May 2024

May 30

What history tells us about UK markets after an election

By FAS | Financial Planning

In a little over a month, the UK will head to the polls in a much-anticipated General Election. The announcement by Rishi Sunak to call a General Election for 4^th July caught many observers off guard. Whilst not unprecedented, summer elections are rare, and many were expecting the Tory leader to call an election in the autumn or winter.

Thus far, market reaction has been muted, which is not surprising, given the relatively limited impact domestic politics can exert over global markets. It is important to recognise that global factors carry greater significance, with the Middle East, Ukraine and US economic policy decisions likely to provide greater direction than political decisions at home.

As both major parties begin to firm up their manifestos ahead of the election, one major theme adopted by both sides will be the importance of financial prudence. Whilst the economic outlook is improving, with UK GDP returning to growth in the first quarter of 2024 and inflation falling, the adverse market reaction to the mini-Budget in 2022, which caused Sterling to fall heavily and gilt yields to rise sharply, will be fresh in the minds of both parties when making spending pledges. Whether Jeremy Hunt remains as Chancellor of the Exchequer, or Rachel Reeves takes up the role, both are likely to tread carefully when announcing policy decisions over coming months.

Can history provide any clues?

To help understand how markets have reacted historically in the period immediately after UK General Elections, we have undertaken research looking back at the performance of the FTSE All-Share Index, which is the broadest measure of performance of UK quoted companies and captures 98% of the UK market capitalisation.

Our analysis shows that UK markets have historically produced a similar performance over the longer term under both major UK political parties. Looking at the tenure of each major party since 1997 (and not including the coalition government from 2010 to 2015) the average total return per annum (including dividends reinvested) from the FTSE All-Share index has been broadly similar under both a Conservative and Labour majority government.

The FTSE All-Share index has returned an average total return of 7.54% per annum under the Conservatives and 6.94% under Labour. Naturally, each period of control has encountered factors that have influenced global markets, such as the Global Financial Crisis of 2007-8, or the Covid-19 pandemic; however, it is interesting to note the broadly similar trend over time, irrespective of whoever is in power, which indicates – at least historically – that politics has little influence over the longer-term market performance.

A short-term boost for UK equities?

We have also looked at historic data to understand the potential for the General Election to be a catalyst for stronger domestic market performance in the short to medium term. In theory, an incoming government may be able to introduce greater fiscal stimulus, or boost public spending, as a result of their policy decisions. The same could, however, also be said for an incumbent government, who are emboldened to carry out manifesto pledges.

Our analysis of the UK stock market performance immediately after an election shows a similar trend, with the performance under both major parties being broadly similar; however, what is notable is the historic strong performance seen in the 12 months immediately after a change of government.

In 1997, when Tony Blair won a large majority for Labour, the FTSE All-Share index produced a total return of 35.6% over the 12 months immediately after that landslide victory. Similarly, under the coalition formed by the Conservatives and Liberal Democrats following the hung parliament in 2010, the FTSE All-Share produced a total return of 17.8% in the following year.

Comparing the returns in election years where power changes hands, to those where the incumbent party remains in power, indicates a marked difference in performance, with an average total return of just 2.5% being achieved by the FTSE All-Share index in the 12 months following a General Election when the ruling party retains power. This does, therefore, suggest that a change of government could prove beneficial for UK equities, at least in the short term.

Should investors be concerned?

Naturally, a General Election can cause uncertainty, particularly when considering any potential changes that will be implemented over the course of a parliament that could affect financial planning decisions. When it comes to market performance, however, we feel the upcoming General Election will have a limited impact, as the direction of UK equities markets continue to be dominated by geopolitics and global events, together with decisions taken by the Federal Reserve in respect of US interest rates. Indeed, we feel the US election in November has far greater potential to influence the direction of UK Equities than our own General Election on 4^th July.

That being said, we feel investors should take the opportunity to assess how their portfolio is positioned, both in terms of asset and sector allocation. Our experienced advisers can take an unbiased look at an existing investment portfolio, to make sure that the portfolio provides adequate diversification and meets your needs and objectives. Speak to one of the team if you have any concerns about the impact of the General Election on your portfolio.

May 23

Behind the Scenes at FAS – Part 3 – Our Advisers

By FAS | Financial Planning

In the first two parts of our “Behind the Scenes at FAS”, we gave an insight into the work of our adept administration and paraplanning teams, who fully support our team of financial planners. This collegiate approach ensures that advisers are afforded the time to spend with clients and pools the many areas of expertise across the firm to provide the best advice and service to clients.

