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Investments

Shifts In The Savings Landscape

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Government incentives to save – like ISAs – are valuable, but recent changes to the savings landscape have opened up new opportunities while closing down some old ones.

If you are aiming to buy your first home, investing in a Lifetime ISA (or LISA) could be a great help. The recent withdrawal of the Help to Buy ISA in December 2019 means that the LISA is now the only tax-incentivised savings plan for first-time buyers. Anyone who had already taken advantage of the Help to Buy ISA during the four years it was available can continue to contribute to it until November 2029.

You must be between the ages of 18 and 40 (inclusive) to open a LISA, and qualifying savers can invest up to £4,000 per tax year. Like other cash ISAs, it grows free of tax, but they also benefit from a 25% government bonus. This is added to the contributions – so for every £4,000 invested, the government adds another £1,000. Once you turn 50, however, you will not be able to pay into the LISA or earn the 25% bonus. This bonus is a major advantage of LISAs compared with the Help to Buy ISAs, where the bonus was capped at £3,000.

Beware of penalties

The trade-off, however, is a withdrawal charge if you cash-in or withdraw from your LISA before age 60 and you are not using the funds to buy your first home (there is an exception for those who are terminally ill).

Ordinarily, the charge is 25% of the amount withdrawn, which recovers the government bonus and applies an extra charge to the original savings. This can be a trap for savers, who could actually end up with less than they paid in, if their circumstances change and they need early access.

However, as of 5th May 2020, there has been a recent relaxing of the withdrawal rules by the Treasury to allow for the current situation – LISA holders who withdraw money will face no penalty until April 2021 as the previous 25% of the amount withdrawn has been cut to 20% until April 2021, which is the equivalent of the bonus being taken back.

 

Child Trust Funds mature

For even younger savers, the first Child Trust Fund (CTF) accounts reach maturity in September 2020. Launched in 2005, the government contributed for children born between 1 September 2002 and 3 January 2011, when the scheme was closed.

New regulations will ensure that the freedom from UK income tax and capital gains tax will continue once the CTF has matured at age 18, even if no action is taken by the now-adult account holder.

Both the maturity of CTFs and the complex LISA rules serve as reminders that financial advice is important wherever you are on your savings journey.

Levels and bases of taxation and tax reliefs are subject to change and their value depends on individual circumstances. The Financial Conduct Authority does not regulate tax advice. Tax laws can change.

3 Reasons to Stay Globally Invested in 2020

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

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

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

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

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

 

#1 Unpredictability

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

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

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

 

#2 Unavoidability

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

 

#3 Underexposure

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

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

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

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

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

 

VCTs and EIS: How Can They Improve a Financial Plan?

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

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

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

 

Overview of EIS & VCTs

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

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

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

 

Case Scenario: EIS & VCTs “in play”

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

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

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

 

Which is better?

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

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

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

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

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

Is It Better to Use an Active Fund Manager?

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For many investors, an active investment strategy appears to be a good idea. It can be reassuring to know that there is someone in the background, making informed decisions about how to invest your money. And more importantly, where not to invest it, since they will be more than familiar with the pitfalls of risky investments.

But recent years have seen an increase in the appetite for passive investment solutions. So what is the difference, and is it worth pursuing an active investment strategy?

 

The Argument for Active

Most of the traditional investment companies offer mainly active strategies. This means that a fund manager has responsibility for choosing the underlying investments, making switches and altering the proportions as necessary.

Now, there are many variations to this. Some managers actively choose stocks and trade frequently. Others prefer to buy and hold, adding new stocks as opportunities arise. Some aim for consistent asset allocation while others will shift proportions depending on what is happening in the market. In any case, a ‘bespoke’ service, including an element of expert judgement can be very appealing, particularly in this era of uncertainty.

But reliance on human judgement is fading, with most active managers now operating robust processes or complex algorithms to decide what they should include in their portfolios. With today’s technology and access to information, the talented fund managers of the past are being phased out in favour of teams of analysts and clever software.

