Tag Archives: Collectives

Inheriting ISAs : Changes to the ISA Rules on Death

23 Apr

 

Some are still unaware of the change in legislation.

Did you know that you can inherit your partner’s ISA savings? New rules came into being in April 2015 that mean ISA assets can now be passed on to spouses or civil partners and retain their tax-friendly status, and although it may not be nice to think about, it could make a huge amount of difference should the time come.

If you save into an Isa, it means you can grow your money in a tax efficient way. Unfortunately, when you die, this benefit dies with you – unless you’re married or in a civil partnership.

New rules introduced by the government enable your surviving spouse or civil partner to inherit your Isa savings when yoU die.

 

Why The Change?

Under the previous system, when someone died, any savings held in an ISA automatically lost their tax-free status. This meant that the surviving partner would have to start paying tax on any returns or income earned from it, which could add up to a significant sum if the ISA holder had been saving for many years.

The system was widely thought to be unfair, particularly given the fact that couples tend to save from joint incomes – they’d have to pay tax on money they thought was protected, and thousands of people were caught by these unexpected tax charges every year. Happily, things have now changed.

 

Pass on the benefits

The rules mean that if an ISA holder dies, the surviving spouse or civil partner will be able to inherit the ISA and retain its tax benefits. This is in the form of an additional allowance – the surviving partner is given an ‘additional permitted subscription’ (APS), a one-off ISA allowance that’s equal to the value of the ISA at the date of the holder’s death, which won’t be counted against the normal ISA subscription limit but will instead be added on to the survivor’s own ISA limit.

In other words, you’ll be entitled to an additional allowance that would cover the value of your partner’s savings as well as your own. For example, if your partner had £50,000 in ISA savings, your ISA allowance for the year would be £65,240 (the value of your partner’s savings and your own ISA allowance for the 2016/17 tax year, which stands at £15,240).

Essentially, the rules mean that the tax-efficiency of the ISA won’t be lost, and that you’ll be able to benefit from the money that could well have been saved together. The changes have been specifically designed to ensure that bereaved individuals will be able to enjoy the tax advantages they had previously shared with their partner, offering more flexibility and a much fairer outcome.

“Approximately 150,000 married ISA holders die each year, so these changes will benefit spouses or civil partners by increasing the amount that they can save by offering the tax advantages in an ISA wrapper,” said Carol Knight, operations director at TISA. “We see it as a much fairer outcome and one we have long advocated. [Surviving partners could have] lost out significantly under the previous rules whereby investments held by deceased ISA savers lost their tax-free status… Allowing ISA savings to be transferable will enhance flexibility and will act as a further incentive to save within these vehicles.”

Rules at a glance

  • Anyone whose spouse/civil partner died on or after 3 December 2014 is eligible, and the APS could have been claimed since the start of the 2015/16 tax year.
  • The rules apply irrespective of the size of the deceased’s ISA pots – no matter how much they’d saved in an ISA, you’ll have that amount as an additional allowance.
  • In the event that more than one ISA was held by your partner, the pots will be combined to give an overall additional subscription amount that you can claim.
  • APS allowance subscriptions (referred to as payments) can be made to a cash ISA and/or a stocks & shares ISA, either with the deceased’s ISA provider or with an alternative that will accept APS subscriptions (not all will).
  • Some ISA providers will allow payments to be made in instalments whereas others only allow a lump sum, so make sure to check.
  • Chances are, arranging your new allowance won’t be at the forefront of your mind on the death of your partner. In most cases, at least for subscriptions made in cash, the allowance is available for three years after the date of death.
  • ISA providers will require key information and personal details from the spouse/civil partner to open a qualifying ISA, and they’ll also require an application form to use the APS allowance.
  • The APS allowance can be transferred to another ISA provider, subject to the new provider’s acceptance.
  • It can only be transferred once and only where no subscriptions have been made under the allowance. But, after an APS allowance payment has been made, the cash and/or investments related to that subscription can be transferred to another ISA.

 

 

 

How are ISA Allowances Inherited?
Anyone whose spouse or civil partner died on or after 3rd December 2014 is eligible for a one-off additional Isa allowance equivalent to the value of the deceased person’s Isa at the time of death.

This is referred to as an ‘additional permitted subscription,’ or APS allowance.

Say, for example, that you’d saved up £50,000 in your Isa when you die. Your spouse will be able to make an additional contribution to their Isa of up to £50,000, in addition to their own Isa allowance for the year (£15,240 in the 2015/16 tax year).

This allowance is regardless of what’s in your will. Which means that even if the money is left for someone else to inherit, such as your son or daughter, your partner is still entitled to an increased allowance equivalent to the value of your Isa assets on the day of death.

So if you left £50,000 worth of Isa assets to your child, your partner would still be entitled to an increased Isa allowance of £50,000, although they would be using their own money to fund it.

 

Where can I invest the Isa savings I’ve inherited?
The surviving partner can choose where to transfer the inherited savings. They can:

  • Keep the money with the original Isa provider
  • Put the money with their own Isa provider
  • Open up a new cash Isa or a new stocks and shares Isa and place the additional subscription there
  • An APS allowance can only be transferred once but if there is more than one Isa to inherit, you’ll have an allowance with each provider.

Under the Isa rules, you can only have one cash Isa and one stocks and shares Isa per tax year. However, you won’t breach these rules if you open up an Isa for the sole purpose of transferring inherited savings.

