FAS

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.

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.

Whilst it is a topic we have covered previously, we make no apology using this week’s Wealth Matters to reinforce the benefits of independent financial advice, and potential pitfalls when using a restricted adviser.

Understanding the difference

Financial advice can be provided on either an independent or restricted basis; however, many people may not immediately understand the difference between the two. Firms need to clearly inform clients whether they offer independent or restricted advice when engaging with a client; however, many restricted firms do not do this, and thus mislead clients.

Independent financial advisers (IFAs) are not tied to any specific financial products, providers or investment institution, so they can offer impartial advice tailored to their client’s needs. In contrast, restricted advisers can only recommend certain products and solutions from a very limited range of options, and in some cases, will only be able to recommend products from a single provider.

Using a restricted financial adviser doesn’t necessarily mean you’ll be getting ‘bad’ advice, as all financial advisers must have a similar minimum level of qualifications and meet the same standards. It does, however, mean that the choices available as a client of a restricted firm may well be limited, which may lead to missed opportunities, or a sub-optimal solution.

At FAS, we choose to be completely independent so that we can research and recommend financial products spanning the whole of the market. In doing so, our advice is unbiased and unrestricted. We are very proud of our independence, and our ability to recommend the most appropriate product or service from across the marketplace helps us to achieve our aim of providing the best advice to clients.

Value for money

Some may make the mistake of assuming a restricted adviser will offer better value for money, as they perceive the amount of work undertaken in recommending a product from a limited range will prove more cost effective; however, this is not the case, and in our experience, the opposite is found to be true. We often meet new clients who have received advice from a restricted firm, and when undertaking unbiased cost comparisons, the restricted firm prove to be expensive compared to the cost of independent advice. One factor is our ability to look across the whole of the investment market and potentially access more cost-effective options that may not be offered through a restricted adviser.

What independence means to FAS

To help demonstrate the importance we place on our independent status, we look at three key areas where our day-to-day advice is enhanced by our independence.

1. Independence in fund selection

The UK fund management industry continues to grow in size with around 3000 funds being available to UK retail investors, covering both active and passively managed fund solutions across the widest range of asset classes, sectors and geographies.

Being an independent firm affords us complete freedom in the investments and funds we recommend are held within client portfolios. The FAS Investment Committee always take a wholly unbiased view when it comes to fund selection, selecting the most appropriate funds from across the whole of the market, without restriction. Comprehensive research and analysis is undertaken on all investment funds available to UK retail investors every quarter, and where funds pass our filters, we engage with fund managers to carry out more detailed analysis.

Funds that we currently recommend to clients need to fight for their place on our recommended list at each quarterly review. In the event that a fund underperforms, we discuss performance with fund managers, and have no hesitation in removing a fund from our recommended list if we feel better prospects lie elsewhere. Our focus on strong fund performance, together with our desire to access competitively priced solutions, can help our clients meet their financial goals, such as saving for retirement, more quickly.

2. Independence in product selection

As an independent firm, we always look to recommend the most appropriate product provider from across the whole of the marketplace. We undertake a regular whole of market review of platforms and product providers, considering factors such as platform cost, service levels received and changes in product features. This whole of market approach means that we can feel confident that the recommendations made to our clients are based on a comprehensive review of the full range of options available.

In a similar manner, we monitor and regularly review platforms that have been recommended to clients, and should a more appropriate solution become available, we have the ability to recommend that the client moves to a platform that provides lower costs, or improved levels of service.

3. Independence in financial solutions

A key benefit of our independent status is the ability to take a totally unrestricted view as to the solutions that would best fit an individual client’s circumstances. This is a particularly important element that supports our holistic approach to financial planning. For example, for those in later life, we are able to recommend esoteric investments, such as business relief solutions for inheritance tax planning, and for individuals who are seeking a high degree of tax efficiency, we can look across the range of Venture Capital Trust, and Enterprise Investment Schemes, if appropriate, given a client’s attitude to risk and objectives.

Why independence matters

We are very proud of our independent status, which we feel allows us to provide the best advice by being able to recommend products and solutions from across the whole of the market. If you currently receive advice from a restricted adviser, you may not be receiving poor advice; however, it may well be sensible to consider the limitations under which the adviser is working.

For example, the limited range of fund options offered by a restricted adviser could lead to underperformance, when compared to recognised benchmarks and peers. Given our experience, it may also be wise to review costs and charges, to see whether the restricted adviser is offering good value for money. Speak to one of our independent advisers, who are happy to take an unbiased and impartial review of your existing financial arrangements.