While consistency and technology reduce the risk of human error, another question arises. If everyone has access to the same information at the same time, does any active manager genuinely have insight that the others don’t? And will that insight consistently lead to higher returns? By consistently, we are not talking about the last 6 months, or even the last 5 years. A 5 years performance history is not that significant when considering a 30 years retirement plan.

 

The Passive Position

Some may argue that active fund management is like trying to get ahead on a busy motorway. You can switch lanes, weave in and out of traffic and take shortcuts. You might gain a small advantage, but it is equally possible that your efforts will be counterproductive. Ultimately you will end up in the same place, and will probably have used more petrol.

A passive investment strategy does not attempt to perform ahead of the market, simply to participate in the growth. Passive investors generally accept the following to be true:

  • The market is efficient. There is no point in trying to time investment decisions based on economic news or world events, as by the time you hear about it, it has already been priced into the market.
  • Asset allocation contributes more to your performance than the individual stocks chosen.
  • Diversification is vital, as the various asset types behave differently. When one goes up, others may go down.
  • Diversification can lead to steadier long term growth.
  • Charges are a certainty, while performance is unpredictable. It therefore makes sense to keep charges as low as possible.

A quick snapshot of the Mixed Investment 40% – 85% index (which is broadly comparable with a typical balanced portfolio) indicates that of the 170 funds within the sector, 71 outperformed the index over 5 years. 99, or 58% of the funds, did not.

In the UK All Companies sector, 85 out of 251 funds outperformed the FTSE All Share. This means that 66% of funds in the sector underperformed when compared to the average of the UK share market.

While it is simple enough to point out an actively managed fund that has outperformed its benchmark, the odds of choosing the right fund at outset and maintaining the outperformance over a lifetime of investing are extremely slim.

Of course, in certain areas, there is little doubt that an active manager can add value. Investing in certain sectors or economies requires specialist knowledge that a typical investor does not have. But this type of investment can be risky, and should form only part of a well-diversified portfolio.

 

What to Consider

There is a place for both active and passive funds in a diverse portfolio. These are our top tips for choosing between active and passive funds in the same sector:

  1. Look at the charges. If the active option charges 1% more than the passive equivalent, that’s 1% in extra performance needed every single year to be in the same position. Is it worth it?
  2. Has the active fund genuinely outperformed? Compare it to the passive equivalent as well as the benchmark. Measure the longest possible period – one year’s good performance is not statistically significant. Look at discrete figures as well as cumulative.
  3. How do the funds stack up when the market falls? Does one appear to provide better capital protection, even if the upside is lower?
  4. What do the funds invest in? For a straightforward equity fund, a passive investment may meet your needs best. Active funds may be more suitable if you want to invest in specialist areas.
  5. What are the trends in the sector? In some sectors, it is very difficult for active managers to outperform passives, while in others, passive funds lag behind.

At FAS, we can agree on an investment strategy with you, one that you understand and feel comfortable with, designed to meet your long term objectives that can help you face the future with confidence.

Please do not hesitate to contact a member of our team if you would like to find out more about your investment options.

Is Property a Better Investment than the Stock Market?

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Many people love the idea of investing in property. After all, a home is an asset you can smell, feel and easily understand. Plus, the beauty of many properties can also make the investment an artistic one and a labour of love. It has also been argued that homeownership is an important cultural value within British society, and property investing taps into that.

However, the picture isn’t completely clear. Despite the importance of homeownership to many British people, for instance, the UK now holds one of the lowest rates of homeownership in Europe (about 63.5%); lower than Croatia, Slovakia and Hungary. Much of the decline has been attributed to rising house prices and increasing unaffordability particularly for young people.

Homeownership is still widely regarded as a sign of economic progression. A property portfolio, therefore, is commonly viewed as a hallmark of high personal wealth and success. Yet, is building a property portfolio the best way forward for most people? In particular, could the stock markets hold better prospects for building and preserving wealth for you and your loved ones?

