April 2020

During March and April, we witnessed a considerable amount of global market volatility and instability, which is why we have been spending a lot of time proactively speaking to our clients in order to provide as much reassurance as possible. As the COVID-19 outbreak sweeps across the world and results in nationwide shutdowns, many UK investors are naturally worried about their portfolios as the markets have reacted.

On the 12th of March, for instance, the FTSE 100 recorded its worst performance since 1987, dropping over 10% following the U.S. announcement of restricted travel from mainland Europe. Indeed, by the end of the month, the index had recorded its largest quarterly fall since Black Monday in 1992.

However, Britain is not the only country to have been affected. We have noticed the effect of COVID-19 on virtually every major economy across the world. In the U.S., for example, the 1st of April logged the worst beginning to a business quarter in history for the S&P 500 and Dow Jones, with losses of at least 4.4%. European markets have also been hit, with the Stoxx Europe 600 finishing the first quarter at a 23% loss.

Given this widespread “bear market”, isn’t it safer to keep your investments confined to one country, just in case other countries are worse hit by COVID-19 than others?

In our professional experience, we would caution against dramatically changing a client’s investment strategy as a result of hitting harder times. Indeed, there are very good reasons to stay globally invested; three of which we share with you here.

#1 Unpredictability

The markets are never predictable, but this is especially true in light of the COVID-19 outbreak. Given the unknowns surrounding the virus, it’s still very difficult to anticipate how it might spread and affect different countries’ economies. This provides a strong reason for not placing all of your investment eggs in one basket, but instead, spread them out appropriately across different countries.

Consider the start of the outbreak. In early March, China seemed to be taking the brunt of the economic damage. Its city of Wuhan was the pandemic’s source, and the country faced strong widespread lockdown. Chinese production stalled, but markets in the Western world did not initially react. Fast forward to April 2020, however, China’s lockdown appears to be lifting and China has passed the U.S. as the world’s most popular venue for stock market listings in Q1, raising over $11bn in three months. The Western world, however, is now struggling.

Of course, everything could change again dramatically in the coming weeks and months. The lesson: don’t assume that one country is a “safe bet” for investments and write others off as unviable, leading to an under-diversified portfolio.

#2 Unavoidability

There is another important reason to include global investments in your portfolio; they cannot really be avoided! Consider that U.S. stocks comprise 54.4% of the world’s market capitalisation in April 2020, and many of these companies will have operations, supply chains and customers based overseas. Within the UK, moreover, many of the FTSE 100 companies also include foreign operations and revenue streams.

#3 Underexposure

Many nervous investors look at global investing and think they can avoid excessive damage to their portfolio during a down market, by keeping a “domestic focus”. There is another way of looking at this, however. By trying to confine your portfolio to one country, you could miss out on a range of investment opportunities which are only available elsewhere in the world.

Consider the effects of restricting your portfolio to the UK. As strong as the UK is for certain sectors (e.g. financial services, oil and gas), many industries/sectors are not represented well in our country. Most of the largest tech companies – such as Netflix and Facebook – are based overseas in the U.S., and many high-tech manufacturers are based in Japan (e.g. Hitachi).

By investing globally, you can help to further diversify your portfolio by exposing it to a wider range of sectors. This can enhance balance amongst your investments and shield your portfolio from excessive damage, should certain sectors struggle, compared to others. Consider the impact of COVID-19 on different sectors by the end of March, which has hit sectors such as retail, aviation and hospitality the hardest. Other areas, however, actually seem to be experiencing a boom in business due to the outbreak such as digital streaming, food delivery and hand sanitiser producers.

As we keep saying, if at any point you wish to discuss your investment strategy in more detail, please do get in touch.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.

Looking ahead in 2020-21, how do you see your pension contributions and Individual Savings Accounts (ISAs) panning out? Some clients regret not considering these earlier in the 2019-20 financial year, to get a better deal out of their tax position. Provided your circumstances allow, you may wish to act sooner this tax year, to take advantage of the full range of tax planning tools available to you, including VCTs (Venture Capital Trusts) and EIS’ (Enterprise Investment Schemes).

