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Is the hype over AI justified?

By | Uncategorised

One of the dominant trends that have contributed to the strong equity market performance over recent months has been growing enthusiasm for the potential that Artificial Intelligence (AI) can bring, and how companies can take advantage of the rapidly evolving technology.

What is AI?

AI is technology that enables computer systems to simulate human intelligence, with the aim of solving problems that would otherwise require human intervention. AI algorithms aim to model decisions that humans would take, by undertaking research and evaluation, and can learn from outcomes, so that the results improve over time.

Although the concept of AI can be traced back to the 1950s, significant advancement in AI capability has been seen very recently. Rapid acceleration in the efficiency of so-called Generative AI, which can produce anything from speech recognition to images and text, has seen applications such as ChatGPT being used by over 100 million users every week1. Unlike traditional AI systems, which are typically used for data classification and prediction, Generative AI models learn from large datasets, and have the ability to learn and then create new content, from realistic images to speech and writing.

The investment case for AI

Businesses that adopt AI are discovering ways to harness the new technology to streamline operations, introduce greater efficiency and in turn boost profitability. For example, in healthcare, AI can help speed up drug research and provide more accurate diagnosis. Another common example is the use of chatbots and automated customer services, which can learn from responses to become more efficient.

Investors often look for developments that can disrupt the status quo and lead to new opportunities, and it is increasingly apparent that AI will continue to be highly disruptive to existing ways of working. The breadth of application of the new technology is impressive and over coming years we suspect AI technology will find greater use in a diverse range of businesses, from finance to vehicle manufacture.

Enabling AI

Whilst many companies can see efficiencies from the use of AI, businesses that provide the infrastructure to enable AI usage have been amongst the biggest gainers over the last few months. The company that may have been able to monetise the boom in generative AI more than any other is Nvidia. As the need for processing power increases, the graphics processing units developed by Nvidia are in high demand, which has helped propel the market capitalisation of Nvidia to $3.3tn, overtaking Microsoft to become the largest quoted company in the World2. Microchip manufacturers, such as Taiwan Semiconductor, have also benefitted from the increased demand for AI solutions.

Other mega-cap tech companies have benefitted from the advancement of AI technology. Google and Microsoft have integrated AI technology into search assistants and the use of cloud computing in AI applications have boosted revenue received from cloud based servers. Recently, Apple have announced the integration of OpenAI into their Apple Intelligence system which will be available on Apple devices.

Universal adoption?

If you consider the very wide range of applications that could potentially benefit from AI technology, it is increasingly clear that most businesses will look to some form of AI integration within their systems over coming years. Customer facing functions, such as website chatbots and automated phone call handling, are becoming increasingly common, and as technology evolves, may lead to business efficiencies across most industries. For example, manufacturing businesses may harness AI technology to streamline inventory management, and help decision making. Similarly, Insurance and Finance businesses are increasingly turning to AI to help detect fraud. Those companies who have adopted AI at an early stage may gain a competitive advantage, which is likely to lessen over time as more and more businesses harness the evolving technology.

An overheated market?

Investors with long memories will recall the end of the last century as being a time when market interest in technology companies reached fever pitch. Known as the “Dot Com bubble”, the value of many technology stocks during 1999 and into early 2000 was driven to totally unrealistic levels based on the premise that they would be able to capitalise on the boom in web based applications. Whilst a select few companies justified their lofty valuations, many did not, and as investor risk appetite waned, sharp falls in value were seen across much of the sector.

Despite the strong returns achieved by a number of stocks involved in AI over recent months, it is possible to draw a distinction between some of the pure speculation that was apparent in 1999 and 2000 when the tech bubble burst, and the returns that have been fuelled by the growth in AI. Firstly, positive earnings reports from tech giants such as Nvidia and Microsoft continue to offer some support at current valuation levels. Simply put, if quarterly earnings continue to beat estimates convincingly, valuations become less demanding; however, expect stock valuations to be punished if future earnings fail to deliver.

The second clear distinction between the current tech rally and 1999 is the diversified nature of businesses that are benefitting from the growth in AI. Whilst it is quite easy to identify the companies at the forefront of AI technology, it is likely that a wide range of companies across different sectors will be able to achieve efficiencies and cost savings through AI use.