In this short guide, we will be offering some thoughts on these very questions and we hope you find this content informative.

 

Property vs. the Stock Market

The question of whether or not property beats the stock market as an investment depends on the perspective you take. Below are some of the main areas to consider:

 

Returns

Here, the question essentially asks which investment generates a greater profit but this isn’t as easy to establish as you might think. It is important to remember that there are many hidden costs involved with both property and stock market investing. The former will carry maintenance costs and repairs which affect your property portfolio, whilst the latter could be affected by excessive annual investment management fees that deplete rates of return.

There is also the investment timeline to consider. How many years should your comparison analysis be over and in addition to this, which properties or stocks are you comparing? For instance, properties in one part of the country may rise in value whilst others fall. Certain market indexes are also likely to vary in performance.

One interesting study is the research conducted by the Credit Suisse Research Institute, which compiled data over the last 118 years to find out where property out-performed stocks when it comes to rates of returns. They found that, on average, investing in UK stocks between 1900 and 2017 would have net a 5.5% rate of return each year, whilst house prices rose by 1.8% per year. So despite popular belief, Property does not necessarily provide a better return than the stock market over a period of time.

 

Taxes

Many believe that property holds better tax benefits than the stock market, yet this is a complex area.

Take Capital Gains Tax as an example. In 2019-20, you can earn up to £12,000 per year in Capital Gains without incurring any tax liability. This applies to the sale of owned property (excluding your main residential home) and to stock market investments, which you might sell after they have increased in value.

However, stocks still arguably have an edge over property as far as taxation is concerned, for at least two reasons. Firstly, you can shelter up to £20,000 of stock market investments within an ISA each year where gains made on investments are exempt from Capital Gains Tax (CGT). This is not possible with a Buy to Let property. Secondly, you can buy and sell your shareholdings over time, possibly keeping everything under your £12,000 CGT annual allowance. However, Capital Gains on property sales must be dealt with all at once and are likely to far exceed this allowance.

 

Risk

Investment risk is closely linked to rates of return. As a general rule, the greater the risk, the higher the level of potential return from an investment. So in theory, since stocks appear to offer greater returns than property, the latter should be less risky?

Over time, the stock market is likely to be more volatile than the property market. If you choose not to invest for the longer term (i.e. more than 5 years) then stocks and shares could be considered a more speculative investment depending on how markets have performed. However, there are at least two ways to mitigate this risk. First of all, diversifying your portfolio across different types of holdings, geographical areas and asset types can help spread the risk. Secondly, stock markets have historically grown over the years despite short-term volatility. By staying invested in the market when prices fall rather than “panic selling”, you can often weather the storm and benefit from the eventual upturn when markets recover.

Of course, it’s important to note that property investments are not inherently risk-free or immune from volatility either, as the 2008 financial crisis should remind us.

This content is for information purposes only. It does not constitute investment advice or financial advice. If you are interested in discussing your financial plan or investment strategy with one of our experienced financial planners at FAS please get in touch.

 

Should We Expect Stock Market Gains in 2020?

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For those regularly following the news, you will have likely seen many headlines about several financial firms expecting stock market gains in 2020. The Bank of America, for instance, has stated that it expects “higher U.S. yields and a softer dollar”, whilst Barclays has predicted “positive, if modest, returns in major asset classes”. Several market commentators point to 2019 as an (overall) strong year for global stocks and anticipate this upward trend to continue.

As Financial Planners, we have a careful balance to strike. On the one hand, we don’t want to over-exaggerate some of the risks posed to investment portfolios in 2020. On the other, we would caution against much of the over-optimism exhibited in the press. There are reasons to be positive, and reasons to include defensive assets in your portfolio.

2020: reasons to be sceptical

One should always be wary when it seems that all financial “experts” are converging around a prediction about what will happen in the stock markets. Remember, in the final quarter of 2018, the US and global stock markets missed their targets considerably, with almost £4.8tn wiped off the stock market. Following this steep decline, professional investors overwhelmingly predicted that 2019 would see performance continue downwards. As mentioned above, this turned out to be false. Most of the major indexes (e.g. the S&P 500 and FTSE 100) rose respectably, or even by as much as 27%.

