ESG is a bit of a buzzword in the business and financial services world at the moment, having gained traction since becoming a mandatory requirement for over 1,300 of the UK largest organisations in April 2023. 

Environmental, social, and governance (ESG) investing is a rapidly growing trend in the wealth management industry. ESG investors consider non-financial factors alongside the more  traditional ones when making important  investment decisions. These factors can include a company's environmental impact, its social responsibility practices, and its corporate governance structure. 

Lets break down what we mean by each of these:

E = Environmental impact in ESG refers to the impact that a company's operations have on the natural world. This includes issues such as greenhouse gas emissions, water pollution, air pollution, waste management, and resource consumption.

S = Social impact in ESG refers to the impact that a company has on people and society. It’s less well known than environmental considerations, and can include employees, customers, suppliers, and the communities in which a company operates. Social impact factors that are considered in ESG investing are often:

• Human rights: Respect for human rights, including labor rights, gender equality, and diversity and inclusion.

• Employee relations: Fair and equitable treatment of employees, including wages and benefits, workplace safety, and training and development opportunities.

• Product safety: Commitment to producing safe and high-quality products and services.

• Community impact: Positive impact on local communities, such as through philanthropy, job creation, and environmental protection.

• Supply chain transparency and sustainability: Commitment to ethical and sustainable sourcing practices.

G = Governance in ESG refers to the way a company is managed and controlled. It includes factors such as the board of directors, executive compensation, risk management, and transparency to stakeholders.

Good governance is important for ESG because it helps to ensure that a company is well-managed and that its interests are aligned with the interests of all its stakeholders. This includes shareholders, employees, customers, suppliers, and the community.

So why should I consider ESG investments for my financial portfolio?

There are a number of reasons why ESG is so important for wealth management, including:

• ESG investing can help our clients to align their investments with their values. Many investors want to put money into companies that are making a positive impact on the world. The belief is that ESG investing allows investors to do this without sacrificing financial returns. It's in line with our ethos as wealth managers, and something we are deeply committed to. 

• ESG investing can help clients to manage risk. ESG factors can be a useful indicator of a company's long-term performance. Companies with good ESG practices are more likely to be well-managed and resilient to future shocks.

• Longevity. ESG investing could help clients to generate superior returns. A growing body of research suggests that ESG investing can lead to superior risk-adjusted returns over the long term.

How do non-ESG compliant companies present more risk to investors?

Here are some specific examples of how ESG factors can impact investment performance:

• Environmental factors: Companies with high levels of greenhouse gas emissions or pollution may face increased regulatory costs or reputational damage in the future.

• Social factors: Companies with poor employee relations or a history of safety violations may experience higher turnover rates and lower productivity.

• Governance factors: Companies with weak corporate governance structures may be more likely to engage in fraud or other unethical behavior.

How do I integrate ESG into my wealth management Strategy?

Investors can integrate ESG factors into their wealth management strategies in a number of ways. One option is to invest in ESG-focused funds. These funds invest in companies that meet certain ESG criteria. Another option is to work with a wealth manager who can help to incorporate ESG factors into a customized investment portfolio.

ESG investing is becoming increasingly important for wealth managers. In a 2022 survey by PwC, 90% of wealth managers said that ESG is a top priority for their business. And 85% of investors said that they are interested in ESG investing.

If you are considering ESG as part of your wealth management strategy, it is important to do your research and talk to a qualified financial advisor, such as Ifamax. ESG investing is a complex topic, and there is no one-size-fits-all approach. Get in contact with us to book an initial consultation or take a look into our ESG policies.

Inflation can have both positive and negative effects on investments in the UK, it all depends on whether the trend is high inflation or low inflation. We have recently witnessed in real-time the dramatic impact and chaos that can result from the effects of significantly high inflation; such as decreasing purchase power, the cost of living crisis and a lack of mortgage availability. We have detailed some of the key impacts that inflation may have on your investments, and when you may want to think of contacting your financial advisor:

1. Purchasing Power Erosion: Inflation erodes the purchasing power of money over time. If the rate of inflation is higher than the return on an investment, the real value of the investment may decrease. For example, if you have an investment with a 3% return, and inflation is at 4%, the purchasing power of the investment effectively decreases by 1% in real terms.

2. Interest Rates: The Bank of England often responds to inflation by adjusting interest rates. When inflation is high, the Bank of England may raise interest rates to curb spending and stabilise prices. Great for savers, not so great for borrowers. We have seen the increases in the BoE rates recently causing chaos for many homeowners whose mortgages are not fixed, or for those trying to buy a new home. Higher interest rates can impact our investments in similar ways. Fixed-income investments like bonds may, for example, experience lower demand. When existing bond prices then fall, it can lead to potential capital losses for investors.

3. Equities and Real Assets: While inflation can erode the value of money, it can also positively impact certain investments. Equities and real assets like real estate and commodities tend to perform well in times of moderate inflation. Companies increase prices for their goods and services, leading to potential revenue growth, which may translate into higher stock prices for investors.

4. Uncertainty: High or unpredictable inflation can create economic uncertainty. Investors may become cautious and reluctant to make long-term investment decisions, which can lead to volatility in financial markets. This is especially true of investment from overseas, as exchange rates are weakened by high inflation.

5. Effects on Different Asset Classes: Different asset classes react differently to inflation. For instance, inflation can be detrimental to cash and cash-equivalent holdings because their value may decline in real terms. On the other hand, assets like commodities, inflation-indexed bonds, and certain equities might offer some level of protection against inflation.

6. Government Policy and Monetary Response: Government policies and the response of the central bank to inflation can influence investment decisions. For example, the Bank of England has implemented measures to try to control inflation. This affects different sectors and industries in different ways. We have certainly seen the effect of the increase in interest rates on the buy-to-let market, as risk averse lenders such as Natwest have tightened their lending criteria making it much harder for investors to borrow, and decreasing the number of lenders available to the market. 

When should you consult your independent financial advisor?

Overall, the effect of inflation on investments in the UK is complex and multifaceted. As investors we should consider inflation rates, investment objectives, and the specific characteristics of our investment portfolio to make informed decisions that can potentially mitigate the impact of inflation. 

Consulting with your financial advisor will be beneficial for tailored advice based on your individual circumstances, such as potential diversification of your investment portfolio to manage risks caused by the current high inflation we are experiencing.

Ifamax are an independent, Bristol based financial advisers managing over £250 million of assets. We specialise in helping business owners, self-employed or successfully employed individuals to plan and prepare for their retirement. We have the expertise to manage your pension, arrange your income tax and capital gains tax requirements, and co-ordinate your inheritance planning.Get in contact with us for your free, no obligation initial wealth management consultation.

After ten years at One Redcliff Street, we have recently moved to our new office. The end of our lease created an opportunity to look for new office space and we are delighted with the new space that we have found.

Our new office is bigger, has a better layout and is a short walk from our old office. The move is an important one to give us room to grow over the next ten years while continuing to provide our existing clients with the same high level of service. The increased office space allows us to create more meeting space for clients and a nice open space for our staff to work.

We are now located at Ground Floor, 1 Temple Back, BS1 6FL.

Above: New office looking towards Temple Meads, standing on St Philips Bridge.

We wanted to stay in the centre as it provides easy access for staff and clients. We are also surrounded by like minded companies which should make it a great place to be located for the coming years.

Parking & Access

Unfortunately, we no longer have a designated car parking space, we tried very hard to find an office in BS1 with a parking space, but we could not find one. There are many on-road and off-road parking spaces located within a few minutes’ walk of the office. We are also surrounded by a multitude of public transport options. One of the team members would be delighted to discuss this further with you if you are unsure.

A bit of history

Temple Church, completed in 1460 on the site of an older round church constructed by the Knights Templar, stands (what is left of it) in Temple Park, a two minute walk from the office. The footprint of the original church, constructed in the 12th Century, is still visible. The church was mostly destroyed in the Bristol Blitz of 1940, along with the majority of Medieval Bristol. The bells from Temple Church, the earliest dating from 1657, thankfully survived the bombing, and are now housed in the North-West tower of Bristol Cathedral. They can still be heard today.

