May 2025

May 29

Why you should review your discretionary fund manager

By FAS | Financial Planning

New clients to FAS often agree to transfer existing investment portfolios they hold with discretionary fund managers, to our management. As a result, the advisers at FAS regularly have the opportunity to review the performance, management style and charging structure of what we would term “traditional” discretionary fund management services, from some of the biggest names in the industry.

As you might expect, our analysis produces some variances in results, depending on the fund manager employed. There is, however, sufficient commonality across a range of different discretionary fund managers to draw meaningful conclusions and reinforces the need to regularly review the investment performance and costs of any discretionary managed service.

Investment selection

When we review investment portfolios managed by other discretionary fund managers, we do so in an objective and unbiased manner. We have the mantra that if performance is consistent, and the portfolio volatility and risk match the objectives of the client, it may be best to take limited action. We do, however, notice a series of trends emerging from our ongoing analysis, which suggests that many of the largest UK discretionary managers adopt a very similar approach to each other, leading us to question whether the blend of investments held within portfolios really suits the client circumstances.

Firstly, many discretionary managers choose to directly purchase Gilts (UK Government Bonds), to form part of their fixed income exposure within a portfolio. Whilst Gilts do have an advantage in terms of their Capital Gains Tax treatment over collective investments holding a wider range of bond positions, we feel the focus on UK Government debt can miss out of the potential for superior returns from good quality corporate bond alternatives.

The second common theme we have identified is the use of investment funds domiciled outside of the UK. These funds often carry higher charges, which push up the overall cost of ownership, and potentially limit returns. There is a myriad of investment options available to UK investors that are UK domiciled, which remain significantly more popular to UK investors than those domiciled overseas. Indeed, the Investment Association produced data at the end of 2024 that showed that 83% of collective funds held by UK investors were held in funds domiciled in the UK. It could be that the common use of an overseas fund is a case of loyalty to a particular boutique fund house that the firm has used for many years; however, given the breadth of choice available within UK domiciled funds, we question the effectiveness of this apparently common trend.

Finally, we note the quantity of holdings that tend to be present within traditional discretionary managed portfolios. We often see portfolios with upwards of 25 or 30 different holdings, which we feel can cloud performance by spreading the portfolio allocation too thinly to good performing funds. Diversification is, of course, an important factor in risk mitigation; however, we would argue that this can be successfully achieved with a more compact and well organised portfolio.

Investment style and charges

We have often commented on our view of the blend of active and passive investment funds that we prefer to see within a well diversified portfolio. Passive funds dominate industry fund sales, and for good reason, as they provide wide exposure through a particular index with low costs. Our analysis shows that where passive investment styles are ideal for some markets, they are less than optimal for others.

Actively managed funds can provide additional returns over and above the target index, by adopting a more concentrated approach. Strong performance from an active manager can easily justify the additional costs associated with active management, which can be 10 or 15 times higher than an index tracking fund investing in the same sector or region. Conversely, weak active management can lead to underperformance of wider indices, with associated higher charges.

Through our analysis of traditional discretionary managed portfolio services, we note that the bias tends to be heavily weighted to active funds, with only limited exposure to passives. As a result, the blended portfolio cost may well be higher than average. Whilst cost and value should not be conflated, where performance is also modest, we have found clients with other discretionary managers are often paying more than they should, for less than stellar returns.

Absence of wider financial planning

Using a discretionary fund manager may ensure that your investments are reviewed and changed at regular intervals. The function of regular rebalancing and risk adjustment is a key component of any sensible investment approach – leaving investments in place without review for an extended period is unlikely to produce good results over the longer term.

The review carried out by a discretionary fund manager may, however, only extend to the funds themselves, and save for use of the annual Individual Savings Account (ISA) allowance, there may be little scope for wider financial planning.

This is not the fault of the discretionary manager. Their remit is to manage a portfolio of funds; however, this function only forms part of a bigger financial puzzle for most client circumstances. This is where an independent and holistic firm, such as FAS, can add significant value, by undertaking a full and comprehensive financial review, providing advice on multiple tax wrappers (such as Pensions and Investment Bonds), esoteric investments such as Venture Capital Trusts and Inheritance Tax solutions and other associated areas, for example protection policies.

The importance of critical review

Given the many examples we have noted, anyone using a discretionary fund manager should regularly undertake a critical review of the service they are receiving. Investors should question the investment performance, both on an absolute and relative basis compared to peers, and the costs and charges of the service. At FAS, we can undertake an impartial review of an existing investment strategy and undertake additional key analysis, looking at areas such as risk and volatility, which can be difficult to assess without expert advice. Speak to one of our experienced advisers to discuss your existing discretionary manager.