Our team of advisers

The FAS adviser team is office based, although they tend to split their time between the office and attending client meetings, which can either be held at the client’s home or business address, or one of our two offices in Folkestone and Maidstone.

Led by the Directors, our FAS adviser team is made up of highly qualified and experienced individuals, the majority of which have at least twenty years or more experience in advice roles across the industry. We will continue to expand our dedicated team of financial advisers in line with our continued business growth.

Importantly, all of our advisers are employed by FAS on a salaried basis and none of our advisers are set targets for achieving certain levels of fee income. We feel this is of fundamental importance, as it allows our advisers to focus on providing the most appropriate advice and removes any notion of “sales” bias.

We appreciate that the adviser-client relationship often strengthens over time, and each client’s dedicated adviser is their usual main point of contact. It is, however, important to recognise that FAS is a team effort, and if an individual’s usual adviser is not available for any reason, another member of our advisory team will happily step in assist in their absence, wherever possible.

A team of all rounders

Working for an independent advice firm, our advisers need to be able to provide holistic financial advice, drawing on extensive knowledge in many different areas of financial planning. None of our advisers are “specialists” as each needs to be able to provide a high level of technical advice in a range of diverse areas, depending on the needs of a client. Typical planning requirements are pensions, investments, tax planning, divorce planning, trusts, and business planning. Other areas of expertise are also required, when client circumstances call for planning advice on personal and business protection, funding care fees or school or university fee planning.

An adviser’s role

As the name suggests, the primary element of an adviser’s role is to provide financial advice! This is either given during an initial, or review meeting, which is conducted face-to-face or through Zoom or Teams. During a client meeting, advisers make contemporaneous notes of the conversation and complete a detailed fact find, gathering the necessary information to be able to provide the most suitable advice. These notes and information are then logged as an ultimate record of the meeting.

Advisers also spend time each day dealing with client email correspondence and telephone calls. They regularly speak to Solicitors, Accountants, and other professionals in relation to queries which are relevant to mutual clients. We are strong advocates of this collaborative way of working, as it ensures that clients receive cohesive advice across common areas.

Working closely with our paraplanners and administration team, our team of advisers assist in the preparation of client reports following meetings, and ensure that comprehensive meeting preparation is undertaken before a client meeting takes place.

Highly qualified advice

To provide advice of the highest quality, the Directors place significant emphasis on study, learning and the achievement of relevant industry examinations.

The majority of our advisers have achieved Chartered status, which means that they have attained the highest standard of qualification in the industry, with others on a study path to achieving Chartered status. Being Chartered is not only an indication of technical competence, it also signifies an individual commitment to professional standards. Only a small proportion of the regulated financial advisers in the UK have achieved this status.

FAS follow a strict regime of continuing professional development, so that staff can keep themselves fully abreast of changes in legislation and reinforce their knowledge. Advisers are subject to an enhanced continuing professional development requirement and need to undertake a prescribed number of hours of learning each year, which includes structured learning.

FAS has also been awarded Corporate Chartered status in recognition of our commitment to professional excellence and integrity. Industry gold standards are not awarded lightly; the Chartered Insurance Institute sets this benchmark at the highest level based on advanced qualifications, an overall commitment to continuous professional development and adherence to an industry standard Code of Ethics. Our corporate title is not simply recognition for passing examinations or paying an annual fee; it is a public declaration of our commitment to excellence and quality in everything we do.

Product knowledge

A key element of an adviser’s role is to ensure that the most appropriate solution is recommended for a particular individual set of client circumstances. As an independent firm, we can recommend solutions without constraint, and therefore our advisers need to have an extensive knowledge of the features of products from across the marketplace and keep up to date with product and industry developments.

FAS – a team effort

Our diverse team consists of experienced, high qualified Advisers, Paraplanners and Administrators who, over the years, have been handpicked for their dedication, team spirit and client-centric focus. We all work closely together for the good of our clients. We prioritise client relationships, ensuring our focus is to always provide quality advice and exceptional service. All staff are integral to the running of the business and there is a mutual respect amongst colleagues for the role everyone plays.

Our experienced adviser team are committed to providing sound holistic financial planning advice. We are proud of our independent status, which enables our advisers to recommend the most appropriate solution to suit the needs of our clients. Whilst the advisers will be the main point of contact for our clients, the advice process is a team effort, requiring the skills and input of our paraplanning and administration teams.

We hope this article helps to reinforce the collegiate nature of our business and welcome any comments or queries you may have.

