Investments

When appointing a wealth manager to provide advice on an investment portfolio, clients are often faced with the choice of selecting between an advisory and discretionary investment approach. We set out the key differences and highlight the potential benefits of model portfolios and our FAS Concepts investment approach, as opposed to traditional discretionary managed portfolios offered by fund houses and banks.

Advisory vs discretionary – what is the difference?

If a client selects advisory management, this is where the investment adviser makes recommendations based on the client’s individual circumstances needs and objectives, and attitude to investment risk. Should any changes to the portfolio be appropriate – for example to switch out of an underperforming investment or change asset allocation – then the express permission of the client is required before the adviser firm can make the changes.

By choosing discretionary management, the first part of the advice process remains the same. A portfolio of investments is established based on the client’s circumstances, attitude to risk and objectives. The main difference is by also establishing a risk profile, the advice firm can make changes to the portfolio within the defined boundaries of the risk profile without consulting the client first to gain their express approval.

Each of these options has advantages and drawbacks. Advisory portfolio management does allow a greater level of client engagement, as clients can get the opportunity of reviewing each suggested change recommended by their adviser. This does afford the client an element of control, although in practice, the majority of advisory clients tend to follow the advice given and accept the recommended changes. The downside of this approach is that it can be laborious and slow, which may not be best practice in today’s fast-moving investment markets.

The Discretionary route has the advantage of offering the potential for investment decisions to be placed in a timely manner, free from the delays introduced by the necessary client contact under Advisory management. That said, by handing over control under discretion, investors cannot dictate precise terms of the strategy adopted, or have an input prior to decisions being taken.

FAS Concepts

At FAS, we offer both advisory and discretionary portfolio options to our clients. We have historically acted for clients on an advisory basis but introduced our own discretionary managed portfolio service, FAS Concepts, to provide the full range of services to our clients.

When we devised our FAS Concepts investment approach, we were very keen to differentiate our discretionary service from the services offered by large fund houses, banks and other institutions that offer discretionary management. We have undertaken countless reviews of discretionary portfolios managed by some of the UK’s largest institutions and found a number of areas where we feel our FAS Concepts approach offers a significant advantage.

The first of these advantages is cost. We tend to find discretionary portfolios to be expensive when you factor in the cost of management, and the cost of the underlying investments themselves. These charges have a cumulative effect over time and dampen returns.

Secondly, many discretionary fund managers build portfolios that feature very similar investment approaches, and indeed similar stocks and funds, to each other. In our many years of experience, we have noticed a trend when reviewing discretionary portfolios that performance across different managers closely correlate with each other and appear to be more focused on relative index performance than achieving strong absolute returns.

Thirdly, traditional discretionary management is often concentrated on UK investments, with heavy exposure to UK directly held Equities and Gilts. We have long been advocates of global investing, and we feel that the current economic and market conditions will continue to favour this approach.

FAS Concepts for individuals and trustees

The FAS Concepts service is a model portfolio service that provides a range of discretionary managed portfolios designed to fit common client needs and objectives. Each portfolio has a stated objective, either providing capital growth or a mix of growth and natural income, and a risk level based on asset allocation.

Our in-house investment committee meets at least four times a year, and following the decisions taken by the committee, changes are made to each model portfolio, either replacing funds where appropriate or rebalancing positions to keep the portfolio within closely defined risk parameters. As all portfolios aligned to a model are changed at the same time, this provides consistency of performance.

In addition to providing a cost effective and responsive discretionary approach to individuals, our FAS Concepts service is an ideal solution for trust investments. Through our regular review of the investment portfolios, and automatic changes based on market conditions and investment performance, this can help ensure trustees meet their obligations under the Trustee Act to keep the trust investment portfolio under review.

Our professional trustee clients have told us that using the discretionary approach alleviates the need for busy professionals to be dealing with recommendations and documents that require a signature under an advisory portfolio service.

Finally, we can assist trustees in meeting their reporting duties through our detailed investment reports, which include relevant industry benchmark performance for comparison purposes.

We are proud of how cost competitive the FAS Concepts service is when compared to traditional discretionary fund management. By working closely with platforms, partners and individual fund houses, and using a blend of actively managed and passive funds, we aim to ensure that the FAS Concepts service is keenly priced.

If you would like more information regarding our FAS Concepts service, please do get in touch with us here.