So, you could have some money in your own cash Isa with one bank, and place the Isa savings you’ve inherited in another bank.

Once the transfer has been made, the normal Isa rules apply and the money is treated as previous years’ subscriptions.

 

Do Isa providers have to accept payments?
In short, no.

Isa providers aren’t obliged to accept APS allowances – so you may not been able to deposit inherited savings with your own Isa savings.

The 11 providers below, although could change their approach and are not the only but rather a few I can detail. This could change and there will be others. It’s just to demonstrate that even though the legislation has changed ISA providers may not offer the flexibility – please check with your provider their stance on this. I have found, these do not accept the additional allowance :

  • Bath BS
  • Buckinghamshire BS
  • Harpenden BS
  • Leeds BS
  • Manchester BS
  • Mansfield BS
  • Melton BS
  • Mowbray BS
  • GE Capital Direct
  • Furness BS*
  • Al Rayan Bank*

 

*Furness BS and Al Rayan Bank have said they are planning to accept inherited Isa savings in the near future.

 

Is there a time limit for additional Isa subscriptions?
When someone dies, their estate has to be administered. This means that all of their assets have to be gathered and debts must be repaid, before it can be distributed to the people named in the deceased’s will.

During this period, interest earned on savings in their Isa is taxable, and income tax may need to be paid.

To help couples keep the tax benefits of their savings, the increased Isa allowance can be claimed by filling out an application form and is available for three years after the date of death, or if longer, 180 days after the estate has been administered.

 

What happens when you inherit a stocks and shares Isa?
Stocks and shares Isas are treated in the same way as cash Isas under the reforms, with surviving spouses entitled to make additional subscriptions into either a stocks and shares Isa or a cash Isa.

There are two ways for a surviving partner to use their inherited stocks and shares allowance:

  • All of the investments – such as funds and shares – could be sold, and the resulting cash can be used to open a new Isa. This is known as a ‘cash transfer.’
  • Alternatively, the investments can be transferred directly without being sold. This is known as an ‘in specie’ transfer.
  • Additional subscriptions made via an ‘in specie’ transfer must be made within 180 days of the surviving partner inheriting the funds and can only be made to the deceased Isa provider.

 

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Investment Bulletin – January 2016

22 Mar

From a momentum perspective, the pessimists were clearly in charge since mid-2015. On the other hand, the sheer size and scope of the setback opens the door to a possible market bounce… a volatile mode the market has been in for recent times. Only time will really tell if this oddly excessive poor start to the New Year was a fluke or the shape of things to come. It’s best to prepare for both possibilities. I’m pleased to say – this is part of our core philosophy.

 

We have been very busy reviewing and reassessing your portfolios, considering the impact of the recently and sometimes violently changing market conditions. The general outcome of our review so far, there are possible changes required and we will speak about this on a one-to-one basis.

 

The results so far indicate, a seriously vulnerable market but I’m pleased to report, we have seen excellent results relative to the general market. We’ve had the panic phase, so is it now time for the panic to subside? I believe there are strong indicators and potentially positive scenarios but as always, only in certain market geographies, sectors and themes.

 

Market Outlook

We believe the key catalysts have been :

 

  • concerns about Chinese exchange rate policy and associated GDP
  • a renewed collapse in oil prices
  • the problems in the Middle East have led to a dire refugee situation
  • the rate hike in the US followed by increased fears of a slow-down in the US economy.
  • the news that Brexit might become a reality after the June Referendum.

 

Macroeconomic and geopolitical factors look certain to play a key part in investor thinking again in 2016, and the outlook is as mixed as it was a year ago. Most western economies are improving slowly, with the US Federal Reserve finally raising its interest rate in December after holding it at an historical low for seven years. European economies also appear more steady, even on the periphery, it appears 2016 will see the continued divergence of central bank monetary policy, with the European Central Bank (ECB) and Japan both continuing their quantitative easing stance.

 

Fixed income was one of the stragglers in 2015, with low yields forcing many investors to seek alternatives, or to move higher up the risk spectrum. The expected divergence in monetary policy between the US and Europe will be a key theme in bond and currency markets.

 

Unless there is some surprise from central banks, it seems clear that the momentum for an even stronger dollar is likely to persist into 2016.

 

An increase in volatility is expected in the months ahead given the shift in the US monetary stance and the increasingly accommodative strategy of the ECB. If there is any sense that the Federal Reserve may be more aggressive than currently priced in, this could possibly lead to higher bond yields and a more negative reaction from credit markets.

 

In Europe, a sharp fall in the euro could trigger a steeper bond curve if inflationary expectations start to build, and this may be temporarily negative for credit spreads.

 

Pseudo-Economics

To paraphrase the late Jude Wanniski – the history of man is a battle between the creation of wealth and the redistribution of wealth. Jude was a Supply-Sider, which means an economist who believes that entrepreneurship and supply (not demand) drives economic growth.

 

Many pseudo-economists have sprung up since the recession voicing opinion rather than understanding, fuelled by a misunderstanding of 2008. They have clearly, used selective excerpts from Economists (such as, Hyman Minsky and the Minsky Cycle), have created an entire theory that the US economy (for example) is in a “crack-up boom.” The boom, according to these “pundits”, has been suggested to be solely caused by the Federal Reserve (Fed), Quantitative Easing (QE) and 0% interest rates, and now that the Fed has tapered and started hiking rates, it’s over and a bust is on its way.

