Investments

Investment market participants will be keen to see the back of what has been a difficult year for investors. Whilst it may seem a long time ago, 2022 began with markets in a buoyant mood. The restrictions imposed due to Covid-19 were finally ending, and with central banks and Governments continuing the support put in place at the start of the pandemic, global Equities markets peaked around the turn of the new year.

Inflationary pressures were already starting to build at the end of last year, although it would have taken a very brave economist to predict inflation reaching double-digit levels in most Western economies by the third quarter of the year. Whilst some of the blame for the heightened inflation can be placed firmly at the door of Vladimir Putin, the shake-off of the Covid excess and a tight labour market also contributed to the rapid rise in inflation. Central banks have predictably moved to raise interest rates to try and dampen the inflationary fire, but the combination of restrictive central bank policy and concerns over the conflict in Ukraine pushed most asset classes lower over the first half of the year.

The summer saw markets rebound, amidst very tentative indications that inflation was being tamed, although the renewed optimism was dashed by hawkish words by the Federal Reserve and the ill-fated Mini-Budget announced by Kwasi Kwarteng. This forced the Bank of England into the very uncomfortable position of firing up the printing presses once again, to provide liquidity to the Gilt market and caused Sterling to plummet against major currencies.

By early November, the mood finally began to lift, as market participants cheered lower than expected inflation data in the US, and closer to home, a second Budget statement was received more positively. Whilst central banks may not be at the end of the rate hiking cycle just yet, markets are hopeful that the first quarter of 2023 will see the end of this painful period where interest rates have realigned to reflect the prevailing and expected conditions.

Nowhere to hide

One of the key takeaways from 2022 has been the negative impact of higher inflation on most asset classes, and how this has reduced the benefits of diversification. An important component of a well-diversified portfolio is to include exposure to different asset classes that tend to produce a variance in performance, with the aim of balancing weak performance from one particular class or sector, with an improved performance elsewhere.

This year has seen very different conditions emerge, and as the year progressed, the performance of different asset classes began to correlate more closely than they have done for many years. The rapid spike in inflation heralded conditions that are not friendly to fixed interest securities, such as Government and Corporate Bonds, and this has undermined the traditional role Bonds play in reducing volatility, at least for the time being. Equities, which should see less of an impact from the inflationary conditions, also retreated, as sentiment towards risk asset faded in light of the ongoing conflict and worsening economic outlook.

The result has been that 2022 has been a disappointing period for investors in most asset classes, with a high degree of correlation across the board. We do, however, see a return to more normal market behaviour over coming months as our expectation is for inflation to fall back towards mid-single figures by this time next year. We therefore believe that the benefits of diversification, which were rather hidden during this year, will make a return next year.

Taking the medicine

Stock markets are often referred to as “discounting mechanisms”, which work on the notion that the current price of a market or asset takes into consideration all available information at the time, including present and potential future events. Whilst this theory is nowhere near perfect, and short-term sentiment is often dictated by market fear and greed, it is clear that markets do take into account expected economic data within prices we see today.

As a result, the difficult market conditions experienced over the last 12 months can be viewed as being a period of readjustment in asset prices, from the positive outlook many held at the start of the year, to the reality of slower growth, and possible recessionary conditions, as a result of the conflict and the spike in energy, food and fuel prices. We feel that investors should not, therefore, be alarmed by the expected gloomy reports in the media about the state of the economy over coming months, as markets have, at least to some extent, factored this into the current market value.

Brighter prospects ahead?

As 2022 draws to a close, investors will reflect on a bruising year and will be hoping for a return to less volatile conditions over the course of the next year. We certainly feel that current valuations are attractive for many asset classes, and we will explain the reasons behind our optimism for the coming 12 months in our market outlook to be released in January.

As this is the last Wealth Matters for 2022, we would like to take this opportunity of wishing all of our readers a peaceful Christmas, and good health and happiness for 2023.

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Just eight weeks after the Emergency Budget announced by former Chancellor Kwasi Kwarteng, Jeremy Hunt delivered an Autumn Statement which was very different in tone to the previous statement. After analysing the measures announced, the Office for Budget Responsibility have forecast the impact of the changes will lead to a drop in living standards of almost 7% over the next two years.  The Budget statement contained a number of changes to allowances and tax rates that will impact investors from the start of the next tax year. However, with careful planning, the impact of the Autumn Statement on investors can be minimised.

Additional Rate Income Band adjustment

Perhaps the most striking measure in the Autumn Statement was the reduction in the Higher Rate Band for Income Tax. Currently income earned between £50,270 and £150,000 is taxed at 40%; however, from April 2023, the upper end of this threshold will be reduced to £125,140, and income above this level will be taxed at the Additional Rate of 45%.

Thresholds frozen for a further two years

In addition to the changes to the threshold for the top rate of Income Tax, the Chancellor has frozen the Personal Allowance, Basic and Higher rate thresholds for a further two years than had previously been announced. These thresholds will now be frozen until April 2028, and the so-called “fiscal drag” caused by the freeze will generate additional tax for the Exchequer as income increases over time.

As more individuals are subject to the Higher and Additional rates of Income Tax, this increases the opportunity for individuals to reduce their tax burden through financial planning. By making personal pension contributions, an individual can obtain tax relief at their marginal rate, and Venture Capital Trusts, which provide Income Tax relief of 30% on qualifying investments in new shares, can also reduce an individual’s tax liability.