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

As we enter a new decade, the environmental impact of the way we live is in sharp focus. As a result, more investors are considering the construction of their portfolio, to see whether it aligns with their core values in respect of the environment and social responsibility. According to the Global Sustainable Investment Alliance, as at the end of 2018, over $30tn was invested globally in responsible investment strategies, a significant jump of 34% over a period of two years.

In this article, we look at the increasing popularity of SRI investment, ways to access portfolios designed to meet SRI criteria, and whether these portfolios can deliver strong returns for investors.

What is SRI investing?

SRI investing aims to invest money in companies and funds that have positive social impacts. Each investment fund with a stated SRI objective will set out its own criteria as to how investment positions are selected; however, most SRI investment funds will automatically exclude investment in companies involved in tobacco, alcohol, and gambling, and will often also exclude companies whose activities are in fossil fuels, weaponry, and animal testing.

SRI managers can select investments via a negative or positive screening method. The former seeks to eliminate those companies engaged in activities listed above, whilst the latter may include a company where the board is gender-diverse or is making strides towards improving its environmental impact. As a result, positive screening tends to allow a wide range of companies from which the manager can construct a portfolio but potentially may carry investments that sit outside of an individual’s ethical preference. These screening methods are sometimes referred to as ‘light’ or ‘dark’ green, to signify the strictness of the criteria used.

SRI investments are often spoken about at the same time as ESG investing. ESG stands for Environmental, Social and Governance, and ESG investment strategies will consider the impact of these three key areas – the environmental impact of a company’s operations, social risks (such as health and safety and human rights), and standards in the way companies are run.

Where ESG and SRI differ is that a company which has a positive ESG score, and therefore may be included in a fund using ESG criteria, could be involved in an area that is precluded from SRI investment as being unethical, for example, a company involved in fossil fuels may pass ESG filters, but not be considered for SRI investment.

The SRI Market in 2020

The first UK investment funds with a mandate to invest in a responsible manner were launched in the 1980s. Early adoption of this investment strategy posed significant issues, in that fund managers were selecting from a very small pool of investments that met the necessary criteria. As a result, performance from SRI funds has, historically, fallen behind more traditional investment management without SRI filters, and investors that chose to invest ‘ethically’ had to make a decision whether their core beliefs justified the potential for underperformance over the longer term.

With an increasing number of companies now meeting SRI criteria, fund managers of SRI portfolios now have a much wider range from which to construct portfolios, and the gap in performance between traditional investment portfolios and constructed SRI portfolios has now narrowed significantly. Indeed, over the last year, we have found that SRI portfolios have outperformed traditional investment strategies, and we feel this is a result of a combination of two factors.

Firstly, many companies are themselves gravitating towards social responsibility, and therefore the range of companies available for investment within an SRI orientated fund has increased. With a greater number of companies that pass the screening methods, active fund managers can select from an increased range, which can lead to better outcomes. Secondly, many traditional industries that SRI funds would avoid, such as gambling and fossil fuels, have struggled over the course of last year, whereas technology and pharmaceuticals, which generally pass SRI filters, have outperformed.

The Future of SRI investing

It is clear from the trends we are seeing that SRI investing is here to stay. Recent analysis shows that one dollar in every four dollars invested in the US is made into SRI or ESG funds.

Given that many companies now issue their own sustainability report, it is likely that those companies that do not embrace SRI issues and take them seriously may find themselves cast adrift, not only from investors but also from doing business with companies who take their responsibility seriously and do not wish to tarnish their reputation. As a result, we expect to see more companies striving to meet sustainability targets.

In addition to actively managed SRI funds, passive investment options have also emerged over recent years, offering access to Global Index funds that meet SRI criteria. This offers a low-cost way of investing in Global Equities, and an increasing range of Ethical Bond funds now provide the opportunities for Fixed Interest investors to gain access to good performing funds that only lend to those companies who meet SRI criteria.

Finally, younger generations, who are generally more conscious of ethical investment themes, will enter the investment world through pensions and other long-term investment plans. We feel this will increase the demand for SRI compliant portfolios.

Accessing SRI investments through FAS Concepts

At FAS, we have devised two discretionary managed investment portfolios that meet SRI criteria. Since launch, these have proved popular, and provide access to global investment markets by selecting investment funds that both pass our standard in-house analysis, but also meet necessary SRI criteria.

If you would like to discuss SRI investing or would prefer an existing investment portfolio managed elsewhere to be managed in a responsible manner, then please get in touch, here.