Finally, mega-tech giants such as Apple and Alphabet are highly cash generative and profitable. This is in contrast to many companies that were swept up in the dot com bubble, who were many years away from profitability and typically carried high levels of debt.

The conclusion we draw is that AI stocks are certainly not cheap on a historic valuation basis. Continued earnings growth may well support valuations; however, any signs that earnings disappoint when compared to market expectations will leave valuations exposed at current levels.

Why it is important to diversify

Market attention has been focused on the AI-fuelled rally in tech names that has driven global equities markets forward over recent months; however, formulating an investment strategy that focuses on a single trend introduces additional investment risk. Building an investment portfolio that encompasses new trends such as AI, together with other, more traditional, industries, can help reduce volatility. Speak to one of our experienced advisers if you would like to discuss your exposure to the AI trend, or to review an existing portfolio.

Sources:

1 OpenAI.

2 Companiesmarketcap.com.

The impact of rate cuts

By | Financial Planning

Decisions taken by central banks have been one of the main drivers of global market direction over recent years. Following the outbreak of the Covid-19 pandemic, interest rates around the World fell to ultra-low levels as policy makers attempted to stimulate demand amidst the global lockdowns. Just over a year later, interest rates began rising across Western economies to combat an inflationary spike, that saw UK Consumer Price Inflation (CPI) peak at 11.1% in October 2022.

As expected, inflation has fallen to more modest levels in most Western economies, and the UK is no exception. In the 12 months to April 2024, CPI has returned to 3.2% and is expected to continue to fall over the course of this year, potentially moving lower than the Bank of England’s own target of 2% by the autumn, although risks remain that inflation could modestly rebound in 2025.

Given the expected course of inflation, pressure is mounting on the Bank of England Monetary Policy Committee (MPC) to reduce the cost of borrowing and ease the burden on households and business alike. Of course, inflation isn’t the only indicator that the Bank are closely monitoring. The UK returned to growth in the first quarter of 2024, and GDP growth expectations have increased for the remainder of this year. Recent unemployment data was worse than expected and retail sales for April were very disappointing, suggesting consumer confidence remains weak. Understandably, the Bank do not wish to cut rates substantially, only to stoke the inflationary fire once again.

On balance, taking recent data and central bank comments into account, there is a large consensus that base rates will be cut in the next quarter.  Indeed, at the last meeting of the MPC on 9th May, two members of the Committee, including the deputy governor Sir David Ramsden, voted to cut rates by 0.25%, with the other seven voting to keep rates on hold.

Source of Data: Bank of England

Bond markets are already beginning to price in a series of rate cuts over the next 12 months, with yield curves implying one or two cuts to the base rate in 2024. The outlook for rates has impacted the mortgage market, where lenders have been making modest cuts to five year deals, and in fixed-rate savings bonds, where rates being offered on one and two year fixed-rate bonds have also fallen from their peak.

The impact of rate cuts

When interest rates move lower, media focus will be targeted on the impact of the cuts on households. The outcome of falling interest rates on household budgets is generally well understood. For those with variable rate mortgages and loans, cuts in the base rate could lead directly to a fall in interest payments on a monthly basis. In turn, this could have a positive impact on discretionary expenditure, and lower rates could also encourage consumers to take on credit, from mortgages to car and personal loans. Consumers also feel more comfortable carrying a higher debt burden when interest rates are lower.

Those with savings begin to see a fall in the interest they receive on their variable rate accounts, and this may encourage those with accumulated savings to spend, potentially providing a boost to economic growth.

What is less understood is the significant impact underlying and future interest rates have on business, and in turn the health of the economy. Whenever the base rate changes, this affects the rates charged by banks on commercial loans, which tend to be arranged using a variable interest rate. The rapid succession of rate increases from the end of 2021 to August 2023 not only raised interest costs on existing business borrowing, but also has the effect of deterring businesses from taking on additional debt, further suppressing economic expansion.

