Our 7 Step Investment Action Plan – Part 1 – Diversification

2013 was quite a year in investment terms – many clients will have portfolios in need of some serious spring cleaning in 2014. We have put together a 7 step action plan for 2014 – part one is below. Stay tuned for more over the next week or two.

The old saying goes, “don’t put all your eggs in one basket” and it has long been the case that when considering an investment portfolio, diversification across different asset classes is of the upmost importance in order to manage risk and return.

While diversification across asset classes is as important now as it always has been, given the increasing speed of change in both the political and regulatory environment, it makes sense to diversify across product types as well.

For example, pension plans offer highly generous tax reliefs to investors as well as tax efficient fund growth, however they also have restrictions in terms of the amount that you can save and the age at which you can gain access to the funds.

Pensions are especially prone to legislative change and recently seem to have become a politically easy target for the government to extract further taxation from more wealthy savers. As such, while a pension plan will form the bedrock of most retirement plans, it makes sense to include some other “product types” to lessen the impact of an adverse change in pension planning rules. An increase in the minimum pension age (from 55 to 60) for example would throw many retirement plans off course. Holding a suitable range of other “product wrappers” such as ISA’s and investment bonds will mitigate this risk.

The tax treatment of product types is also prone to change. There has been talk in the media of government plans to reduce the level of tax relief available or further limit the total allowable lifetime savings within a pension plan. Conversely, there is pressure to increase the amount of tax-advantaged savings allowed in an ISA each year to encourage the public to save and invest.

Given that the time horizon for some investments is 30 years or more, it seems almost inevitable that some form of taxation or legislative change will impact on the plan before it completes. It is vital to review your plans on a regular basis to ensure that they remain suitable for your circumstances over time.

Budget 2014: Your ISA is now NISA

The chancellor has just completed his budget speech and one of the key announcements was a reform to the ISA rules to make ISA savings simpler and more flexible. The government has decided to replace the ISA with the New ISA or NISA as it is referred to in the budget document. I wonder if this name will stick!

This change is positive in all senses and will surely encourage savings in the UK.

The changes in summary:

  • The ISA allowance will increase to £15,000 per annum from July this year.
  • The stocks and shares and cash limits will be merged into one.
  • Transfers will be permitted from stocks and shares ISA’s into cash ISA’s for the first time.
  • The junior ISA limit will increase to £4000 per annum.

All in all this simplification is great news for UK savers and investors and can do nothing to harm savings culture in the UK. When considered in tandem with the pension reforms announced today, it will be more important then ever to take a holistic view on retirement planning, as i alluded to in my blog a couple of months ago.

5 Days To Go!

In 5 days time George Osborne will deliver his 5th budget as chancellor of the exchequer. If the leaks and predictions are anything to go by (which they seem to be if the past two years are anything to go by) then this budget could have significant impacts from a financial planning perspective.

We are all too aware of the fragile state of the economic recovery and as such we expect this budget to be “cost neutral”. That is, any tax cuts or spending increases, will have to be paid for from increased takings elsewhere.

There is speculation that the chancellor may announce yet another increase to the state pension age (as I alluded to in my previous blog), as well as making yet further reductions to the annual or lifetime pensions allowances.

Add in the fact that there could well be a significant change to income tax legislation, and a reform of the capital gains tax rules, and we have a budget that anyone who is interested in financial planning will want to keep a close eye on.

We will be watching the budget and blogging live as it happens. We will also be preparing a short guide to the major announcements and providing specific advice to clients over the coming months.

If you would like to find out how the budget will impact on your finances, please get in touch to arrange your discovery meeting, provided at our expense,

Could You Spare 1/3rd Of Your Time?

I have recently finished work on a set of new investment portfolios for our clients. This is arguably my most important task as a financial planner because this is where I recommend my clients invest their money. It is a large responsibility, and one that I take extremely seriously.

This process has taken almost a whole month of solid work. I would approximate 130 hours in total. This is the amount of time required to conduct proper research, analysis and due diligence on the daunting amount of investment options available in the marketplace. What’s more, this is a process we will undertake every 3 months to ensure we keep up to speed with the fast changing world of investments.

Our process focuses on finding funds and investments that will meet our clients’ objectives, represent good value for money and that don’t expose our clients’ funds to excessive risk (however some risk is required in order to generate above average returns).

We repeat this process once every 3 months to ensure that our investment portfolios remain suitable for our clients’ needs. All in all then, this investment process takes up around 1/3 of my working time and even then we rely on external research and analysis conducted by experts in various fields to assist us in our endeavours.

While some people can and do “self invest”, I would suggest that they are unable to dedicate 1/3rd of their working life to such tasks. While some people feel confident taking this approach, most would feel more comfortable knowing that they have left the selection of their investments to an experienced professional, who can dedicate 1/3rd of their time to researching suitable investments and protecting their clients money.

If you would like to know more about our investment process or to find out how we could help manage your portfolio, please get in touch to request your discovery meeting, provided at our expense.

How To Control Your Inner Pigeon

An interesting article on IFA online today likened investors to pigeons. While some might say that this is a little offensive, the similarities can be stark in some cases, when it comes to investing.

The premise of the report is an experiment in which pigeons were given a red light and a green light to peck on. The green light would dispense food 60% of the time and the red light would only give a morsel of food 40% of the time.