At the moment, a large number of professional investors seem to be “riding on the high” of 2019, expecting strong growth from riskier investments such as US tech companies. However, there are good reasons to avoid impulsively piling all of your capital into stocks at this time, avoiding other asset classes. Including at least some level of protection (e.g. defensive, fixed-income assets) is important to help shield your portfolio in case 2020 does not transpire as these optimistic forecasters expect.

Here are just a few reasons to be sceptical about sky-high stock market gains in 2020:

  • The US-China trade war, which is taking centre-stage to many macro forecasts. For the last 18 months, these two major powers have been imposing tariffs on each other’s goods, escalating from $34bn US tariffs in July 2018 to $200bn in May 2019. Despite the welcome news that a tentative “phase one” agreement has been reached, tariffs will stay in place for many goods for the time being and it remains to be seen how this will impact various industries (e.g. manufacturing) and the wider global economy in 2020.
  • The UK’s withdrawal from the EU, currently scheduled for 31st January. The possibility of a “no-deal” Brexit still appears to be on the cards, with Prime Minister Boris Johnson insisting on not extending the time to agree on a new UK-EU trade deal beyond December 2020 (whilst the EU claims this is not enough time).
  • Increasing tensions in the Middle East, which have the potential to dampen sentiment and potentially lead to higher Oil prices.

2020: reasons to be optimistic

It is not all bad news, however. In its assessment for market outlook in 2020, Deutsche Bank argues that periods of high stock market growth (e.g. 2019) are usually followed by modest growth, not steep falls. Whilst this does not guarantee, we will avoid stock market volatility or decline in 2020, it should help caution anyone against spiralling into panic.

Moreover, remember that almost half of the world’s global capitalisation emanates from the US, so investors should take some encouragement from the fact that America’s economy remains quite strong as we enter 2020. GDP is still growing (although more slowly than in some previous quarters), and fears of a US recession seem to have lowered at the time of writing.

(The US-China trade war remains a concern for investors. However, recently there do appear to be some signs of progress. In the latter part of 2019, China agreed with the US to roll back some of its tariffs, totalling as much as £280bn on its imports (e.g. electrical appliances).)

Another interesting development across the world is that many governments are now regarding monetary stimulus as decreasingly effective. The result? Political leaders are starting to turn their attention more towards fiscal expansion. Prime Minister Boris Johnson, for instance, was recently elected in December 2019 partly on a platform to increase public spending (e.g. £34bn more for the NHS per year by 2023-24). Although it is not guaranteed, higher public spending does tend to accompany higher inflation, which benefits shares over fixed-income assets such as bonds.

At this point, you might still feel like you have no certainty over what will happen to stock markets in 2020, and that’s the point. Nobody has a crystal ball on these matters, and so it’s vital to ensure your portfolio is well-constructed and prepared for different scenarios. Diversifying appropriately across different funds and asset classes will be key, as will following good investment practices such as investing for the long-term and avoiding impulsive decisions.

If you need to discuss your investment strategy or financial plan with an experienced member of our planning team at FAS, please give us a call.

 

A Short Guide to Bond Investing in 2020

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With Brexit now looking almost certain to go ahead on 31st January 2020, many people are wondering what the impact might be on their investments. For those concerned about possible volatility or decline, it can be tempting to consider other, less “risky” asset classes in a preemptive attempt to try and shield your portfolio.

Whilst we would caution against making rash, ill-informed decisions about re-constituting your portfolio, it can certainly help to be aware of how fixed-security asset classes work, and how they might be appropriate following discussion with your financial planner. In this short guide, we will be sharing a brief outline on one of these types of securities (i.e. bonds), and how they might be important in 2020.

An overview of bonds

Bonds are actually quite a simple concept. It’s a similar dynamic to when you go to your local bank branch and ask them for a loan. If they agree to give it to you (say, £10,000), then you will be obliged to pay this amount back over an agreed period, with interest.