 

These Pseudo-Economists have focused almost solely on money; they’ve forgotten the entrepreneur. We believe quantitative easing did not boost economic growth because banks shovelled that money straight into excess reserves.  We also believe in new technologies – simply, good old entrepreneurship is driving profits and economic output inexorably upward.

 

Volatility in The Markets

Most people think of volatility as a bad thing. It is assumed that higher volatility leads to higher risk of a negative outcome and as it is in our nature to be risk-averse, this tends to take the form of trying to avoid or hedge a loss.

 

Volatility can, however, be an investment opportunity and there are strategies that focus on exploiting bouts of market uncertainty to capture a return premium. Investors need to treat volatility like any asset that has a long-term expected return and a risk profile.

 

Investors should also bear in mind that periods of high volatility are usually short-lived. It is therefore key, to focus on the important developments and ignore the transient ones.

 

Summary

Maintaining a nimble and responsive portfolio is more important than ever. We have chosen to employ a systematic investment approach and diversifying across a number of underlying volatility strategies has the potential to add value to an investor’s portfolio. Particularly in this high-volatility environment, a number of different risk strategies to achieve the desired risk/return outcome to meet investment objectives is considered.

 

We have found the most effective and successful approach to investing, is to focus on the macro-backdrop potentially identifying short-term investment risks and with the potential of tactical advantages. The short-term volatility helps to provide longer term buying opportunities. We see these recent events as a superior opportunity to add value through the service we provide. Our wish is, within your attitude to investment risk, to target potential returns while focusing on capital preservation, where possible.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)

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Investment Bulletin – October 2015

12 Nov

2015 has been a poor investment period so far, seeing the most significant losses since 2011. The question I’m asking – are we about to see a similar outcome to 2011 with the investment markets rallying and posting significant returns? The answer I have is “maybe” – no one knows but what is clear is the markets have been in the grip of panic, leading in my opinion to being oversold. I believe that this will offer opportunities in certain investment markets for the future.

 

In recent years, the investment markets have been “trading in a range” and this has seen a fall from the top of the range. So, if the markets follow a similar model this could realistically lead to positive returns.

 

It has been our strategy to position your portfolio, within your risk profile, with the focus of relative capital preservation and real total returns. Relative to the market situation, we have performed above expectations and produced pleasing returns.

 

Our portfolios are well diversified and where relevant, we have already made recommendations leading to changes in the asset allocation and some of the fund selections.

 

 

Market Overview

It has been impossible to ignore the recent dramatic sell-off in the Chinese markets and the subsequent falls in other equity markets around the world. Despite the opening up of the Chinese economy its impact on the developed world is fairly limited as regards first round effects, with exports of goods and services to and from China a very small part of GDP (Gross Domestic Product) for all mainstream economies.

 

 

 

I think it is economies that kill markets not the other way around so I believe the current decline is overstated.

 

On a more positive note, lower commodity prices are, of course, producing a significant boost to the western consumer and we are seeing an acceleration in consumer spending across the US, Europe and the UK in 2015. Inflationary pressures are also likely to remain muted for longer and interest rate increases which, until recently, seemed almost a certainty over the coming months could well be pushed back. The US rate increase heavily tipped for December.

 

It is also worth noting that although we have seen sharp falls in equity prices, the moves in bonds have been much less pronounced.

 

Whilst we shouldn’t be complacent, bearing in mind that equity markets can often be a good signal of trouble ahead, I think weakness in China is not sufficient to bring down the global economy. We maintain a modest preference for equity markets but do expect volatility to remain. I am inclined to think the recent drama has been a bit of an over-reaction and is unlikely to have a significant impact in a raw economic sense.

 

 

Summary

We are expecting the prospect of the first interest rate rise since June 2006 and we await the December Federal Reserve meeting. The Fed’s actions in the coming three-to-six months could have wide-reaching implications for the global economy. We expect that if (and based on the Federal Reserve’s commentary and dialog, a rate rise is imminent), this will be closely followed by the Bank of England to raise rates. In both cases, we are expecting small incremental steps based on the strength of the economies. So do not expect large or quickly followed further increases. The expectation is this will not lead to a rise in bank interest rates paid to the consumer, as banks based on recent results and the multitude of fines and legacy problems are not anticipating paying a higher base to account holders.

 

We do expect more volatility but anticipate buoyant equity markets in the near future but with clear risks in several sectors, themes and geographies.

 

Therefore, we reaffirm our focus on valuation discipline and total return strategies, where care and attention is and will always be needed. This focus has allowed us to achieve above average returns in less than average markets over a longer term, always with a clear relative focus on capital preservation, targeted returns and risk profile.

 

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

(If you require personal advice based on your circumstances, please contact me.)

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Pension Freedoms – Is Buy to Let a Stupid Option With My Pension Fund?

22 May

 

 

I have been investigating this due to the discussions in the tabloids but rarely with clients. If I cash in my pension fund, pay the tax and invest the residue in a property – is this a good idea? I have heard that near a university there are student flats available with a guaranteed rental for the first 12 months, etc etc

The details below are for all of those thinking of entering this market….