In our weekly Wealth Matters newsletter, we try to keep our readers up to date with developments in financial markets and information on financial planning opportunities. Reviewing the feedback we receive (which is always welcome!) we have been asked to provide readers with an insight into how FAS operates on a day-to-day basis. In the first of a recurring series of articles, we go behind the scenes to look at the role of the administration team at FAS and the vital role they play in providing excellence and high levels of service to our clients.

Our Administration Team

Our clients will no doubt build a strong relationship with their adviser, who they see face-to-face at review meetings or through other regular contact. FAS is, however, very much a team effort, with dedicated staff focused on ensuring that the administration of client assets runs smoothly. Our  strong administration team is office based and is split across the two offices, in Folkestone and Maidstone. Our team needs to be multi-skilled, as they handle all aspects of client administration, communication with product providers and providing business support.

Gathering Information

When we begin acting for a new client, it is imperative that we fully understand any existing financial arrangements they may have. To enable us to gather information, it is usual that we lodge a letter of authority, signed by the client, with the pension or investment provider. This authority allows the provider to forward information to us relating to a client’s existing investments, pensions, and other financial plans.

Naturally, we look to obtain this information as quickly as possible; however, the speed at which product providers respond varies from reasonable to incredibly slowly, and one of the administration team’s key tasks is to chase up outstanding information and responses from product providers. Our team are highly experienced and diligent in obtaining missing information, so that our advisers can provide the very best advice they can, based on the fullest set of information available.

Processing instructions

When a client follows our recommendations and proceeds with a financial transaction, our administrators deal with all aspects of the purchase, transfer, or sale, to ensure that the recommendations are followed precisely to those specified in the report. Our team always aim to process instructions swiftly and accurately on the relevant platform via an online interface, which ensures instructions are processed quickly.

Whilst most instructions are now dealt online via secure websites, some client instructions still require paper forms and applications to be submitted. This involves close liaison with product providers, and in the case of transfers from existing pension arrangements or ISAs, this will normally involve an element of follow-up and chasing to expedite the transfer. Given the poor level of service we receive from certain product providers from whom we arrange transfers, persistence and patience are key virtues that all of our administration team possess!

From time to time, platforms and product providers request further information or additional documentation at the time an instruction is lodged. Our administration team will contact clients directly as required to obtain further information, or if a signature is needed. As a result, some clients will get to know the administration team directly through this contact.

Preparing client reviews

When an adviser attends a client review meeting, it is vital that he or she is armed with accurate and complete information on a client’s investments, pensions and protection policies. Our client review service is fundamental to our business and ensures that clients receive a comprehensive review and regular contact at predetermined intervals. Given the importance we place on the value of regular reviews, a great deal of care and attention is afforded to the preparation of client valuation statements. The review preparation process involves dealing with product providers to obtain up to date valuations, and checking that the records we hold in respect of the number of units and holdings, prices and dividends match those records held by the product provider or platform.

Dealing with compliance

Compliance with all relevant regulations and following internal procedures are crucial to the smooth operation of the business. Our administration team have a key role to play here, confirming client identification and source of funds with product providers. By liaising with product providers directly, this frees up time for advisers to focus on their key role of providing advice.

Continuing Professional Development

All staff at FAS follow a strict regime of continuing professional development, so that staff can keep abreast of changes in legislation and reinforce their knowledge in all areas of the business. Our administration team fully participate in this professional development programme, to ensure that their knowledge is up to date. They also undertake regular training with product providers to make sure that the team are fully conversant with changes to platform services and procedures.

A team effort

The administration team at FAS play a key role in the business, supporting other staff in their day-to-day activities, and ensuring that client instructions are carried out efficiently and accurately. We hope this article helps to reinforce the collegiate nature of our business and the fact that FAS is far greater than the sum of the parts. We hope you have enjoyed this look behind the scenes, and in the next part of the series, we will look at the work of our paraplanning team.

With the end of the tax year rapidly approaching, it’s an ideal time to consider your finances and take decisions to maximise tax-efficiency. With the right planning, you can make the most of available allowances, exemptions, and reliefs, before the 5th April.

Use your ISA allowance

Individual Savings Accounts (ISAs) remain one of the most tax-efficient ways to save and invest. As the tax year draws to a close, it’s time to assess whether you have fully used your available ISA allowances. For the 2023/24 tax year, the ISA allowance stands at £20,000 per individual. This allowance can be split between a Cash ISA, Stocks and Shares ISA, Innovative Finance ISA, and Lifetime ISA (up to a certain limit). In addition, up to £9,000 can be invested in a Junior ISA, which can be held by a child up to the age of 18. This could provide a planning opportunity to make gifts to children or grandchildren which makes use of the Junior ISA allowance.

