Investments

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.

Since March 2020, investors have been exposed to volatile market conditions, with markets falling heavily at the height of the Covid-19 pandemic, only to be followed by a rapid recovery, and then weaker market conditions again this year, due to higher inflation and the conflict in Ukraine. Whilst volatile conditions lead to opportunities, there are a range of funds that aim to generate profit irrespective of whether markets are positive or weak.

These funds are known as Absolute Return funds, and as the name suggests, they aim to generate positive returns in all market conditions, by adopting a different strategy than is used in more traditional investment funds that tend to invest in a single type of asset (e.g. Equities or Corporate Bonds) or a mix of asset classes.

Absolute Return funds often use “long” and “short” strategies, and are designed to make money from shares in companies that go down as well as up, thus aiming to  deliver a positive return for investors regardless of whether the market is rising or falling. They also aim to achieve returns that are smoother, reducing some of the volatility that has been so apparent for investors over recent years. This is also reflected in the choice of benchmark, or performance measure, used by Absolute Return funds, which is more often a return based on cash, or inflation, plus a percentage margin, rather than broader market movements.

A combination of strategies

The primary feature of Absolute Return funds is that the fund manager is not usually constrained by investing the fund in a rigid asset allocation, and has the flexibility to choose where the fund is invested across a range of different asset classes and strategies. In many Absolute Return funds, the manager will look to employ strategies that hold both “long” and “short” positions.

“Long” strategies are traditional investments into assets that the fund manager believes will rise in value over time and involves buying and holding the shares of companies or other assets. A “short” position can be adopted on any investment that the manager believes will fare less well, or fall in value. These positions make use of derivatives, which are complex financial instruments that typically allow the manager to sell shares they do not own, with the aim of buying them back at a lower price to make a profit.

In addition to these strategies, Absolute Return funds also invest in other assets depending on market conditions. Some use cash and short dated loans/bonds as a way of protecting the portfolio in more difficult market conditions, and use alternative assets and commodities as hedging tools.

What is the attraction?

Looking at historic returns from the sector, it is clear that a well managed Absolute Return fund can limit volatility and risk, whilst achieving good returns over the medium to longer term. The fact that the fund manager is not limited by strict guidelines can help tailor the portfolio to match the underlying and expected conditions more closely than when the fund manager is constrained by the fund guidelines. This flexibility can also mean that a strong performing Absolute Return fund can aim to deliver returns when other asset classes struggle.

And the drawbacks?

This type of investment is more heavily dependent on the skill set of the manager or management team than perhaps any other type of investment. As the investment strategies used often involve derivatives, these can amplify performance in both directions, and lead to greater losses if the wrong asset is held at the wrong time.

In addition, Absolute Return funds tend to be expensive in terms of their annual charges, and some funds charge a performance fee, which is charged in addition to the standard fund charge when certain performance targets are reached.

In addition to the added complexity of Absolute Return funds, in certain circumstances, positions taken within an Absolute Return fund can be less easily realisable than mainstream assets, which could lead to delays or difficulties if investors wish to sell or encash their investment.

Does flexibility translate into returns?

Absolute Return funds started becoming more popular immediately after the financial crisis of 2008, and by 2015, they represented the most popular type of fund by volume of sales. However, this popularity has waned over recent years, with outflows of £3bn from the sector seen during 2021.

Performance across the sector has been mixed. A number of funds have shown consistently strong performance over a range of different market conditions, and merit consideration. In a diverse sector, however, there have been a number of funds that have performed less well, with a wide divergence of returns seen over the medium term.

Given this variance in performance, increased due diligence is required when considering Absolute Return funds, and careful analysis of the strategy, track record of performance of the management team, and risks, is key to making the right selection within the sector. At FAS, we maintain a limited exposure within our portfolios to a small, select group of Absolute Return funds that we feel have good prospects for outperformance over the medium to longer term. However, we use these funds where appropriate as part of a much wider, diversified portfolio of assets.

If you would like to discuss Absolute Return funds or would like to review your portfolio strategy 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.

Anyone heading off abroad at the moment will be facing the prospect of the Pound not stretching as far, as Sterling continues to weaken when compared to other global currencies. The implications of a weak Pound go much further than making holidays more expensive as it has a major impact on the UK economic outlook and for investors in UK assets.

