As we start a new year, it is often a time to reflect on the last 12 months, to ask what we may have learnt and to speculate whether the coming year will have any major differences and it would be easy to fall into the trap of thinking nothing much has changed. After all, we still have the shadow of Covid hanging over us and with Omicron spiking both at home and abroad, there are some similarities with where we were this time last year but all we need to do is ‘to look under the bonnet’ and we will quickly see that things are actually very different.
It is worth remembering that the first vaccination was given in the UK on December 8th 2020, whereas now, there have been in excess of 133 Million doses administered, with the percentage of the population for each dose being demonstrated in the graph below.
Ignoring the political hyperbole, and the distortion of statistics not being reported consistently over the Christmas and New Year period, it would seem that Omicron is indeed spreading faster than Delta, but is less severe for most people and although hospitalisations are increasing, they are not soaring to anywhere near the degree they did a year ago and the mortality rates are also much lower – all of which is potentially good news, if indeed Covid is weakening through the mutation process as predicted.
Whilst we need more time to be certain, the investment markets certainly seem to be reassured that this is the case and that the major concerns are over staff absenteeism due to the self-isolation rules that remain in place, rather than the threat of further lockdowns or other restrictions.
This is part of the reason I believe, why markets ended 2021 in such a strong fashion, with the US and some European markets closing the year at record high levels. So, are we out of the woods? Not just yet I am sorry to say. As we know from history, markets are cyclical and periods of peak value are often followed but what the markets call ‘profit taking’ or ‘corrections’ – in plain English, that means values are likely to drop and we will in all likelihood, experience on-going volatility with some bumps in the road ahead.
That having been said, the longer-term picture remains a positive one with plenty of optimism being expressed by commentators who share this view. From an investment management perspective, we have also seen the Fund Managers we work with, taking a more defensive approach over recent weeks and so they should be well positioned to deal with the short term influences as they unfold.
And What About New Year Resolutions?
It is always dangerous to make firm resolutions as they can so often be easily broken and for this reason, I resist the temptation. However, a close-run thing to a resolution is my determination to see the evolution of our business, with the incorporation of Bates Campbell, into a new group structure to be completed in the early part of this year.
At the present time, we are in the hands of the FCA as our Regulator, who have to give their consent to our proposed changes, and in that regard, having submitted our application and answered their follow up questions, we are now playing a waiting game as their wheels tend to turn fairly slowly.
Once we receive their approval, we will then be able to launch the new branding which will include a new trading style and a revamped website, so we will have our work cut out to complete this task.
For our clients, apart from a new livery, there will be no changes to service levels or costs, although we are planning a number of improvements to systems and processes which we will keep you informed about as we move forwards.
Although predictions are dangerous, I am hoping that we will hear from the FCA soon enough to complete the process to coincide with our year end which falls on 31st March – we shall see!
Above all else, our priorities remain to provide an efficient and friendly service and to remain totally accessible and to help wherever we can.
Let me close by wishing you a Happy & Healthy New Year and let’s just hope 2022 shapes up to be a better year all round.
With best wishes from all at RAFP
As we are now only 9 days away from Christmas itself, I’m sure many thoughts are turning to family arrangements and celebrations over the Christmas holiday period and in many ways, although this year will be far from normal, it will certainly be a far cry from last year’s restrictions.
You can’t go anywhere without bumping into the latest statistics about Omicron and I certainly don’t intend to add to that subject here in any direct detail, because there’s already too much conflicting information out there as to how serious the spread of this latest variant will in fact be in terms of degree of illness and hospitalisations etc.
Rather, I would like to turn my attention firstly to the impact that we are seeing on markets, both directly from the concerns over Omicron, but also the potential implications that this could have for the supply chains and indeed, inflation, which we are seeing spiking around the world.
It’s interesting to see that with UK inflation figures up at 5.2%, the Bank of England has today decided to increase interest rates from their historically low level of 0.1% to 0.25% Bank base rate.
By comparison, with inflation around 6.8% in the US, the Federal Reserve decided to leave rates where they were.
Traditionally, interest rate manipulation by central Banks has been seen as an effective way to control inflation and clearly, with an inflation target of 2.5%, an actual inflation at more than double that is something the Banks need to take very seriously.
However, when we flip back to the implications of Omicron and the wider investment markets, we’re really not seeing major concerns being interpreted into the markets themselves.
In fact, over the last 2 weeks, we’ve pretty much seen that the losses that were in evidence at the end of November when Omicron first surfaced, have been reversed and despite daily volatility, markets are trading relatively strongly.
As we know, markets are always trying to anticipate the next moves and last month it was widely expected that the Bank of England would increase interest rates and of course, they didn’t. This time around, markets were anticipating rates would remain unchanged, but we now know they have been increased.
I think however, the following graph helps to put it in perspective when you look at interest rates over the last 16 years and from this, I think you can see that it is rather more a symbolic upwards movement rather than a major rattling of the financial sabre!
There are schools of thought that say with the increased rates of taxation that are coming through in the UK, Europe and the US, that these will all have an impact on people’s spending ability and thus, will be a negative influence on inflation rates and therefore, it begs the questions whether interest rate hikes now are appropriate or not.