It is important to note that ISA allowances must be used in the tax year in question, otherwise they are lost. There is no facility to carry forward or make use of allowances from previous years. It is very much a case of “use it or lose it”.

Making Pension Contributions

Contributing to your pension is not only a prudent retirement planning strategy but can also be a tax-efficient way to reduce your tax bill. Personal pension contributions benefit from tax relief at the individual’s highest marginal rate. Higher-rate and additional-rate taxpayers can claim additional tax relief through their self-assessment tax return. The maximum contribution that can be made (known as the Annual Allowance) for this tax year is £60,000 or 100% of an individual’s net relevant earnings (whichever is the greater).

Pensions are complex and the annual allowances carry some quirks for higher earners, as the amount they can contribute into a pension could be limited. In addition, an individual who has flexibly accessed a pension will be subject to the Money Purchase Annual Allowance, which limits the level of contributions to £10,000 in the current Tax Year. We recommend you seek advice before making pension contributions, to ensure that allowances are not breached, as there could be tax penalties for making excess contributions above your available allowance.

Consider Capital Gains

With the annual Capital Gains Tax (CGT) allowance dropping from £6,000 in the current Tax Year to £3,000 in the next Tax Year, it is an ideal time to review an existing investment portfolio and make use of the annual CGT allowance. Whilst the rate of CGT payable on the disposal of investments is not particularly punitive (10% for basic rate taxpayers and 20% for higher and additional rate taxpayers) it may make sense to sell part or all of an investment to use the available allowance if you hold investments that stand at a significant gain over the purchase price. That being said, the decision to sell an investment certainly takes greater consideration than simply looking at the tax implications, and this is where independent advice can help you assess an existing investment portfolio to take the right decision.

Gifting for Inheritance Tax planning

The end of the Tax Year is a good time for those with significant assets to consider whether any simple planning for Inheritance Tax mitigation is appropriate. The easiest method of reducing the value of an individual’s assets is to make a gift, and gifts made within the annual gift exemption do not carry any Inheritance Tax (IHT) implications.

For the current tax year, the annual gift exemption is set at £3,000 per person, which means that you can gift this amount to one person, or make a number of gifts up to this total. Couples can benefit from making joint gifts, effectively doubling the annual gift exemption to £6,000. In addition, if you haven’t used the gift exemption in the previous tax year, you can carry forward any unused allowance; however, this can only be done for a single tax year.

Gifts with a greater value than the annual gift exemption are also potentially exempt from IHT, as long as the individual making the gift survives for seven years after the gift has been made.

The end of the tax year is, therefore, an ideal time to assess whether you wish to make gifts, so that available allowances are maximised.

Other Tax breaks

There are many other smaller tax breaks that can add up and minimise the amount of tax that you pay. As with many tax allowances, the end of the tax year presents a call to action to avoid missing out on potential tax savings.

Those who are married or in a civil partnership could benefit from the marriage allowance. This is only effective if one partner earns below £12,570 per annum, and the other pays tax at basic rate. The non-taxpaying partner could transfer £1,260 of their personal allowance to the taxpaying partner, which would mean an income tax saving of £252. You can also potentially claim the allowance for the last four tax years, if you were eligible and did not claim.

It is also worth reviewing your income position in relation to the Child Benefit High Income Charge. Making pension contributions could be an effective way of reducing net income so that a lower charge is applied, or removed completely.

Get the right advice

As we have identified, there are many opportunities to take decisions to maximise tax efficiency, many of which could be lost if not used before the end of the tax year. Successful financial planning is, however, far more involved than simply ensuring your investments and savings are tax-efficient, and this is where engaging with a financial planner can help assess your financial priorities and make sensible plans for the future. Speak to one of our experienced financial planners to carry out a review of your financial position and consider any actions that need to be taken.

It is fair to say that monetary policy decisions taken by central banks have been a leading driver of market sentiment since the start of the Covid-19 pandemic. Investors have been keenly watching for signs that UK interest rates would begin to fall, after the rapid series of hikes during 2022 and 2023 pushed base rates from 0.15% to 5.25%.

The first sign that a rate cut may be on the cards followed the Bank of England’s Monetary Policy Committee (MPC) meeting in February, which saw the vote split three ways, with six members voting to keep rates on hold at 5.25% and two members voting to hike rates further, to 5.5%. One Committee member voted to cut rates to 5%, the first such decision  since the MPC started to raise rates in December 2021.