How markets may react

Monetary policy decisions taken by central banks are one of a number of variables that dictate the progress and direction of financial markets. Cuts to base interest rates are generally perceived as being positive for both equities and fixed income securities. Equities benefit as companies can reduce their borrowing costs and more easily fund expansion. Depending on the sector, company profits may also benefit from more buoyant consumer confidence. Those companies who carry the highest level of borrowing tend to benefit the most from falling interest rates, which helps explain the recent strong performance of high growth companies, such as those involved in new technology, who tend to be highly geared.

The performance of bonds is directly linked to the future path of interest rates. As base interest rates increase, existing bond prices tend to fall, as investors can choose other options that offer a higher rate, such as newly issued bonds, or cash. The rapid increase in base rates during 2022 and 2023 proved to be very painful for bond investors, and saw bond prices retreat. The inverse is true when rates fall, as existing bonds offering higher rates look increasingly attractive compared to cash or bonds issued at a lower rate.

It is important to note that markets are forward looking, and have long been anticipating interest rate cuts in the US, UK and Eurozone. Indeed, markets have been frustrated by the slow march toward the expected rate cuts, although some of the concern has been offset by consistently stronger US economic data over recent months. Some of the positive impact of easing monetary policy has, therefore, already have been taken into account.

What action should investors take

As interest rates fall, investors would be wise to consider reviewing their existing financial arrangements in light of the changing landscape. Whilst cash has provided savers with attractive interest rates over the last 12 months, it is likely that savings interest rates will fall over the next two years, and those holding excess deposits on cash may do well to consider alternative options.

We feel a falling interest rate environment should prove positive for both equities and bond markets, and despite the strong performance seen since last autumn in anticipation of central bank action, the prospects over the medium term remain positive. Given the expected impact of a shift in monetary policy, this may be an ideal time to take another look at how your investments are positioned. Speak to one of our experienced financial planners to discuss the impact of falling interest rates on your investment portfolio.

Get the right advice when approaching retirement

By | Pensions

Each major financial decision that we take throughout our lives will have some form of impact on our financial wellbeing. From the decision to purchase a property and take out a mortgage, to changing careers and other life events, such as divorce or receipt of an inheritance, the choices we make will have some impact on our financial future. Perhaps the most crucial decisions, however, need to be taken when we approach retirement, as actions taken at this time can have lifelong implications. This is where tailored and personal advice on the options open can prove highly beneficial in navigating the right course to take.

Pension Options

As we head towards the end of our working lives, thoughts inevitably turn to the level of income that we can look forward to in retirement, and pensions are likely to form a substantial part of your income when retired.

The full rate new State Pension is now £221.20 a week, although you will need to have accrued 35 years of qualifying National insurance Contributions to receive this amount. It is worth checking your State Pension record with the Department for Work and Pensions, as this can identify any gaps in your record that could be filled before reaching State Pension age. This is currently 66 but will rise to 67 for those born after April 1960, with a further increase to age 68 between 2044 and 2046.

Many individuals would prefer not to work until State Pension Age, and this is where careful planning at an early stage can help you assess your options and make best use of private and workplace pensions accrued during your lifetime, which could, in turn, make earlier retirement feasible.

Taking the time to review existing pension arrangements at an early stage can help identify poor performing investment funds, or recognise opportunities to increase pension saving, which could boost the end value of the pension plan as you reach retirement. It could also provide an opportunity to consolidate and rearrange plans, if appropriate, to benefit from cost savings or access the widest range of options when retired.

When taking a defined contribution pension, it is usually the case that 25% of the value will be available as Tax Free Cash. This is the first of many decisions that need to be reached. Some may decide to use the Tax Free Cash payment to cover existing debts or pay for discretionary expenditure. Some plans allow you to draw Tax Free Cash over a period of time, rather than in a single payment. Depending on the retirement strategy adopted, this could be an effective way of generating a tax-efficient “income” through regular Tax-Free Cash payments.

Deciding on how to draw an income in retirement is a key decision that many find daunting. Many choose a Drawdown approach, where the pension fund remains invested, and income is drawn flexibly to suit your needs and objectives. If funds remain invested after you die, these can normally be paid to a nominated beneficiary. The risk with drawdown is that the invested pension fund is fully depleted during your lifetime, and this is where regular reviews of the investment performance and amount of income drawn are important.