In fact, comments from Suren Thiru, Head of Economics at the British Chamber of Commerce, suggests that today’s rate increase will have little effect on most firms, although many may view this as the first step in a longer term policy movement – however, he added as the current inflationary spike is mostly being driven by global factors, higher interest rates now will do little to curb further increases in inflation.
Talking this week to one of the Fund Managers that we work closely with, he was of the view that certainly in the EU and UK, inflation may well peak in the middle of 2022, because as he said, inflation cannot continue to rise or remain at its higher levels whilst we have a backdrop of the continued slowdown in China. As always, people have differing opinions.
We also know that some inflationary pressures have been caused by supply chain issues and yet last week, General Motors in the US announced that their supply of chips for their car components were now back on track and that they were no longer suffering a shortage. This in itself helps to endorse the view that industry is progressively finding ways to adjust its productivity by learning to live with the constraints of Covid.
Bringing all of this together, it does rather suggest that whilst we might see short term lumps and bumps in market movements, this is likely to largely be sideways until we get a clearer picture as to what the medium and longer term impact of Omicron might be, in particular in regard to supply chains and whether the inflationary pressures this could bring could extend the inflationary period.
Getting in the Christmas Spirit
Returning now to thoughts about Christmas, I thought I would look for some Christmas comments from others and I hope the following might be of interest:
‘My idea of Christmas, whether old fashioned or modern, is very simply; loving others. Come to think of it, why do we have to wait for Christmas to do that?‘ – Bob Hope.
Another one I saw that is anonymous reads ‘May you never be too grown up to search the skies on Christmas Eve’ – I quite like that thought!
And finally, ‘The thing about Christmas is it almost doesn’t matter what mood you’re in, or what kind of year you’ve had – it’s a fresh start.’ – Kelly Clarkson (American Idol winner in 2002 – no, I didn’t remember who she was either!)
Thinking about a fresh start in the New Year is perhaps a positive note to end the last newsletter of 2021 and so I would like to thank everyone for your comments and messages of support over the last year and in a couple of weeks’ time, we can start to do it all over again.
Christmas Office Hours
As a reminder, we are planning to close the office at noon on 23rd December and reopen on 4th January 2022. We will, however, be monitoring e-mails over the Christmas period, so will be able to respond to any urgent situations that may arise.
Let me close by wishing you and your families a very Merry Christmas and let’s hope that we can look froward to a better 2022.
Please see attached our Christmas greeting.
With best wishes from all at RAFP
I am pleased to say we returned to the UK safely from our travels on Friday of last week and what a welcome the markets gave me when I had a quick look at my “trusty app” just after we landed at Heathrow. Clearly something had spooked all markets and it took very little time to realise that the latest Covid 19 variant in the form of Omicron was the main culprit!
We have often been told that all viruses will mutate many times and as they do so, they will typically weaken along the way. There have been a number of new variants since Delta which have pretty much gone unnoticed by markets and then all of a sudden, they get spooked by the latest manifestation.
I know that we often speak about volatility in the markets and sometimes it almost seems that a convenient excuse for a “correction” (selling off and profit taking) is all that is needed and I personally think there is an element of that at work here. After all, the experts tell us that the Delta variant is the dominant one at present and despite a recent spike in the number of cases in the UK, we are seeing the statistics relating to hospitalisations and Covid related deaths on the decline.
The main fear of markets is that further lockdowns and other restrictions will have a negative impact on the global economy and this was the key reason for the market falls. However, we are seeing strong and improving economic recovery in the UK and other western areas and that is allowing for the effects of Delta. It amused me the other day to read that he UK economy is now forecast to grow at a faster rate that China next year for the first time since the 1970’s! (UK 5.3% compared to China 5.2% - a small amount but it made a good headline!) Mind you, it does depend on who’s figures you look at!
It is all too easy to get swept along with days like last Friday, but we need to keep a wider focus and that is ably demonstrated by the bounce in major markets this side of the weekend with much of the downturn being reversed already.
As I have often said, volatility creates opportunity, and this is just another “blip” on the graph.
COP26 was the name given to the 26th United Nations Climate Change Conference held in Glasgow. I must say the cynic in me asks the question as to what achievements have there been from the previous 25 attempts and will we simply see lots of political commitments but what about the follow through. I suppose one should concede that the last major achievement was the Paris Agreement at COP21.
I think the major outcomes from 26 can be summarised as follows:
Unfortunately, there were some shortcomings too, the major one being a failure to meet the 1.5 degrees target C and a dilution in the wording for the use of coal to be “phased down” rather than “phased out” as had be originally proposed.
As always, only time will tell as to whether Governments follow through and at what pace, but clearly, we all have a vested interest on behalf of future generations to do our bit.
As the Advent Season has now started, we are seeing the Christmas lights and other decorations starting to go up and I dare say that this coming weekend will see a lot more activity in that department.
Last year, we took the decision to send Christmas greetings via email and the money that we would previously have spent on sending cards was donated to charity. Having received positive feedback from many people, we have decided to do the same again this year. The charities we are supporting this year at the Kent Surrey and Sussex Air Ambulance and MacMillan Cancer Support.