With bonds, however, you (i.e. the investor) are the loan provider and it might be a company, or government, which agrees to borrow money from you. Specific names are often given to different types of bonds. For instance, UK government bonds are often called “gilts”, whilst “corporate bonds” refer to bonds issued by companies to raise capital.

Bonds in 2010, and looking ahead to 2020

Many market commentators have noted that the 2010s saw a lot of interesting behaviour in the bond markets. In 2016 following the Brexit vote, in particular, investors witnessed government bonds across the world (possibly as much as 30% of the total bond market) produce negative yields. A similar thing happened in 2019 during the summer, where $17trn-worth of government and corporate debt produced negative returns. Historically speaking, this is quite unusual and it happens when an investor (e.g. you) buys a bond for more than its face value. If the interest due over the lifetime of the bond amounts to less than what you originally paid for it, then it produces a negative yield, effectively translating into lost money.

Looking ahead to the 2020s, however, many market commentators are speculating that this era of ultra-low yields may be coming to an end. Sweden has recently abandoned negative interest rates, for instance, recognising that they cause issues for the wider economy. The final quarter of 2019 saw steady growth in bond yields. However, it’s important for financial planners to advise clients that speculation is always dangerous. Nobody knows what will happen in the UK and the global economy in 2020. Much hinges on the precise form Brexit takes, and whether the EU and UK are able to negotiate a satisfactory trade deal and avoid a “no-deal” scenario.

Why include bonds in a portfolio?

Every investment portfolio will, of course, be different depending on your financial goals, interests, stage of life and risk tolerance. That said, bonds are often a feature within a portfolio recommended by a financial planner, to a greater or lesser extent.

The fact is, risk is built into the nature of money, wealth and investing. Opening yourself up to the possibility of greater financial reward usually means accepting a greater level of risk. Holding cash savings is typically seen as one of the lowest-risk options available to you, but in today’s world of low interest rates, it usually results in capital erosion over time (once inflation is taken into account).

Bonds and other fixed-interest investments are commonly seen as the next step up from cash. Investing in UK government bonds (gilts), for instance, is likely to be less risky than investing in company stocks within a fund, yet the potential returns are also likely to be lower.

Where bonds can really add value is by acting as a “buffer” within your portfolio. Bonds are often classed as “defensive” assets because they tend to experience less volatility than other assets, such as property or stocks. They are also deemed less risky because companies tend to pay out income to bonds before they pay out to shareholders. Bond payouts take particular priority over shareholders if a company goes bust.

Suppose the UK experiences an economic slowdown. Quite often, this tends to lead to lower inflation, which can make bond income more compelling. Such a slowdown also can lead to lower company profits and return on the stock market, which can push up the value of bonds even further. Moreover, if the stock market takes a dive then fixed-income securities such as bonds can provide a powerful hedge within your portfolio, shielding you until market recovery.

These can all be powerful reasons to consider including bonds within your portfolio, but it’s important to understand the downsides too. Remember, if the market believes interest rates are likely to go up then this tends to result in a reduction in the value of existing bonds (which have lower rates). On the other hand, if market expectation is for interest rates go down then any bonds you hold are likely to go up in value.

If you are interested in discussing your savings or investment strategy with one of our financial planners at FAS, then please don’t hesitate to contact us to arrange a meeting.

This content is for information purposes only and does not constitute investment advice or financial advice.

What Is Ethical Investing?

By | Investments

It’s probably fair to say that in 2019, environmentalism is moving increasingly into mainstream public consciousness. People are now more concerned about how their behaviour, habits and even investments are impacting on the planet. To note just a few developments:

    David Attenborough released his “Climate Change: The Facts” documentary earlier this year, which had a huge impact on bringing the topic to the fore in public discussions.
    Extinction Rebellion (an activist movement advocating rapid, far-reaching measures to combat climate change) has run protests and rallies across the country, throughout the year, to raise awareness and influence politicians on climate change.
    More and more celebrities (such as Prince Harry) are being scrutinised by the media over their use of private jets, due to the carbon footprint they produce.