May 15

The evolving outlook for Japan

By FAS | Investments

We previously cast the spotlight on Japanese Equities late in 2023, at a time when the region was seeing a sharp rally in values, which extended through to the start of this year. Recent performance has, however, been disappointing, as investors become wary of the impact of tariffs imposed by the US. Despite these challenges, Japan remains an interesting opportunity for investors.

New highs in 2024

Over the last two decades, Japanese equities have often been a source of disappointment for investors, promising much, but delivering sub-par returns. This is in stark contrast to the boom days of the 1980s, when Japanese equities were caught in a bubble of optimism that extended across other aspects of the Japanese economy, such as real estate. Partly due to lax regulation, asset prices continued to climb until the bubble burst in the early 1990s. It took 34 years for the Nikkei 225 index of leading shares to reclaim the level reached in 1989, when the index climbed to a record high in July 2024.

The rationale behind the strong performance in Japan during 2023 and 2024 has little to do with speculation. After grappling with deflation for many years, Japan’s inflation rate has been positive since the end of 2022, which has helped the Japanese economy to normalise. With stable levels of inflation, wages have increased, improving the outlook for domestic demand. Interest rates are now also positive, albeit at just 0.5%, after many years where the base lending rate was negative.

Japanese companies have also evolved over recent years, improving their corporate governance and engagement with shareholders. As a result, Japanese companies have become more “westernised” when delivering shareholder value, by increasing dividends and using excess capital to arrange share buybacks. Each of these measures has the potential to improve return on capital and enhance the attractiveness of Japanese equities to investors.

Volatility remains

Using valuation metrics, Japanese equities look inexpensive compared to global counterparts. For example, they stand at a sizeable discount to the valuation of US equities. It is, however, worth noting that Japanese equities are not as cheap as they were two years ago, prior to the upswing in values.

Japanese equity markets can also be volatile. Investors in Japan suffered a temporary setback in August last year when a sharp rally in the value of the Japanese Yen against the Dollar triggered the unwinding of the so-called “carry trade”. This is where investors take advantage of the low interest rates in Japan to borrow Yen and use these funds to invest in assets with higher potential returns. When the Yen rose unexpectedly, this led investors to unwind their positions, which led to a short but painful fall in the Nikkei 225 index. Whilst the index had recovered the lost ground within four weeks, it served as a timely reminder of the importance of considering the outlook for the Japanese currency in conjunction with the prospects for equity markets.

Tariff threat

Japan is seen to be one of the nations most at threat from the imposition of tariffs by the US administration. Japan is a major exporter, and the 24% tariff announced on 2^nd April by President Trump was certainly not welcome. Despite the pause on tariffs announced a week later, investors remain concerned that tariffs could derail the positive outlook, and result in weaker economic growth.

The US accounts for around 20% of Japan’s exports, and any lasting trade barrier could prove troublesome, particularly for industries such as automotive, given the scale of exports of Japanese cars to the US market.

It is also important to consider the “knock-on” effects of tariffs imposed on other nations which trade with Japan. Lasting tariffs on major trading partners, such as China, could lead to a hike in the cost of parts and components used by Japanese industry.

Whilst tariffs continue to pose a threat to the outlook for Japanese exporters, and the wider economy, Japan enjoys good relations with the US and of the nations looking to strike a deal with President Trump, a good argument can be made that Japan are in a better position than many others to achieve a reasonable outcome.

Largely due to the tariff announcements, the Nikkei 225 fell by 8.2% over the first four months of 2025, compared to the index level at the start of the year, although valuations have subsequently rebounded strongly from their low point. Market valuations have, therefore, already discounted some of the concern over tariffs, and a positive outcome from trade negotiations for Japan, could aid further recovery. On the other hand, a reimposition of the punitive rate announced by President Trump on Liberation Day could potentially lead to further underperformance.

The investment outlook

Using valuation metrics, and considering the pace of change within Japanese companies, Japanese equities appear attractive; however, risks do remain, and whilst the regulatory reforms may prove helpful in the long term, the most immediate threat is posed by tariffs on global trade. For this reason, we recommend allocations to Japan are held as part of a diversified investment portfolio, which enables investment risk to be controlled. By allocating funds to different regions, where investment performance does not necessarily correlate, and to different asset classes, such as Government and Corporate Bonds and Alternative Investments, volatility and risk can be reduced.

Speak to one of our experienced financial planners to discuss the asset allocation of your portfolio.

May 08

Testing times for ethical investment strategies

By FAS | Investments

Ethical investment strategies have seen significant growth over recent years, as more investors aim to align investments with their own values. According to data from Morningstar, total assets in global sustainable funds have climbed to US$3.2 trillion at the end of 2024, almost double the total assets held in similar funds at the end of 2020.

