Topic: News

The Impact of the EU Referendum – Part 1

Posted on May 4, 2016 by - Investments, News

The Buckingham Gate blog is back after a short hiatus over the busy tax year end period. Thank you to all of our clients both old and new for making 2016 our best year yet.

Many clients have enquired about the possible impact of a UK exit from the EU (or Brexit) and in this series of blog posts, we will explore some of the issues and the potential impacts on the UK economy and the markets.

Please note that while we have tried to take views from the most unbiased sources possible, it does seem that almost everyone has some ‘skin in the game’ when it comes to the EU Referendum, so it is important to filter out facts from opinions.

Given the sheer size and scale of the issues surrounding the UK’s membership of the EU, I’m not convinced that anyone really knows all the answers, however this next few weeks of blog posts will be dedicated to some of the key questions.

We start with Financial Services and the City…

We all know that London is one of the world’s financial centres and many have made the argument that this is because we offer a ‘gateway’ into Europe. Some have pointed out that London on it’s own as a financial centre may not be as strong as London within the larger EU.

In the event of an EU exit, if the latter argument is to be believed, then this could cause a lower level of investment into financial services in the UK economy and whether you like them or loathe them, banks and financial services businesses do make up a large part of the UK economy (and the UK stock market).

As I suggested earlier, most commentators on the EU referendum have something to lose or gain based on the outcome, so I am keeping my ear to the ground for independent views. The Governor of the Bank of England, Mark Carney, has, in my view, one of the most relevant opinions on the debate and he has cautioned against a UK exit from an economic perspective.

On the other side of the coin, some have argued that if we were able to break free from some of the bureaucracy and red tape that come with the EU, the City could become even more competitive on the global stage.

With regard to stock markets, there is no doubt that the lead up to the referendum and the outcome itself will move markets. It is fair to say that ‘the markets’ would prefer if we remained in the EU as this is a known quantity, so I would suggest that the risk is on the downside if we do decide to leave. There could well be a ‘relief rally’ if we do remain in the EU, however this may not be quite so pronounced as the falls if we leave.

The issue is, with recent polls at precisely 50/50 (Source: whatukthinks.org), it really is too close to call. As such, we will not be making any extreme movements in our portfolios on the basis of the EU referendum. Whatever the outcome, we remain confident that any impact on the markets will be relatively short term when considering investment time horizons of 5 – 10 years or longer.

Woodford Joins the Team

Posted on February 12, 2016 by - Investments, News, Review

In the recent meeting of the Buckingham Gate Investment Committee, we deliberated long and hard about adding the Woodford Equity Income fund to the Buckingham Gate Portfolios.

While Neil Woodford’s experience and performance in this sector is almost undeniable, the reason we had pause for thought is that the track record of the fund is only 18 months. We usually like a fund to have a 3 year track record before we would consider adding it to the portfolios.

In this case however, we have made an exception to this rule for what we feel are a number of very good reasons:

  1. The performance of the fund during it’s 18 month history is outstanding by almost every measure. We have considered no less than 12 different fund performance metrics and the Woodford fund tops the tables in all of them. The case for including the fund was compelling based on these factors alone.
  2. While Woodford Investment Management is a new venture, Neil Woodford has been managing a UK Equity Income fund with a very similar mandate for more than 20 years at Invesco Perpetual with similar success. If we combine Neil Woodford’s track record across the two funds, it makes for some very impressive viewing.
  3. Given the ‘brand name’ of Neil Woodford, he has been very successful in gathering new monies to invest in his fund, with the Woodford Equity Income Fund having over £8bn of funds under management at the time of writing. As such, the fund does not have the same characteristics as many other ‘start up’ funds. In fact, the fund is considerably larger than many other more established players.

With all of the above taken into account, we have decided to include the fund within our portfolios.

When we combine Neil Woodford’s experience in the UK Equity Income space, with that of Nick Train (Lindsell Train UK Equity Fund) in the UK Equity growth sector, we are left with a duo of the most experienced and successful managers in the UK equity sector.