Central banks fuel market rally

Both the MPC and the US Federal Reserve changed their language in the final quarter  of 2023, which suggested the battle with inflation was nearing an end. This led to a sharp rally in both equities and bond markets, as investors welcomed the prospect of easier monetary policy. US bond markets began to price in multiple rate cuts, with the first coming as early as March, and UK Gilt yields also fell on the prospect of imminent central bank action.

Since the start of the year, however, investors have had to temper the expectations of rate cuts. US economic data continues to prove highly resilient, with GDP growth remaining strong. As a result, bond markets have reacted to the stronger-than-expected data by paring expectations of multiple rate cuts, and pushing back the start of the rate cutting cycle to June.

It is a similar story in the UK, where Gilt yields have risen back towards level seen in November 2023. This is despite the news that the UK economy fell into recession at the end of last year, and it is clear that the higher borrowing costs are affecting consumer confidence.

Inflation – one of the primary reasons for the rate hikes seen over the last two years – has fallen back from a peak of over 10% in October 2022 to stand at 4% in January, and economists expect inflation to fall further towards the target of 2% over coming months. Recent comments from Bank of England Governor Andrew Bailey have indicated that the Bank do not need to see inflation reach their 2% target before action is taken to cut rates.

Over the medium term, the MPC’s projections show lower base rates are likely. Forward market interest rates imply a rate of 3.9% in 12 months’ time, and 3.3% by the start of 2026. These projections are, of course, subject to revision, although it is interesting to note that the rates projected for early 2025 and 2026 have been lowered somewhat from the Bank’s own projections just three months earlier.

The MPC are, however, making no comment on the pace of rate cuts, or indeed when the first cut will arrive. One reason behind this may be the potential for global events to cause inflation to spike again. In the wake of the Red Sea attacks on global freight, the cost of shipping has increased significantly since the start of the year, although costs have moderated a little over the last couple of weeks. The increased cost of shipping, and delay caused by ships using sub-optimal routes, could be inflationary. The wider conflict in the Middle East could also cause oil prices to jump, which would feed into higher prices generally.

How investors can take advantage

Prevailing and expected interest rates and inflation data have an important role in determining the performance of corporate and government bonds. Higher inflation, and interest rate increases, make bonds look less attractive, as higher rates on cash deposit mean investors will demand a higher return from bonds to compensate for the additional risk over cash.

In order for bonds to remain attractive, they need to pay a higher yield to compete with cash interest rates, and as bonds pay a fixed rate of interest, prices fall as yields rise. Both UK and Global bond prices fell sharply during 2022, as markets expected higher interest rates. Conversely, as markets now expect interest rates to fall, this may well prove to be positive for bonds, where yields become increasingly attractive compared to falling cash interest rates.

We feel that bond investors do, however, need to take a sensible approach to how their portfolios are allocated. A weakening global economic outlook could increase the rate of default on lower quality bonds, where the most attractive yields can be found. Whilst longer duration bonds may be the most sensitive to changes in interest rates, they are likely to be more volatile and susceptible to any disappointment in the pace or timing of rate cuts.

Lower interest rates also impact equities markets, but to a lesser extent. A drop in the cost of borrowing may well be welcome news for heavily indebted companies, and equities generally feed off the boost in sentiment that less restrictive monetary policy could bring. Expectations of lower rates have been the main catalyst in the sharp rally in equities this year, particularly in the US.

Diversification matters

Markets are at an interesting point in the investment cycle, where the prospects for improved performance from bond markets are competing with positive momentum in global equities. We feel these are conditions where a well diversified portfolio could perform well.  Cash will always remain an important element of any sensible investment plan; however, this brief period of strong returns from cash deposit may be close to ending. Whilst we do not expect interest rates to fall back to pre-pandemic levels in the medium term, cash is likely to be less attractive when compared to the opportunities for superior returns from asset markets.

We believe this would be a sensible time for those holding significant allocations on cash deposit to consider alternative options. Our experienced financial planners are on hand to provide tailored and independent advice on how to best construct an investment portfolio to meet your needs and objectives.

The news that the UK economy fell back into recession at the end of last year is likely to be of little comfort to investors whose portfolios are heavily weighted towards UK Equities. It is fair to say that most UK investors will have some exposure to shares listed in the FTSE100, the index of the largest quoted UK companies. Indeed, we often come across portfolios that continue to hold a heavy concentration of UK Equities, and this is particularly true of traditional Discretionary Managed portfolios, which hold a blend of directly held shares and collective investments.