Purchasing an annuity, where the remaining pension is exchanged for a guaranteed income for life, is an option that some prefer, given that this provides a degree of certainty. The downside is that the purchase of a lifetime annuity cannot be reversed, and therefore careful consideration of the benefits and drawbacks need to be taken into account.

The final option is to take out the pension value as a single or series of lump sum payments. Taking this option is rarely sensible, as it will leave no ongoing pension income, and could potentially lead to adverse tax consequences.

Other Income sources

For many individuals, pension income is built from several sources, and whilst pensions form the majority of retirement income, other income streams can help support ongoing living expenses. Some may hold property that is rented out, which provides rental income, which may well be reliable, although such income is normally not tax efficient.

Many individuals hold existing investment accounts outside of a pension. Undertaking a review of such investment plans could prove beneficial in determining whether an income stream can be generated. Use of the annual Individual Savings Account (ISA) allowance can help ensure income is received free of tax.

Finally, some continue to work past their normal retirement age, or look to adopt a phased retirement approach of gradually reducing hours, whilst building up pension income slowly. This can be an effective way of managing income and leaving pensions in place to potentially benefit from further growth.

Watch out for tax

We are all taxed during our working lives, and many will continue to pay Income Tax on pension income throughout retirement. There are, however, steps you can take to look to reduce the tax burden in later life. For example, where income is generated in a flexible manner, the level of income can be tailored to meet your precise requirements without surplus income being generated, on which tax becomes payable.

Seek out personal advice

Planning for retirement is a point where important decisions need to be taken, and  seeking independent and tailored financial planning advice at an early stage is therefore advisable. Every individual’s circumstance, needs and objectives are different, and other variables, such as your attitude to investment risk and personal preferences, are key factors in reaching the right decision for you.

Speak to one of our experienced financial planners, who can help guide you through the retirement planning process.

What history tells us about UK markets after an election

By | 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 4th 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 4th 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.

Behind the Scenes at FAS – Part 3 – Our Advisers

By | 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.

The drawbacks of a passive only investment approach

By | 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.

Scaling the wall of worry

By | 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 12th 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 1st January 2020 to the low point on 23rd 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.

Behind the scenes at FAS – part 2

By | Financial Planning

Many outside of our industry may not be familiar with the role of a paraplanner within a financial services firm. The National Careers Service defines a paraplanner as an individual that helps a financial adviser with technical and administrative tasks. Whilst this may be true, this definition barely covers the varied and highly skilled work undertaken by our own paraplanning team, which is integral to the continued success of the business.

Our paraplanning team

The FAS paraplanning team is office based and consists of seven staff split across our Folkestone and Maidstone offices. Boasting many years of combined industry experience, the team provide vital support in all aspects of the business, from report writing to financial analysis and calculations. We continue to strengthen our dedicated team of paraplanners to support growth in the business.

FAS paraplanners

It is fair to say that the paraplanners at FAS need to be skilled in several areas, as these various strengths are called upon daily depending on the nature of the job in hand. Primarily, the FAS paraplanning role is to compile client recommendation reports following adviser meetings. Working closely with the advisory team, our paraplanners have a major input in the preparation of the report letter, together with the collation of supporting documentation, such as illustrations and key features documents.

Our paraplanners often engage with clients in relation to reports that have been issued, and as a result, many FAS clients may well become familiar with some of our paraplanning team through direct contact.

A key element of the paraplanner’s role is to undertake the necessary research and analysis to support the recommendation being made to a client, involving the use of industry leading financial research software. The team often liaise with product providers to discuss how an investment is implemented whilst obtaining the necessary forms or documentation, as required.

As an independent firm of advisers, we can recommend financial solutions from across the whole of the market. Our paraplanning team take full advantage of our independent status when preparing recommendation reports by comparing a wide range of product costs and features, which are then discussed with advisers before completing the report.

Once a client proceeds with a recommendation, it is the responsibility of the paraplanner to check the returned signed documentation and notify our administration team of any important considerations, so that the implementation stage goes as smoothly as possible. There is ongoing daily communication between our paraplanning and administration teams to ensure adviser/client needs are adhered to and service standards remain high.