It is important to remember that past performance is no guide to the future, however we do feel that there is significant value to be added by experienced managers in the UK equity space. This is in an unusual contrast with the US equity sector, where there are very few, if any, ‘active’ managers who consistently add value.

For this reason we continue to adopt our hybrid approach to fund selection, choosing more expensive active managers where we feel they can add value, and using low cost ‘tracker’ funds where they may not.

Are We On The Verge Of The Next Industrial Revolution?

Posted on January 15, 2016 by - Media, News

Ok, so perhaps in this day and age ‘industrial’ would be better replaced with ‘technological’, but the sentiment is the same.

The smartphone has defined the last decade in terms of technological advancements and has also spawned the potentially more valuable ‘app’ space which has seen several companies go from ‘start up’ to $1bn+ valuations almost overnight.

My own personal view (and it is just that), is that while these apps and other technologies are undoubtedly valuable, I’m not sure they have always made us more productive in business (think Facebook, twitter etc).

Please don’t get me wrong, new technology has undoubtedly driven greater efficiencies in business, however my feeling is that this will pale into insignificance compared to what is to come next.

My view is based on two interlinked new technologies, driverless cars/vehicles and artificial intelligence (AI).

A recent study in the USA suggested that we spend around 1 hour and 40 minutes driving each and every day. A disconcerting feature of my car is that it keeps a tally of all the time I have spent driving. The result – 41 days in the past 18 months – more than 1/18th of my entire life!

If we then factor in the volume of time spent by people driving for business (think taxi’s, HGV’s etc), then the numbers must be huge. Imagine the increase in company and personal productivity when all of this time can be used for something else!

If we also consider the potential for AI to begin to make a significant dent in our boring and laborious tasks, then the economic benefits could be huge.

While these technological changes will undoubtedly cause some people to have to look for new employment, we have been through several of these ‘revolutions’ in the past and history tells us these people can be redeployed in the economy with great new skills and insights. When all of this time spent driving and doing simple IT tasks can be replaced with other productive, or leisure activities, we will surely see a new era of economic growth.

 

The Overview Effect

Posted on December 16, 2015 by - News

As Tim Peake blasted off into orbit yesterday, I couldn’t help but be inspired by his journey from pilot to astronaut. It seems that against all the odds, he has achieved what many of us dream of as children (I know I certainly did) and will be one of the lucky few to see the world from a different ‘point of view’.

Space has always fascinated me and I guess it is a sign of our increasingly technological world that one day in my lifetime it may well be possible to travel to space as a fare paying passenger with the likes of Virgin Galactic. A dream that I sincerely hope will become a reality.

Many astronauts report feeling what has been coined the ‘overview effect’ when in outer space. They say that seeing the world in space allows them to see things differently, more clearly. In that moment, they realise that viewed from above, some of those little things that we worry about day-to-day don’t matter. They say that they see how fragile the world seems, when suspended in space as a ‘pale blue dot’.

I think that sometimes all of us could do with experiencing the ‘overview effect’. In our busy lives, there rarely seems time to stop, sit back and really think about what we are doing, where we are going or what it is that’s really important in our lives. It’s so easy to get caught up in the day-to-day, week-to-week routine of our lives and before we know it, another year has passed.

In my daily meetings with clients, so many people say that having two or three hours of quiet, un-interupted time to talk about them and their goals both financially and in life is, at the very least, highly refreshing and energising and in some cases, even life changing. Our meeting is often the only time in the year that they get that opportunity.

Christmas is one of the few times of the year when most of us get that chance to stop and have some down time to think, plan and consider where we want to go from here. In some cases, it may be that nothing needs to change, in which case thats great and hats off to you. Most of us however, have something that we would like to see improved, goals that we want to work towards or changes that we wish to make in our lives.

The holiday period is the perfect time to review 2015, consider what went well, what could be improved and what to leave in the past.