Image result for buy to let pictures confused

Since the change of Pension Legislation in April 2015, the press has been fully of “spiffy” ideas – why not use your pension to buy a Property and let it out. Much better than one of those silly ‘pension’ things. How can you lose? Property prices always go up??? Hurray for pension freedom! – if I made these statements in my professional life, I’m sure I’d be strung up …. seems madness just focusing on what might go right; what about the risks??? – there I go – typical financial adviser trying to offer a balanced representation – naughty, naughty

Firstly, unless you are going to get involved in timeshare and fractional ownership, we are talking about proper money here. I’d say £200,000 and more.

At that level, we can assume that the client is a higher rate taxpayer, and will probably have other assets.

So let’s run the numbers. Let’s see what this looks like.

If we accept the premise that pensions do and will perform worse than property, and that property can never fall – ‘stupid’ assumptions, but go on – then the simplified figures go something like this

£300,000 pension pot, assuming 6% gross growth, minus 1% fund and platform charges, and 1% adviser charge. A bit high, but OK.

Value of pot in 10 years is a bit under £447,250.

Instead, attracted by the publicity, we take the £300,000 and cash it in. That makes it worth £211,250, using the ‘tax free cash’.

Not great, but we are looking at higher returns. So 4% year on year compound capital growth and 5% income yields – both gross, but 9% total return as a starting point, 50% more than a pension portfolio.

Assuming that the client is a higher rate taxpayer throughout, and that the property is always occupied, and that there are never any capital events required (boilers, roof painting), there are no legal fees, there are no ‘void’ periods, that all tenants pay their rent and look after the property, and the property is sold at the imagined market value, then the net total value returned to the client – including income is… (drum roll) …. just under £399,438. So another £47,812 loss after the original £88,750 tax take.

So I guess the revenue will be supportive of this particular brilliance. Always remember there are other fees to consider, such as, Agents fees (they can be chunky as well), Stamp Duty, Legal Fees,m Contracts, Tenant Vetting, Property Maintenance, Property and Landlord Legislation, costs due to voids and periods of the property being empty, utility costs, tenants non-payments maybe, etc.

As a point of interest, any idea what the gross return needs to be for the Buy To Let to actually break even with the pension? A ‘critical return required?

Its actually nearer 14.5%.

Can you imagine if I tried to take this plan to our compliance for approval?

“I’ve got this great idea! We take a well diversified, flexible and secure portfolio, and cash it in. The client then pays at his highest marginal income tax rate (mainly 40% tax but a bit in the additional rate of 45%) and then invests in a single illiquid asset, which may well require them to add further funds, and take time to manage the asset themselves. There may be court costs involved at some point and we get to pay lots of agents fees and tax. And to match the boring, diversified portfolio, in a low inflation, low risk environment, this single, risky asset only has to grow by at least 14.5% every year to break even!! What a great wheeze!

Excuse me, why are you ringing the FCA……?”

In all the above I have ignored the effects of Inheritance Tax. Promises have been made. They have been before. This time they may be kept. Who knows?

But the BTL is assessable for Inheritance Tax, the pension is not. So if we look at Inheritance Tax, then an additional 40% tax knocks us down by another lump. A real and substantial loss after 10 years.

If your belief is, we all need to give extra coppers to the national pot – then this could be a good option – not only a loss through initial tax payable of £88,750, relative loss in capital value net of Capital Gains Tax of £47,812 but if Inheritance Tax applies then a further £159,775. This could provide £296,337 of tax and relative losses that you could have avoided.

I believe emotionally, some clients will be vulnerable to this suggestion, and clearly some will actually do OK. The numbers are brutal for the majority and I see my role must be to make people aware and protect them from the circling speculators, who are not held responsible for their wild and ill though through counsel.

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Investment Bulletin – September 2014

30 Sep

 

2014 year to date has behaved more or less as expected, trading in a range with the FTSE 100 bouncing from (circa) lows of 6450 to highs of 6850 (data until 15.09.2014).

 

We have made good returns, especially relative to the market – so far in 2014. 2 January 2014 to 15 September 2014, the FTSE 100 Index rose 1.2% in total (and 16 September 2013 to 15 September 2014 rose 2.7%). If we keep this as a consideration of market performance – this explains my opinion.

 

Our forecast of challenging markets has been correct and our approach of diversity is serving us well and I expect positive relative performance for the remainder of the year and beyond. Markets change, the risks and potential outcomes of these markets will change. This will lead to our further discussions around funds selected and asset allocation – I expect that this will lead to some fund selection recommendations and changes.

 

Our portfolios are well diversified, but we are carrying out in-depth risk return analysis and taking into account your outlook to investment risk linked to your investment portfolio(s).

 

Market Outlook

Our plan is for your portfolio to combine growth stock, with income/yield generating assets and defensive assets to help protect the capital value during periods of market decline.

 

Our prediction based on the market so far, and our asset allocation and expectations are on track. The market will remain weak and trade within a range, we will see subdued economic growth globally, but with pockets, countries and some economies slipping into negative figures and possibility returning to recession.

 

I expect the remainder of the year to be beneficial from an investment perspective, leading to high hopes for 2015. So far, there has not been any unexpected fears entering the market and the optimists have not been able to lead a break or up-surge through market barriers. The UK economy continues to exhibit signs of sustained recovery, however, interest rates are now widely tipped to rise – and signs of dissent among Bank of England policymakers have fuelled speculation about the timing and scale of such an increase.