The rules surrounding pension contributions can be complex, and Venture Capital Trusts are higher risk investments and only suitable for investors with an appropriate appetite for investment risk. For this reason, we strongly recommend investors take independent advice on the best way to proceed.  

State Pension increase confirmed

As covered in last week’s Wealth Matters, there had been speculation that the State Pension “triple lock” could have been under threat, given the elevated levels of inflation, and the impact this may have on public finances. The Chancellor announced the “triple lock” remains in place, and that State Pensions will increase by 10.1% from April 2023.

It is important to remember that the State Pension takes up the first part of an pensioner’s Personal Allowance, and the increase from April, whilst welcome, may mean that a greater proportion of personal pension, rental or investment income will be subject to basic rate Income Tax. It would be sensible for pensioners with additional income sources to review the tax efficiency of investments and ensure that allowances, such as the Marriage Allowance, are used where appropriate.

Dividend Allowance cut

The Dividend Allowance, which shelters dividends from shares and business profits from tax, will be reduced from £2,000 to £1,000 from 6^th April 2023. When the Dividend Allowance was first introduced in April 2016, it was worth £5,000 and fully covered the dividends generated by shareholdings for many investors. The reduction from April will likely mean more shareholders will be liable to tax on dividends, and an even greater number will be liable to tax from April 2024, when the Dividend Allowance will be halved again to £500.

Capital Gains Tax allowances reduced

Changes to the Capital Gains Tax (CGT) thresholds and rates have been mooted for some time. Whilst the Autumn Statement left the current CGT rates unchanged, the CGT allowance – which is the amount of gain an individual can make on the disposal of assets before CGT becomes payable – will fall from the current £12,300 to £6,000 from April 2023. As with the Dividend Allowance, the Chancellor has gone further and will halve the CGT allowance again, to just £3,000, from April 2024.

This is likely to have a significant impact on investors who are selling assets such as shares and investments, and rental or second properties. As a result, investors may wish to revisit existing portfolios and make sure that the current CGT allowance is used to its’ fullest extent. Furthermore, if an investor makes a net capital loss over a tax year, this loss can be carried forward to offset against gains made in future tax years. This is called an “allowable loss” and can be claimed up to 4 years after the end of the tax year in which the asset was disposed. Given the reduced annual allowances, it will become even more important to report allowable losses to HMRC.

Making use of the ISA allowance

As a result of the reduction of the Dividend Allowance and Capital Gains Tax annual allowance, we feel it is now more important than ever to make use of the annual Individual Savings Allowance (ISA). All income earned within an ISA is exempt from Income Tax, and sheltering Equity investments within an ISA will ensure tax efficiency is maintained, despite the reduction in the Dividend Allowance. Furthermore, all gains made within an ISA are exempt from Capital Gains Tax, and again this renders the ISA even more valuable given the reduction in the Capital Gains Tax allowance over the next two tax years.

The ISA allowance remains unchanged at £20,000 for the 2023/24 Tax Year, and using the available allowance consistently each tax year remains an important way of ensuring investments remain tax efficient.

Planning opportunities

The Autumn Statement introduced a number of measures designed to raise additional tax and as a result, investors could end up paying more tax on dividend income and capital gains from 6^th April 2023. However, with careful financial planning, individuals can reduce the impact of the changes to thresholds and allowances on their personal finances. Speak to one of our experienced advisers to discuss how careful financial planning can maximise tax efficiency of your investments in the current and future tax years.

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

After more than a decade of negligible returns, deposit interest rates have slowly increased over the course of the year. The actions of the Bank of England, in an attempt to slow inflation, have given savers some respite after many years of ultra-low interest rates.

For those seeking to generate an income from their capital, to supplement income from other sources such as pension or property rental, cash has given very little in the way of income since 2008, and investors have turned to other forms of investment, such as equities, to generate better returns. With cash deposits now offering higher rates than at any time over the last decade, some may consider whether cash is a viable option for income generation. However, as we will explain, there are good reasons for investors to stick with assets, such as equities, to provide a consistent income.

The inflation trap

After the measures taken by Governments and Central Banks around the World to help their economies through the Covid-19 pandemic, and the significant inflationary pressure exerted by the war in Ukraine, inflation stands at over 10% in the UK and Eurozone, and 8% in the US. This headline rate somewhat understates the true impact of the cost of living on individuals and households, where essential items such as food and energy have seen much greater price increases than the official rate.

Looking at deposit rates currently available on fixed rate savings bonds, a rate of over 4% can now be obtained for locking cash away for one year. This may, at face value, seem attractive, particularly when compared to savings rates seen over the last decade. However, when the effect of headline inflation is taken into account, this represents a negative real rate of return of -6%. In other words, the spending power of a saver’s capital is still eroding, despite the higher savings rates on offer.

Indeed, the current conditions provide a deeper negative real rate of return for cash deposit than at any time since 2012. Between 2012 and 2021, the headline Consumer Prices Index did not exceed 3%, and therefore even a deposit rate of 0.1% would have only produced a negative real return of -2.9% per annum during this period.

Despite the disappointing real return, cash remains an important element of any sensible diversified investment strategy. However, for investors seeking consistent income levels, with the potential for capital growth in an attempt to offset the eroding effects of inflation, equity income investments remain a viable and attractive option.

Growing an income

Investors in equities derive returns from two sources. Firstly, an investor will hope that the value of the investment will rise over time, as growth in the profits of the company is reflected in the price of the share owned by the investor. Secondly, successful companies make distributions of a company’s earnings to its shareholders in the form of a dividend. The level of dividend paid, divided by the share price, provides the dividend yield figure, which is a useful way of comparing the income generated by equities to the income earned on cash, or any other income generating investment, such as a rental property.