As always, stay safe.
From all at RAFP
In recent News & Views, I have been looking at how investment portfolios are structured and how they both manage and vary risk to meet individual objectives. The Fund Manager has a specific task to deliver the anticipated returns within an agreed risk profile and timeline but how do we get to the point where those instructions can be given? To answer that, I need to consider the role that we play as Financial Advisers.
Although the Financial Conduct Authority (FCA) are there as our Regulator with a large focus on delivering good outcomes for clients in a fair and professional way, they also emphasise to us that we need to treat ourselves fairly as well as our clients. Historically, Financial Advisers have tended to undervalue themselves and the services they provide - the FCA consider this to be a potential problem and part of the reporting we must undertake to them looks at our fee levels, margins, mix of business and sources of income. There is also a regular review of our capital adequacy, as there are minimum requirements to be maintained which are determined both by the levels of business we undertake and the different types of advice we provide.
They are also concerned that we avoid “cross subsidising” any services so that we ensure that we fulfil the Regulator’s “Treating Customers Fairly” requirements. All of this is background to how we have to operate, before we begin the process of providing financial advice.
The whole process begins with being able to demonstrate that we fulfil the KYC standards – Know Your Client, to a sufficient degree to be able to provide relevant advice. We are categorised as Independent Financial Advisers, which from the FCA’s perspective, means we have access to and must consider whole of market solutions for our clients. This differs from other types of Advisers who are restricted to a narrow range of product providers and /or solutions. Being fully independent brings with it higher levels of operation inasmuch that we cannot simply pay lip service to having access to the whole market, but must have systems in place to be able to demonstrate how we undertake our research and maintain an ongoing review of the advice we give, to ensure that it remains relevant and that it is the best solution for clients.
In addition to having the financial resources and systems in place, each individual Adviser has an obligation to maintain minimum levels of CPD – Continuing Professional Development. This has a base level of 35 hours per year plus an additional 15 hours relevant to the Defined Benefit pension advice we provide. We also must have an ongoing process to fulfil our obligations to ensure our standards are maintained. This is achieved by a monthly ”competent Adviser” review which is undertaken by an independent third party firm with us demonstrating that we meet our KPIs – Key Performance Indicators.
Gathering relevant information (KYC) I liken to painting a picture. We often start with an outline sketch and then need to “add the colour” to get a complete and clear picture to enable the advice process to begin.
The colouring in, includes understanding aims and objectives, preferences and sensitivities, the resources available and considering all the potential “what if” scenarios that might impact the advice. This could include changes in circumstance or family matters or could be outside influences such as tax or legislation changes and future investment performance.
Understanding the complete picture then enables us to provide relevant advice and our ongoing reviews enable us to ensure the advice remains relevant and fit for purpose. This in turn enables us to determine what instructions should be given to the Fund Managers for them to complete their role.
As we know, we live in an ever changing world, and that is very true when it comes to investments and financial planning. We make assumptions at outset, knowing for certain that things will change and not work out exactly as anticipated – hence the need for review.
When we structure our advice, we also need to take into account tax considerations, to make sure no more tax than is necessary is incurred, whilst remining safely within the bounds of legitimate tax planning. We also need to consider legal aspects and on occasions, it will be necessary to work alongside other professionals, particularly when it comes to Estate or Succession planning, looking at appropriate Wills and sometimes the use of Trusts to fulfil objectives.
Behind the scenes, we are monitoring all these factors, including regular review meetings with the Fund Managers who have been appointed, not to try to tell them how to do their job, but to ensure they stay on track with the stated objectives, to understand their approach and views on markets and opportunities as they arise, with the overall objective of ensuring that their solution remains relevant for individual clients. These are all the responsibilities we take onboard and often forget to tell our clients that we are doing this for them.
Industry research demonstrates that the services of an Independent Financial Adviser, can and often do make a difference of as much as 2% - 3% per year in net value terms. This is not an additional investment return, but rather the combined effects of maximising tax efficiency, appropriate investment structures and suitability.
As you are probably aware, the US opened their borders to overseas travellers from the UK and Schengen area countries with effect from 8th November, which has resulted in a huge increase in passenger numbers. On Monday, we saw video footage of two planes taking off from Heathrow, both bound for JFK in New York – one was a BA flight and the other Virgin Atlantic. They used both runways and took off at exactly the same time, with allegedly “friendly competition” between the pilots as to who would make it to JFK first – I don’t actually know who made it first, but the sense of normality that this generated was a relief to many with pent up travel hunger.
As you know, I am currently in the US, having first spent 2 weeks in Canada, and the difference between the 2 countries, when it comes to Covid management are huge. In Canada, we had to show proof of vaccination at every café or restaurant we wanted to use and inside everywhere, face masks are a requirement. In the US by contrast, not once have we been asked to prove our vaccination status and the wearing of face masks, is an individual choice and whilst some establishments have a recommendation to social distance and wear masks, many people here in Florida do not seem to do so!
I know we have to learn to live with Covid rather than in fear of it, but the almost total disregard for caution is just a bit concerning.
We are now down to the last few days of our trip, and I am pleased that we went ahead. More paperwork along the way has been the main experience, but I am pleased to say that Chris has not lost her appetite for retail therapy – I just hope we can get it all in the suitcases for our return!