Above: Temple Church, dating back to the 12th Century, from which the area takes its name.

Dear Investors,

This edition delves into the crowding-out effect within stock indexes and highlights the significance of adopting a value-based investment approach.

The crowding-out effect is when certain stocks dominate an index, potentially reducing diversification and investment opportunities. Simply put, you have little room for growth once you dominate your market. This point seems obvious when you think about it. Amazon, Google, and Apple, to name three. This effect can have several implications for investors:

• Concentration Risk: When a few stocks within an index experience substantial price increases or attract a large portion of investor capital, they can dominate the index's market capitalization. This concentration can lead to concentration risk, making the performance of the entire index heavily dependent on these few stocks. As a result, the benefits of diversification may diminish.

• Limited Investment Opportunities: The crowding-out effect can cause investors to flock to popular stocks, neglecting or overlooking other stocks within the index. This scenario limits investment opportunities as capital flows towards popular choices. Consequently, the overall breadth and depth of the index suffer, potentially impacting returns.

• Market Distortions: When investors excessively concentrate on specific stocks, their prices inflate beyond their fundamental value. This overvaluation can create market distortions, as prices no longer accurately reflect underlying fundamentals. Consequently, when sentiment towards these crowded stocks changes, a correction or market downturn may occur, affecting the entire index.

Investors often turn to a value-based investment approach to navigate the potential downsides of the crowding-out effect. Here's where the value-based approach comes into play:

• Emphasis on Intrinsic Value: Value-based investing identifies undervalued stocks relative to their intrinsic value. By analyzing a company's fundamentals and assessing its true worth, investors can uncover opportunities the market may have overlooked due to the crowding-out effect.

• Diversification and Risk Management: A value-based approach promotes diversification across stocks considered undervalued. By spreading investments across various sectors and companies, investors can reduce concentration risk and limit potential negative impacts caused by the crowding-out effect.

• Long-Term Focus: Value-based investing typically takes a long-term perspective, looking for opportunities that may provide sustainable returns over time. By focusing on the underlying value of a company and its growth potential, investors can withstand short-term market fluctuations caused by the crowding-out effect.

The fund that we use for investing in Global Developed Markets is the GSI Sustainable value fund. As an example of their strategy with two stocks in the S&P500, which one may consider are stocks that are crowding out the others:

Another interesting point is that, given time, approximately 1 in 35 listed companies will end up crowding out the other stocks at some point in future. How do we know which ones they will be? We don't, so allocating a little extra across all the cheap ones is best. Cheap. That can be measured—future dominance we cannot.

In conclusion, the crowding-out effect within stock indexes can pose challenges for investors, including concentration risk, limited investment opportunities, and market distortions. However, by adopting a value-based investment approach that emphasizes intrinsic value, diversification, and long-term focus, investors can mitigate these challenges and identify opportunities that may have been overlooked.

Ifamax Wealth Management Bristol are independent financial advisers managing over £250 million of assets. We specialise in helping business owners, self-employed or successfully employed individuals to plan and prepare for their retirement. We have the expertise to manage your pension, arrange your income tax and capital gains tax requirements, and co-ordinate your inheritance planning.

When it comes to managing your finances, having a trusted advisor by your side can make all the difference. While there are many options available, working with a wealth manager who is Bristol based can offer unique benefits and advantages. A local wealth manager understands the nuances of the local market and can provide personalised advice tailored to your specific financial goals and needs. They also offer a level of accessibility and responsiveness that can be hard to find with larger wealth management businesses. Here are some of the main benefits of having a Bristol based wealth management team:

• Personalised attention: Perhaps the most important of all, a  local wealth manager can provide more personalised attention to their clients than a distant or online service. They can take the time to understand their client's unique financial situation, goals, and preferences. Financial planning can be complex, and we aim to work directly with you to achieve the best results. Our small but perfectly formed team of Bristol based Financial Advisors are ideally placed to understand your unique goals and challenges. 

• Access to local networks: A wealth management advisor based in Bristol will have an extensive local network, including other financial professionals, business leaders, and community organisations. We certainly do! We help connect our clients to valuable resources, including investment opportunities, legal advice, and networking opportunities. Find out more about our wealth management team.

• Face-to-face meetings: Meeting with a local wealth manager in person can help establish trust and build a stronger long term relationship. This allows for a more thorough discussion of financial plans and strategies, without the pressure of technologies whose performance is not always consistent!. We are happy to see you at our office based in Central Bristol, or we are happy to set up a remote consultation when it suits you. Many clients prefer a mixture of both based on their needs and convenience. You can book an initial consultation with us here.

• Accountability: A local wealth manager can be held more accountable for their advice and performance, as they are more accessible and visible to their clients. We take a fully transparent and honest approach, and have done since our beginning in 2003. The volatility of untested investment opportunities is at the heart of why our founder decided he needed to put his skills to use in helping people avoid the crushing financial losses that can affect people’s retirement opportunities. Read more about Max Tennant and how Ifamax was founded.

• Peace of mind: Working with a Bristol based wealth management advisor can provide our clients with peace of mind, knowing that their financial affairs are in good hands. They can rely on their advisor to provide guidance and support, even during challenging market conditions or life changes. Our Bristol based team is on hand to support you at each milestone in your journey.

Using a Bristol-based wealth management advisor can offer a range of benefits, from local knowledge and access to networks, to face-to-face meetings and a convenient location. We aim to enable our valued clients to manage their finances more effectively and achieve their financial goals, safe in the knowledge that they are in the hands of experts.

What do our clients say?

We have a number of testimonials from our happy clients in Bristol and the South West. You can read our testimonials here, or book an initial wealth management consultation.

You may have noticed the term ‘Stealth Tax’ getting more of an airing across the press recently, especially so since Jeremy Hunt’s Autumn Statement back in November 2022. Keep an eye out again for more, over the next week, when we have the next Budget announcement (15th March 2023).

The Cambridge Dictionary explains ‘Stealth Tax’ as “a new tax that is collected in a way that is not very obvious, so people may not realise that they are paying it”. Often it is seen as a way for governments to increase tax revenues without needing to bring in new, or even increase existing, tax rates.

An example of some of these from just that recent statement include:

Income Tax

The majority of people can earn the first £12,570 of their annual income free of income tax, the next £37,700 at 20% tax and anything over £50,270 pa at 40%. These levels have now been frozen at these rates until 2028.

Whilst on the face of it this may seem like business as usual, it actually means a lot more people may now have to start to pay, or pay more, tax on their income.

Even assuming that the recent ~ 10% inflation rates won’t stay around forever, it is expected that over time that the cost of living will continue to increase. If we expect our income levels to increase in line with this, which you would hope would be the case over the next five-year period, then you are left in a situation where many may move from 0% to 20% or from the 20% to 40% tax bands.

In this situation, the government increases its tax take and you could potentially be left in a worse position in real terms, as your newly taxed income does not even cover the increase in the new cost of living.

Higher earners should also be wary of the rather large cut in the additional rate tax band. Currently, those earning over £150,000 pa pay income tax at a rate of 45%. However from the 6th April 2023 the 45% tax charge will start to come in for those earning over £125,140 pa. Thus bringing more people into additional rate tax and increasing tax take from those higher earners.

Dividend Income

Based on current rules, individuals can receive up to £2,000 in dividend income free of tax. However, this is being reduced to £1,000 from the 2023/24 tax year and halved again to £500 in 2024/25.

Again, another example of no new taxes or increase in tax rates, but how a simple tweak to allowances can bring a lot more shareholders into taxable income and increase tax receipts for the government.

Capital Gains Tax

The current tax-free allowance for capital gains is £12,300 – this is the amount of gain you can generate in a tax year when selling investments (or a rental property!) before paying any tax. This is also being reduced soon; down to £6,000 from the 2023/24 tax year and halved to £3,000 in the 2024/25 tax year. With similar consequences as the dividend changes above.

Things to be aware of?

• Ensure you are sensible with the use of your respective allowances each tax year and where possible make the most of them; this could include utilising your ISA and CGT allowances and ensuring your assets are held as tax efficiently as possible.

• You may now fall into the requirements for tax returns! As more of us hold potentially taxable assets it could lead to you having to now declare and pay tax on these.