Qualified support

To ensure that the highest level of technical knowledge and support is given, all our paraplanners are at least Diploma qualified – the Chartered Insurance Institute’s Diploma requires the student to pass six examinations, covering all areas of financial advice, including regulation and industry ethics.

In fact, several of our paraplanners have reached Chartered status, which means that they have attained the highest standard of qualification in the industry. This helps demonstrate the importance we place on delivering the very best advice from highly qualified individuals.

FAS follow a strict regime of continuing professional development to ensure its staff keep themselves fully abreast of changes in legislation and reinforce their technical knowledge. Our paraplanning team are required to undertake a prescribed number of hours of learning each year, covering a wide range of topics. This ensures our paraplanners keep up to date with any changes in taxation rules, as well as regulatory requirements and compliance.

Meeting preparation

Our paraplanners often assist advisers in preparing the necessary documentation for a client review meeting. We provide a robust review service, and preparation is needed in advance of a meeting, so that an adviser has access to detailed performance return calculations and supporting evidence to aid discussion with a client. The paraplanner’s role here is not just limited to gathering and collating data, as advisers and paraplanners will work together to discuss financial planning opportunities that may require discussion at a client meeting, and the preparation of a meeting agenda.

Technical expertise

We often find that our clients have complex financial circumstances, where finding the right solution and strategy is key to successful financial planning. Our paraplanning team use their technical skills to prepare tax calculations, cash flow analysis and formulate strategic plans, in conjunction with the lead adviser, to ensure that the most appropriate recommendation is made to a client. Often specialist knowledge is required, for example where Trust planning or Inheritance Tax mitigation is the desired course of action.

Dealing with compliance

Compliance with regulatory requirements is a vital and necessary part of the role of a paraplanner. Our paraplanners need to ensure that recommendation reports are produced in a compliant manner, and that record keeping of the analysis and research undertaken to support a recommendation is correctly documented.

A team effort

The paraplanning team at FAS play a key role in the business, assisting advisers with key research, analysis, meeting preparation and the writing of recommendation reports issued to clients. Working in conjunction with our administration and adviser teams, our paraplanners also provide vital support to all other areas of the business, such as collating tax return information for accountants and portfolio details for probate cases.

We hope you have enjoyed this further look behind the scenes, and in the next and final part of the series, we will focus on our adviser team.

Later Life Planning – planning all the way through life!

By | Financial Planning

The last 25 years have changed the way we live. Now we can access information instantly, share experiences with people across the world, and reap the benefits of rapid technological change. These benefits include increased living standards and healthcare, and longer life spans. A longer life means your pensions and any other investment income in retirement have to last for longer; maintaining financial planning advice is more vital than ever to ensure you don’t outlive your income; and families may now stretch across more than three generations, making estate planning more of a challenge.

Financial planning for later life is, in many respects, the same as planning at earlier life stages. However, the emphasis will often change. For example, income will normally become a more important focus of investment than growth and planning for inheritance tax and potential care fees come to the fore.

Setting your goals

The first step in creating any plan is to decide what you want to achieve. There is no such thing as a standard, one-size-fits all solution – you need a personal plan designed around your goals. For example:

  • What should the balance be between maintaining your lifestyle and preserving what you pass on to your family?
  • Do you wish to stay living where you are today? Ultimately you may have no choice but to move to residential or nursing care, but in-home care can defer that transfer – albeit at a cost.
  • If you are still working, perhaps part time, how long will you continue to do so before fully retiring?
  • Are you prepared to rely solely on the NHS for your healthcare?

Careful income planning can be key to making the most of later life. Money concerns are never welcome, particularly if the opportunity to earn your way out of them is no longer open to you.

The transition from work to retirement is now often a gradual process. You might not want the instant change to 100% leisure time. Alternatively, you may need to earn extra income to cover a pension or other shortfall, perhaps because of the continuing increases in state pension age. Whatever your reason, national statistics show that men and women still work beyond their state retirement age. However, it is unwise to assume that you can rely on continued earnings for a long period of time. Factors such as your or your partner’s health, your enthusiasm, and the type of work you’re engaged in could mean you have to stop work at some point. If you think you will have to continue working indefinitely, then your non-retirement plans almost certainly need a serious review!