As always, stay safe.
Best wishes. From all at RAFP
Managing Risk Within A Portfolio
In my last newsletter, we were looking at how a managed portfolio is typically structured in terms of asset allocation, geography and currency and having determined what proportions are appropriate, it then comes down to selecting the funds or direct holdings that should be included in the portfolio.
If, for example, it has been determined that 50% should be held in Equity funds (Stock Market linked investments) and that some of that should be UK funds invested in GBP, then it is quite likely that more than one fund will be selected in that sector. It really depends on the size of the portfolio as to how many funds will be included in the portfolio.
It is part of the work of the Portfolio Manager to research the most appropriate funds to be included and to keep all funds under review.
As market trends unfold, it may well be appropriate to vary the proportions that are held in each sector and this leads us on to managing investment risk.
Broadly speaking, it is the Equity content of the portfolio which will determine the level of risk that is associated with it.
A balanced portfolio for example, will typically have a “normal” balance of 50% Equity and 50% other sectors. This proportion could be considered the neutral position if markets are settled and volatility is not an immediate concern.
The graph below, is extracted from an investment report prepared by TAM Asset Management, one of the portfolio managers we work with, and this demonstrates how increasing the Equity content, affects the risk level of the portfolio.
Although the neutral position for a balanced fund is 50:50 between Equity and Non-Equity investments, this does not take into account the current trends and volatility in the markets at any given point in time. One of the “tools” available to the Fund Manager, is to adjust the proportion held in Equities and the chart below demonstrates the degree of flexibility, TAM will allow within their Balance portfolio. The Equity content can go as low as 15% or as high as 65%.
During periods of anticipated volatility or concerns that Equity markets are over-valued, TAM will seek to reduce the Equity content as a “downside” protection and then when they judge that markets are under-valued, they may well increase the Equity content beyond the 50% level to take advantage of the upturn when it comes.
Different approaches are taken by Portfolio Managers, some will regularly adjust the proportions of holdings if they are taking shorter term views, whereas some will look to the longer term with a view to allowing the funds to “ride the markets” and settle naturally over the longer term.
Where Are We On Our Travels?
I am pleased to say that we arrived in the US on Saturday, having spent 16 nights in Canada. The requirements of the US are that we had not been in the UK or any Schengen zone countries, for the previous 14 days and whilst we could prove where we had been (a whole bundle of receipts saved during our time in Canada, just in case proof was needed) we were still a little anxious to know we would be allowed in to the US - past experience has shown that the border staff can be very officious on a good day and that any type of banter should be avoided.
Our departure airport from Canada was Vancouver and we were able to clear US immigration in Vancouver. The staff were very friendly, were happy to have a joke with us and the whole process was much quicker and easier than normal. Having completed that in Canada, it meant that on arrival in Los Angeles, we were treated as a domestic flight and had no further formalities to go through. All round brilliant!
The anxiety over, we were able to enjoy a day in LA, (including a small earthquake at 08.00 on the Sunday morning) and it was really nice to have traded the rain in Vancouver for some warm LA sunshine.
We are now in New Orleans, having taken a 48 hour train ride from LA. The changing scenery across nearly 2000 miles was fascinating and the staff and catering onboard were all exemplary. The accommodation though left quite a bit to be desired - It was very cramped in our bedroom compartment, and yours truly was assigned the top bunk! Negotiating that ladder in the dark, in the middle of the night to answer a call of nature was a sight to behold and a bit of a challenge - I am just glad Chris was asleep and did not have her camera rolling at the time!
We were glad to get off the train as the last few hours seemed to drag but I am pleased we experienced that trip.
New Orleans welcomed us with tornado warnings on Wednesday afternoon and this morning, there was an emergency in our building and we were evacuated, while the fire department made sure the building was safe.
I am pleased to say all was well and that “normal service” was quickly resumed.
I hope all is well with you and we will keep in touch.
As always, stay safe.
Best wishes. From all at RAFP
Close Encounter With A Moose In The Rockies & A Look At Portfolios
One of the recurrent things in the news at the moment is the Northern Ireland border issue and whilst I am not going to go into any detail, I did see the cartoon below which I thought was quite apt and gave me a chuckle!
What do we mean when we refer to a portfolio of investments?
Whilst I try to avoid jargon as much as possible, one description we often use is to refer to portfolios which are either managed as a model within a certain risk profile or on a bespoke basis, tailored to each individual.
In both cases, the processes have some common elements used when putting a portfolio together. There are three key elements that are typically taken into account. This first is to consider an appropriate asset allocation to determine how much should be held in stock market related investments which are referred to as Equities and how much should be in other sectors like Government issued debt - more commonly called Gilts in the UK and Treasury Stocks in the US - often referred to collectively as Bonds or Fixed Interest investments. Then there are alternative investments like commodities, which would include things like physical gold as one example.
The second key consideration is geography; we live in a global world and investments need to reflect this if they are to gain access to the whole market and associated opportunities.
The last area is currency - even though you may live in a single currency area, there are further opportunities to use other currencies as part of the overall strategy.