• Now could be the time to sort out and tidy up those rogue share holdings; especially so if you hold them as physical paper copies. Keeping an eye on the dividends could be more important if it now means you are at risk of exceeding your dividend allowance.

• And finally – just to be aware that we can help you on all of the above!

Each year, investors face a barrage of commentary and speculation from the financial press about which stock, sector or country is set to do well in the coming months. The quotes below are taken from articles published by well-known media outlets and demonstrate that 2023 is no different:

‘2023 could be a very good year for renewables.’ – Forbes advisor (1)

‘U.S. stocks have long dominated investor allocations, but it may be time to consider selectively owning emerging markets (EM) stocks’ – Morgan Stanley (2)

‘We see energy sector earnings easing from historically elevated levels yet holding up amid tight energy supply. Higher interest rates bode well for bank profitability. We like healthcare given appealing valuations and likely cashflow resilience during downturns’
- Blackrock (3)

‘Materials—especially metals—look even better than energy at the start of 2023, based on supportive valuations and this industry group's past performance in periods of weaker manufacturing data.’ - Fidelity (4)

Predictions and forecasts are all well and good, but investors would be wise to tread carefully before positioning their portfolio to benefit from narratives like the above. Many convince themselves that they have spotted a pattern in past returns, or that somehow the past can be used to navigate an uncertain future. They are likely mistaken. As Warren Buffet eloquently puts it:

‘Forecasts usually tell us more about the forecaster than of the future.’

The chart below is sometimes known in the investment world as the ‘patchwork quilt’. This example focuses on sector performance in the last decade and each sector of the global developed equity market is represented by a different colour. The randomness of markets is well demonstrated. In 2014 and 2015, healthcare came out on top whilst energy stocks were rock bottom, however, in 2016 the roles reversed with energy delivering an ≈40% premium over and above healthcare stocks.

Another topical example is that of technology. For the first 9-years of the decade, the tech sector beat the overall developed market every single year and came in the top three 2/3rds of the time. Last year, the streak came to an abrupt halt as technology fared relatively poorly. The energy sector, on the other hand, reaped the benefits of the surging post-pandemic demand for oil and gas, exacerbated by supply shocks caused by Russia’s invasion of Ukraine.

Figure 1: Developed market sector returns (2013-2022)

Data: Morningstar Direct © All rights reserved. Indices: MSCI World (parent) and sector specific series. Returns in GBP.

The temptation to chop and change is strong. Over the last 4-years, a portfolio invested in a technology index fund at the start of 2019 and switched to an energy one in 2021 would have enjoyed outstanding average returns of around 46% per year (5). Whilst this would have been superb, it represents a classic case of investing using the rearview mirror. Hindsight is bliss.

The challenge that all investors face is that forecasting investment returns based on the information we have today is a highly challenging game to win consistently over the long term. If markets work, then prices effectively reflect an equilibrium position between the views of buyers and sellers and their expectations for the future. Unexpected shocks, such as pandemics, wars, financial crises, and political turbulence are quickly factored into expectations, and prices adjust accordingly. Very few individuals possess the skill (or fortune) to anticipate such events and reposition their portfolio appropriately.

Evidence from Morningstar’s database of global developed equities managers backs this up, indicating that of the 5,269 active funds available at the start of 2013, 3,242 (62%) failed to survive the period, 1,841 (35%) survived the period but were beaten by the broad developed market, and a mere 186 (4%) survived the period and outperformed . Take it from the late, great John Bogle:

‘We deceive ourselves when we believe that past stock market return patterns provide the bounds by which we can predict the future.’

(1) Forbes advisor (2023) Top 9 Investing Trends For 2023. https://www.forbes.com/advisor/investing/top-investing-trends-2023/

(2) Morgan Stanley (2023) Investing in 2023: A Year to Be Patient and Selective. https://www.morganstanley.com/ideas/investment-outlook-2023-year-patient-selective

(3) Blackrock (2023) Global Outlook. https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2023.pdf

(4) Fidelity (2023) 5 surprising investing ideas for 2023. https://www.fidelity.com/learning-center/trading-investing/five-ideas-for-newyear

(5) Annualised returns in GBP terms.

At the start of 2022 investors needed reminding that investing is not an easy game, despite having enjoyed around a decade of relatively strong – and fairly consistent - market returns, even in light of a global pandemic, recession, and political polarisation. 2022 has laid bare the fact that investing can very much be a game of ‘three steps forward, one step back’. If there was no risk of market downside, it would be unreasonable to expect any return at all above cash. This short note provides a brief look at the past 12 months, and highlights some of the lessons we can learn as investors.

Looking backwards

For many investors 2022 was a relatively tough year, with returns ranging from benign to poor across most major asset classes - global developed value companies being an exception. Rising prices make returns significantly worse on an after-inflation basis, with year-on-year inflation in the UK having reached levels not seen for decades. The year was particularly challenging for investors in bonds, as yields have risen (and thus prices have fallen) across much of the world. Bondholders with longer and lower quality debt suffered greater capital falls – shorter dated, high-quality bonds continue to be preferred.

Figure 1: Global investment returns – sensible assets 2022 returns

Data: Funds used to represent asset classes, in GBP.

With few places to hide most investors will have finished the year in negative territory, which is to be expected from time to time. The magnitude of the losses, however, should lie well within the tolerances of their financial plan. Investors with a reasonable amount of equity exposure should be able to withstand more material falls than those experienced in 2022 (global equities fell by over 40% during the Credit Crisis, for example). That said, those overweighting value companies and focusing on shorter-dated bonds will find themselves in better space than most, though this is little consolation when returns are still negative in an absolute sense. Investing is never a straight-line journey.

Sensible, systematic portfolios comprising a diversified basket of equities – with tilts to value and smaller companies - paired with short dated high-quality bonds - from low risk to high risk – will have provided better results than most other solutions in 2022. Such solutions outperformed over 70% (1) of professionally managed multi-asset funds over the 12 months due to these portfolio decisions.

The asset class that – uncharacteristically - stole the headlines (for all the wrong reasons) was fixed income. Many bond indices experienced their worst calendar year on record. This was chiefly due to a swift increase in the compensation bondholders demand for lending their capital, on the back of – more persistent than foreseen – high inflation and corresponding rising policy rates from central banks. Rising borrowing costs, and little yield buffer to begin with, have meant absolute falls for fixed income investors, something that few investors will have seen, in a year when equities fell too. The last time was 1994.

The reality is, however, that higher yields are a good thing for investors with time horizons longer than the maturity of their bonds. Over time, the new bonds being invested in have been at a higher yield, providing a larger yield cushion going forward and reducing the chance of absolute falls on an interim basis. Bondholders start 2023 in far better shape – from an expected return perspective - than 12 months prior. Today, 5-year gilt yields stand at 3.5%, as opposed to -0.1% at the start of 2022.

Looking forwards

Uncertainty abounds - it always does. Basing investment decisions on forecasts or judgments is generally best avoided. Forming market outlooks can be used to create accountability, or perhaps at best just for a bit of fun. After stating his column’s 2023 predictions Robert Armstrong, of the Financial Times, questions: ‘Do I have high confidence in any of this? Heck no.’. There is no shortage of seemingly sensible predictions on market performance and global developments (2), nor any effective method to separate those that will be more or less accurate.

Investors should therefore look to the future with the anticipation that new information will come to light, and markets will react quickly to take it into account. Without the ability to profit directly from superior information one, therefore, should construct a diversified portfolio built to weather all storms, guided by an ever-growing body of academic literature. If, for example, inflation or growth come in higher or lower than expected, some parts of the portfolio will – by design - be helping, and others detracting from, performance. That is what diversification is!

With the reasonable belief that risk and reward go hand in hand, each day it should be expected that incremental risk taking in a portfolio will be rewarded, such as owning equities or bonds over cash. However, on a daily (or even multi-year) basis – which in the context of a true investment time horizon is miniscule – the expected daily reward is dominated by unexpected noise, which can be positive or negative.

From an investing perspective, we are hopeful for the best in 2023 and beyond but remain prepared for the worst.

(1) Albion Strategic Consulting.