May 16

The drawbacks of a passive only investment approach

By FAS | Investments

First available to investors in 1975, a passive fund aims to offer a low-cost method of replicating the performance of a specific market index, rather than actively selecting individual assets within a particular market. Over the last decade, passives have grown substantially in popularity, with Morningstar research confirming that passive funds saw higher inflows than active funds during 2023.

The rise in the popularity of passive strategies is also evident from our own market analysis. Our Investment Committee regularly undertakes a comprehensive review of managed portfolio solutions offered by discretionary fund managers, to ensure that we can demonstrate that FAS clients receive good value for money. Our analysis clearly demonstrates an increasing bias towards passive investments, on which many of our competitors’ products and services are founded.

The rationale behind the increased use of passive investment funds is that the ongoing cost of a passive investment is usually cheaper than an actively managed fund. This helps passive only strategies maintain a competitive total cost of ownership. A key drawback of such an approach is that investors may be missing out on additional returns generated by strong active management. In our opinion, many portfolio managers are confusing “value for money” with “cheap”, with the focus on costs being the dominant factor.

Drawbacks of passives

Many investors fail to take account of two key disadvantages of a pure passive investment approach. The first is that, by definition, a passive investment will not outperform the representative index or market it is trying to replicate. Indeed, due to costs and potential tracking errors, most passives return just below the index return. As an investor, we contend that you should be seeking outperformance where possible, as long as the level of risk being taken remains commensurate with the prospects for superior returns.

A second key risk of a pure passive approach is that replicating an index will mean producing returns in line with that index. When market indices fall, the value of a passive investment tracking that index will fall by a similar amount. Unlike a fund with an active manager, who could potentially take avoiding action by reducing allocations, increasing the percentage of cash or possibly using derivatives, the passive fund will simply track the index on the way down.

Our approach

Within our investment strategies, we try to seek out good value for our clients, and our independent status allows us to take an unbiased approach as to the precise blend of funds we select. This allows us to select passive funds, where this is appropriate. We will, however, also look to use active funds if we feel this is likely to result in outperformance.

Our Investment Committee undertake considerable research on a sector and region basis when conducting the regular review of funds that we recommend to clients. This research, which has been carried out for many years, allows us to better understand areas where passive investment is likely to be sensible, and where selecting an active investment approach may produce superior returns.

The most commonly cited example of a sector where passive investments perform well is US Equities. Our own analysis has shown that index funds that track the S&P500 index of leading US companies tend to produce consistently strong returns when compared to actively managed US Equity funds. There will, of course, be active funds that do beat the market; however, the key is whether this can be achieved on a consistent basis.

One of the main reasons for the attractiveness of passive funds in US markets is the dominance of a small number of mega-cap stocks, where performance has been positive compared to the wider index for some time. Our analysis concurs with research carried out by S&P Dow Jones, who suggest in their recent SPIVA report that 60% of active large-cap US Equity funds failed to beat the representative S&P500 index during 2023.

A good example of an area where passive investment has shown historic weakness is in Fixed Income investment. Whilst many investors would associate passive funds with Equity investment, a wide range of passive bond funds are now available, which track a particular UK or Global bond index, and typically replicate hundreds or potentially thousands of individual bond positions. Bond investment is an area where adopting the correct strategy can yield significant outperformance, and an active bond fund manager can alter the duration of bonds held, the credit quality and sector or geographic allocation, to try and generate superior returns over the benchmark index. These additional levers available, which can adjust the allocation within the fund, can help a skilled fund manager generate superior performance to a passive fund, which simply holds the constituents of an index.

At FAS, we view ourselves as conviction investors, and therefore when selecting an active fund, we prefer to select an investment manager or team with a clear vision as to how their fund is to be positioned. This can often mean a concentrated portfolio, when compared to the representative region or universe of stocks available. All too often, we come across funds that employ an active manager or management team, who take an approach that allocates their portfolio closely to the benchmark index. In most instances, such funds fall between two stools, carrying high charges without the prospects for outperformance.

Summary

With the increased focus on costs across the industry, many portfolio management services are leaning towards a passive only investment approach, with the ultimate aim of highlighting a competitive pricing structure. We feel such an approach is highly inflexible and potentially means that opportunities for outperformance from active managers is being missed. We prefer adopting a hybrid strategy, using passive funds in areas where index tracking funds should perform well, combined with actively managed funds where we feel the prospects for outperformance justify the higher costs of active management.

If your investment manager is using a passive only approach, speak to one of our experienced advisers to discuss whether adopting a different strategy would be appropriate.

May 02

Scaling the wall of worry

By FAS | Investments

Recent events in the Middle East have once again led to increased concerns about the impact that World events can exert on global financial markets. In such times, it is important to remain focused on the long-term trend, and to try and avoid taking short-term decisions that could prove detrimental, as history tells us that the initial knee-jerk reaction to global events is often short lived.