Now it seems obvious that the pigeon should continuously peck the green light, as this is the one that will distribute food most often. What the pigeons did however, was try to “time” their pecks and they would peck the green light 60% of the time and the red 40%.

What they were in effect doing was trying to “time the market”, thinking that they could correctly select which light was going to give food at any given time. It goes without saying that this was not a good strategy and the pigeon would have been more successful by sticking to the green light alone.

Investment markets are cannily similar to the above example and markets post gains in around 60% of months and losses 40% of the time. The issue is knowing which months will be winners and which losers. Some people will try to “time” their entry and exits from markets to take advantage of its ups and downs, however this is a strategy most likely destined for failure.

Multiple studies have shown that long term “buy and hold” investors are far more likely to be successful than short term traders. While there is an argument for small “tactical” allocations into different markets to take advantage of opportunities, the general position within a portfolio should be long term holdings.

As investors we need to “control our inner pigeon” and make logical, long term investment decisions, otherwise we will find ourselves pecking more lights than we need to and receiving less food!

How Clean Is Your Fund?

You may have seen the term “clean” or “super clean” funds in the news recently. What this refers to is the “unbundling” of fund manager charges and the shift on to a new charging structure.

To “clear things up” (no pun intended), it may help to first explain what a “dirty” share class is.

Historically a fund manager has made an annual management charge which included the cost for actually managing the fund as well as an additional provision to pay some money to a broker for introducing the client to the fund. For clients who use online platforms, the fund manager will often rebate some of the total charge to the platform as an incentive to introduce more clients to the fund manager.

This old system was rather “muddy” (I’m really on a roll now) to say the least so the FCA has seen fit to introduce a new charging structure. So called “clean share classes”.

Under a clean share class you pay predominantly for the costs of fund management and as such there is little or no rebate paid to the platform. Consequently, most platforms will now charge an explicit fee for their services.

The idea is that charges should be clearer and more transparent, however due to the number of deals being done between fund managers and platforms, that ambition has only been partially realised.

Investors should review their investment holdings without delay in light of these new charging rules, in some cases a switch into the new “clean” share classes will be beneficial. For those investors in tax wrappers (ISA’s and pensions for example) it may be better to remain in the old “dirty” funds.

If you would like tailored advice on your investment holdings, please get in touch to arrange your discovery meeting, provided at our expense.

Price Is What You Pay – Value Is What You Get

With pension charges back in the news again last week following the governments decision to delay the cap on charges for auto enrolment schemes, perhaps now is a good time to consider value, rather than price. In the famous words of Warren Buffet “price is what you pay, value is what you get”.

Please don’t get me wrong; I am not excusing, nor defending, overly high or punitive pension scheme charges. In fact, I am one of the strongest proponents of better value pension savings vehicles. It does seem however, that in our never-ending quest to make all financial products cheaper, that we have forgotten all about value for money. Surely this should be the deciding factor.

Lets illustrate this with a simple example and assume for a second that both options are similar in terms of risk profile and financial strength. Fund A charges 1.5% per annum and generates a return of 8%, fund B charges 1% but only delivers a return of 4%. All other things being equal, I will choose fund A thank you very much.

Now clearly the above example is quite extreme, but the principle is sound. It should be the value for money of a particular scheme that we are questioning, not the fee itself.  Part of any good fund analysis should take into account the level of charges made by the fund manager, and the additional performance that the manager has generated (or, heaven forbid, subtracted) from the fund. Only then can we get a true idea of the value for money that the proposed investment represents.

While the government is right to look into the cost of pension plans for workers under the auto enrolment regime, surely it should be value for money, and not cost alone that is the primary focus of any review.

Is Your Fund A Closet Tracker?

A report released yesterday brought to light the fact that many supposedly “active” funds are actually “closet trackers”. Perhaps I should first shed some light on the difference between the two.

An “active” fund is one where the fund manager is able to pick and choose the investments that make up the fund, normally constrained by some form of mandate, such as maintaining at least 50% of the fund in bonds, but this is not always the case. In an active fund the investor is hoping that the stock picking skills of the fund manager will lead to the fund outperforming its peers and the stock market index or benchmark which it is aligned to (the FTSE 100 would be an example).

In return for this stock picking skill and expertise, the fund manager will make a charge, usually a bit higher than the charge levied on so called “passive” or “tracker” funds.

In a passive fund the manager is simply trying to replicate the performance of an index or benchmark such as the FTSE 100. Because there is no active stock selection the charges on these funds tend to be lower.

What this new report highlights is that many supposedly active funds are actually very close to being a tracker, with little stock selection from the fund manager at all. The problem that this poses is that the investor will generally be paying a higher charge, but receiving the same performance as if they had invested in a tracker fund. In fact, the performance will usually be slightly worse, due to those very same higher charges.

Clients may want to review their investments to see what they are actually paying for. While we believe that there is a place for both active and passive funds in a clients portfolio, when recommending an active solution, we would always want to see that the fund manager is adding demonstrable value to justify the higher fee.

As part of our analysis of fund we will consider the amount of the fund actually being managed on an active basis. This will let us know if the fund manager is really generating additional performance, or whether the fund is actually a closet tracker with an unjustifiably high fee.