Interest rates are key

Whether a currency is strong or weak against a basket of other currencies, and notably the US Dollar depends on a number of factors. The prevailing interest rate, and expected interest rates in the medium term, can help promote a strong currency, as investors will be more keen to hold cash in a currency where interest rates are higher than in a currency with lower interest rates.

The Bank of England, whilst raising interest rates on five occasions since December 2021 are still lagging behind the US and Canada, with the US Base Rate standing at 1.75% and the Canadian Base Rate at 1.50%, compared to 1.25% in the UK. However, the Base Rate is still some way above the Eurozone, where Base Rates are effectively still at zero. Interestingly, the Euro has been just as weak against the Dollar as Sterling, and is close to reaching parity with the US Dollar.

The importance of stability

Financial stability is another important consideration, as investors would, unsurprisingly, be more willing to hold reserves in a country that has sound economic prospects and good governance. It is quite evident the political turmoil and uncertainty we have seen over recent months has impacted on Sterling’s performance. Looking at the longer term, Sterling has been on a broadly downward trajectory against the Dollar ever since the Brexit vote was announced in 2016, and given the uncertainty that was introduced by the vote to leave the EU, again, it is perhaps not a surprise that Sterling has found itself on the backfoot.

Inflationary pressure

Lastly, levels of inflation that exist in the location where reserves are held is also important, as higher levels of inflation can hinder real returns achieved on deposits. Inflation in the UK is also higher than most other developed nations, with the Consumer Price Inflation (CPI) measuring 9.1% in May and standing higher than both the US and Eurozone, at 8.6%.

The higher levels of inflation are, to some extent, not only a disincentive to holding Sterling, but a direct result of Sterling’s weakness. The UK has a negative trade balance, in that it imports significantly more than it exports. Imported goods that are priced in Dollars can potentially cost more when passed on to end consumers, once the Dollar price is converted to Sterling.

The impact on the UK economy

Considering these factors, there is plenty of evidence that confirms why Sterling is under pressure at the current time. But how does this impact on UK businesses, and in turn on the prospects for investors in UK assets?

We have already alluded to the fact that importing goods in Dollars will become more expensive as Sterling weakens. Businesses have a choice whether to absorb these higher costs, at a risk to their margin, or pass on the cost increases, which runs the potential risk that customers may turn to alternatives or simply reduce or stop buying the product altogether. This is the reason why we favour funds that invest in businesses with strong market share, good cash flow and brand loyalty, that can look to pass on increased costs without affecting their market position.

Sterling weakness can provide a positive impact on companies that earn a good proportion of their income from outside of the UK. Within the FTSE100, around three quarters of revenue earned by the largest UK companies are generated overseas, and once these earnings are converted back into Sterling, a falling Pound can amplify the profits of these companies. This effect is less prominent in mid-sized companies, and in particular, far less apparent in smaller companies, that tend to be more domestically focused. For those companies that primarily export their goods, a weak Pound is a barrier to profits, as goods and services priced in Sterling can look more expensive to overseas buyers.

Should investors be concerned about currency risk?

We live in a global economy, and it is only correct that investors should look to hold a diversified investment portfolio, with assets spread across the globe. As we have commented in previous articles, the UK market is relatively tiny compared to the influence of the US, and by simply focusing on UK positions, many of the World’s largest and by definition successful companies will be out of reach. That does, of course, lead to currency risk.

As we have seen over the course of this year, Sterling’s weakness has helped overseas investments held in UK funds. The S&P500 index of leading US shares is down over 17% over the year to date in Dollar terms, but due to Sterling’s weakness, the fall is just 8% when converted back to local currency.

The reverse effect would, of course, be apparent in periods when Sterling strengthens. In these conditions, one option is to blend funds that aim to hedge their portfolio against currency movements.

Where next for Sterling?

The Pound has drifted down a slippery slope this year, due to higher inflation, political upheaval and weak economic prospects. Given our expectations for the coming months, it is difficult to see the position changing significantly in the short term.

If you would like to review your portfolio to consider aspects such as currency risk 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.

Making sure an investment portfolio has sufficient diversification can help mitigate risk, and one way that a portfolio can effectively be diversified is to allocate funds globally. By investing funds across a range of different geographic areas of the world, the impact on the overall portfolio, if a particular region suffers a downturn, is reduced.