The “doughnuts” below are examples of these three elements and are actually taken from my ISA, which has a moderately adventurous strategy. This is why you will see that the equity content is quite high at 76%. A medium risk portfolio would typically have around 50% in Equities.
By creating a well-structured portfolio, based on comprehensive research, the levels of risk can be managed accordingly.
The main test though is performance. The theory is all very sound, but the individual stock and fund selection will be the acid test as to whether it will perform and preferably, outperform the markets. To measure this, each portfolio will have a benchmark to measure against. The benchmark will typically be an independent industry based index that most closely resembles the investment risk level and objectives of the portfolio. The graphs below are once again for my ISA showing the actual performance over the last 3 years. As you can see, my portfolio has a healthy margin over the bench mark which I am very happy with.
In the next newsletter, I will look in a bit more detail at the individual content of portfolios and how the risk levels are determined and controlled.
An update on our travels.
At the time of writing, we are on Vancouver Island, having landed a week ago in Calgary. We took a few days to drive up what is known as Icefields Parkway and tracks up through the Canadian Rockies for nearly 200 miles. Apparently, this is in the top ten of the world’s best road trips, but unfortunately, even having completed it, it’s impossible for us to say, because most of it was low cloud, which turned into an intense snowstorm and we found ourselves in 8 inches of snow, helping to push stranded vehicles out the way, so that those with all-weather tyres on their vehicles (like us thankfully) could get through.
Chris was talking to one of the other drivers, who proudly said that his other car had winter tyres on, but not the one he was driving - her comment - ‘a fat lot of good that is then’ which clearly helped the situation!
That evening in Jasper, we decided to have a walk through the town before supper, and were treated to the sight of a family of 3 black bears up a tree in somebodies front garden!
However, the next day, we were treated again with some spectacular scenery with the fresh snow adding to the vista.
We took a drive through one of the local parks and were had more wildlife sightings including a close encounter with several moose, who are supposedly shy creatures, but not always!
The bull moose below was particularly bold and not only did he come right up to the car, but took pleasure in licking it and we can only assume that he was attracted by the salt deposits on the side! You can see him in the pictures below and can see how close he got!
Fortunately, Chris managed to close her window just in time, otherwise she might have got licked too!
On our last night in Jasper, when leaving the restaurant to walk back to our hotel, we were warned to be careful as a wild bull elk had been spotted in the town and as it was rutting season, he could be unpredictable! By comparison to wildlife at home, it makes squirrels and foxes look comparatively tame!
For the next week, we will be self isolating, prior to our attempt to fly to the US next weekend and we can bring you up to date in the next newsletter.
As always, stay safe.
From all at RAFP
I thought it might be useful to take a bit of a look at inflation, as it is a word that is often in the news and causes concern as to how this might impact on investment returns.
I think we are all well used to identifying certain inflationary factors, such as the oil price for example. When oil goes up, the cost of transporting everything also increases, and prices get passed on to the end consumer.
This is perhaps most ably demonstrated now by the current surge in food prices and in this regard, the United Nations Food Price Index, which covers key agricultural materials such as cereals, vegetable oils, meat, dairy products and sugar is up 33% year on year and that in fact, is the fastest rate of growth since 2011. This is by no means a new phenomenon as the graph below ably demonstrates.
Source: Food and Agricultural Organisation of the United Nations
So, it begs the question, what is driving food prices higher and in fact, there are a number of factors, including shipping and port bottlenecks, shortage of truck drivers, bad weather in Brazil, where they suffered both drought and unseasonable frost, which affected both oranges and the coffee supply. Largely because of the one off or short-term nature of these aspects is why Central Banks are saying that these are transitory factors, which is why they say they will hold off interest rate increases.
The doubters though, will point fingers at the 1970’s and start to draw analogies when there were 3 distinct waves of inflation, which led to the Federal Reserve and the UK increasing interest rates to double digit levels, which clearly, is something that neither consumers nor the financial markets want to see again.
In recent days, I’ve seen the word stagflation appearing in some of the financial commentaries, which can occur when there is economic stagnation at the same time being accompanied by rising prices, i.e., inflation. In particular, it occurs where the money supply is expanding whilst supply is being constrained. With the current delivery problems that we are seeing in the UK, together with the huge amounts of money still being pumped in by Central Banks, this is perhaps a concern. The knock-on effect of stagflation could be that you would see increases in unemployment and prices, which in turn makes it more difficult for people to buy goods and it can become difficult to solve. A typical way to solve this is to see economic performance boosted by Government spending. That thought of course, takes you into a whole round of political debate, which I am not going to venture into.
It is a bit of a tightrope though because if controls go too far, then you run the risk of creating a deflationary environment, this is where you see a general fall in prices, which could be described as negative inflation. The problem here is that deflation can often contribute to lower economic growth, with people deferring spending in the hope that prices will come down further. That also is not good for the economy.
It is for all these reasons that Central Governments set inflation targets at low levels with 2% being the current target for the Bank of England and Central European Banks. This is because a little inflation is good for the economy, and it helps to keep things moving and with cash flow arising from spending and keeping supply and demand in balance is healthy for all concerned.