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

One of the biggest responsibilities facing charity trustees is how to invest donations and other financial support received in an appropriate manner. In this article, we explain why charities should look to invest funds, some of the issues that need due consideration, and how FAS can assist in this process.

Why should charities invest?

Charity trustees need to consider investing the funds they receive, rather than leaving large amounts on cash deposit, to try and achieve a better return on the monies held, to further the aims of the charity. This return could be in the form of growth, which allows greater charitable work to be carried out in the future, or to provide an income to support the charity’s ongoing operations. Furthermore, trustees need to consider the eroding effects of inflation on funds held, as keeping significant sums on cash deposit is likely to see the real value of funds fall over time.

What can charities invest in?

Charity trustees have a wide range of investment options open to them. In addition to straightforward cash deposits, charities can invest in shares of listed companies (Equities), interest-bearing loans (Gilts and Corporate Bonds), property or land, and Collective Investments (which may invest in one or more of these main asset classes). Not all of these asset classes will be appropriate to all charity situations and independent financial advice should be sought before charity trustees make any investment decision.

In all cases, trustees must consider the suitability of any investment for their charity. This will be influenced by the agreed level of risk and other factors, such as the size of the investment fund and the aims and objectives of the charity, together with the need to diversify the investment portfolio.

Considerations for trustees

When beginning the process of deciding how best to deal with charity funds, the first consideration is to assess the overall financial position of the charity and determine any immediate financial needs. Appropriate levels of funds should be held as cash to cover these short-term requirements, and these should be kept separate from funds that can be considered for longer-term investment. A breakdown of expected income should also be prepared, to ascertain whether the income the charity expects to receive is sufficient to meet planned expenditure, or whether investment income or withdrawals will be needed.

For funds that are not needed in the short-term, trustees can move on to consider an investment strategy. Helpfully, there is government guidance set out to assist trustees in the investment process.

By law, trustees need to act within the charity investment powers, exercise care and skill where making decisions, and diversify investments wherever possible.  Charity trustees must also consider the risk of any investment made and limit this risk to an acceptable level. The Charity Commission recommends that trustees should decide on an overall investment policy and agree on the balance of risk and reward that is right for the charity; naturally, the aims, objectives of the charity, and size of the funds available for investment will all have a bearing on these decisions.

In addition, trustees also need to ensure that investments align with any environmental, social, and governance factors that are pertinent to the charity’s ethos and values. An example of where this can produce an adverse public reaction was the decision by the Church of England investment managers to invest part of their funds in one of the key backers of payday lender Wonga. Whilst this position was quickly rectified once the link was discovered, it is a good reminder of the importance of looking very carefully at the investment portfolio and determining whether the investment policy conflicts with the ethical stance taken.

The value of advice – how can FAS assist with charitable investments?

Given the high degree of responsibility placed on trustees to make appropriate investment decisions with charity funds, it is vital that trustees consider taking investment advice as set out in the Charity Commission guidance. Naturally, the board of trustees may have individuals with some investment experience, although even in this case, we would suggest that an external view from an independent professional could offer an objective opinion.

In addition to obtaining initial advice as to how charity funds are invested, keeping those investments under regular review is crucially important. In addition, where charity investments are already in place, trustees should be considering the following points:

• Are the investments performing well compared to markets and recognised benchmarks?
• Does the asset allocation of the portfolio continue to fit with the trustees’ preference for investment risk?
• Does the portfolio continue to fit with the ethos and values of the charity?
• Are there external economic factors that could affect the portfolio in the medium and long term?
• Are there any short-term funding requirements where decisions to realise investments are needed?

Obtaining independent advice may well be of benefit in considering these and other points. FAS is a chartered, independent practice, that can give an impartial and unbiased view on existing investment portfolios, or to trustees looking to establish a new investment portfolio.

FAS Concepts, our discretionary management service, is an ideal solution to assist charity trustees. We have devised socially responsible investment portfolios that meet stated ethical criteria, enabling trustees to invest in a managed portfolio of assets that fit with the aims and policies of the charity, whilst seeking to limit volatility.

Our discretionary managed portfolios are reviewed at least four times a year and changes made to the portfolio based on individual fund performance and prevailing economic conditions. These regular reviews will fulfill the requirement for charity trustees to review the investments in place and save time and cost compared to an advisory investment process. Lastly, our comprehensive reporting package provides clear information on portfolio performance, including performance measurement against recognised benchmarks, further assisting trustees in compliance with the requirements.