(2) Armstrong provides a list of outlooks from several significant market participants: https://www.ft.com/content/7803704f-8161-4af8-b9b5-1a7ccd5c2cba.

It has been a very tough first week for the chancellor, in his new job; lambasted by the media, accused by the Labour leader of ‘crashing’ the pound and causing higher inflation and interest rates; and a bad report from the IMF. It is certainly true that Sterling has been falling, and inflation and interest rates rising; yet to suggest that this is solely down to recent Government incompetence is to take a very narrow view. Putting hyperbole, politics and the minute-by-minute gyrations of the market aside for a moment, let’s take a step back and look at what has been going on.

Sterling’s woes or Dollar strength?

Sterling has been falling against the US dollar for some time, but turning this upside down, the dollar has been strengthening against Sterling. In fact, due to its status as a ‘safe-haven’ currency, and the Fed’s more aggressive rate raising strategy, which has resulted in more attractive shorter-term yields, the US dollar has strengthened against most major currencies over the past year, attracting global capital. It is also a major energy exporter, which adds extra support. The DXY index that tracks the dollar against six major currencies stands today at a 20-year high. As the chart below illustrates, Sterling is largely unchanged against the Euro and the Japanese Yen over the past year.

Figure 1: Dollar strength is the key driver of currency ‘weakness’ – 1 year to 27-Sep-2022

Data: Google.

A consequence of the weak Pound is importing inflation, as around one third of household consumption is made up of imports, which are now more costly.

Narratives that suggest that Sterling is turning into an emerging market currency and that this could lead to a currency crisis are headline grabbing but flawed. The UK has a flexible exchange rate (it is not pegged to any other currency); its financial markets are highly established and liquid; the Bank of England operates independently of the Government; and unlike emerging economies, almost the entirety of its debt is denominated in Sterling (1).

From an investor’s perspective, a rising US dollar provides a positive contribution to Sterling-based returns, as US assets are worth more – over 20% more - in the past year. This has helped to shore up portfolio returns for many. The UK equity market is down only around 3% in the past year (2), supported by large holdings to sectors such as energy and low holdings to technology, combined with the fact that a majority of earnings are from overseas, benefitting to some degree from these exchange rate movements. No-one really knows where Sterling will go from here and over what timeframe. Hedging fixed income assets remains sensible as this reduces their volatility and remaining unhedged (i.e. exposed to currency movements) in equity assets continues to make good sense and will support portfolio values if Sterling falls further.

Inflation and interest rate rises

Again, reading the news one might get the impression that rising inflation and interest rates in the UK is a pain inflicted on the population entirely by its Government. Yet to turn this inward looking view outward, rising interest rates are a global phenomenon as the countries grapple with high inflation caused by a rapid growth in the money supply (quantitative easing), supply side issues caused by Covid, and the price pressures on energy and food created by Russia’s war in Ukraine. The fact that the UK Government needs to borrow more, as a consequence of the energy cost support packages and its unfunded tax cuts, is also contributing to rising yields. But take a look at inflation, central bank interest rates, and bond yields in a number of major economies in the chart below.

Figure 2: Inflation and interest rates on 27th September 2022

Data source: Countries’ central banks (note inflation for Germany and Italy is the Eurozone inflation rate).

It is evident that inflation is universally high. Five-year bond yields are at or near 4% in all but one of these economies, and all have risen materially in the past six months. Whilst that is bad news for mortgage and other borrowers, who have benefited from an extremely low cost of borrowing for many years, it is better news for those holding cash or investing in bonds. Despite bond price falls as a consequence of yield rises, long-term investors will be better off, over time (3), from yields at 4% than at near 0%, which we saw 18 months ago. In the UK real (after inflation) yields on index linked gilts are now in positive territory for the first time since 2010. That is good news for investors. As a consequence, investors’ future liabilities are likely to be more easily funded by their assets.

A few commentators have even begun to question whether the UK will be able to service its debts in the future, grabbing headlines. Yet, the UK still remains a major global economy and while the debt service burden will be increasingly heavy, it issues bonds in its own currency, can print money to pay its debts (in-extremis) and has a maturity profile with around half of its bonds maturing beyond 2030 – far longer than most major economies - reducing the short-term refinancing risks that often accompany defaults. Insurance against UK government debt default over five years implies the risk of default is negligible at less than 0.5% (4).

There is a school of thought, including that of the Chancellor, that the recent support for the supply side of the economy (i.e. increasing productivity and output) by incenting companies and entrepreneurs through tax reductions, may lead to higher rates of sustainable growth in the future, which will, in turn, help to reduce inflation and allow the Government to bring down debt. Obviously, this would take time. The markets currently seem unconvinced. In essence, no-one knows how this all plays out exactly. There is no doubt that there will be uncertainty ahead, but investors who own globally diversified portfolios of equities and higher-quality shorter-dated bonds are well-positioned to weather any possible storms.

The view from a bat’s perch, as we have seen, can provide useful perspective in a world full of politicians, central banks, economists, pundits and active investors all bumping around in the dark. 

‘This too shall pass!’, as the late, great John C. Bogle used to constantly remind investors.

(1) See: https://www.economist.com/britain/2022/09/26/the-pound-is-plumbing-near-historical-depths-why

(2) Based on Vanguard FTSE U.K. All Share Index Unit Trust GBP Acc (GB00B3X7QG63:GBP) – for illustration purposes only. This is not a recommendation.

(3) Related to the duration of their bond holdings.

(4) 5-year credit default swap rates – from http://www.worldgovernmentbonds.com/country/united-kingdom/

While often high-earning, barristers are typically self-employed or sole practitioners within a chambers. With self-employment comes the ups and downs of unstable income, cash flow planning and learning how to manage things like retirement savings on the job, so to speak. This can no doubt be a bit of a quagmire with niche financial considerations and specific requirements based on multiple criteria.

As a high-earning self-employed person, it’s all the more important to work with professionals who know ‘what’s what’ when it comes to retirement planning and understand the complexities of the system, because if left too late planning may only be able to do so much.

Specific considerations for self-employed barristers

While it may be daunting to think about retirement when you have fixed, monthly payments to make for your mortgage, chambers rent and other costs, putting aside for pension contributions will place you well in the long run. We know how difficult it can be when income can fluctuate wildly; that’s a part of the reason we do what we do.

Retirement planning for self-employed barristers is about more than contributing to your pension — it’s often about how you manage and address your money as a whole. It can be a shift in mindset entirely. Some considerations in retirement planning for barristers outside of direct contributions to pension plans include:

●       Capital gains tax

●       ISA allowances

●       Venture Capital Trust (VCT), Enterprise Investment Schemes (EIS) and Seed Enterprise Investment Schemes (SEIS) planning

●       Cash management in savings interest and liquid funds for emergencies

●       Charitable giving

 Of course with contributing to pensions yourself there are a number of considerations, rules and obligations you should be aware of when planning your retirement contributions.

How much can you contribute to a pension?

How much you can contribute to your pension (gross) in your annual allowance depends on what your income is, in short. If you go above your annual allowance you’ll likely need to pay a tax charge. Sometimes your pension provider may, but likely the cost will be on you.

If your threshold income is over £200,000 or your adjusted income is over £240,000 you’ll have a tapered, lower annual allowance after which point you’d have to pay tax on your contributions. Otherwise, your annual allowance in 2022 is £40,000. It can get as low as £4,000 a year with tapering.

To determine your threshold income, start with your net income for the year, and deduct the gross amount of your pension contributions where you had relief at source. While there are a few other more niche deductions and additions, this is the basic calculation for threshold income.  

For adjusted income, start with your net income for the year and add the amounts of claims made for tax relief on pension savings paid before tax relief. Again, there are a few other calculations here, but that’s the broad calculation.

Carry forward

With all of that, you may also be able to carry forward unused annual allowance from the immediately previous 3 years. The biggest requirement for this is that for the immediately previous 3 years you’ve been a member of a UK registered pension scheme, or a qualifying overseas scheme..

Gross up

For personal contributions, your pension plan often acts as relief at source and adds 20% to your pension pot contributions, so when you calculate what you can contribute to your pension pot, it’s important to take this into consideration.