It is important to note that dividends are not guaranteed, and are reliant on the fortunes of the company in which the investor owns shares. Large, stable companies tend to offer a consistent dividend, and would only seek to cut their dividend if the company saw a significant downturn in performance. For this reason, equity income strategies tend to focus on mature large cap stocks, with a track record of consistent dividend payment.

Dividend growth is a key added attraction. Many companies look to grow dividends paid out to investors year on year and there are a small number of global giants, such as Johnson and Johnson and Coca-Cola, who have consistently increased their dividend at each declaration point for many years.

Diversification is key

Within any equity income strategy, it is important to maintain a well diversified portfolio. This is where collective equity income funds can provide investors with an allocation to a large number of individual positions, to spread the risk and also achieve a regular income stream. Equity income funds are generally actively managed, although an increasing number of passive options are now available. Most equity income funds adopt the approach of balancing income generation with capital appreciation over time, and whilst investors can achieve additional growth through reinvested dividends, those seeking an income can arrange for this to be paid out.

Further diversification can be achieved by investing in global equity income funds, in conjunction with UK equity income, as this further spreads the investment across different geographies.

Focus on the longer term

2022 has been a difficult period for investors in almost every asset class, which is in stark contrast to 2021, where most asset classes posted strong returns. Over the longer term, the total return – i.e. income and capital appreciation – generated by equity income funds has a significant lead over the return achieved on cash deposit. For example, since 2016, cash returns have only beaten returns from equities once (2018) and in the other years, equities have outperformed by a wide margin.

Despite the increase in cash savings rates, we feel that equity income remains a viable option for investors seeking an income from their investments. Naturally, risk needs to be considered, and an element of cash savings is an important part of any diversified strategy. This is where expert financial planning can add value, both in respect of helping investors determine the appropriate strategy for their objectives and attitude to risk, and also devising an appropriate portfolio of funds to generate an attractive level of income.

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

In a year dominated by the War in Ukraine, higher inflation and political upheaval, most asset classes have struggled to make headway over the year to date. According to traditional investment theory, these conditions would usually prove positive for the price of Gold.

A store of value?

Gold has been viewed as a highly valued precious metal for centuries, with the first records of Gold being considered a desirable symbol of wealth dating back as early as 4000 B.C.. Gold coins were first struck around 550 B.C. and records show that these coins were used as currency by merchants at that time.

Gold is a scarce resource, and apart from being valued both as an investment and in the form of jewellery, it is used in electronics, with small amounts of Gold being used in the production process of everyday items such as smartphones, televisions and cars.

Investors often perceive Gold as being a store of value, and it has a long-standing reputation for being a safe haven in troubled times. This has been the case during recent periods of global turmoil. Investors in Gold were rewarded in 2020, when the World was in the grip of the Covid-19 pandemic. Given the high degree of uncertainty lockdowns and restrictions caused, it is perhaps not surprising that Gold prices climbed rapidly, surpassing $2,000 an ounce for the first time.

The increased geopolitical risk caused by the Russian invasion of Ukraine also provided a temporary spike in Gold prices. The price of an ounce of Gold was $1,800 at the start of 2022, and following the Russian invasion, Gold climbed above $2,000 an ounce by early March, as investors in Equities and Bonds took flight amidst the turbulence.

An inflation hedge?

As Gold is a finite resource, the supply of Gold cannot be manipulated in the same way as currencies, where Governments and Central Banks can print paper currency to control supply and demand. In theory, this means that the value of Gold cannot be devalued in real terms, and is why many investors continue to believe Gold to be a hedge against inflation.

This should be good news for Gold investors, given the elevated levels of inflation seen around the World. Inflation in many Western economies has reached levels that have not been seen for many years, as a result of the monetary policies adopted during the Covid-19 pandemic, and the hikes in energy and food prices seen following the invasion of Ukraine. The reality for Gold prices over recent months has, however, been somewhat different. Gold has been a disappointing investment, falling by almost 20% in Dollar terms from the peak seen in March. So why has Gold underperformed this year, and should investors still consider Gold as part of a diversified portfolio?

Gold has fallen heavily since March

As we progress towards the end of 2022, inflationary pressures continue to dog wider financial markets, and the situation in the Ukraine is far from stable. The recent falls in Gold prices may, therefore, seem a little surprising. However, there are a number of key factors that have led to the underperformance of the yellow metal.

Gold as an investment can only rise and fall in value, and it doesn’t offer the investor any interest or income. This places Gold at a clear disadvantage to other investments, such as Equities or Bonds. Over recent years, when cash and Government Bonds offered little in the way of interest, the opportunity cost of holding Gold has been minimal; however, with interest rates climbing around the World, investors in Gold need to consider the lost income or dividend stream more carefully, as this forms an important part of total investment returns achieved by other asset classes.

The strength of the Dollar against other currencies has also harmed Gold’s progress. As Gold is priced in Dollars, the dominance of the US currency has led to Gold becoming more expensive for overseas investors to buy. The weak performance of Equities and Bonds during 2022 may also be a contributory factor, as investors look to the perceived value in global investment markets, which stand at a discount to levels seen at the start of the year.