Whilst opinions may vary on the above events, demonstrations and productions in question, undoubtedly more British people are coming to accept the broad scientific consensus about humanity’s impact on climate change, and want to do something about it. Indeed, many are even asking how their money and investments can be put to responsible use in this regard.

This is where our Financial Planners can often start to talk about ethical investing with certain clients. Other broad, related categories on this subject include “ESG investing” (Environmental, Social & Governance) and “social impact investing”.

Here, we’ll be outlining what “ESG investing” looks like and what it tends to involve. Please note that this content is for information and inspiration purposes only. It should not be taken as investment advice or financial advice.

What Is ESG Investing?

There is no doubt that different companies have a varying impact on the planet and human society. A financial planning business such as FAS, for instance, is a service-based business. It does not have a supply-chain in the same way as a car manufacturer. Whilst both companies will produce a carbon footprint, the latter is likely to have a much greater direct impact on the environment due to the size of the business and the nature of their core product.

ESG investing is an approach to investing which factors in the impact of different companies and other assets upon our physical environment, such as their approach to pollution and consumption of natural resources. It also factors in the governance of these companies (e.g. their approach to anti-corruption and gender diversity on the company board), as well as their impact on the society they inhabit (e.g. wage fairness and corporate social responsibility).

Is ESG Investing New?

It might surprise you to learn that ESG investing was quite a “fringe” approach to investing until recent years, as investor demands have brought it increasingly into the mainstream of investment management solutions.

There are many reasons for this, but among them include the fact that investor demographics are shifting. “Millennials” are growing as a target market of investment firms, and this group, in particular, tends to be very environmentally-conscious.

There is also the fact that many companies themselves have experienced considerable internal change with regards to beliefs about their ESG profile, as mounting evidence about climate change has accumulated over time.

There is also now increasing evidence to suggest that, with a viable strategy, ESG investments can offer investors attractive returns. This is gradually supplanting a common, previous belief widespread in the sector that ESG generally provides lower returns than non-ESG investments.

How Do I Start ESG Investing?

The important thing to recognise with ESG investing is that it is broadly intended to achieve two primary goals, simultaneously:

1/. Meaningful returns for the investor;
2/. Positive impact on the environment, governance and society.

To a degree, these two goals are in constant tension. Sometimes investors are tempted to sacrifice investment performance in the hopes of producing a positive sustainable impact. Whilst this is noble, it achieves little for your financial goals to lose money over the long term. Investing and charitable giving are called two different things for a reason.

On the other hand, there is also the temptation for investors (and fund managers) to chase after investment opportunities with a poor or dubious ESG profile, but which might offer more attractive potential returns. The more you go down this road, the more you dilute the definition of ESG and eradicate the second goal, above.

A good Independent Financial Planner will be able to help you navigate the world of ESG investing carefully with these two goals (as well as your own financial goals) in mind.

For some people, they might want to reconstruct an existing investment portfolio gradually, to include more ESG investments over time. This can help to reduce instability and risk in the portfolio, although some people might find such an approach in tension with their conscience.

Other people reading this article might be nearer the beginning of their investing journey and would like help setting up a portfolio which reflects their “ESG values” to a high degree, from the very outset. One of the challenges here will be establishing your financial goals and selecting an appropriate range of investments which can be justifiably labelled as “ESG”, and which also achieve an appropriate level of diversification, risk-minimisation and potential of return.

Final Thoughts

We have only managed to scratch the surface of ESG investing here in this article. However, we hope it has given you enough information to inspire you and help gather your thoughts on this increasingly important topic.

We understand some people will want to act quickly out of intentions to “make a difference”. Whilst this is completely understandable and noble, it is also important to look after yourself – and your loved ones – by not putting your capital at unnecessary risk.

If you are interested in discussing an ESG investment strategy with us, please do get in touch.