Market Round-Up

Signs of growth within the US economy has supported the idea that one of the world’s largest economies was on the path to recovery. Further ammunition was provided by the US Federal Reserve’s (Fed) statement that it would do whatever it took to be accommodative until economic data showed significant improvements.

 

Asian markets are becoming quite attractive, in part this is due to valuations and associated negative performance, especially in 2013. It seems reasonable to assume that many associated economies have bottomed out (key anticipated markets are possibly India, Indonesia and possibly China).  Outlooks are starting to improve – or so we believe.  In the long run, it is a common belief that these economies have better growth potential than developed economies.

 

When looking at sectors with the best growth potential, this seems to favour technology, small cap, commodities, Europe and healthcare. True, this is assuming that the overall economic global growth story continues, at least as strongly as predicted – now that is a big assumption.   There are vulnerabilities to the scenarios and is a key reason why we combine asset classes and consider both positive and negative associated correlation.

 

On the macro side, economic data remained mixed. Inflation in the eurozone

slowed further, unemployment remained constant. GDP figures showed the German economy shrinking, France’s stagnating and Italy falling back into recession. Yet, fundamentals remain constructive. Lead indicators still point to expansion in the eurozone, albeit at a slower rate. The fiscal drag in Europe has been significantly alleviated and the economic revival in some peripheral countries is still well on track. In Spain, latest total mortgage lending

figures showed a growth of 13.2% year-on-year. Corporate earnings have also improved in Quarter 2 and are set to grow in 2014, helped by a pick-up in global economic activity. Despite the latest headwinds, various economic forecasts still imply a strengthening of activity in the eurozone going into 2015.

 

Your portfolio is being monitored closely and should there be fundamental movements, economic date or expectations away from the planned – I will be in contact and changes where suitable recommended.

This bulletin provides information, it is not advice. Any opinions are given in good faith and may be subject to change without notice. Opinions and information included within this document does not constitute advice.

 (If you require personal advice based on your circumstances, please contact me.)

 

 

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Investment Bulletin January 2014

6 Feb

Market Outlook

This may be the first year since 2007, where the market’s attention is not being dominated by a major tail risk. No double dipping, no fiscal cliff, no life or death moment for the Euro. It seems that the risks are more mid-term as in the problems bubbling away underneath the surface of the Chinese financial sector but this is not generally believed to be an imminent threat.

I agree it is the key medium-term risk to monitor in the global economy but this should not prevent you from being a bit optimistic currently. Instead, the relative normality in the global economy as we begin 2014 means developments in the good old belly of the probability distribution, rather than excitement or doom in the tail, are what matter for the markets.

Okay, fair to say, the markets are well poised for a short-term correction in the first half of this year but I believe we are prepared for this through your portfolio structure, asset allocation and funds selected. Although, as always, “watch this space” as I am constantly reviewing our assumptions, stress testing portfolios and recommending changes as and when suitable.

What Are The Important Questions for 2014?

1.  Will US capital expenditure (capex) pick up from its weak trend so far during the recovery?

The consensus expects US consumption to accelerate in 2014 and capital expenditure to modestly improve.

2.  Will forward guidance stop working?

It makes sense to us that the US Federal Reserve and the Bank of England are cautious by maintaining low policy rates as economies continue to normalise over the course of the year and this is reflected by current policy.

However, the crucial question is – will Janet Yellen and Mark Carney be able to convince markets that the Fed and the Bank of England are themselves not moving towards pre-emptive inflation fighting mode? This is crucial for equity markets.

3.  Which of the so called ‘Fragile Five’ emerging markets (India, Indonesia, South Africa, Turkey and Brazil) will adjust relatively smoothly in 2014 to tighter financial conditions and which won’t?

India is making the best progress so far with the current account deficit falling and its superstar central bank head Raghuram Rajan is following enlightened policy to help the adjustment. In Turkey and South Africa, however, things are looking potentially uglier. All five countries have political elections in 2014, which look likely to act as catalysts.

4.  Where to for the Yen exchange rate?

I expect further Yen depreciation while we are this side of 120 Yen to the US dollar. The rationale being I believe that Yen depreciation and higher inflation are the core components of Abenomics, and still have much more work to do.

Market Round-Up

So it seems fair to say, there seems to be encouraging signs that Europe is now in a recovery phase (maybe), the UK economy is clearly on the mend, the US is seeing possibly a return to productivity; with Asia and Emerging Markets seeing a more contrived situation.

My guess is, we will see periods of expectations running ahead of reality – although the general outcome still potentially looks positive overall but with more volatility and clear periods of panic and decline; and of course the reverse, with signs of underlying growth and optimism.

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Gold – the ultimate hedge, or an increasingly irrelevant asset?

4 Jun

Whether or not you are a gold bug, as followers of the yellow metal are sometimes known, the reality is that gold remains a popular investment asset. More than any other precious metal, gold is where investors turn at times of economic, political and social unrest or as a hedge against currency crises and stock market weakness. Just recently the returns have been less than golden, but opinion is as divided as ever over what the future may hold in store. 

However, the swift reversal in the fortunes of gold – down from a high of over $1900 in 2011 to just above $1,300 this year – has led to technical analysts calling a new bear market. Yet conditions around the world – conflict in Syria, problems with North Korea, continuing concern over economic strength and low-interest rates – set a scene that many would consider conducive to continuing demand.

