ Acc 2 ● US Equities 4.75 2 Vanguard U.S. Eq Idx £ Acc 4.75 ● Emerging Markets 1.8 3.8 Fidelity Index Emerging Markets P Acc 1.8 ● Emerging Markets 3.8 3.15 Fidelity Index Emerging Markets P Acc 3.4 ● Japanese Equities 2.25 3.4 Fidelity Index Japan P Acc 0.9 ● Japanese Equities 1.3 Fidelity Index Japan P Acc 6 ● Asia Pacific 1.3 4.3 HSBC Pacific Index Accumulation C ● Asia Pacific 1.7 HSBC Pacific Index Accumulation C 2.5 ● Global Equities 2.5 Dimensional Global Value GBP Acc ● Global Equities Vanguard Glb Small-Cp Idx £ Acc Dimensional Global Value GBP Acc Vanguard Glb Small-Cp Idx £ Acc ● Specialist BlackRock Gold and General D Acc ● Specialist BlackRock Gold and General D Acc Flying Colours Quarterly Investment Report - Q2 2022 7

Core Portfolio Breakdown Core Balanced Core Growth ● Bonds 31.9 ● Bonds 14.9 L&G Short Dated £ Corporate Bd Idx I Acc 7.3 L&G Short Dated £ Corporate Bd Idx I Acc 3.8 Vanguard U.S. Govt Bd Idx £ H Acc 4.3 Vanguard U.S. Govt Bd Idx £ H Acc 2 BlackRock Corporate Bond 1-10 Year D Acc 4 BlackRock Corporate Bond 1-10 Year D Acc 1.5 L&G Global Inflation Linked Bd Idx I Acc 4.7 L&G Global Inflation Linked Bd Idx I Acc 2.2 iShares Overseas Govt Bd Idx (UK) D Acc 5.6 iShares Overseas Govt Bd Idx (UK) D Acc 2.6 iShares UK Gilts All Stks Idx (UK) D Acc 3.75 iShares UK Gilts All Stks Idx (UK) D Acc 1.75 L&G EM Govt Bond Lcl Ccy Index I Acc 2.25 L&G EM Govt Bond Lcl Ccy Index I Acc 1.05 21.3 28.1 ● UK Equities 2.7 ● UK Equities 3.55 Vanguard FTSE UK All Shr Idx Unit Tr£Acc 2.5 Vanguard FTSE UK All Shr Idx Unit Tr£Acc 3.3 HSBC FTSE 250 Index C Acc 9.5 HSBC FTSE 250 Index C Acc 9.45 Fidelity Index UK P Acc 6.6 Fidelity Index UK P Acc 11.8 L&G UK Index I Acc 5.6 L&G UK Index I Acc 2.6 2 2 ● Cash & Money Market 1.8 ● Cash & Money Market 0.6 Cash 1.8 Cash 4.1 Royal London Cash Plus Y Acc 3.1 Royal London Cash Plus Y Acc 4.1 Royal London Enhanced Cash Plus Y Acc 3.1 10.75 8.15 ● European Equities 10.75 ● European Equities 8.15 Fidelity Index Europe ex UK P Acc 9.1 Fidelity Index Europe ex UK P Acc 6.95 9.1 6.95 ● US Equities 7.45 ● US Equities 5.6 Vanguard U.S. Eq Idx £ Acc 7.45 Vanguard U.S. Eq Idx £ Acc 5.6 6.6 5 ● Emerging Markets 6.6 ● Emerging Markets 5 Fidelity Index Emerging Markets P Acc 11.55 Fidelity Index Emerging Markets P Acc 8.8 8.25 6.3 ● Japanese Equities 3.3 ● Japanese Equities 2.5 Fidelity Index Japan P Acc 4.85 Fidelity Index Japan P Acc 3.6 4.85 3.6 ● Asia Pacific ● Asia Pacific HSBC Pacific Index Accumulation C HSBC Pacific Index Accumulation C ● Global Equities ● Global Equities Dimensional Global Value GBP Acc Dimensional Global Value GBP Acc Vanguard Glb Small-Cp Idx £ Acc Vanguard Glb Small-Cp Idx £ Acc ● Specialist ● Specialist BlackRock Gold and General D Acc BlackRock Gold and General D Acc Quarterly Investment Report - Q2 2022 8 Flying Colours

Core Portfolio Breakdown Core Growth Plus Core Aggressive ● Bonds 7.9 ● Bonds 0.75 L&G Short Dated £ Corporate Bd Idx I Acc 0.95 BlackRock Corporate Bond 1-10 Year D Acc 0.75 Vanguard U.S. Govt Bd Idx £ H Acc 0.6 32.9 BlackRock Corporate Bond 1-10 Year D Acc ● UK Equities 5.1 L&G Global Inflation Linked Bd Idx I Acc 2 Vanguard FTSE UK All Shr Idx Unit Tr£Acc 3.9 iShares Overseas Govt Bd Idx (UK) D Acc 1.25 HSBC FTSE 250 Index C Acc 12.1 iShares UK Gilts All Stks Idx (UK) D Acc 1.5 Fidelity Index UK P Acc 11.8 L&G EM Govt Bond Lcl Ccy Index I Acc L&G UK Index I Acc 2.25 1 ● UK Equities 0.6 ● Cash & Money Market 2 Vanguard FTSE UK All Shr Idx Unit Tr£Acc 30.65 Cash 0.25 HSBC FTSE 250 Index C Acc 4.25 Royal London Cash Plus Y Acc 4.85 Fidelity Index UK P Acc 3.6 4.85 L&G UK Index I Acc 11 ● European Equities 12.65 11.8 Fidelity Index Europe ex UK P Acc 12.65 ● Cash & Money Market 2 10.7 Cash 2 ● US Equities 10.7 4.5 Vanguard U.S. Eq Idx £ Acc 8.75 ● European Equities 4.5 8.75 Fidelity Index Europe ex UK P Acc 11.75 ● Emerging Markets 7.8 11.75 Fidelity Index Emerging Markets P Acc 7.8 ● US Equities 9.9 13.6 Vanguard U.S. Eq Idx £ Acc 9.9 ● Japanese Equities 9.7 8.1 Fidelity Index Japan P Acc 3.9 ● Emerging Markets 8.1 5.75 Fidelity Index Emerging Markets P Acc 7.2 ● Asia Pacific 5.75 7.2 HSBC Pacific Index Accumulation C ● Japanese Equities 12.6 Fidelity Index Japan P Acc 9 ● Global Equities 3.6 Dimensional Global Value GBP Acc ● Asia Pacific 5.4 Vanguard Glb Small-Cp Idx £ Acc HSBC Pacific Index Accumulation C 5.4 ● Specialist ● Global Equities BlackRock Gold and General D Acc Dimensional Global Value GBP Acc Vanguard Glb Small-Cp Idx £ Acc ● Specialist BlackRock Gold and General D Acc Flying Colours Quarterly Investment Report - Q2 2022 9

Head Office Lincoln Liverpool 1301, Ocean House, The Ring 1 Ingleman Place, The Lawn Yorkshire House, 18 Chapel Street Bracknell, Berkshire RG12 1AX Lincoln LN1 3BU Liverpool L3 9AG 0333 241 9900 01522 712 514 0151 909 4937 fcadvice.co.uk The value of an investment, and any income from it, can fall as well as rise. Past performance is not a reliable indicator of future performance and investors may not get back the full amount they invest. Flying Colours Investment Management Limited is authorised and regulated by the Financial Conduct Authority under number 922882. We are registered in England and Wales under company number 12433663 at 1301 Ocean House, The Ring, Bracknell, Berkshire RG12 1AX.