Why markets react to conflict

It is true to say that investment markets crave certainty at all times. Calm waters allow investors to focus on the prospects for the global economy and individual companies, without the need to consider the disruptive impact of global events, such as major conflict. One of the key reasons why recent conflicts have caused consternation from an investment perspective is the potential impact on commodity prices. For example, as Middle Eastern nations are key players in the global oil market, the recent heightened tension between Israel and Iran have forced oil prices higher. Likewise, the Russian invasion of Ukraine caused a significant spike in natural gas prices due to supply shortages.

What history tells us

Looking back through history provides clear evidence that investor pain following a global event is relatively short-lived. The Russian invasion of Ukraine in February 2022 led global markets lower, as inflationary pressure rapidly increased and caused investors to re-think economic projections. Despite reacting calmly to the initial outbreak of hostilities, the S&P500 index of leading US stocks moved decisively lower a few weeks later, and took just over one year to recover to a higher level than at the start of the Russian invasion. For those investors who correctly took the view that investment is a long-term process, this period of uncertainty will now be little more than a memory, as the S&P500 now sits relatively close to new all-time highs.

Other major conflicts and acts of terrorism have caused a sharper short-term market reaction, which then quickly corrects once markets have had time to assess the impact. Following the suspension of global markets in the wake of 9/11 attacks in 2001, the S&P500 index fell over 11% in the space of seven trading sessions, as investors digested the US reaction and potential impact on economic prospects. The downturn was, however, very short-lived, as by October 12^th 2001, the S&P500 had recovered the ground lost immediately following the terror attack and ended the year a further 5% higher.

It’s not just war

Of course, geopolitical risk does not necessarily increase as a result of conflict. The outbreak of the Covid-19 pandemic created the largest global economic crisis for a generation, as lockdowns caused significant damage to public finances and global commerce. Between April and June 2020, UK Gross Domestic Product fell by a record 19.4% during this period, only to rebound by 17.6% in the following three months, as the country slowly emerged from the first wave of lockdowns.

Investors had nowhere to hide during the early stages of the pandemic, with stock markets around the World moving rapidly lower during March and April 2020. The S&P500 index fell by 29% from 1^st January 2020 to the low point on 23^rd March 2020, but had recovered to stand higher than at the start of the year by the end of July, just four months later.

Many investors will vividly recall the unprecedented sense of concern at the time of the Covid-19 outbreak, and the economic damage to public finances around the World will take many years to repair. Global Equities markets, however, corrected rapidly once the initial panic had subsided and investors began looking at the fundamental recovery in business confidence and economic performance to follow.

Climate related events also have the potential to be a greater source of concern to investors over years to come. The changing weather patterns and increase in extreme weather events have the potential to reduce economic output and cause widespread damage, including disruption to supplies of raw materials, food and energy. Our view is that climate related risk may also prove to be an opportunity for those industries who are able to adapt, and the impact of such changes could be far more gradual over a number of years than the immediate impact of conflict or other global events.

Why markets bounce back

As demonstrated by recent precedents, global markets tend to be resilient and often shrug off an initial overreaction to unexpected global events. Once the initial shock of the event has subsided, investors are able to take a measured view of the impact on corporate earnings and economic growth, with markets often rebounding quickly following an initial sell-off. One of the primary reasons why this may be the case is that central banks can invoke a monetary policy response, and Governments can provide fiscal stimulus, which can boost investor confidence. It is also often the case that the global event will do little to damage future earnings, although of course depending on the nature of the event, some sectors of the economy may be more adversely affected than others.

Keep the long-term view in mind

When investing in Equities, it is vital to focus on the longer term objectives. Equity markets are volatile, and from time to time, global events push risk levels higher and can cause periods of underperformance. Whilst we cannot predict the future, we can learn from the market’s reaction to past events, and it is evident that markets often rebound shortly after the initial shock of a global event has passed. Even a once in a generation event (we hope…) such as the Covid-19 pandemic, only caused markets to retreat temporarily. Comparing index values today to the depressed levels seen in March 2020, is a potent reminder of the need to stay calm and stay invested through turbulent times.

It is at times of major concern that the ongoing advice of an independent financial adviser can prove invaluable, both to provide counsel on actions that need to be taken and reassure and aid you to focus on the longer term prospects. Our advisers at FAS are highly experienced, and through regular contact with clients, can provide ongoing advice in all market conditions. Speak to one of our friendly team to start a conversation about your financial planning requirements.