The recent collapse in the gold price owes much to the increasing level of speculation that surrounds this asset, an approach made easier through the introduction of sophisticated instruments allowing exposure and the use of futures contracts and derivatives. The severe fall in April – the largest for 30 years – was put down to margin calls brought about by recent weakness in the price, thus triggering a further wave of selling. Hedge funds, which are often active in this market, bore the brunt of the blame, though there was some speculation that Cyprus might have to sell some of its reserves as part of the restructuring demanded by the providers of the bail-out fund, perhaps setting the scene for other indebted nations to sell.

However, it is hard to view such concerns as being the reason behind gold’s fall from grace. Cyprus’s stock of the metal is small in international terms, while some governments, such as Sri Lanka, have even indicated that they could take advantage of the decline to add to their reserves. Perhaps a more credible explanation is that the price was driven higher through the availability of cheap money from central banks – itself a response to the financial crisis which gripped the developed world which was just the kind of background that has investors flocking to buy gold as a hedge against uncertainty – and that this will come to an end at some stage.

 

What is the reason for holding gold as an investment?

Make no mistake, gold is currency in its purest form. Until comparatively recently many currencies were convertible into gold – the so-called “Gold Standard”. Globalisation and competitive exchange rates have rendered this particular aspect of gold as an investment largely irrelevant, but it is worth remembering that convertibility into gold was only abandoned by America in 1971.

Perhaps one of the principal reasons for considering gold as a potentially important investment is the limited quantity of it around. It is estimated that all the gold ever mined totals only around 160,000 tonnes – a quantity which veteran investor Warren Buffett once remarked could be held in a cube with sides measuring just 20 metres. The reality, though, is no-one knows for certain how much gold is around, though its durability and the fact that central banks hold a lot of it suggests that most of the gold ever mined is still around in one form or another.

 

Because supply is relatively inflexible (which itself creates a reason for wishing to hold it), price fluctuations are most likely to occur through changes in sentiment. Two macro aspects will influence the price on a regular basis, though. Because gold does not pay dividends and actually costs money to store, interest rates can affect demand, with high interest rates likely to depress the price and low to encourage investing. Recent low-interest rates will certainly have helped the price, with fears that at some stage quantitative easing must come to an end a reason to turn a seller.

 

Similarly, the value of the dollar influences sentiment. Gold is priced in dollars – as is oil, which arguably enjoys some correlation with the gold price – so a weak dollar encourages a rising gold price, just as the recent reversal of the fortunes of the greenback could well have added to the selling pressure. However, gold’s position as a global currency means that some holders will always wish to retain a physical holding in case local upsets render their other assets of limited or unrealizable value. Gold is the ultimate hedge against fear.

 

How might investors gain exposure to gold?

The options available today are far wider – and arguably purer – than those which investors could utilise in the past. Back in 1974, when a global economic and financial crisis on a scale not too far removed from that which gripped the developed world recently brought our stock market to its knees, renowned investor Jim Slater remarked the ideal investment portfolio was shotgun cartridges, tins of baked beans and Krugerrands. This South African minted gold coin closely followed the gold price in value and was much in demand by investors during these difficult times

Gold coins remain an option today, as do bullion bars for the seriously wealthy, but Exchange Traded Funds are now arguably the easiest option for an investor seeking exposure. The first of these to be issued – SPDR Gold – is one of the largest ETFs available, worth around $50 billion. It is also possible to purchase gold certificates, which demonstrate ownership without the costs associated with storage, while derivatives, including CFDs, also provide an option. Gold can easily be included in a portfolio if so required.

 

What about gold mining shares?

One of the less easy to understand aspects of gold investment is that gold shares often do not move in line with the price of the metal. Mining shares, for example, peaked ahead of the gold price and have suffered a torrid time of late. The best known fund, BlackRock Gold & General, includes the term “General” in its title at the insistence of the first manager, Julian Baring. He contended that, while opportunities to profit from gold shares would arise, at times they should be avoided en bloc – hence the ability to purchase other mining assets.

Just recently there has been evidence that the surge in the price encouraged some mining companies to develop higher cost options, which the recent fall in the gold price has rendered uneconomic. Comparing valuations of gold mining shares with those of companies extracting other minerals suggests that this sector of the market’s problems may not yet be over. However, the most important point to make is that mining shares do not automatically confer performance of the gold price to the investor and need to be considered totally separately.

 

Is the future direction of the gold price any easier to forecast than for any other asset?

This is an easy question to answer on the face of it, though what is happening elsewhere in the investment world can give an important steer to how the price might behave. The performance of gold, like any other asset, cannot be forecast with any degree of accuracy. Gold remains an option for those seeking a hedge against the uncertainties that can develop both financially and geopolitically, but is hardly an appropriate investment for anyone seeking income.

That said, there will always be gold followers and gold traders. Watch interest rates and the dollar if gold is an area you seek to follow, but do not expect any silver bullet when it comes to knowing when to buy and when to sell.

Remember, diversification should always be the wise investor’s mantra. So be a gold follower or not, remember not to rely any specific asset class, single strategy or geographic region too heavily – otherwise you risk a higher potential to losses. You could also argue, a higher potential to profits – true but I believe the art of investing is to minimise market losses and enjoy fair potential to market gains. All I would say, is this is a more defensive strategy and has been a successful approach over the last decade or two (showing my age now).