As far as the markets are concerned, extreme intervention or over reaction could unsettle Stock Markets and an unexpected increase in US interest rates for example, could send jitters through global Stock Markets.
That having been said, most investment commentators seem to remain bullish and are of the opinion that whilst volatility will be with us for the foreseeable future, there are also opportunities and potentially, more winners than losers. Consequently, I think we should assume we will see some bumps in the road ahead, but nothing to suggest that we should be overly concerned.
For some people, when there are volatile markets, they tend to think about turning to cash deposits as a more secure place for their money and whilst holding cash in times of market volatility for short term projects is a prudent choice, over longer periods of time it is not generally recommended. The main reason for this being, that although you are not exposed to investment risk, you will be exposed to inflationary risk. Inflationary risk is the risk that if the interest earned by the chosen cash account does not match inflation (measured by RPI) the ‘Real’ value of your cash will be depleted over time. I have included below a table detailing RPI over the period Jan 01st 2010 to Dec 31st 2020.
If you ‘invested’ £100 into a bank account at the start of 2010, 10 years later (at the end of 2020), so long as the interest rate received at least equalled Bank of England Base Rate, your money will have risen in value to £105.27. In contrast £100 of household groceries across the same period will have risen in price to £135.26 (using the above RPI figures). Therefore in ‘Real’ terms your cash will have lost part of its ‘value’ - over 29% of its original purchasing power!
These are some of the reasons why we look to more diversified investments and in subsequent News and Views, I will look at how investment portfolios work, why they are invested in the way that they are and how they are structured to provide steady returns in excess of the inflation rate.
On the personal front, we are now getting close to our travels, and we will be departing for Canada on 7th October, which will see Chris and myself away from the office for 7 weeks.
We will however be keeping in touch and of course, both Lesley and Nigel will be available to deal directly with any issues that need our input, so it will be very much business as usual.
I will also be writing with further News and Views every 2 weeks, and I will let you know how our travels are progressing at the same time.
As always, stay safe.
Richard, Chris, Lesley and Nigel
Travel Plans and Arrangements
Like everyone else, apart from our short business related trip to Portugal back in June, our travel plans have been on hold now for the last 18 months. Chris and I had an extended trip to the US planned for the Autumn of 2020, which had to be postponed and was rescheduled for this Autumn. Who would have believed that 18 months after the US closing their borders to travellers from the UK, that they would still remain closed? Although there has been lots of speculation in recent weeks about when those borders may reopen to the UK and the Schengen countries, there is still nothing in prospect.
However, the current restrictions may it clear that entry will not be permitted if you have. Been in the UK or Schengen countries within the previous 14 days and many people are therefore using a third destination to ‘self-isolate’ to then enable them to enter the US.
Having researched this further, we have decided that we are now going to go ahead with our travel plans, but will amend these slightly such that we will be travelling to Canada on 7th October, where we will spend just over 2 weeks before crossing into the US to pick up the trip that we had planned.
The reason I wanted to let you know this is that we will actually be away from the office for a total of 7 weeks and furthermore, we are going to into voluntary self-isolation for 2 weeks prior to our departure, with a view to minimising further any potential risk of coming into contact with people with Covid. After such a long postponement, it would be ironic if we were unable to travel due to testing positive ourselves!
As a result of this, I will not be engaging in any face to face meetings after 22nd September until our return, but we are able to continue meetings via Zoom or similar, up until our departure.
I mentioned in a recent News Letter that Nigel King joined us from the beginning of June, and he is a Chartered Financial Planner, who I have to say, is settling down extremely well and he has a very similar approach to client relationships and financial planning advice as myself. Whilst I am away therefore, if any direct advice or input is needed that cannot be dealt with remotely whilst I am away, Nigel would be able to assist. As always though, Lesley will be manning the office and therefore, she remains a primary contact for you in the event of any needs that you may have. She will then be able to determine who is best able to deal with this for you.
Whilst we are travelling, I will also be picking up e-mails and will be staying in regular contact with Lesley and Nigel and I am confident that we will be able to maintain business and service levels as usual throughout.
What’s in Store for Q4?
It really is quite amazing to think that we’re coming towards the end of the third quarter of 2021 and before long, dare I say, we will start to see Christmas appearing in the stores!
When we look back at markets over the last 2 years, we can see that all major markets showed a huge dip in the Spring of 2020 as the world got to grips with the uncertainties of Covid and whilst most major markets have fully recovered, both since then and indeed, have reinstated value beyond where we were 2 years ago, notable laggards are the FTSE 100 Share Companies in the UK and the Hong Kong market in general.
Hong Kong of course, has a big influence from China, but closer to home, is there a question mark to raise over the UK? Bearing in mind the 100 Share Index is the 100 largest Companies by capitalisation, this does not necessarily represent the UK market as a whole. In fact, the All Share Index has shown full recovery over that 2 year period and looking ahead, it really is the smaller Companies where the greater opportunities lie from a UK perspective.