Whilst returns from socially responsible investment strategies have been strong over the longer term, recent performance has lagged unfiltered investment approaches. This underperformance is one reason for the slowing demand for socially responsible strategies.

Playing catch-up

Those who wish to invest with an ethical stance have enjoyed returns over the medium and long term which have closely matched the returns from wider markets. Over recent months, however, this has not been the case. After seeing strong growth in 2024, largely due to the allocation to technology within ethical funds, socially responsible investment strategies have lagged more inclusive investment approaches since the start of the year. The chart below shows the widening gap between the MSCI World Index (shown in blue), and the MSCI World SRI Index, which excludes companies whose products have negative social or environmental impacts (shown in red), over the last 12 months.

The disparity in performance is the first significant divergence seen between the two MSCI indices over the last five years and clearly demonstrates the additional “cost” that ethical investors are currently paying to invest in line with their values.

MSCI World vs MSCI World SRI indices, Total Return in GBP over 12 months. Source FE Analytics April 2025

The underperformance can be attributed to the sector rotation we have seen over the last three months, due to global events. The decisions taken by European nations to increase defence spending has seen the Aerospace and Defence sectors grow strongly, as investors anticipate the potential profits that could be generated from growing order books. Socially responsible strategies are likely to hold a very limited exposure to these sectors.

Energy stocks have also performed well in the first quarter of 2025, producing the strongest performance of any sector within the S&P500 index, spurred on by a shift in policy from the US administration towards oil and gas production. This contrasts with the performance of renewables related stocks over the same period.

The underperformance of Technology has also been a major detractor that has hindered ethical investment strategies. After an extended period of growth, investor confidence in the major US Tech players has cooled due to concerns over the impact of tariffs and Chinese advances in Artificial Intelligence (AI).

Finally, the new Trump administration has clearly set out plans that fail to align with the green agenda and climate goals. This has led investors to question whether the change of direction could lead to continued underperformance.

Strong headwinds

The weaker returns achieved from ethical investments over recent months is likely to be a key reason behind the significant outflows seen from ethical investment funds over the last quarter. According to Morningstar research, more money was withdrawn from ethical strategies globally than invested, and new fund launches also fell to their lowest point in three years, reflecting the weaker investor demand.

Recent performance is not, however, the only reason ethical investments are facing strong headwinds in the current market conditions. Tighter regulation of sustainable investments has seen Europe, and the UK introduce new regulatory frameworks, designed to reduce the potential for “greenwashing”, i.e. misleading marketing that makes an exaggerated or false claim about the environmental impact of an investment.

In the UK, the Sustainability Disclosure Requirements (SDR) came into force last year, which encouraged funds to apply for a sustainable label, and for funds that choose not to apply for a label, to tighten up naming conventions. Take-up of the new labels has been slow, with just 94 funds adopting one of the SDR sustainability labels by April 2025. This is due to the rigorous scrutiny of the investment approach by regulators. As a result, a much greater number of funds have chosen to change name, more closely reflecting the strategy of the fund, or have decided to drop a sustainable investment approach altogether.

Whilst the slowdown in fund launches is a concern to asset managers, there remains a wide choice of both active and passive investment funds available for those who wish to invest ethically. Sustained weaker performance and diminishing investor appetite could, however, lead some fund managers to ditch their ethical stance, or in the case of smaller funds, merge or close investment strategies.

Where next for Ethical investments?

Socially responsible investment has taken significant leaps forward over recent years in terms of popularity and the availability of both actively managed and index tracking funds. Whilst ethical investors have seen returns closely match mainstream investment strategies over the longer term, the recent underperformance will no doubt be of concern to some who prefer to invest ethically. This could potentially have wider implications for continued growth in the ethical investment space.

At FAS, we have two distinct approaches to cater for those who wish to incorporate ethical considerations into their investment approach. Through CDI, our discretionary managed portfolio service, we offer two strategies that take a common-sense approach to socially responsible investment, that are designed to meet suitable screening criteria (which limits exposure to areas such as fossil fuels, gambling, animal testing and weaponry) whilst being as inclusive as possible.

We also appreciate some investors would prefer a more focused ethical investment approach. Here, we can build bespoke advisory investment portfolios, using rigorous quantitative screening processes and active engagement with leading fund managers, to meet a client’s ethical preferences.

Speak to one of our experienced financial planners to discuss existing investments you hold, or if you wish to invest in a socially responsible manner.