I wish all of our clients, contacts, professional connections and suppliers a very merry Christmas and a happy new year. We look forward to seeing you all in 2016!

 

 

The Worst Day in …. A Day??

Posted on December 15, 2015 by - Investments, Media, News

I have been slightly amused recently by the apparent desperation of financial media outlets to run a ‘panic’ story. The problem the media outlets have is that ‘normal’ does not make a particularly good story.

‘FTSE rises steadily by 0.5% this month as usual’ does not have that much of a ring to it.

You see, we all seem to like bad news stories, ones filled with disaster and fear. Accordingly, this is what the media generally creates.

It is important to remember what the main objective of a media outlet is (that is any media outlet and not just financial ones) and that is, to get you to consume their content, visit their website, read their blogs and, most importantly, see the adverts that they place alongside that content (or pay for it up front). The main objective of a financial media outlet is not to provide you with impartial, balanced views that are likely to enhance your financial decision making. Of course, there are a range of financial media outlets out there that go from the sublime to the completely ridiculous and some do provide useful insight and analysis, however it’s important not to take one view too seriously.

Sidetrack over, back to my point. You see, over the past month or two I have been noticing a trend towards increasingly short term assessments of the markets to generate a ‘panic’ headline. ‘FTSE has its worst week in a month’ was one recent example.

Now, I’m sorry, but a month is not that long in investment terms. In fact a month generally contains 4(ish) weeks. If we assume that the markets are generally random when considered over such short periods of time, surely there is approximately a 1 in 4 chance of every week being ‘the worst week in a month’.

The past few days have been a prime example in my view. Given the recent slip in oil prices, markets have been reacting, sending the FTSE 100 below 6000. Of course, the financial media outlets reacted with horror.

The irony is, these blips tend to be (most of the time) just that, blips. Things recover soon enough and ‘normality’ ensues.

True to form, the headline yesterday: ‘FTSE has best day in over two months’!

The Insanity of ‘Predicting’ Markets

Posted on November 9, 2015 by - Investments, News

I have followed the recent commentary on the decision by the Bank of England to hold interest rates at their current lows yet again with some interest. Of particular note was not the decision to hold interest rates for the month of November (which was widely expected), but more the ‘forward guidance’ that we should not be expecting an interest rate rise for even longer than the markets had been expecting (perhaps as far as late 2016, or, dare I say it, early 2017).

As usual, various media outlets jumped on the story, commenting that even the Monetary Policy Committee or MPC (the people who actually make the decisions to change rates) actually had no idea when rates were going to rise. This came as no surprise to me at all. The MPC will make their decisions each month based on the information that they have available to them at the time. This information is constantly changing and evolving as world events, new economic reports and various geopolitical developments unfold. As such, it should come as no surprise that the people in charge of setting rates often change their minds because the information on which they base their decisions is changing constantly too.

Which brings me onto the topic of trying to predict markets. There are numerous industry ‘experts’ that voice their views on the future direction of markets and how the economy will evolve over time. Given that interest rates are such a key component of the economic activity of a country, they tend to feature quite heavily in the ‘experts’ analysis.

This begs an interesting question to me … If the people who actually have full control over setting rates have no idea when they are going to change, how do the rest of us have any hope and more importantly, how accurate can any ‘prediction’ ever be.

I recently reviewed an academic study on this topic and the results were fairly unsurprising. When we look back on previous predictions made by ‘experts’ in the financial field and see if they came true, you could just as well flip a coin. Approximately 50% of them were correct and 50% incorrect.

So which will it be, heads or tails?

We feel that a far better approach is to design a strong long-term asset allocation and stick to it, rather than trying to ‘time’ or ‘beat’ the markets because, surely if the insiders don’t know what’s going to happen, the rest of us have no hope at all.