 What you’re contributing is the net amount, add 20% for the gross, and that amount is what you need to be using to calculate your threshold income as well as your annual allowance. Contributing £40,000 net on your own will mean that you’ll need to pay a tax charge in most circumstances because of the grossing up of your pension pot by your pension plan.

Rather, if you’d want or need to hit the annual allowance, in 2022, you’d want to pay £32,000 yourself. It’s remembering things like these that sometimes as a self-employed person you can encounter because you’re time-poor or cash flow stressed. 

Lifetime allowance

The lifetime allowance for the total of all your pension savings can change, at the time of writing, it sits at £1,073,100.

Different types of pension pots have different rules around what figures count to your lifetime allowance, so your pension provider should be able to provide details about where you are in relation to the lifetime allowance.

 If you go above the lifetime allowance, as with your annual contribution, you’ll likely owe a tax charge, which they’ll take out before you receive payments. You’ll need to report this as well. The tax rates paid on amount above the lifetime allowance are:

●       55% if you get it as a lump sum

●       25% if you get it any other way, for example pension payments or cash withdrawals

Setting goals, building a plan and getting next steps

This is really where a wealth manager or an outside perspective can be helpful. It’s a bit easier when you’ve seen a thousand retirement plans to say whether or not what you as a client are hoping to do is realistic for your lifestyle and your expectations, and what that looks like with less than consistent income.

Whether that’s setting a consistent plan to always hit the annual allowance or to diversify your pension and retirement planning in different ways with other investment strategies, a financial advisor should be able to help you find the best solution for the kind of wealth, and life, you’re looking to build both in the short term and in the later years of your life with your loved ones.

We have a useful Financial Planning for Barristers Guide available to download from our dedicated Barristers page here, or you can get in touch if you would like to know more about our services.

Tips for getting the most out of retirement, part three of our series

Regardless of how mentally and monetarily you’ve prepared for retirement, it’s a change that can hit you in ways you don’t necessarily expect, even before you’ve actually retired. Retirement planning takes time and consideration to do in a way that accounts for lifestyle as well as your anticipated (and unanticipated) needs. 

What is a wealth manager? 

While the definition of a wealth manager is typically a high-net worth investment advisor, at the heart of things, a wealth manager translates to extra time for you. We know, particularly with business owners, your time is a precious commodity. When you work with a wealth manager, you get the time - and potentially lost sleep - back that otherwise would be lost in trying to plan your retirement on your own, weighing all the considerations you have for you, your loved ones, and your lifestyle. 

Net worth minimums to work with a wealth manager in the UK vary depending on the individual firm; we typically work with individuals or families who have £250k or more to invest. This is not a hard and fast rule, and anyone with an interest in managing their assets better is welcomed to contact us. With your portfolio in hand, we’ll answer your questions, often focused on retirement, like: 

-How do I change my business success into personal wealth, without paying too much tax? 

-Is the portfolio I have still appropriate? 

-How can I be sensible with my finances and still get the life I aim for? 

-What of the existing retirement options makes the most sense for me and my circumstances? 

-How have any recent changes to pension plans impacted my investment strategy?

We take the worry out of these questions and can help you keep a clear path ahead of you to a worry-free retirement all while navigating any changes to retirement offerings, your lifestyle, or the market. 

An array of services within wealth management

Wealth managers aren’t solely about investment advice, for example, we focus on retirement or pre-retirement wealth planning. Wealth management can also include services like estate planning, legacy planning, charitable giving and tax planning; you’d want to speak to your advisor about additional services they may offer. 

Wealth management can help keep all your financial decisions for retirement in one place, with one account manager or advisor, rather than a mess of papers in your own home when trying to manage multiple assets or different elements of the whole of your retirement planning. 

An outside perspective

When you work with a wealth manager for your retirement planning, you get our expert, and outside, perspective. We haven’t lived your life, and while of course we speak to you about it, we also will have your portfolio in front of us. Even - or perhaps especially - when you work hard for it not to be emotional, money and retirement can be an emotional process, and sometimes that creates blind spots. 

We will likely be able to see things - weaknesses, strengths, opportunities - in that portfolio even you may not catch. We may also be able to see things that may not be clear to someone who hasn’t studied these kinds of retirement investments over the course of years. Our job is to know the details of your life and weigh the emotional and rational to give you sound financial advice that will put you on the right path for the journey you want to take into retirement. 

We’ll also be able to work with you to adjust your portfolio smartly according to the kind of life you want to live in retirement, a balance of risk appetites and how much cash you want accessible as well as weighing up the newer pension freedoms from 2015. From 2020, the way advisors treat defined benefit pensions has changed as well, so a wealth manager should be able to keep on top of changes to make sure your assets and investment all still make sense.  

Some of the discussions we’ll have with you in this planning & review include:

-Understanding your risk appetite

-Sequencing your risk by seeing what might happen with poor investment returns

-Reviewing any alternative assets or asset opportunities, like real estate/property

-How to draw income tax effectively

-Cashflow planning to guide how and when you’re best placed to spend

-Reviewing death benefits

Retirement is what we do

While this may be the first time you’re retiring, this isn’t the first time we have. In all likelihood the circumstances you’re working with when moving towards retirement are ones we’ve seen before, and we’ll know how to approach it with the correct care and decision-making to create the life you’d like to lead. And while we may have seen all of the elements of your retirement strategy before, your situation is unique, and we should create a unique financial plan for it, with all the right analysis to confirm the path we’re on will work with you. 

We’ve seen the ebbs and flows of the market and know how to ride them in a way that should put you in a better financial position than you may have been otherwise. We likely know how to manage your business wealth and transition it to personal wealth in a way that will help rather than harm your investment portfolio and asset allocation. 

Working with a wealth manager when preparing for retirement can give you the peace of mind you need to set the right scene when you step into your golden years and enjoy the life you’ve planned for yourself. 

Tips for getting the most out of retirement, part two of our series

Retirement is one of those major life events that people look to with equal amounts of relief and trepidation, often due to the financial considerations associated with retirement and your associated pension. How do you know you will have enough saved? Will your state pension and private pension pots be enough? How much will your new lifestyle cost? What special circumstances should you consider? Should you continue to work in some capacity? As a business owner, what part will you continue to play in the finances or running of your business?

A financial advisor should be able to help sort out those questions with you and smooth your path to retirement as much as possible. 

When should I start thinking about retirement? 

Often your scheme administrator will start sending you wake up packs at 55, if not earlier. The state pension age is under review, proposed to rise to 68 by 2044 and 2046 and there is no longer a default retirement age (which was 65) - so if you want to work longer than your state pension age you’re able to. You’re also able to retire before the state pension age as well; it’s all a matter of things like: 

• your current and planned lifestyle

• your living expenses

• your risk appetite

• your personal pension pots, investments and savings

• your personal circumstances (health, etc)

About 2-5 years before a person plans on retiring is often when financial advisors recommend reviewing your risk profile, but you may not be the “average” person. Your life and your needs are unique, and the most common path may not be the right path for you. Maybe you want to sell your family home and travel the world, or maybe you plan on becoming the carer for your partner, or maybe you’d like to give your loved ones an early inheritance. 

Every person has a different idea of what their retirement will look like, and those personal circumstances can make all the difference to how a financial advisor recommends managing your money in that retirement.

What are the options with pension?

With the Pension Freedom Act of 2015, after the age of 55 you’re able to have a bit more flexibility about how to access your defined contribution savings. Before this, most had to buy an annuity with their pension savings, which had the upside of a guaranteed income throughout retirement; but became less popular as annuity rates fell. 

Presently, as an individual, you have a number of options to access your pension, all with both benefits and drawbacks and all with considerations dependent upon your current situation and desires for your retirement. Options include: 

• Annuities: the traditional method of accessing pension where you buy an annuity at the beginning of your retirement and it pays out a guaranteed amount over either a set period of time or your lifetime.

• Drawdown: only taking “what you need” for a set period of time while leaving the rest invested (can be either “capped” or flexi depending on when the plan was set up). 

• Take your pensions as a number of lump sums: similarly to a drawdown, you take what you need in lump sums from your pension. 