Investors who have focused on UK shares are likely to have seen an extended period of underperformance compared to investors who have adopted a global approach to investment. The FTSE100 index level has increased by just over 7% over the last 5 years, which is disappointing when compared to the performance of other global indices over the same period. Over the last 7 calendar years, the S&P500 index of leading US shares has outperformed the FTSE100 in each period, with the sole exception being 2022, which proved to be a very disappointing year for most asset classes. Moving away from the headline FTSE100 index, the performance of mid-sized UK companies in the FTSE250 index has been weaker still.

Structure of the index

One reason for the extended period of underperformance of the FTSE100 is the composition of the index itself. At the end of 2023, just under 20% of the FTSE100 is represented by financial companies, with Consumer Staples being the second largest sector. Industrials, Energy and Healthcare are the next three largest sector allocations. Over recent years, much of the outperformance of global markets has been led by stocks in the technology sector, which are significantly underrepresented in the FTSE100 index, with just over 1% of the index allocated to Tech stocks. By way of comparison, close to 30% of the S&P500 is invested in the Technology sector.

London losing its’ lustre

Another factor that is influencing the performance of UK indices is the diminishing influence of the UK in global financial markets. In 2022, the market capitalisation of French listed companies temporarily exceeded those listed in the UK for the first time. Further damage to London’s reputation has been caused by a number of leading domestic companies who have chosen to list on global exchanges rather than list on the London Stock Exchange. These include semiconductor stock ARM, who listed on the NASDAQ index last September. If this trend continues, the gap in performance between the UK and global markets could widen further.

Positive for income seekers

The above factors paint a rather gloomy picture for domestic shares. There are, however, a number of redeeming features which suggest that investors would be unwise to shun UK Equities altogether.

For investors who are seeking a high level of dividend income, the FTSE100 can be a happy hunting ground. The current yield on the index is around 3.7% per annum, which represents a significant uplift over the yield on the S&P500 index, which stands at just 1.3% and is also higher than the yield generated by the indices of our major European counterparts. The composition of the FTSE100 lends itself to an attractive dividend yield, due to the high concentration of mature companies that are cash generative. Furthermore, UK companies have a long-standing culture of returning excess profits to shareholders in the form of dividends.

Whilst UK stocks tend to offer the most attractive yields, many investors now choose to focus on total return from their investments, which combines capital appreciation or losses achieved in conjunction with dividend income received. Given the modest capital performance over the last five years, using this measure reduces the attractiveness of the FTSE100 dividend yield.

Investors seeking income can also broaden their horizons, as Global Equity Income funds increase in popularity. These funds, which are typically actively managed, invest in global stocks that offer attractive and sustainable dividend yields, and whilst it is fair to say that other geographies don’t share the dividend culture present in the UK, many mature companies listed in the US and Europe still offer attractive yields. Adding Global Equity Income to a portfolio can be a useful way of diversifying a highly concentrated exposure to UK companies.

Cheap for a reason?

The UK market is certainly attractively valued when compared to global markets. The forward price-earnings ratio – a well-known measure of whether a stock or index is cheap or expensive – stands at around 10 times earnings. This is less than half the price-earnings ratio of the S&P500 index, and indicates the UK is certainly cheap compared to US markets. The FTSE100 price-earnings ratio also stands at a discount to the same ratio for the major German and French indices.

Given the discount to other global markets, why have UK stocks continued to underperform? Perhaps the answer is that UK stocks are cheap for a reason, given the stagnation in the UK economy and lower appeal in the current market trend towards technology stocks.

The benefits of diversification

Over recent years, holding a high allocation to UK Equities may well have led to underperformance as UK shares have lagged their global counterparts consistently for an extended period.

Whilst UK Equities remain attractively valued, the FTSE100 is poorly placed to take advantage of current market momentum, which is very much focused on new industry and technology in particular. A swing in market sentiment, however, towards more value orientated companies could help UK indices regain lost ground, and this is why retaining exposure to the UK remains appropriate in a diversified portfolio. There are, however, compelling reasons why investors, who hold significant allocations to UK shares, should broaden their horizons and seek to diversify into other geographies, such as the US and Far East.

Our experienced financial planners can review an existing investment portfolio and suggest areas where greater diversification could be beneficial. This can be particularly important for those who hold portfolios that have not been reviewed for some time. Speak to one of the team to arrange a formal review.