Looking backwards is always the easy part, but where does this take us in the last quarter of this year is a leading question! On a regular basis, I’m talking to the Fund Managers that we work with to gather their views and the general consensus is that even pre-pandemic, the UK was trading at a discount when compared to global markets and that although opportunities have been slower to materialise through a number of factors including dare I say, Brexit and the pandemic, the belief is that in the UK mid and small capital Company space, there are some phenomenal Companies which are serving both domestic and international business customers. A further thought is that the UK Government is looking at ways to remove the previous EU barriers to home grown innovation, in its attempt to create ‘a level playing field’, this should help to further stimulate the innovative smaller Companies.
Whilst all of this sounds very promising, certainly for the UK and indeed, we should see some catch up with the US markets, this is taking the longer term view. With the latest inflation figures jumping to 3.5% however, and as trading volumes pick up again this Autumn, we will almost inevitably see some volatility come back into the markets through the last quarter of the year. As an example, the US market has now passed over 200 days since it had a 5% sell off, which is one of the longest in history and keeps getting longer! Consequently, the likelihood of this happening sooner rather than later is growing, but as always, it’s worth remembering that this type of pull back or correction in markets is entirely normal and indeed, is very much expected. It is in fact, the sign of a properly functioning market in which arguably, exuberance and fear exist as opposing forces!
Probably one of the main factors to keep an eye on is the way that the Central Banks, in particular the Fed in the US, start to taper or reduce the financial stimulus that they have been pumping into the market and a surprise announcement from the US could indeed trigger some selling off and profit taking.
My view therefore, is that I think the final quarter could be represented by some market volatility, but the fundamentals with many Companies remains sound and with the continuing economic growth and return to work, the medium and longer term remains positive.
Whilst these thoughts might prompt the question in some people’s mind, is it worth stepping out of the market if we’re expecting volatility until things settle down, but conventional wisdom says this is not a strategy that will work and in fact to quote Warren Buffet, who is a well known investor and philanthropist and currently is Chairman and CEO of Berkshire Hathaway ‘the only value of stock forecasters, is to make fortune tellers look good’ – he went on to say that the short term direction of stock process is close to random because that is largely down to human psychology and the relationship between markets and volatility. He said that time in the markets, always beats trying to time the market every time.
I hope that you will find these thoughts useful and as always, if you have any questions, I would be pleased to hear from you.
Take care and we will be in touch.
Richard, Chris Lesley and Nigel
In the last two newsletters, I have taken a look at Wills and Powers of Attorney, and this has sparked a few questions about Will Trusts and Trusts in general, so I thought I would include a few thoughts for you on this subject.
It is often assumed that placing things into a Trust fund is all about saving tax and whilst tax can be a consideration, it is actually more about keeping control, as I will explain.
Trusts are arrangements that are widely used in the UK and other locations, but not all countries will recognise them. Notably, Spain, France and Italy do not recognise the Trust status as a separate legal entity and will simply look through the Trust at the Settlor and Beneficiaries and treat Trust assets as though they belong to the individuals.
The Settlor to the Trust is the person who creates it and typically, adds the assets to be held in Trust. The Beneficiaries are people, who could be individuals or other entities, such as charities, who are the intended recipients of value from the Trust. As to what is available and when, this will be determined by the way the Trust is constructed.
It could for example, be an absolute Trust which names a specific beneficiary or beneficiaries and could be for a fixed proportion to be paid on reaching a defined event such as reaching a certain age or perhaps on marriage.
There is an alternative, which is a discretionary or flexible Trust. This will typically identify a class or classes of beneficiary, for example, children and grandchildren and will often indicate what proportions are to be made available to each.
Keeping control can be a concern and, in particular, if children are the beneficiaries and there is a concern over keeping money in the family, even in the event of matrimonial breakdown, then a Trust can be constructed to protect the assets and perhaps provide enjoyment to the beneficiaries during their lifetime, without the assets actually passing to them.
We also see this where Solicitors recommend including a Will Trust in the Will itself. This could often be to deal with property and where a couple may have Wills that mirror each other, there could be a Will Trust to receive the deceased partner’s share of the property on first death, such that the survivor retains a right to live in the property for the remainder of their life, but the property itself is passed into the Trust for the benefit of the children. This ensures security of tenure for the survivor, but potentially protects a share of the property for the children and perhaps ringfences it from future care fees assessments etc.
Gifting into Trust can have some Inheritance Tax savings in the UK, which typically, would use allowances available during the lifetime, or using the “nil rate band” of up to £325,000 per individual. This would be known as a potentially exempt transfer and providing the donor lives for 7 years after the date of the gift, it will fall out of the eventual Inheritance Tax assessment.
These thoughts are really the “tip of the iceberg” when it comes to the subject, and often your Solicitor is the best person to advise on Trusts, but we have a reasonable working knowledge of how and when they can be useful in the financial planning sense, so do ask if you need any help in this area.
The Here & Now!
A couple of weeks ago, I found myself in London for the second time in the last month after a gap of nearly 18 months and it was quite a surprise to see how much busier it was than earlier in the month. I guess with the school holidays and staycationing, that should not have really been a surprise. Walking across Leicester Square seemed to be as busy as it was pre-Covid, and I noticed very few people were wearing masks outside and only about 50% on public transport. I cannot say that I felt totally at ease with the travel, but it won’t put me off either and in fact, I will back in London later this month.