May 01

Choosing the right investment vehicle

By FAS | Financial Planning

One of the most important choices facing investors is where to place long-term investments. The choice of investment vehicle can influence the tax-efficiency of the strategy, the overall cost of the arrangement, and the potential for growth. For many investors, an Individual Savings Account (ISA) offers a tax advantaged route which is ideal for long-term investment, whereas Pension contributions receive tax relief, and Pension savings benefit from tax-free growth whilst invested. Beyond Pensions and ISAs, the tax implications of any investment plan need to be considered. There is, however, a further option that investors could consider, that can defer a tax liability or in some circumstances, remove it completely.

Investment Bonds in focus

Investment Bonds are products offered by life insurance companies, which combine features of both insurance and investment. For the uninitiated, Investment Bonds can appear complex structures, given the decisions that need to be taken when establishing the Bond, and the tax treatment of gains. This is where independent advice can prove invaluable in navigating the options available.

In simple terms, the first option when choosing an Investment Bond is whether to purchase a Bond from a UK based provider (so-called “Onshore” Bonds) or an International Bond provider, who may be based in Jersey or the Isle of Man. These are known as “Offshore” Bonds. As this choice will also dictate the tax treatment of the Bond, this decision requires careful consideration.

Unlike an ISA or Pension, Investment Bonds do not provide tax-free growth. They do, however, allow the investor to defer an income tax liability, whilst providing regular access to a proportion of the original investment. Investors can withdraw up to a maximum of 5% of the original investment each policy year, without triggering an immediate tax liability, although adviser charges are deemed to be withdrawals, and form part of the annual 5% allowance. As a result, the investor can potentially withdraw 100% of the original investment over a 20-year period, without any immediate tax considerations. The example below demonstrates the ability to draw regular sums from an initial investment of £200,000 into an Onshore Investment Bond.

Initial Investment	£200,000
5% allowable limit per annum before incurring a tax charge	£10,000 per annum
Monthly Withdrawal payment	£833.33 per month

Any withdrawals made above the accumulated 5% allowance, either as a larger lump sum or full policy surrender, is deemed to be a Chargeable Event and the gain is assessed for Income Tax on the investor. The precise level of tax payable will depend on whether the bond is held Onshore or Offshore, and the tax position of the investor. Further tax mitigation can be achieved through a mechanism where the gain is effectively “spread” over the number of years the Bond has been held.

Wider investment options

Historically, Investment Bond solutions were exclusively provided by the largest UK insurers, such as Aviva, Scottish Widows and Standard Life. This has presented challenges in terms of investment selection, as most contracts of this type offer a restrictive range of fund options from which to select. More recently, leading investment platforms have introduced modern Investment Bond contracts, which allow complete freedom of investment choice, including Discretionary Managed options. This wider range of options greatly enhances the attractiveness of an Investment Bond structure. In addition, such platform-based solutions are also competitively priced when compared to older insurance products.

Tax efficiency

The availability of more modern Investment Bond solutions is testament to their growing popularity as an investment option, much of which is due to changes in tax legislation.

The reduction of the Capital Gains Tax (CGT) annual exemption from £12,300 to £3,000 over recent years means that investors holding direct equities, or investment funds outside of an ISA or Pension, are more likely to face a CGT liability when disposing of investments. This is not a concern for investments held within an Investment Bond, as funds can be freely switched without creating a chargeable event.

The availability of the annual withdrawal allowance is another benefit, as this allows investors to establish a stream of regular payments, by way of an “income” without considering the tax implications.

Specialised uses

Investment Bonds can also be a sensible option when trustees consider how to invest trust funds, although this very much depends on the type of trust and objectives. As an Investment Bond doesn’t produce any income (unless a Chargeable Event occurs) or capital gains, this can ease the burden of administration on trustees.

Discretionary trusts are a particular example where an Investment Bond could be an option to consider. As such trusts pay Income Tax at a rate of 45%, the Bond structure defers this tax liability until a beneficiary requires funds from the trust. At this point, segments of the Bond can be “assigned” to the beneficiary, to encash at their personal rate of tax, which may well be lower than the rate that would apply if surrendered by the trustees. Whilst this could be a sensible way to structure an investment for this particular type of trust, it would not be appropriate for others, and we therefore recommend that trustees seek bespoke advice tailored to the precise terms of the trust.

The value of independent advice

The decisions behind the selection of an appropriate investment strategy can be complex and multi-layered. Aside from selecting the correct asset allocation and investment provider, the choice of product will influence the tax-efficiency of the arrangements, the costs and flexibility offered. Investment Bonds could be an ideal solution in certain circumstances; however, it is important that the right investment vehicle is chosen to meet the needs of each individual. As an independent firm, we can recommend products and solutions from across the marketplace without restriction. Speak to one of our experienced advisers to discuss the options in more detail.