The role of pensions

Pensions, both state and private, are usually the main source of income in later life. For growing numbers of people, some pension income will be via income drawdown, rather than the traditional pension annuity. The drawdown approach offers flexibility suited to gradual retirement, but ongoing management is vital. The level of withdrawals needs regular review: taking too much from a fund can mean you outlive your pension, whereas the opposite could mean a lower than desired standard of living, thereby building up funds that your children, grandchildren or chosen benefactors will ultimately benefit from.

Investment management

What you require from your investments could alter over time and investment horizons naturally tend to shorten as you get older. For example, you may wish to increase the emphasis on security of income rather than income growth. To maintain a coherent approach, it is important to review your investments as a single portfolio, rather than as compartmentalised direct holdings, ISAs, life policies and pensions.

Tax

Income and tax sometimes seem inseparable, but this need not be the case. The flexible pension regime created ways to draw regular payments which are not fully taxed as income or are even tax free. Other investment structures can produce similar results if you think of your income requirement as a series of regular payments. For couples, tax savings can sometimes be achieved by simply rearranging who owns investments. The aim is to maximise use of an individual’s allowances and tax bands.

Long Term Care

Financial planning for social care is a highly complex area requiring specialist expertise. It had been made more complicated by the fact that, until September 2021, there had been no long-term plan for funding social care in England. Following new legislation, from October 2025 in England there will be an index-linked £86,000 cap on the total personal care costs (which excludes accommodation costs) that must be paid by an individual and capital limits will be raised for means-tested contributions, with the upper limit moving to £100,000.

Planning the future of your estate

You should ask yourself, what do you want to happen to your estate? That question affects more than inheritance tax (IHT) planning. Your estate and IHT are inextricably linked, but the most IHT efficient planning may not be ‘family efficient’ estate planning.

Protecting assets during your lifetime

The current and, to a lesser extent, future funding rules for long-term care can result in your estate being whittled down to pay care home fees. The average stay in a residential care home in England is around 30 months and average fees can exceed £1,200 a week in some parts of the UK. It may be possible to plan your affairs to limit the cost, but this is an area where in-depth knowledge is vital, and many dangerous myths exist – such as ‘just give it all away first’. To mitigate IHT, you should consider not only your will, but also any opportunities you have to make lifetime gifts. Today’s IHT regime has a favourable treatment for lifetime gifts. For example, outright gifts made more than seven years before death are completely free of IHT, as are regular gifts, regardless of size, when made out of income, provided that they do not reduce your standard of living.

Trusts

Trusts have long been used as a way of controlling lifetime gifts or legacies after they have been made. For example, a trust could be used to provide income from a portfolio for a surviving spouse, while also ensuring capital passes to children from a previous marriage when the surviving spouse dies. Trusts have often been associated with tax planning, but over the years legislation has been tightened. Now, most trusts are subject to the highest rates of income tax and capital gains tax, meaning that they can be disadvantageous from a tax viewpoint. Nevertheless, trusts continue to have a role to play, particularly when the would-be recipients of a gift or legacy are minor children or young adults.

Generation skipping

A five-generation family is a real possibility today, thanks to increased life expectancies. This can create some difficult estate planning decisions. Purely from an IHT viewpoint, the best option is to pass assets straight to the youngest generation, avoiding the tax that might otherwise be incurred on the trickle down through generations. However, the generations overlooked by such a strategy may be more in need of funds than their children or grandchildren. There might even be an expectation from the older generation of support with their care costs. As with so many other areas of later life planning, compromises may be necessary and sound advice essential.

How we can help

Later Life planning can be complicated with conflicting goals and uncertain timings. However, our experienced financial planners can provide advice on the following areas, so you are not alone. Please do get in touch if you wish to discuss any of these in more detail:

  • IHT and estate planning
  • Managing your pension arrangements
  • Your options for funding long-term care
  • Identifying opportunities to reduce your income tax bill
  • Managing your investments, including pension assets
  • The costs of downsizing and the alternatives available to you.