These two options can be attractive to investors who want the opportunity of possibly generating stronger returns. However, they can also be great for some people who are likely to maximise their pension and ISA contributions during a tax year.

In this short 2020 guide, we outline some ideas how you can do this.

Overview of EIS & VCTs

In the 10 years preceding 2019, both EIS & VCTs markets have doubled in size. Since its inception in 1994, for instance, the EIS market has attracted more than £18bn of investment to over 27,905 companies. VCTs, moreover, have raised about £7bn since first launched in 1995.

Both EIS & VCTs are Government-run schemes intended to incentivise investment into innovative companies, which can spur economic growth and create jobs (thus creating more tax revenue). One reason they have proven popular with some investors is down to the tax reliefs on offer. In particular, both EIS & VCT investments allow you to claim back 30% of your investment against your Income Tax bill.

However, both EIS & VCTs have also come to the attention of pension savers, who have faced an increasing “squeeze” in recent years. Over ten years ago, for instance, you could put up to £255,000 per year into your pension. Today in 2020-21, you can only commit £40,000 per year (or up to 100% of your salary; whichever is lower). As a result, some clients now consider EIS & VCT investments as another way of supplementing existing retirement savings but of course they are more complex and need to be fully understood.

Case Scenario: EIS & VCTs “in play”

Suppose you earn £100,000 per year and want to continue saving and investing into your pension, despite nearly having used up your £1,073,100 Lifetime Allowance. What options do you have?

One idea to consider (which we recommend discussing with us first!) is to reduce your pension contributions (to keep within your Lifetime Allowance before you retire), and redirect some of this into VCT investments. This involves “buying” shares in one or more VCT companies on the London Stock Exchange (LSE), and you can commit up to £200,000 per year into these investments. From there, you could then claim back 30% of your VCT investment against your Income Tax, the following April. If you put £40,000 into VCT investments, for instance, then you could claim back £12,000.

Another option, however, would be to consider investing in some EIS-qualifying companies or EIS funds. With an EIS, you can invest up to £1m per tax year (i.e. 5 times more than VCTs), which can make it an attractive option if you have just sold a business or received a large bonus, and are wondering what to do with it. Again, you can claim back 30% of your EIS investment against your Income Tax bill.

Which is better?

The suitability of VCTs over EIS’ (and vice versa) depends on your individual financial objectives, needs and circumstances. One notable benefit of VCTs, for instance, is that they provide dividends which are paid completely free from tax. This can lead us to recommend VCTs as a useful tool for retirement planning, since they provide a regular tax-free yield. On the other hand, EIS investors can defer a Capital Gains Tax (CGT) liability, which can give you much more tax planning flexibility if you have suddenly received a large unexpected sum of money, such as an Inheritance.

It’s important to note, both EIS and VCT investments involve a higher level of investment risk when compared to the likes of other Equities, Bonds and Cash. The potential returns, of course, can be higher and thus worth the trade-off. Yet you should always discuss this with one of our experienced Financial Planners first, to ensure that any EIS or VCT investments sit appropriately within your investment risk profile.

Two notable benefits of EIS, nonetheless, are worth mentioning. First of all, you can claim loss relief on any EIS investment which fails, equivalent to your highest rate of Income Tax. In the case scenario above, for instance, a £100,000 earner would be in the 40% Higher Rate bracket in 2020-21. So, if he/she invested £10,000 into an EIS opportunity which failed, they’d “only” make a £4,200 loss. This is because 30% of the original investment would be claimed back against the Income Tax bill, meaning that the “at-risk” capital was £7,000. 40% “loss relief” on this amount is £2,800, resulting in a £4,200 loss. Secondly, any EIS shares held for at least two years are exempt from Inheritance Tax.

If you are interested in exploring this area of financial planning in more detail, please do give us a call or broach the subject with your Adviser when next reviewing your circumstances.

This content is for information purposes only. It does not constitute investment advice or financial advice. To receive bespoke, regulated advice regarding your own financial affairs, please contact us.