The New Property IHT Allowance

Posted on July 15, 2015 by - Budget, News, Taxation

One of the more predictable elements of the summer Budget was the introduction of a new ‘Property Nil Rate Band’, which will mean that eventually individuals can pass on a further £175,000 tax free to their direct dependents, in addition to the current £325,000 nil rate band that exists at present.

As with all new legislation however, there are some things to be aware of.

First of all, the new allowance will be introduced in tranches as follows:

  • 2017/18 – £100,000
  • 2018/19 – £125,000
  • 2019/20 – £150,000
  • 2020/21 – £175,000

These amounts are given with reference to the date of death of the deceased.

In addition, the new Nil Rate Band will only apply to a family home (i.e your main residence), passed onto direct descendants, which in the legislation are taken to mean children and grandchildren. There is some further consultation on where the property could be left to certain types of trust.

As with all new legislation, it is important to review you current plans to make sure you get the full benefit. Any older will that include gifts into trust, may not be eligible to claim the new nil rate band, and this could also be true for those who do not own a home, or who choose to leave their home to people not considered to be direct descendants.

We will be covering the new changes in detail during our updated Estate Planning Seminars, running from September onwards. You find out more information here.

Summer Budget Summary

Posted on July 10, 2015 by - Budget, News

The Summer Budget contained little in the way of surprises (nice ones anyway), however the rate of change seems to be building, creating a more dynamic and fluid financial planning world. There are already hundreds of budget summaries online, so I will cover here some of the key points that might impact on Buckingham Gate Clients:

 

1. Dividend Tax Changes

From 2016, dividends will no longer come with their 10% tax credit, which used to satisfy the basic rate tax liability for those in the 20% tax band. From 6th April 2016 dividend income will be taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers, once income from dividends exceeds a £5000 tax free allowance. This news will be unwelcome for business owners who receive large amounts of dividends as part of their remuneration and those with large share portfolios outside of a tax wrapper such as an ISA.

Business owners especially, may wish to review how they are remunerated from their companies.

 

2. New IHT Property Nil Rate Band

I have written a more detailed article about this change here.

 

3. Removal of Higher Rate Tax Relief on Buy to Let Investment

I have written before about the potential pitfalls of using pension assets to fund buy to let purchases, however the case has just become even less compelling. The Chancellor has announced that over the coming years, tax relief on buy to let mortgages will be restricted to just 20%. This will have the effect of reducing the net returns from buy to let investments for higher rate taxpayers. While buy to let property is undoubtedly a success story for many, there are risks and pitfalls.

Lifestyle Funds That Put Your Lifestyle At Risk

Posted on June 26, 2015 by - News, Pensions

People with their pension savings invested in lifestyle funds have suffered losses of 9% since February, says the Telegraph.
It criticises the insurance companies running these funds for not changing their methods since the pension reforms were introduced in April. The losses have occurred because the lifestyle funds progressively switch money from shares to fixed interest as you near retirement age and in recent months bond prices have dropped sharply. Experts say these lifestyle funds were designed for people intending to buy annuities at retirement, but many people will now use the pension reforms to keep their fund invested and make regular or occasional withdrawals, so a lifestyle approach will not be appropriate.

As you approach retirement, it is essential to review the investments within your pension fund and make sure they match the way you plan to use your fund in later years.

If you would like a professional view on your retirement investments, please contact us for a no-obligation Discovery Meeting, provided at our expense.

Beware Of Temptation

Posted on June 19, 2015 by - Budget, News, Pensions

A majority of pensioners who were asked if they would sell their annuity – a reform the government is currently consulting on – said they would not sell, reported the Financial Times. Almost half said they thought they would get a poor deal. But almost one in five said they would sell either to pass on an inheritance or to fund healthcare costs in old age.

The sale of existing annuities is likely to be tricky and even if the government does go ahead with its proposals, many annuitants can only expect to get back a much smaller sum than they paid originally.

What needs to be remembered here, is that it is likely to be the same insurance companies who offer the annuities that will be offering to buy them back, and the cynic inside me says that they will want to take some profit along the way.