• Take your whole pension in one go.

With all options, not all pension plans offer all payout options. You’ll also want to consider for all options the tax-free threshold of the payout is usually 25%; the rest of the income you’ll need to pay tax on. And because of the risk involved, you are required to speak to a financial advisor by law if you want to take your entire defined benefit pension in a lump sum.

And if you’d like to retire later or build up and increase your pension pot more, you can continue to get tax relief on:

• pension savings of up to £40,000 a year, or

• 100% of your earnings if you earn less than £40,000, until age 75.

With continuing to save, though, there are laws around what’s called “pension recycling” and if you’re seen to break those laws, you could be in some rather serious trouble. 

How can a financial advisor help? 

As we can tell from what we’ve illustrated above, there are a number of different scenarios and pieces of information to take into account when planning retirement and making the right steps to secure your financial future and well being into your older years.

Whether that’s how to manage investments and risk when choosing drawdown, or even understanding what the best choices are for your circumstances - medical, lifestyle or otherwise, a financial advisor can help you plan that out clearly. According to the late 2021 Saltus Wealth Index, even high net worth individuals have a gap in understanding how much they would need to have in their pension pots to retire at their desired comfort level - and misjudged by about half. A sanity check by a well-trained professional is in everyone’s best interest, then.      

How should I choose a financial advisor? 

Financial advisors should all be registered with the FCA, which is publicly accessible. 

Working with a firm or financial advisor that understands the area you live in can be helpful as that way the advisors have an implicit understanding of at least part of the lifestyle you’re currently living. Reading reviews online and speaking to friends and family is also an important step in finding the right financial advisor for you. 

You can get free guidance on your pension and retirement options from:

• Money Advice Service

• Pension Advisory Service

• Pension Wise for “defined contribution” pensions

Speaking to a financial advisor about your options in retirement will help you plan in a way that fits what you want from your future and rest assured your retirement and pension is well looked after. 

Today, it certainly feels like the world is in a very uncertain place. The events in Ukraine are extremely unsettling; the eyes of the world are firmly on what happens next. 

Coupled with this, The World continues to struggle with what is hopefully the back-end of the Covid crisis as populations gather immunity through vaccination and infection and as new drugs and treatments come online almost daily.  Economically, the greatest challenge is soaring inflation, hitting levels not seen for several decades.  Consequently, interest rates and yields on bonds have started to rise, and global equity markets have started the year down.  That can all feel both gloomy and unsettling.

Stock markets falling on the back of geopolitical events is nothing new; we have been there many times before. It is always easy to feel that the present is more uncertain than the past. A common phrase we hear is “this time it is different”. Yes, this is a different event, but we have been through similar. The table below shows the S&P 500 (US index) performance in periods after major historical geopolitical/military events.

In summary, the stock market was higher one year after in nine of the 12 events above. The other three coincided with a recession.

Could we have predicted this?

The threat of Russia invading Ukraine has been around for many years now. Yes, the news has ramped up over the past couple of months, so you could argue this was always on the cards. Jumping in and out of markets based on news events is a very dangerous game to play. Not only do you have to make a call on when to exit markets, but you also need to decide when to get back in. Once you start to make calls like this, where do you draw the line? As a business, this goes against our fundamental investment beliefs. Based on today's news, being shaken out of markets is about the worst mistake any long-term investor can make.

What is to be done?

The short answer is ‘not much’. As ever, all the news that we see and worry about – including an invasion of Ukraine by Russia - is already reflected in market prices. For sure, new news will have an influence on those prices, but by its very definition, this is a random process that is hard to benefit from unless you own a crystal ball.

In terms of direct portfolio exposure, it is worth noting that Russia represents around 0.35% of global equity markets, and that is before this is diluted down in any portfolio by bond holdings. To put this in perspective, the global market weight of Apple is over 4%! In fact, Apple’s cash reserves alone are of a broadly similar magnitude to Russia’s entire market capitalisation.

At this stage, nobody knows the wider consequences of a Russian invasion. Below are a few things to be thinking about:

• Have your financial and personal circumstances changed recently to such an extent that you need immediate liquidity from your equity positions? That is most unlikely. Feeling uncertain about markets is not a valid reason for seeking to get out of markets (when would you get back in?).

• Remember that our high-quality bonds provide several valuable attributes. They provide more stable values, supporting a portfolio against equity market falls; liquidity to meet any liabilities without having to sell equities when they are down, and the dry powder to rebalance the portfolio and buy more equities when they have fallen to take advantage of cheap equity prices (as we did in the Covid crash two years ago).

• We should all be vigilant (as always) on cyber security. If you need any help with this, please do contact us. Rest assured, we treat cyber security extremely serious here at Ifamax and have measures in place.

It is not uncommon for limited companies to build up sizeable cash balances. Most owners opt for a low salary, high dividend and regular employer pension contribution type strategy. But what about companies in the fortunate position of being able to accommodate this and still have large cash balances?  

A route most take is the ‘path of least resistance’ i.e. leaving it all in the company bank account. This is by far the easiest option and arguably the safest. The main drawback of this is that interest rates are currently very low and have been for many years now. When you factor in inflation you may be in a position of losing money in ‘real’ terms. The chart below aims to illustrate this: 

Assumptions used:

Initial investment amount £1,000,000

Long term cash return: 1.5% per annum

Long term inflation rate: 2% per annum

Long term investment return: 5% per annum

You can clearly see the issue of holding cash that is consistently generating a return that is less than the rate of inflation.

What can business owners in this position do?

• Nothing. Just accept that your cash is slowly reducing in real terms.

• Try and find a better rate of interest. This is tricky at the minute unless you want to tie up your cash for several years at a time.

• Extract more via salary/dividends/pension contributions. The main issue with this is the increase in tax when withdrawing from the business.

• Look at setting up a general investment account within the business This will allow the cash the opportunity to hopefully generates returns in excess of the inflation As with any investment, the risk associated means that the underlying investments will go up and down. Discussions would need to be had with your accountant regarding the potential tax implications of this route.

When used in the right circumstances, option four can be a very attractive route for many business owners.

There is no one size fits all approach and individual advice should always be taken. This article is for information purposes only and should not be taken as advice.

Tips for getting the most out of retirement, part one of our series

If, like many of my clients, you are on the verge of retirement, you may be wondering what life will be like on the other side. You have worked hard to get your finances in order and can finally enjoy the down time that a full working week did not afford. You may also be looking forward to being unencumbered by the restrictions of work commitments on your ability to enjoy annual leave freely. Retirement brings a wealth of opportunities and the possibility of exciting new ventures.

There may also be some concerns too, and this is completely natural. What will I do with all that spare time? What if I am lonely or bored? For many of us, work has been a way to keep our minds sharp and our social lives active. Will that change now that you are retiring? 

I have had many of these conversations over the years with a variety of different people, all of them feeling a mixture of apprehension and expectation. One correlation I have noticed in those who found retirement to be a blessing, are those who chose to plan ahead.

These are my top tips for retiring well, gratefully learned over the years from my many clients.

• Make sure your finances are in order so that you can enjoy your new found time without feeling the burden of financial constraints. What are your retirement goals and how will you fund them? What are your expenses likely to be?

• Make a plan for investments that will help your pension pot to grow to its maximum potential. Talking to a wealth management advisor is a great first step if you haven't already.

• Practice self-care. Any sort of adjustment to routine can take its toll mentally. It's important to learn to recognise when you are feeling low or unmotivated. As with all stages of life there will be ebbs and flows, and retirement is no different. Self-care can be as simple as picking up the phone to a friend or loved one when you are feeling down, or making regular plans to engage socially with others. 

• Keeping physically and mentally active. Now is the time to take up all those hobbies that you previously had no time to participate in. If you want to climb Pen y Fan but never had the opportunity, you absolutely can now. Retirement creates the perfect window of opportunity to build up fitness and realise your long held, but previously neglected, goals. The sky really is the limit if you put the time in. 

• Keeping mentally alert is equally important too. It can be quite a change of pace, especially if you are transitioning from full time work to full retirement. Many people chose to study during retirement, particularly those who felt that they did not study in their preferred field the first time round.