 

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So What’s All This About Adviser Charging

29 Apr

Okay, I think it is important to talk about this. From the beginning or 2013, how advisers charge for the services provided has changed; and the service provided has now changed. There is now Independent or Restricted Advisers.

There has been so much focus on what is paid and the general terms are typically, either an hourly rate (average from what I can see around £175 per hour) or where investment advice takes place it’s typically 3% initial (based on the investment amount) and an ongoing servicing fee circa 1.0% (but some institutions will charge more and few less).

business man writing investment concept or investment plan on white board Stock Photo - 13224684

Personally, I believe the big issue is – a fair price is charged for the work done or being done –  what you receive for what you pay. Should Restricted Advice charge the same as Independent Advice? The answer to this is in the detail – so what is the difference?

What is Independent Advice?

The rules set out a new definition for independent advice, which is unbiased and unrestricted, and based on a comprehensive and fair analysis of the relevant market. This is designed to reflect the idea of genuinely independent advice being free from any restrictions that could affect their ability to recommend whatever is best for the customer. To reflect the range of products that a consumer would expect an independent firm to have knowledge of, and in line with work the European Commission has undertaken.

What is Restricted Advice?

This advice that is not independent and will need to be labelled as restricted advice; for example, advice on a limited range of products or providers.

Where a firm providing restricted advice chooses to limit their product range to certain range of investments or providers, there will be clients for whom this is not suitable. It is not acceptable for a firm to make a recommendation for a product that most closely matches the needs of the consumer, from the restricted range of products they offer when that product is not suitable.

I am an Independent Financial Adviser and have specialised in investments and tax planning with the focus on a high level of service, expertise and support. My view on the argument between the different advice type is simple but then again I am very technically focused targeting tax mitigation and investment returns, profitability and success.

My question to you is should you, as the consumer, pay the same for a Restricted Service as for an Independent Service? 

The first point is be aware of the service being provided – make sure if you are paying for the service being provided and in my opinion that should be a fully comprehensive service. Restricted advice is simply that “Restricted” and Independent is “Independent”. An IFA – Independent needs to take into consideration all available contracts, both packaged and unpackaged, available in the UK Markets – assess, consider, review and recommend from every available structure; whereas a Restricted Adviser will sell you a contract from their permitted range.

Clearly, the time and effort and expertise required under both designations should carry a cost reflective to the service provided. I personally believe that the charge for Restricted Advise should be the less expensive option. It seems that many institutions are not differentiating – I assume they are hoping/expecting the consumer not to notice the difference.

Perhaps also worryingly, a number of institutions and banks have declined to disclose their adviser charges with some saying they would not make their limits public (as reported by Citywire, Investment Adviser, Money Marketing, The Telegraph, Financial Times, amongst others).

Of those who have disclosed mandated adviser charges, there is a typical initial charge of around 3% with ongoing charges ranging up to 3% per annum.

I did think of putting together a list of the institutions and the fees paid but felt that this is not constructive. I believe it is wiser to weigh up the pros and cons of what is being offered and the price you are being asked to pay.

Remember, now you agree to a contractual fee arrangement and as with all contracts the terms are binding both ways. If you are paying for annual reviews, on-going investment advice, portfolio stress-testing and your adviser is remunerated relative to their level of success….make sure you get what you pay for. I know my clients do…and it creates very close and personal relationships where my financial interest and their financial success are aligned i.e. I need my clients to be successful and see positive returns on their investments.

All I suggest is take care and consider your options – what you receive for what you pay.

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Bill Mott and Neil Woodford Issue Warnings For 2013

15 Jan

Neil Woodford has warned investors to expect further downgrades to profits forecasts for those companies more sensitive to the economic cycle.

Neil Woodford (manager of the Invesco Perpetual Income and High Income funds) paints a pessimistic story for the rest of 2013. He has grave concerns pertaining to the existing problems (eg the ongoing crisis in Europe, a possible slowdown in the US and reductions in borrowings across the western world) will limit the pace of global economic growth. Conversley, in his monthly update, he states he believes there is a “population of stocks that can grow consistently through this difficult period”.

Bill Mott (manager of the Psigma Income fund), has always raised his concerns over the effect of central bank policies,  he has warned that these have raised the chances of increasing inflation by continually introducing unprecedented policies into the market. He believes that these have increased the expectation of a growth in inflation.

“To some extent, inflation is already with us. The Bank of England has exceeded the middle of its target inflation range for 38 months in a row. What is remarkable is that despite this persistent inflation, the UK gilt market is trading at such low yields. Real interest rates on bonds have been negative for some time. Are low gilt yields telling us that the bond markets are relaxed about the inflation numbers? Or is it rather that the same target-busting Bank of England has been the most enormous buyer of gilts and has successfully subverted all price signals?”

Bill Mott has avoided investing in bank shares through the portfolio he manages, Psigma Income Fund. This has caused poor returns (short-term) against his peers. Time will tell if his decision is correct, as there has been a recent period of price rallying in this sector but is this a “true” rally or rather a “relief” rally. The latter will see the prices collapse, or could the pricing be sustainable?

Personally, I have concerns over the banking sector as there are several unknowns which carry a huge risk and could derail the recent optimism, One major issue with this sector is the lack of clarity of information and the continual fiascos constantly being unearthed. I see the comments about RBS and Libor, where the fines could be significantly worse than those suffered by Barclays (but expected not to be as large as those suffered by UBS). This is just an example and who knows what next?