Finally, with Global growth likely to slow over coming months, the likely economic slowdown could reduce demand for Gold in technological manufacturing and jewellery, which may be particularly affected by weakness in consumer confidence. The jewellery industry accounts for over 55% of global Gold demand, and a deep recession could depress prices further.

Is Gold a true diversifier?

Some investment strategies look to include an allocation to Gold within an investment portfolio, as historically Gold prices have a weak correlation with the performance of other asset classes. This has not been the case over recent months, as Gold prices have struggled in line with Equities and Bonds during the summer and autumn. It remains to be seen whether this suggests that Gold has lost it’s attraction as a portfolio diversifier, or the poor performance is just a product of a very difficult year for investors in all asset classes.

Should investors hold Gold?

When we review asset allocation, we regularly consider whether it would be appropriate to hold direct allocations to Gold. However, we usually reach the conclusion that it is difficult to justify holding Gold when investors are not rewarded with income or interest, which is a key component of total investment returns. The short and medium term prospects do not hold much appeal for us to consider an allocation to Gold, although it could have some limited use in the event of further significant geopolitical turmoil.

Holding the right asset allocation is a crucial component of an effective investment strategy. If you hold an existing portfolio of investments, let us review your asset allocation to see whether it meets your needs and objectives, and market conditions.

If you are interested in discussing the above further, please speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Sustainable investing has been a increasingly popular choice for investors, who are aiming to achieve financial returns whilst also promoting positive environmental or social benefits. According to the Global Sustainable Investment Alliance (GSIA) global investment assets under management, with a sustainable mandate, increased from $30.7 trillion in 2018 to $35.3 trillion in 2020.

A more difficult year to be responsible

Over recent years, investors in ethical strategies have benefitted from good performance, with sustainable strategies at least matching more mainstream investment approaches. This year has, however, been less favourable for ethical investors, with performance lagging behind broad market returns generally.

On closer inspection, the reason that ethical strategies have struggled this year is quite clear. Whilst few areas of the market are doing well this year, investments in fossil fuels have seen a standout performance compared to other sectors. Russia’s invasion of Ukraine saw prices for Oil and Natural Gas surge, and coupled with ongoing supply chain issues and increased demand, market valuations of stocks in the Energy production and exploration sectors rose strongly.

To the end of September, the S&P Energy sector is the only US sector showing a positive return over 2022 to date. The outperformance has been consistent throughout the course of the year, and returns from Energy have been the single bright spot in an otherwise difficult year so far. Of course, the activities of mega-cap companies such as Exxon Mobil and Chevron mean that they are unlikely to feature in a portfolio adopting an ethical approach.

Whilst Energy has been the best performing sector overall, individual stocks in other traditionally non-ethical sectors have also performed well. Global Defence stocks, such as the UK listed BAE Systems, and US giants Lockheed Martin and Northrop Grumman, have also seen their stock well supported, as investors look to invest in companies which may benefit from increased global Government spending on defence. As with Energy, defence stocks are largely incompatible with an ethical investment approach.

Value in focus

Another factor impacting the performance of Ethical investment strategies so far this year has been the underperformance of Technology stocks. Sustainable investment portfolios tend to hold high allocations in Technology, Healthcare and Consumer Discretionary stocks, which are all sectors that have struggled this year. The proportions held in Technology are particularly important to consider, as this sector represents 22% of the MSCI World ESG (Environmental, Social and Governance) Index. Whilst the weight towards Tech had a positive influence on performance during 2021, the inverse has been true this year to date.

Delving a little deeper into market conditions we have seen over this year, it is evident that 2022 has been a year where value companies have been in vogue. We define value stocks as being those companies that are more defensive and mature, offering an attractive dividend yield. With the war in Ukraine and Inflation dominating Global markets, conditions are very different to those seen last year, where growth companies outperformed value stocks. Growth companies are usually defined as those with higher growth potential, but this may come with less financial strength or track record. Technology stocks tend to sit in the growth space and the general nature of markets this year has been another contributing factor to the underperformance of ethical investment strategies.

It also should be borne in mind that a number of value stocks are also unlikely to feature in an ethical portfolio. Take Tobacco stocks for example. Both British American Tobacco and Imperial Brands, who are the two largest quoted UK stocks in the sector, have shown a positive performance this year, compared to the weaker conditions seen overall.

Keep the faith

In the face of more difficult conditions for ethical investors over the year to date, you can understand why investors might look to reconsider their ethical stance. We do not believe this is the correct approach to take. Investment is a long-term process, and whilst a great deal has happened geopolitically and economically since the start of the decade, ethical investment approaches have seen investors rewarded for their stance during both 2020 and 2021.

Over the longer term, ethical investors have every reason to feel optimistic about the future. Following the COP26 Climate Change Conference, pressure is mounting on the World’s largest corporations to play their part in combating global warming. Indeed, many are already working towards net zero carbon emissions, and with the direction of travel being clear, this in turn will force others to follow their lead. Companies that are unlikely to feature in an ethical investment approach at the current time are making strides that could see their inclusion in the future. Take Shell, for example, who announced last year their intention to halve absolute emissions by 50% by 2030, through investments in low-carbon and renewable energy.

With the focus on delivering a cleaner and greener future, it is likely that technological advance will have a significant part to play. This would tend to suggest that the longer term prospects for sustainable and ethical investment are good. Looking to the short and medium term, 2022 has been a year where Tech has struggled, though investors would be well served to look to the performance over the previous two years, where they were rewarded for taking an ethical stance.