• Get involved in the community. Your local community is a great place to start in making social connections, and also provides the opportunity to volunteer and support others. As many charities rely on volunteers in order to function, this is one way that you may want to get involved. If you have a fondness for animals, a rescue centre or animal charity would welcome an extra pair of hands. Find something that you are passionate about and reach out to the organisers to get started.

• Re-define your boundaries, and excel them. When you are out of your comfort zone, your brain creates new connections between neurons. You’re not only keeping mentally active at this point, but upskilling your mind. Neuroplasticity is the learning phenomena of how our brains function. By continually challenging yourself to try new things, you are strengthening your mental wellbeing. Your brain will continue to change even as you get older. Improving your cognitive function during retirement will help to ensure that you are healthy, happy and enjoying the best stage of your life.

If you would like to talk to a wealth manager about our retirement planning strategies, get in touch and a member of the IFAMAX team will get back to you.

For those readers interested in financial news (some might call it noise), the unfolding story of Chinese property developer Evergrande (a name which is ironic given its dire financial position) has spooked global equity markets.

The short version of the story is that the company is very highly leveraged i.e. it has borrowed US$300 billion from banks to fund its property developments and has hit material cash flow problems, leaving suppliers and debt repayments at risk. Property prices have risen dramatically in urban China over the past few years and the Chinese Communist Party (CCP) is now clamping down on bank lending to slow the boom, which is part of Evergrande’s problem. To add to the drama, Evergrande has also sold high risk retail products to its wealth management arm’s clients, which it appears to have misrepresented as low risk investments. Some of these investors’ funds have been diverted to shore up the company’s own working capital and some has allegedly been used to pay off other investors, which is the hallmark of a Ponzi scheme. More acutely, the company needs to meet an interest payment of US$84 billion this week* and the markets are waiting with bated breath to see if they manage to do so. Its bonds are trading at 25 cents on the dollar and its equity has fallen by 85% in value in 2021. Not pretty.

IF Evergrande default - some have suggested this could be the equivalent of Lehman Brothers collapse that set off the market falls leading into the Global Financial Crisis - AND if this then leads to the collapse of the company with repercussions for lending banks (most of which are Chinese), AND if there is a resultant fire-sale of properties, AND suppliers go unpaid AND this all precipitates a collapse of other development firms, THEN this could cause a major challenge for the CCP (not least that 1.4 million buyers who have put down deposits on unfinished properties) AND impact on Chinese growth on which the world depends. Could it THEN cause a contagion in global markets resulting in a major decline in stock markets around the world?

BUT, hold on a minute, what started as a potential corporate default has grown – in this story – into a major decline in world growth and a stock market crash! BUT in this case, much of the debt is in local currency and lent by banks that are mostly owned by the CCP, which can force them to roll or forgive debt and provide unlimited liquidity to the banking system. It does not mean that things will be easily resolved, BUT it does not mean that the conflated IF, AND, THEN story of conditional probabilities is likely to occur.

It is important to remember that many material world events occur on a regular basis, but do not always end up in negative market outcomes. Even COVID, which put a dent in equity market valuations in early 2020, has failed to turn into a prolonged downturn. Global markets are now well above their highs before the COVID-induced falls. Certainly it is true that on occasion a single event precipitates a market fall, but the problem is that we, as investors, have absolutely no chance of knowing which event this might be and position portfolios ahead of any anticipated fall. If this were possible, the market would already have fallen! In this particular case, it is important to note that Evergrande’s market cap is under USD6 billion - or put another way, Apple is over 400 times larger - so any portfolio holding would be miniscule at worst. The company represents around 0.01% of global equities and China is only 4% of the global equity markets. Our suggestion: don’t pay too much attention to the financial ‘news’!

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

*This article was originally written on the 23rd September 2021.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

We have dealt with many business owners over the years in all shapes and sizes. Within this short article I am going to focus on some of the planning ideas available to businesses whose owners ‘are the business’. By this I mean a business that without a certain person would effectively possess no sale value.  

One of the biggest challenges businesses like this face, is that when this one person retires there is no business or no business to sell. Advanced planning is therefore vital in order to extract or build as much value into a business prior to retirement. 

An area of planning we like to explore is what to do with excess cash within a limited company. A profitable business, generating good profit year after year will soon get to a position where they have a large cash buffer. What are the normal options available in this situation? 

• Withdraw a salary 

• Withdraw dividends 

• Make employer pension contributions 

It is cash in excess of the above that often provides business owners with a bit of a headache. This has been exemplified in recent years with desperately low interest rates. I’ve lost count of the amount of times I’ve seen limited companies sitting on stacks of cash earning no interest which continues to build up through the years.  

What are the options for this surplus cash? 

1. Leave it in the company current account earning no interest 

1. Use a cash management service to at least earn some interest 

1. Look to invest the money into a corporate investment account 

We can look at the pros and cons of each of these on an individual basis. What works for one company may not be suitable for another.  

Option 3 can often be an interesting route for businesses that are still some way off of winding down but have, and expect to continue to have, large cash surpluses each year. The diagram below illustrates this: 

• Initial investment amount £1,000,000 

• Long term cash return: 1.5% per annum 

• Long term investment return: 5% per annum 

As always, there are no guarantees, and this is for illustrative purposes only. I am just trying to show the potential long-term impact of holding cash.  

Why is the particularly interesting for businesses with no business sale value? 

Companies, and business owners, in this position can plan ahead with a strategy like this. By doing so, they are diversifying away from them being the business and ultimately them being their own pension. Building an investment pot within the business does come with some tax differences that would need to be discussed and understood ahead of any planning.  

There is no one size fits all approach and individual advice should always be taken. 

It may have passed you by, but recently a little-known hedge fund called Engine No.1 (David) scored a direct hit with its shareholder slingshot to the forehead of one of the world’s mighty oil companies ExxonMobil (Goliath), stunning its adversary.  Despite only owning 0.02% of ExxonMobil, it put forward a motion at the latter’s AGM to put nominees on the board of directors. It gained two of twelve seats.  Quite a coup.  Its simple rationale was straightforward:

‘We believe that for ExxonMobil to avoid the fate of other once-iconic American companies, it must better position itself for long-term, sustainable value creation’.

Engine No.1 website

In 2010, ExxonMobil was the largest public company in the World, with a value of around US$370 billion, but in 2020 it ignominiously dropped out of the Dow Jones Industrial Average index and today has a value of around US$250 billion.  That is an awful lot of shareholder value destroyed, given how strongly the broad US market has performed. Last year the company made a loss of around US$25 billion, but the CEO still got a pay rise! ‘Go figure’ as our American friends would say.

So how did such a small investor have such a large impact on this behemoth?  Simple. It co-opted major pension investors, such as the California State Retirement System, and the giant fund managers Blackrock and Vanguard - representing the investors in their funds - to vote in its favour.  Ironically perhaps, the Norwegian ‘oil’ fund, which was funded from profits from oil extraction, voted with Engine No.1. It is now one of the world’s leading investors focused on sustainability.

And why would they do that?  In large part because of the growing focus on the climate crisis - and sustainability more broadly - by investors in their funds, who want their voices to be heard. It also comes down to hard-nosed capitalism.  Companies such as Exxon, who appear blind to the train-wreck they face when no-one wants or needs to buy oil, potentially risk losing further value, in some investors’ eyes.  They believe that they can help these oil-tankers to change direction more quickly towards a more sustainable harbour and reap the financial rewards of doing so.  Engine No. 1 was pretty honest about it[1]:

‘Our idea was that this was going to have a positive impact on the share price…What we’re saying is: plan for a world where maybe the world doesn’t need your [oil] barrels.’

Chris James, Engine No.1 Founder (from FT)

Perhaps the key message of Engine No.1’s move is that, even though our individual impact may be small, collectively we can make a difference, through the consumer choices we make and the power of the markets to penalise companies that are out of sync with the values of the day and to reward those who adapt.  From an investment perspective, that means remaining invested in companies in order to have our say, via the fund managers who manage our money.

It may be David 1, Goliath 0, but this game has a long way to go. 