Talking of London, the City was noticeably quieter, and I think many of the financial, banking and insurance companies have large numbers working from home still, although some of the pubs and bars that I walked past, (honestly, I kept walking) were showing signs of customers returning, but not in the same numbers as used to spill out onto the streets across the city at lunch time and early evening. Bad for the pub takings, but good for liver recovery!
There is not really a lot to talk about on the financial scene as trading has been low and markets are largely benign, apart from perhaps Japan and the Alternative Investment Market (AIM) in the UK, both of which have had a good performance over the last month. As holiday season comes to a close, we would expect to see volumes of trading increasing once more and then we may well start to see a few lumps and bumps, but no major trends at the moment.
As always, it will be good to hear from you with any thoughts or comments and in the meantime, stay safe and we will keep in touch.
Richard, Chris and Lesley
Lasting Powers of Attorney (LPA) vs Enduring Powers of Attorney (EPA)
In the last News & Views, I was talking about the merits of having LPAs in place alongside your Will to act as a safety net in the event that you were suddenly unable to deal with your own affairs or make important health or financial related decisions.
That sparked a few questions and one of these is in relation to EPAs which were the forerunner to LPAs but of course, many people still have them in place.
EPAs were actually replaced by LPAs in 2007 and the later version is more flexible.
With an EPA, you would appoint an Attorney or multiple Attorneys and if more than one, they were obliged to work together such that any decisions had to be on a “joint” basis. Attorneys could not act on your behalf until the EPA is registered and this potentially could not happen until a “trigger event” as defined in the EPA itself. For example, this could be in the event that the person lost mental capacity, the Attorney(s) could then register the EPA and act thereafter. However, their powers were limited to financial and property matters only and could not be used for health & welfare decisions.
An EPA which was set up prior to 2007 is still valid but it begs a question as to whether the Attorney(s) are still relevant 14+ years later.
By contrast, LPAs can be set up for either health & welfare or property & financial matters or for both but they will be 2 separate LPAs. It would therefore be possible to appoint different people to act as Attorney for each aspect.
When setting up the LPAs, you can determine whether all Attorneys have to work jointly or whether they can work individually – this is known as “jointly and severally”, which could be more practical.
With an LPA in place, this automatically stops when the individual dies, at which point, the Executors would take over.
This is a very general summary of the differences, but it is a complex subject and if you have any concerns or need more specific information, your solicitor who prepared your Will is the best person to speak to.
Latest Travel Experience
On Thursday of this week, I was in Edinburgh for the day for a client meeting and having shared my experience of flying to Portugal back in June, which was incredibly complicated with all the testing, flying from Gatwick to Edinburgh and back could not have been easier. There was no requirement for any testing before or after and as a domestic flight, I did not even need to show photo ID, which actually surprised me.
Masks are mandatory throughout the airports and during the flight, but that was reassuring in its own way and everything ran to time. It was by far the best way to do the trip so if you are thinking about flying within the UK, my advice is, don’t hesitate.
As I think we all know, markets can be very fickle and sometimes the very smallest of things can give them the jitters and other major events leave them without so much as a blip. Over the last week, we have seen both of these aspects in action, certainly in regard to the UK, European and US markets.
The events I am thinking of are first, the lightening speed with which the Taliban regained control of Afghanistan and all the political fallout and finger pointing that will be ongoing for some while to come and yet - the markets didn’t so much as flinch.
Conversely, the Federal Reserve make a passing comment about potentially reining back on their quantitative easing policy and the markets drop 2% on 19th August before showing some later recovery in the day but still closed down. This speculation was not new news at all, and has in fact been on the radar for some months and inevitably, we know the financial support has to slow down and stop sooner or later so you would have expected that to have been factored into market prices already.
The Afghan situation, was largely unexpected in terms of the speed of change and therefore, markets could not possibly have factored that in already, so it is very difficult to find a rational reason why they did not react!
It is fair to say that trading tends to be fairly thin at this time of year and market makers don’t like static markets, as it gives them little scope for making profits, so perhaps the answer is that there is some familiarity in their reacting to a known element, such as the Fed’s fiscal policy and the belief that this is not really a long term concern, but nonetheless, it created short term opportunities, whereas, they don’t yet know what the implications from Afghanistan are going to be, so we could see some volatility yet.
One of the other influences we have spoken about recently, is the question of inflation, and the July figures for the UK actually saw a reduction to the Bank of England 2% target, but that is likely to be short lived and we still expect to see inflation rise over the remainder of this year and into early 2022 before stabilising once more. The general view is therefore that this is not and should not be a concern for markets in the medium and longer term.
The other little flutter we saw in the press this week, is speculation that UK interest rates could well increase by 150% by this time next year! Don’t you just love the headlines; what this actually means is we could see a rise in base lending rate from 0.1% to 0.25%. The percentage increase identified is correct, but the reality is not as extreme as the headlines would have you believe. As far as I can see, the UK market did not react to this speculation.
It won’t be long now before all the schools are back in England for their Autumn term and before you know it, we will be talking about Christmas once more – where does the time go?
As always, it will be good to hear from you with any thoughts or comments and in the meantime, stay safe and we will keep in touch.
Richard, Chris and Lesley