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Investment Bulletin – My Views For 2013

7 Jan
Fireworks explode over Times Square as the crystal ball is hoisted before New Year celebrations in New York December 31, 2012. REUTERS-Joshua Lott
What a year 2012 has been. It has not been an easy year and with the Christmas & New Year break, life has been put back into perspective and some sanity has returned. 2012 has ultimately been a good year for my clients and despite the challenges, we have made good gains. The challenges that faced the markets have been considerable:-

  • Disappointing economic growth and corporate earnings
  • US Presidential Election won comfortably by Barak Obama
  • Worrying geo-political developments, such as, in the Middle East and China
  • The ongoing debt crisis in the Eurozone (at times threatening the very existence of the Eurozone)
  • Easing political risk in Europe but still minimal Eurozone growth
  • Consumer confidence growing in the US
  • Relatively successful Chinese growth expected in 2013

Looking ahead, we’re beginning to see signs that a more positive outlook is developing. In the US, in particular, the recovery we see in the housing market could have a meaningful impact on growth prospects. Does this mean that the 30-year bull market in bonds is coming to an end? And should we be braced for an imminent increase in interest rates, reminiscent of the US Federal Reserve’s 2.5% worth of hikes that clobbered bond markets in 1994? I don’t think so. The Fed has said that it won’t raise rates until 2015 and while it could do so earlier, I think that next year would almost certainly be far too soon.

The outlook for returns in 2013 will depend on where you invest, I am confident that there are still attractive investment opportunities in several areas of the investment universe. In these conditions, a flexible approach and experienced active management can really prove their worth.

Markets will worry about the Italian elections in 2013 (likely to be brought forward thanks to PM Monti’s resignation) and in Germany (likely in September 2013) and even about the stability of the coalition government in the UK.

Currently, the most likely outcomes seem to be a strong vote for Merkel and her CDU/CSU grouping in Germany and the election in Italy of a coalition with a strong commitment to the Euro but a rather weaker commitment to structural reform of the economy. 

Worries about the possibility of a hard economic landing in China in 2012 abated with a soft landing and expected growth should be robust in 2013. Although Obama’s re-election does not solve the issue of political gridlock within the polarised system in Washington, growing consumer confidence underpins hopes that the US economy is on the mend.

Above all, markets still take heart from the extraordinary support offered by central banks across the developed world, with ultra-loose policy keeping interest rates and bond yields low, providing liquidity for the financial system and helping governments finance budget deficits cheaply. There may yet be worrying consequences from this grand monetary experiment, but for now investors should think twice about betting against the tide of central bank Dollars, Pounds, and perhaps increasingly Euros and Yen that are expected to keep flooding the world economy.

Will 2013 be the year in which the world really starts to emerge from the shadow of the global financial crisis? Perhaps that is too much to hope for, but there are good signs that the healing process in the global economy and markets can continue. Growth in the major developed economies is likely to remain quite subdued – slightly more robust in the USA, but still close to zero in the Eurozone.

 

The Economy 

Economic developments around the world now range from tangibly-improved in the United States, through apparently-improved in China and India, to less-bad in Europe. A return to financial markets driven by fundamentals is long overdue but first we need to consider the political ramifications of 2012 and prospects for 2013 :-

  • Risks from the Middle East are higher
    • displacement of US influence in Egypt by the Muslim Brotherhood
    • civil war in Syria
    • this clearly fragile balance of power leaves the region less stable than a year ago
  • Elections were a feature of 2012
    • two in Greece
    • France (with the arrival of a wave of socialism, which already appears to be on the wane)
    • Barrack Obama’s re-election in the US
    • Re-election of Shinzo Abe in Japan.
  • Risks from the Eurozone are lower and falling
    • It appears very likely that Angela Merkel will be re-elected in Germany
    • The Italian election, which must be held by April 2013, will determine whether the reform process Mario Monti was able to begin during his tenure continues or whether it reverses
  • The time for forgiveness is late 2013
    • The German election will likely coincide with Greece’s return to primary surplus. 
    • This could mean that Greece’s debt could only be forgiven if it defaults, and thereafter no more fiscal transfers would be possible. The appeal for the creditor countries is that it reduces the risk of political extremists gaining power and forcing the long-feared Grexit – an event which carries unquantifiable risk to the broader financial system.
  • Will profits matter more than politics?
    • The chances of markets being driven by fundamentals, rather than politics, are clearly higher for 2013 than they were for 2012.
    • I expect equities to trade according to their earnings growth.
  • In the UK, general share capital growth is expected to be positive, combined with attractive potential dividends
  • In the US, stronger earnings growth but a lower yield and a slight softening of the dollar will mean a more sedate return in sterling terms.
  • European companies seem well placed to capitalise on the region’s export performance. The modest valuation of European shares offers an attractive yield, and positive trade dynamics are supportive of further gains.
  • Japanese equities are currently heavily overbought and I expect profit taking might be in order. With the country back in recession, I expect modest total return from Japanese shares.
  • The rest of Asia, however, looks set to enjoy robust earnings growth which encourages me to think positively about the potential for strong equity returns.

Investors must clearly treat these opinions with caution, as equities are volatile. I am an advocate of asset combining to take advantage of the differing asset performance related correlations, helping to manage both risk and volatility. I believe, however, that the potential for markets to reflect fundamentally attractive valuations should give investors optimism about the prospects for 2013.

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