Investing in a global investment fund may be a sensible way of obtaining this diversification, and you may be forgiven for thinking that such a fund would invest a reasonable proportion of the portfolio in each region. The reality is that a significant proportion of the portfolio, perhaps up to two-thirds, is highly likely to be invested in the US market. The MSCI World Index, perhaps the most recognised global market index which comprises the largest 1,540 global companies from 23 developed nations, allocates 68.3% to the US market, with the next largest component being Japan at just 6.2% and the UK at a mere 4.4%.

Size that can’t be ignored

The reason US markets command such a weight in global indices is a result of the sheer size of the largest components of the US S&P500 and Nasdaq indices. The relative size of companies value on the market is calculated by multiplying the number of shares in issue by the price of each share, and is known as the market capitalisation (or market cap). Currently, US tech giant Apple and Saudi energy company Saudi Aramco are swapping places as the largest global stock by market cap, with both companies valued at over $2 trillion. To put this in perspective, both companies are individually over 10 times bigger than Shell, which is the largest component in the FTSE100 index of leading UK shares.

Of the remaining 8 companies in the top 10 global stocks ranked by market cap, 7 are based in the US, with Chinese conglomerate Tencent being the only other non-US company to feature in the top 10.

To reinforce the scale of these mega cap stocks, it was interesting to note that at one point in 2020, the market cap of Apple was bigger than the combined market cap of all 100 constituents of the FTSE100, and whilst Apple shares have fallen back this year, the value of the company continues to stand just below the combined market cap of the UK index.

Given the sheer magnitude of the largest US stocks, active managers of Global Equities funds would have to make a very bold decision to ignore the largest positions, as doing so would be increasing the chance that the fund would perform very differently from the market as a whole.

When America sneezes

It is clear to see the dominance of US companies in global terms, and why US stocks really can’t be ignored when considering geographic asset allocation within a portfolio. But this doesn’t necessarily explain why the fortunes of the US economy are key to how global markets perform.

Whilst the origins of the saying are open to debate, the phrase “when America sneezes, the world catches a cold” is often used to describe the influence the US economy has over the rest of the world. Perhaps the most striking example would be the Great Depression in the 1930s, which started following the infamous Wall Street Crash of 1929.

Despite only being home to less than 5% of the world’s population, according to the World Bank, the total Global Gross Domestic Product in 2020 was $84.5 trillion, with the US contributing almost $21 trillion or 25% of the world’s economic output. Any shift in performance of the US economy, by virtue of the global marketplace, will therefore have a disproportionate impact on the economic prospects for many other countries.

The confidence of US consumers will have a truly global impact, as it is the most important export destination for one fifth of countries around the world. Increasing US consumer confidence can lift the fortunes of many trading partners through an increase in demand for imported goods, and this is why the prospects for Emerging Markets are, in particular, linked to the performance of the US economy.

Another key reason is the importance of the US Dollar, which is the most commonly used currency both in trade, and also financial markets. The Dollar is seen by many as the world’s reserve currency, and according to the International Monetary Fund, just under 60% of Global central banks reserves are held in US Dollars. Monetary policy decisions by the Federal Reserve, the US central bank, are so carefully watched due to the impact these can have on the strength of the US Dollar, which in turn affects the financial stability of countries that rely on Dollar reserves.

Finally, global commodity markets are intrinsically linked to US economic prospects. As the US is the largest producer, and consumer, of both Oil and Gas, the output from US production of energy supplies, and the demand for those supplies around the world, will weigh on global commodity prices.

The US is key to the global economy

As these factors demonstrate, the US economy and stock market have a defining role to play in the fortunes of the global economy, and in our opinion, any portfolio strategy should have exposure to the US as part of a global approach.

We see many investment portfolios managed by others that are too focused on UK stocks and funds, and significantly underweight in their allocation to US Equities. Since 2016, this would have led to underperformance as UK Equities have consistently lagged US stocks over this period. Whilst we advocate good exposure to the UK within any strategy, given the importance of holding domestically focused positions, not having a sufficient allocation to the US means missing out on the prospects for the world’s largest firms, and the most influential economy.

If you would like to discuss the geographic diversification in your investment portfolio with one of our experienced financial planners, 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 circumstances.