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1]    FT.com, Hedge fund that beat ExxonMobil says it will have to cut oil output, May 27, 2021

If you have ever been fortunate enough to swim in the azure tropical waters of the Caribbean, or on Bondi Beach amongst the surfers, or in the chilly waters of Cape May (where the film ‘Jaws’ that scared the 1970s generation out of the water was filmed) in the back of your mind may have lurked the thought that a large shark might just be out there looking for lunch. What was that shadow?

Yet most of us don’t think twice about the risks of sitting under a coconut tree, which urban myth suggests is far more likely to kill you from a falling coconut than a shark attack, as is the malaria-carrying mosquito that lands on bare flesh as the sun sets in paradise.  Nor did we consider the risk of a deep vein thrombosis from the long-haul flight to get there.  We fixate on the shark.

Humans are irrational and find it hard to place risks in perspective, in part because they involve numbers (which many people hate), are influenced by fear or recent news and often depend on the way in which they are framed, to name just a few of the challenges. 

We have a very clear recent example of our confusion with the extremely rare possible side effects of some of the Covid-19 vaccinations.  Latest estimates, suggest that the risk of dying from the vaccine due to blood clots is 1 in 1 million, which is similar to the chance of being murdered next month (nasty) or dying in a road accident on a 250-mile road trip [1].   And that, is the point. 

Life is full of risks and those that we deem to be everyday consequences of modern life, we take, usually without batting an eyelid, such as: driving, using ladders, drinking alcohol, climbing mountains, and walking through fields of cows (nearly 100 people were killed by cows between 2000 to 2020) [2].  Yet other exceptionally low risks we deem ‘too big’ to take. 

It is similar with investing.  Investors tend to worry about equity market crashes, perhaps not surprisingly, as equity markets can and have fallen by more than 50% in the past. Yet owners of equities should not be looking to sell them in the next few years but relying on fixed income assets to meet liquidity needs. 

In most cases, markets recover relatively quickly over say 3-5 years, sometimes more slowly.  With horizons well beyond these falls and recoveries, investors who stay the course should be rewarded - as they have been in the past – with strong returns above inflation.  The latter is the real (excuse the pun) risk to long-term investors. 

Avoiding equity market risk and putting money on deposit is actually the risky strategy.  Over the past 10-years, those holding cash have lost around 1/5, or 20%, or £20 in every £100 of purchasing power [3], however you want to describe it.  That is risky.  Managing risk in our lives is summed up well by Professor Dame Glynis Breakwell who wrote a book titled The Psychology of Risk [4].

‘Risk surrounds and envelops us.  Without understanding it, we risk everything and without capitalising on it, we gain nothing.’

Go on, get the vaccine, take that long haul flight (once you can) back to the azure waters, brave the sharks and stick with your equities.  The risks will be worth it.

[1]    https://www.bbc.co.uk/news/explainers-56665396

[2]    UK Health and Safety Executive (HSE) https://www.hse.gov.uk/

[3]    Bank of England – 1 month Treasury bills

[4] This is not for the faint-hearted – it is an academic tome. If you are interested in how to use and understand statistics in a statistics-laden world, an enjoyable and accessible read is Tim Harford’s new book ‘How To Make The World Add Up’

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

As an investor one is always learning. Our perception of investing is guided by our experiences: those old enough to have been investing in the 1970s will retain uncomfortable memories of rampant inflation and the impact that had on cash, bonds, and the general travails of life when prices spiral upwards.

Others who lived through the birth of the internet and the boom and subsequent bust of the ‘dot.com’ era of the late 1990s and early 2000s, may also be living through a sense of déjà vu.

For most investors, interest rates have been on a steady long-term decline making mortgages cheaper and supporting bond and equity prices. In the past twelve months, we have been reminded of some useful lessons that can – hopefully – make us all better investors. Several key lessons stand out for us:

1. Markets go down as well as up. In the decade following the Global Financial Crisis, investors were treated to a long and almost interrupted run of rising equity, bond, and property markets. It seemed as if everything always went up. The first quarter of 2020 reminded us that this is not always the case. Some equity markets fell in excess of one third of their value. It could have been much worse. A useful rule of thumb is that the equity content of a portfolio could easily fall by 50%, as it has in the past on several occasions. Equity investors get rewarded for taking on this uncertainty and pain, eventually.

2. Short-term pain does not become long-term pain unless you sell. Those who needs their money in under a year should not own any equities at all. In reality, most investors have very long-term horizons; after all, if you are 60 you should be planning to be invested for at least another 40 years! Yet it is a sad fact that some investors panic and sell out when markets nosedive, even though they don’t need their money that year or probably for many years. Broad global markets have recouped all of their losses (and more) since the start of 2020 to the start of March 2021. Bailing out of a long-term strategy can be costly. Most investors who need to withdraw money from their portfolios own high quality bonds that they can sell to meet expenses, leaving their equities intact.

3. High yielding bonds have equity-like characteristics. During painful sell offs, investors need to be able to rely on their bonds to help ease the pain. Unfortunately, high-quality bonds (i.e. bonds from the most credit-worthy issuers) pay low yields. Yet, high yielding bonds – from lower quality corporate and emerging market borrowers – are not the solution as they act far more like equities, just when you do not want them to. Sticking with high quality bonds is an insurance policy. Owning the right level of insurance coverage is important.

4. Fads, trends, and social media tips are dangerous to your wealth. In the past few months, we have seen extraordinary share price rises of many growth-oriented companies, particularly in the US. For example, Tesla’s stock price rose from US$121 a year ago to a high of $883 on 25th January 2021. Social media pumping of stocks like GameStop and the ‘enthusiasm’ of online retail investors pushed some stocks ‘to the moon’🚀🌙 (symbols used on social media to signify a ‘great’ stock!). Yet most turned out – or will turn out - to be meteorites falling back to earth. Tesla’s stock price has fallen by around a third since then. Owning stocks is for the long run. Owning them for short-term gains is gambling with costly consequences for most. Let others take the losses. Remember that owning a diversified portfolio means that you already own many of tomorrow’s winners. Be happy with that.

5. Inflation may not be dead. We have been living for some time in a relatively benign inflation environment. Yet, the huge levels of government stimulus and consequent growth of the money supply – not least the US$1.9 trillion (i.e. $1,900,000,000,000) package in the US – risks fanning inflation. Inflation is a form of unlegislated, invidious taxation.

6. Bonds do not always go up. Inflation – or the fear of inflation - is bad for bonds. Bond yields - that incorporate the market’s view on future inflation - have risen of late as a consequence, pushing bond prices down. Bond yields have been falling for around 40 years to historic lows, so this is new to many investors. Owning shorter-dated bonds helps lessen the pain and investors benefit more quickly from the rise in yields.

7. Gold is not a good short-term hedge of inflation. Although the salaries of comparably ranked army officers from Roman times to today – a mere 2,000 years - are almost identical in gold terms (1) (i.e. the price of gold has kept up with inflation), just as we are potentially experiencing a rise in inflation, gold prices have been slumping from above GBP2,050 per ounce in August 2020 to below GBP1,700 per ounce today. In fact, gold’s inflation-busting myth relates to the 1970s when inflation was rampant and gold prices rose dramatically. Correlation does not imply causation.

8. It is always darkest before dawn. The last 12-month period has seen some tough times for everyone, both in terms of our personal lives and in the markets. It is always easy to see the doom and gloom, but there is light at the end of the tunnel. Keep positive. This too, shall pass.

These lessons lead us to some obvious conclusions about portfolios. Own a sensible balance between bonds and equities and understand that owning high-quality bonds is an expensive, but necessary insurance policy for most and allows you to meet your nearer-term liabilities.

Own a globally diversified equity portfolio. A few US technology stocks cannot continue to out-run markets for ever. Keep the faith in your long-term portfolio strategy and turn your eyes away from market temptations!

At the end of the day, building wealth from investing is a long, boring process interspersed with years like the one we have just had. We survived what the markets threw at us and will survive whatever comes our way again. Stick with it.

(1) Erb, Claude B. and Harvey, Campbell R., The Golden Dilemma (May 4, 2013). Available at SSRN: http://ssrn.com/abstract=2078535 or http://dx.doi.org/10.2139/ssrn.2078535.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed. 

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.