If you are interested in ethical investment strategies, or are looking to review an existing pension or investment portfolio to see whether this fits with your personal ethical stance, speak to one of our experienced advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

The events since Friday

Much has happened in markets since Kwasi Kwarteng began his statement to the Commons on Friday morning. Currency markets reacted first, with the Pound slipping further against a strong Dollar, reaching an all-time low (at the time of writing) of $1.05, and also losing ground against the Euro. The price of Gilts – loans issued by the UK Government to fund its liabilities – also fell heavily, as investors sold off the bonds, leaving the Government with a higher interest bill on existing debt.

The perception from global investors appears to be that UK economic policy is heading in the wrong direction. Announcements from the Chancellor that a spending review and full statement would follow in late November did little to improve the mood of Sterling or Gilt markets, and following a fall in Gilt prices on Tuesday, the Bank of England announced a return to Quantitative Easing, by starting to purchase longer dated Gilts in unlimited quantities, albeit for a limited period, which has helped stabilise long dated Gilt prices. This move came after concerns were raised by defined benefit pension trustees, where final salary pension liabilities, which are largely linked to Gilts, came under financial pressure.

There have been calls for the Bank of England to raise interest rates ahead of the next scheduled meeting on 3^rd November; however, the Bank has resisted these calls, for now at least, but a large increase in base rates is expected at this meeting. As a result of the expected higher interest rates, mortgage lenders have been pulling fixed rate deals from the market and relaunching the same deals with higher rates. This is likely to have a dampening effect on the UK housing market.

We wait to see what effect the Bank of England’s actions will have, although we see the intervention in Gilt markets as being necessary given the weakened sentiment. The International Monetary Fund and currency markets have given their initial opinion on the fiscal announcements made by the new Government, and we would anticipate further moves will be made by both the Treasury and Bank of England to calm markets over the coming days and weeks.

The impact for UK investors

Sterling’s weakness is something of a double-edged sword for UK investors. As the UK are net importers of goods and services, a weak currency pushes up the price of these imported goods and stokes the inflationary fire already ablaze. This, together with the general market perception of the strength of the UK economy, will likely lead to higher interest rates as the central bank tackles inflation.

For holders of UK shares, however, a weak Pound may be beneficial, particularly if the company generates profits overseas. And holders of Global Equities have seen losses largely cushioned by Sterling’s weakness. This underlines the importance of holding a globally diversified portfolio – a key component of our investment strategies – in these conditions.

For investors in Fixed Interest securities, this has been an uncomfortable period. Bonds tend to be assets that provide stability in times when Equities markets are volatile; however, the rapidly increasing inflation and higher interest rate expectations have sent Bond prices lower over the course of the year. As a result, Bond yields have now risen to attractive levels and both Investment Grade and High Yield Bonds are offering good value to investors who are happy to take a medium to long term view.

Markets always look forward

In conditions such as those we are experiencing at the present time, it is important to remember that markets are a discounting mechanism, reflecting future earnings that companies will generate. As such, the difficult market conditions seen over the course of this year will, to some extent, have already discounted the impact of higher inflation and interest rates on the global economy. This discounting of future earnings can provide opportunities for investors. This is a view shared by leading Fidelity fund manager Aruna Karunathilake who commented earlier this week “We are getting excited by the opportunities in the market – not because the outlook is improving, in fact the opposite is true, but because this very negative outlook is now being reflected in share prices in selected areas of the market.”

Looking a little further ahead, we continue to expect inflationary pressures to abate over the course of the next 12 months. The expected slowdown in the global economy, together with the monetary policy decisions taken by central banks, should bring inflation back down to more modest levels, and, indeed, inflationary pressures could ease significantly should progress be made towards a resolution in the conflict between Russia and Ukraine.

On the assumption that inflation falls back next year, the focus will then shift to see whether central banks can begin to unwind the base interest rate increases seen over the course of this year, and provide monetary stimulus to kick-start growth.

The importance of diversification

Clearly the events of the last few days have rattled Bond and Currency markets, and time will tell whether further intervention or policy change will be forthcoming. However, for investors willing to take a medium to long term view, these conditions present a number of interesting opportunities. As renowned investor Warren Buffett famously quipped, “be greedy when others are fearful”.

Market performance over this year has only served to reinforce our conviction in global investing. Holding assets in a diversified portfolio, with money allocated across western economies, can provide shelter when specific localised concerns arise, such as we are seeing in the UK at the current time.

Given the slowing economy, it is also apparent that investors should look to focus on the strongest companies through this period, be they through Equity or Bond investment. Companies with good levels of cash flow, resilient earnings and the ability to pass on price increases to their customers should be able to withstand the testing conditions.

At FAS, our Investment Committee will continue to stay in close contact with fund managers and we will remain watchful for opportunities in the current conditions.

If you would like to discuss markets further then speak to one of our experienced advisers here.

Fidelity Risk Warning
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

The retail fund management industry, which was established in the 1920s, was built on the creation of actively managed pooled investment funds, where fund managers and management teams take frequent investment decisions to their portfolios, with the aim of beating a particular benchmark or target index return. The 1970s saw the creation of a challenger to the fund management industry, when the first index tracking funds were launched. These are funds that operate with far less human interaction and decision making, and manage funds by looking to mirror or track the performance of a particular index or set of indices.

Index tracking funds have steadily gained popularity as the decades have passed, so much so that the amount of new money invested in passive investments now outstrips actively managed funds. However, despite the rise in passive usage across the world, the debate still rages as to which approach can yield the best returns for investors. As we will demonstrate below, we feel that both approaches have merit, and combining the two distinct investment styles can often be an appropriate solution.