If you are interested in discussing the above with one of our experienced financial planners at FAS, please get in touch here.

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

Some of the recent headlines coming out of China have been troubling, to say the least. But if you’re looking for growth, there are plenty of good reasons to invest in the world’s second-largest economy. Here we outline some of the arguments for and against investing in China.

One of the hottest – and most hotly debated – investment topics of this year has been China. The world’s second-largest economy rarely seems to be out of the headlines, and most of them are disturbing. Back in June, the new security law imposed on Hong Kong, removing the region’s autonomy, was considered to have been China’s boldest – and most worrying – political manoeuvre in years. And just last month, Foreign Secretary Dominic Raab accused China of human rights abuses against its Uighur population, suggesting that sanctions from the UK government could follow.

Donald Trump’s favourite enemy

That’s not to mention the ongoing trade war between China and the US, and seemingly endless headlines expressing concern over state-controlled businesses such as Huawei and even TikTok (if you haven’t heard of TikTok, we suggest you ask your children or grandkids).

So perhaps the bigger question is, what is it about investing in China that makes it worth the risk? And would investors be better off avoiding the region altogether?

There are plenty of reasons why investing in China is a good idea

In pure investment terms, investing in Chinese markets can be a valuable way to diversify your investment portfolio. It has been one of the few regions to have performed well during the pandemic this year, and the returns from Chinese stock markets are not closely correlated to British or American stock markets. That’s a definite plus point during volatile times.

And there are longer-term reasons to be keen on China. As well as being the world’s largest exporter, China has a huge domestic market, and is home to some of the world’s largest companies that you may, or may not have heard of – like Alibaba, TenCent, PetroChina and Xiaomi. However, it is worth noting that Chinese companies don’t have a tradition of paying dividends, unlike companies in the UK. Investors look to China for growth, rather than income.

China drives the global economy

In many respects, China’s economy, which emerged from lockdown just as the rest of the world was entering, has a head-start on the rest of the world, and this is an advantage China intends to keep. And, for all the bad press China has been receiving recently, its exports seem to be relatively unaffected. China is tightly weaved into the fabric of the global economy, which has begun whirring again, so China is pushing its inventory stock out and increasing exports dramatically.

But China’s politics are leaving it with fewer friends

However, political risks around China appear to have increased dramatically – there has even been some talk of a new ‘cold war’ between the US and China. But President Trump’s bluster might quieten down if the US economy doesn’t recover enough to improve his election chances in November. And, with governments all over the world desperate to avoid a lengthy and damaging economic downturn, they may have no choice but to deal with Chinese businesses for the foreseeable future. Even so, the threat of wider-reaching sanctions, or stealth sanctions in the form of red tape and regulation changes, remain a threat.

What does the investment community think of China?

When it comes to China, two so-called inevitabilities are often taken for granted. First, that China’s economy will one day inevitably overtake the US economy to become the world’s largest. And second, that China’s investment universe will inevitably one day become fully integrated into the financial systems we enjoy here in the west. But both of those outcomes will only happen if China maintains good relationships with the rest of the world. Even with China’s impressive recent strengthening of its domestic economy, the stellar growth seen over the last two decades cannot continue if it becomes decoupled from its major trading partners. It won’t matter how valuable Chinese companies are if trade wars and sanctions make China an international pariah. And, while there has been huge demand for Chinese domestic assets from overseas investors recently, that demand could be dented if those assets come with big political risks, or could even result in capital invested in China being frozen as part of escalating sanctions.

For now, investors continue to back Chinese stocks, despite the rising geopolitical tensions. But at what point will the political uncertainties overtake the investment case? Recent events have shown that investors are justified in questioning the ethics of owning Chinese stocks. China’s economy is the second-largest in the world, but is easily the most controversial. It is perfectly reasonable for investors to now consider investing in China on a par with investing in other countries with poor human rights records, or non-ethical investment sectors such as tobacco, military-grade weapons or oil companies.

Summary

Whatever your views on China and its politics, it is an investment market that is hard to ignore. The sheer size of China’s economy, its continued growth and ever-increasing global importance, are all very good reasons for investors to consider increasing their exposure to China when building a balanced investment portfolio. But whether you think China deserves a place in your investment portfolio has now become a highly personal and political decision.

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 here.

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

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.

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.

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.

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.

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.