ISA rules refreshed

By | Savings

Launched as the follow-up to the Personal Equity Plan (PEP), the Individual Savings Account (ISA) has just reached its 25 year anniversary. Prior to the start of this tax year, ISA regulations have remained largely unchanged for some time. The updated ISA rules taking effect from 6th April 2024 will, however, lead to greater choice for savers and investors, further reinforcing the benefits of using your ISA allowance.

ISAs provide a tax-free wrapper in which any income earned is exempt from Income Tax, and in the case of Stocks and Shares, any gains are free from Capital Gains Tax. There are five types of ISA, with Cash ISAs and Stocks and Shares ISAs being the most well known. The Lifetime ISA and Innovative Finance ISA are less popular, and the fifth ISA, the Junior ISA, is only open to those under the age of 18. The maximum an individual can save in an ISA in any tax year is £20,000, and the subscription can be split across the different ISA types. The Junior ISA has a £9,000 subscription limit.

There is no facility to carry forward unused ISA allowances, and therefore it is important to make regular use of the allowances as they become available each tax year.

Split your ISA across providers

Until 5th April 2024, the ISA rules restricted an individual to opening just one ISA of each type in a tax year. These restrictions have now been lifted, and you can now invest in multiple ISAs of the same type, in a single tax year. For example, you could split your ISA subscription between a fixed rate Cash ISA with one bank or building society, and a variable rate Cash ISA with another institution. Similarly, you could split a subscription into a Stocks and Shares ISA across different ISA providers. The new freedom does not, however, extend to Junior ISAs or Lifetime ISAs, where the single provider per tax year limit remains.

Less restrictive transfer rules

The ISA rules on transfers have been relaxed to give investors more freedom and choice. Before 5th April, partial transfers of ISA money paid in the current tax year were not permitted – you had to transfer the whole ISA balance. You can now make a partial transfer of money that is subscribed in the same tax year. For example, you could invest £20,000 into a variable rate Cash ISA, and later in the tax year, partially transfer £10,000 of that subscription into a Fixed Rate Cash ISA.

Loophole for 16 and 17 year olds closed

The new legislation has closed the loophole that has previously allowed those aged 16 and 17 to save £29,000 tax free each year. Under the old rules, the minimum age for a Cash ISA was 16, which allowed someone aged 16 or 17 to subscribe £20,000 into a Cash ISA and £9,000 in a Junior ISA, which is open to those under the age of 18. The rules have been tightened, with only those aged 18 or over now being able to open a Cash ISA.

British ISA

Many clients have asked us for further information on the British ISA, which was announced in the Budget statement last month. The statement confirmed that the British ISA would provide individuals with an additional ISA allowance of £5,000, on top of the existing ISA allowance, which could be used to invest in UK companies. The eligibility rules for the British ISA are yet to be announced, and the Government are currently engaging in a consultation period with the industry, which is set to run until 6th June. Whilst it remains a possibility that the British ISA will become available later in the current tax year, it is far more likely that the allowance will not become available until April 2025.

NS&I Bonds

Another of the announcements in the March Budget was the latest round of National Savings & Investments (NS&I) savings bonds. The new issues have been labelled as “British Savings Bonds”, but in essence they are simply a new moniker for the Guaranteed Growth and Income Bonds. These are long established savings products, where all income earned is taxable.

The new issues do not offer anywhere near the market leading rate of interest offered on the last round of Bonds, which were only available for a short period last Autumn. The new British Bond issues are both fixed for a 3 year term, and the interest rate payable (4.15% per annum on the Growth Bond and 4.07% per annum on the Income Bond) is uncompetitive when compared with similar fixed rate bonds offered by Banks and Building Societies. The only real positive factor to consider is that the products are backed by the Treasury and therefore offer greater protection than the standard £85,000 Financial Services Compensation Scheme (FSCS) protection limit.

Time to review existing savings

With the new tax year upon us, we feel this would be an ideal time to reassess your existing savings arrangements. Cash interest rates have been higher over the last 12 months than they have been for some time, although we expect that UK base interest rates will begin to fall later this year. As a result, it may be a good time to consider the level of savings you hold and whether surplus savings could be more productively invested in other assets, such as Equities or Corporate  Bonds. Speak to one of our independent advisers to carry out an assessment of your existing cash savings, and to make sure you are making best use of your ISA allowance.