Active can outperform

The key difference between the potential returns from an active approach is that the fund can beat returns achieved by the market generally, if the fund manager or team get the investment calls right and hold more in positions that perform well. This is simply not possible through a strict passive approach, where the returns can only mirror (or usually lag slightly behind) the returns achieved by the representative index. As the main driver for most investors is to seek outperformance, this places active funds at a distinct advantage; however, this is only the case if the active manager or team can consistently beat their benchmark.

Another potential positive is that active managers have the flexibility to adjust their portfolios in periods when markets perform less well, therefore potentially reducing the impact of a period of weakness on the fund’s performance.

However, the success of the strategy will largely be dependent on the skills of the manager or management team, and the analysts they employ. Some active fund managers have built up a strong track record of outperformance over many years, and have proven themselves over a range of different market conditions. There are others, however, where performance has lagged benchmarks consistently, and therefore careful analysis of the approach, style and past performance of the fund manager are factors investors need to consider when selecting actively managed funds.

The teams of analysts and fund managers employed to manage an actively managed fund do, naturally, increase the running costs of the fund. This is passed on to investors through higher charges than are typically charged when holding a passively managed fund. For this reason, it is important to achieve good value for money when considering active funds.

The positives of passives

When investing in a passive fund, the first important point to consider is that you are highly unlikely to outperform the representative index that the passive fund aims to track. Even passive funds that fully replicate an index are likely to underperform the index slightly due to charges and tracking error.

It is also important to note that the very nature of passive funds means that the performance is purely driven by that of the underlying index. There is no ability for a human fund manager to take decisions to protect a portfolio in periods when markets perform less well. For example, a fund manager of an active fund could look to increase cash positions within the portfolio, or reallocate the balance of the portfolio to take advantage of underlying conditions.

That being said, there are distinct advantages that a passive fund can provide. Firstly, as the fund tracks an index, the investment will provide exposure to a good proportion, or indeed all of the constituent holdings within the index. This provides good levels of diversification across a range of different sectors, which is difficult to achieve from an actively managed approach. That being said, we often review actively managed funds where the portfolio does not deviate significantly from the composition of the underlying index. If an active manager was closely replicating an index, it begs the question what are you, as the investor, paying for?

Low charges are the other area that passives have an advantage. Given the lack of a human manager, passive fund management charges are generally much lower than active funds.

No winner, but plenty to consider when asking ‘Do Active Managers add value?’

As you can deduce from our analysis above, both active and passive investment management styles have features that make them attractive to investors. At face value, a passive investment approach is the most cost effective method of investment, and also potentially offers greater diversification over an active approach.

However, there may be a cost to using passives, which is the potential underperformance compared to an actively managed fund which outperforms the representative market and its’ peers. Given that active managers can often outperform the benchmark by several percentage points of performance each year, and potentially often downside control through asset allocation, this makes quality active funds an attractive proposition. But what if an active manager runs into a rut, where performance disappoints and lags the performance of similar funds? This is a situation avoided by a passive fund, and therefore when selecting active funds, there is heavy reliance on choosing the right fund from thousands of funds available to UK investors.

Our Investment Committee at FAS undertake regular and comprehensive due diligence across a very wide range of funds available to UK investors, to seek out strong performing active funds. We also regularly review passive investment approaches and look to select the right approach for each sector and asset. Speak to one of our experienced financial planners if you would like to review an existing portfolio, or invest funds using a blend of cost effective passive funds and attractive actively managed funds.

If you would like to discuss the above further then speak to one of our advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

As the A-level results are announced, students up and down the country are busy securing their place at University. The future funding of further education is a growing concern, highlighted by press reports at the weekend that tuition fees will need to rise considerably above the current level of £9,250 per annum over coming years. Add on top all of the other costs of living in student accommodation, it is little wonder that further education funding is a common topic of conversation when advising parents and grandparents.

The Student Loan system is designed to provide support for tuition fees, and as a result, finding the money up front to pay for learning costs is often not an issue. This system does, however, saddle young people with significant debts, which are only repayable once earnings exceed a certain threshold. Maintenance costs are, however, means tested, and given the cost of accommodation, living expenses, food, study materials and socialising, this can run into several thousand pounds a term.

This is why we are often called to advise families on the best way to fund these expenses for their children. We will explore a number of ways this can be achieved.

Regular saving

Most of us are familiar with the notion of regular saving for retirement through a pension, which aims to provide an income in later life. We can look to take the same approach, but with a much shorter time horizon, by setting up a regular savings investment plan. Whilst using cash is an option, it is rarely sensible to use cash for an investment of this type as returns are generally low and inflation can eat away at the real value of the sum saved. By using investments into other assets – such as Equities (Company Shares), Fixed Interest Securities (Bonds and Gilts), Property or Infrastructure – returns in excess of those generated by cash can normally be achieved over the longer term.

The investment can be held in the name of a parent, which retains control over the investment fund, or potentially could be invested through a Junior Individual Savings Account (ISA) in the hands of the child. The latter option does provide immediate access to the funds when the child is 18, which could be a consideration if a parent has concerns that the child may use the funds for other purposes than intended.

An additional benefit of investing regularly is that the monthly contributions will purchase investment fund units at different values, and therefore a smoothed investment effect known as “pound cost averaging” can be achieved.

The earlier a regular savings plan is commenced, the greater the time horizon for investment. This can lower the risk of the investment plan as investments in assets other than cash should really only be considered when the investment can be left in place for five years or more.

Lump sums and gifting

Grandparents in particular are often keen to help future generations, by helping them fund their grandchildren’s study costs. This can potentially have a dual benefit, as making gifts at an earlier point can also ease concerns over Inheritance Tax liabilities that Estates may be burdened with in the future.

As with regular savings, a lump sum gift could be placed in a cash savings account; however, as described above, returns on cash over time are generally poor, and investing the lump sum into a suitable investment plan can often yield better returns.

When establishing an investment of this type, there are options to consider as to how the investment is structured. To also be effective for Inheritance Tax planning, the gift needs to be absolute, which means either passing funds to the parents of the child to hold for the benefit of the child, or establishing a Bare Trust.

Bare Trusts and tax efficiency

Assets in a Bare Trust are held in the name of a trustee. However, the beneficiary has the right to all of the capital and income of the trust once they reach the age of 18. This means the assets set aside by the settlor in Trust will always go directly to the intended beneficiary and there is no discretion as to who receives the benefit.

The advantage of using a Bare Trust set up by a Grandparent is that whilst the assets are held by the trustee, any income generated by the investments are taxed on the beneficiary, i.e. the child. As children are entitled to the Personal Allowance before Income Tax is paid, this effectively means that no Income Tax charge will arise. It is important to distinguish this tax advantage from the situation that occurs when a Bare Trust is set up by a Parent, rather than a Grandparent. In this instance, the Parent is deemed to be the “settlor” and if income of more than £100 per Tax Year is produced, the entire income is taxed on the Parent, and not the Child.

Success is down to careful planning

Whether a regular savings approach is adopted, or a lump sum invested, the success of any plan to save for University costs will rest on the performance of the investment strategy and funds selected. FAS can provide independent advice as to the type of strategy that should be adopted, and discuss aspects such as investment risk and volatility and also address any ethical considerations.

As with any investment plan, regular reviews should be carried out to ensure the investments are performing as expected and given that funds will be needed at a known point in time, it may well be appropriate to consider reducing investment risk as the child nears the point that the funds are needed. This can help avoid the potential for markets to suffer a downturn at the time that funds are to be withdrawn. At FAS, we provide ongoing advice and regular reviews to consider whether the underlying strategy should be altered during the life of the investment.

If you would like to plan ahead to fund further education costs, or are considering gifting funds for this purpose, then speak to one of our advisers here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

The profit announcements from BP, Shell and others have made headline news over recent weeks, due to concerns over the raising of the energy price cap and hikes in gas and electricity prices to follow in the Autumn. Given the size of the profits generated, and dividends declared to shareholders, it is of little surprise that the Energy sector has been the best performing sector within the UK Equities market over the year to date.

In the first half of 2022, the Energy sector returned 28.2%, a comfortable lead over the next best performing sector, Healthcare, which returned 16.5%. This performance is in stark contrast to the worst performing sectors, Consumer Discretionary (which fell by -21.2%), Industrials (which recorded a 21.9% fall), and Technology which returned -28%.

How an investment fund responds to such disparity of performance across sectors depends on whether an passive or active investment approach is being adopted, and where an active manager is employed, whether a high conviction strategy is used.

The Passive v Active debate

Within a Passive Index fund, which tracks the return of a particular market index, the fund will allocate the portfolio to broadly match the composition of the index. This means that the fund holds representative weights in each sector in line with the weight in the index. So a FTSE100 index fund could hold around 8% of the portfolio in Shell and 3.5% in BP.

The opposite of a passive investment approach is an actively managed fund. When a fund is actively managed, it employs a professional portfolio manager, or team of managers, to decide which underlying investments to choose for its portfolio.

Being actively managed, this would permit the fund management team to allocate funds across different sectors of the index, and depending on the style of the fund, the sector allocation could differ a great deal from the percentage allocations of the benchmark index. These decisions can have a significant impact on fund performance, depending on the level of variance compared to the index composition. For example, an actively managed fund with a lower allocation to the Energy sector during this year would have struggled to keep pace with the index over the course of the year. Similarly, holding too much in Technology, the worst performing sector in the UK over the last year, would also weigh on returns.

Holding the right stocks at the right time

Of course, market conditions continue to evolve and the performance of different sectors of the economy will swing from period to period. Comparing the period from March 2020 to March 2021, to the last year, illustrates this very well. Over the lockdown period, Healthcare was the best performing sector, followed by Basic Materials and Technology, with the Energy sector – which has performed so well recently – lagging the leading sectors by some margin.

The ability of a fund manager to allocate the fund correctly, and make decisions to alter the structure of the portfolio over time, will make a sizeable contribution towards the overall performance. Looking at the Energy sector over the longer term, for example, paints a very different picture to the significant outperformance seen this year. Over the last 10 years, both BP and Shell shares have each lagged the benchmark FTSE100 index by over 30% over this 10 year period. Holding the correct stocks, at the right time, is therefore key to effective active management.

Research is key

When we research investment funds, through data analysis and meetings with leading fund houses, we often come across fund managers and management teams that look to take a so-called “conviction” based approach. This involves constructing a concentrated portfolio of a smaller number of holdings than an average fund would hold, perhaps holding as little as 30 stocks. Holding this number is likely to mean that the manager will be taking a considerable position in certain sectors and holding very little in other sectors of the economy. As demonstrated by the sector data over the course of this year, correctly allocating the portfolio to the right sectors and positions could yield significant outperformance.

Taking the opposite approach, we often review actively managed Equities funds that positions the portfolio with only subtle variance to the representative index. As a result, the performance of these funds tends to hug the index return, and lends predictability to the performance achieved. However, holding this type of fund begs the question whether the investor is getting good value for money from investing in an actively managed fund, when a passive tracker fund could do a similar job for the investor typically at much lower cost.

The average actively managed UK Equity fund will charge an annual management fee of between 0.50% and 1% per annum, which will eat into returns, unless the active manager can generate outperformance that justifies the cost. Compare this to a UK index fund, which can cost as little as 0.06% per annum, and will achieve returns close to those achieved by the benchmark index.

Both passive and actively managed funds do very different jobs in a diversified portfolio of funds, and there are advantages to each approach that merit their inclusion in a chosen strategy. Where fund managers show high conviction, with a good deal of success, this can often easily justify the higher costs due to the outperformance achieved. We are often less impressed with actively managed funds that offer a very similar strategy to a passive approach, but offer the investor poor value for money.

With over 3000 funds available to UK investors, blending funds to achieve good levels of diversification, lower volatility and strong performance can be daunting for private investors. At FAS, we have a disciplined investment selection process, which is designed to select funds with good prospects for outperformance over the longer term. If you hold an investment portfolio currently, speak to one of our experienced Financial Planners to review the performance, risk and value you are receiving.

If you would like to discuss the above with one of our experienced advisers, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.

Most of us will be familiar with the concept of regular investing, through pension saving for retirement. Each month, contributions are deducted from salary or earnings and under a Defined Contribution arrangement, are invested into a stock market fund. The monetary contribution buys a number of units based on the prevailing price of the fund on the day the contribution is received by the pension provider. At each monthly contribution point, the number of shares the contribution buys is different, as the price of the units will fluctuate from month to month.

When markets are buoyant, and performing well, the monthly contribution is likely to buy less shares, as the price of the fund is likely to be higher. Conversely, when markets are under pressure, the monthly contribution is likely to buy a greater number of shares as the price will be lower. By saving regularly and investing at different entry points, this provides the benefit of “Pound Cost Averaging”, which is an effective way of smoothing out the peaks and troughs that markets experience over a period of time.

Under a pension arrangement, or any other regular saving approach, regular savings of this manner are often the only way that an individual can effectively save over the longer term. As the regular savings are deducted from salary, this leads to a disciplined saving regime month after month. But what if the investor has a lump sum to invest? Should regular savings still be employed, or should the investment be made in a single transaction? This is a more complex decision, where a series of factors need to be considered before reaching a decision.

Don’t try and time the investment

Conventional investment wisdom would dictate that investors should maximise the time that investments are held, and therefore the simple answer would be that a rational investor would make a lump sum investment at the earliest opportunity in order for the investment to begin working for them. In periods when markets are stable or rising, this is often sound advice, as not being invested comes with an opportunity cost.

Missing out on just a few of the best performing days that investment markets have witnessed can have a dramatic impact on long term performance. For example, the annualised return achieved on an investment made in 1990, invested in the S&P500 index of US Equities, would fall from 10.4% per annum to 7.7% per annum if just the 10 best days, when markets gained the most, were missed. This is, perhaps, the best illustration of the importance of being invested in markets, and staying invested for the long term, rather than trying to time the entry point into an investment position.

A phased approach

When markets are more volatile, however, a case can be made to drip feed the investment in over a number of months. When a lump sum investment is split into a number of smaller investments that are made over a period of time, this is known as “Phasing”. A phased investment approach effectively converts the lump sum investment into a series of smaller amounts, which are then invested over a period of months. The investment is normally established so that the same amount is invested at each point in the phasing process, and as prices and values will be different from month to month, each purchase buys a different number of shares in a fund or series of funds, thus smoothing the entry into markets.

Phasing can work in an investor’s favour, if markets fall during the phasing process. At each investment point, the phased investment would buy a greater number of shares if prices are falling, leading to a better outcome than if the lump sum was invested in a single transaction. On the other hand, rising markets will mean that each phased purchase will buy less shares, if prices are rising, leading to a worse outcome than would be the case using a single purchase point.

An individual decision

Other factors need to be considered when deciding on whether to invest a lump sum immediately, or phase an investment over a series of smaller transactions. For example, investment experience is an important consideration. If an investor is making a lump sum investment for the first time, drip feeding funds in over a period of time can be helpful in reassuring a nervous investor.

The opportunity cost of not investing in a single lump sum also needs to be considered. If funds are held in cash during a phasing process, and are not invested, the cash funds are likely to earn a negligible rate of interest, and if the investor is seeking to generate income from the investments, the income stream will take longer to develop, as only a small investment would be made initially.

Lastly, the size of the investment, in relation to value of an individual’s wealth, may also be a contributory factor in the decision making process. If a large lump sum is being invested, the investor may be more keen to invest over a number of months, rather than investing in a single transaction.

Deciding on an appropriate strategy for entry into an investment position is an area where independent advice from a professional can add significant value. At FAS, we employ Phasing where appropriate and always consider an individual’s circumstances in a holistic manner when advising whether to invest a lump sum using a phased approach or not. As each individual’s needs and objectives are different, we take the time to talk to our clients about risk and volatility, enabling clients to reach a decision with which they are comfortable.

If you would like to discuss the benefits and drawbacks of phasing with one of our experienced advisers, please get in touch here.

The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.