Investments

After a horrible 2020 for dividend paying companies, this year has been an encouraging return to form. Investors can’t afford to ignore the benefits of reinvesting dividends.

Good news: the COVID-induced dividend drought appears to be over. After a terrible 12 months, when most dividend-paying companies in the financial services, property, and oil and gas sectors were forced to suspend or drastically reduce dividend pay-outs to shareholders, 2021 has seen a sparkling recovery.

Dividends are usually considered to be a good sign that a company is doing well, and has plenty of spare cash in the bank. But the UK’s reputation for dividend payments took a battering during 2020 thanks to the COVID-19 pandemic, forcing companies to take widespread and often drastic measures to keep operating during a period of uncertainty. As a result, last year the FTSE 100 average dividend yield for 2020 overall ended up at a significantly lower 2.98%, and total dividends paid to investors fell to £61.4 billion. However, stockbroking firm AJ Bell expects FTSE 100 dividend payments to bounce-back to an impressive £85.1 billion this year, just short of the record-breaking peak of £85.2 billion in dividend pay-outs set in 2018.

Dividend tax is on the increase

Of course, the downside is that the government has now introduced a 1.25% increase in dividend tax to help pay the bill caused by COVID-19, and to increase spending on health and social care. As a reminder of the government’s tax plans, investors can still earn up to £2,000 in dividends before they are liable for any tax. But beyond that threshold, basic rate taxpayers can expect to pay dividend tax at a rate of 8.75% from the 2022-2023 tax year. Higher rate taxpayers will see their dividend tax rate increase to 33.75%, while additional rate taxpayers (earning more than £150,000) in England will pay dividend tax at 39.35%. It’s worth remembering that investors do not pay any dividend tax on money invested in an Individual Savings Account (ISA), which is why it’s essential to always use up your tax-free ISA allowances.

Why it pays to reinvest dividends

Dividend paying companies are very attractive within any investment portfolio, but you don’t have to collect the regular dividend payments. In fact, it’s well worth using the dividends instead to purchase additional shares – which in turn also pay out future dividends. This is known as the power of compound interest.

Here’s a quick example to show what we mean. You buy 100 shares in a company at a cost of £1,000. The company pays a dividend of £6 every year for ten years. Instead of pocketing the cash, you reinvest your dividends and you use the money instead to buy more shares in the company. As time passes, a dividend reinvestment strategy starts to become the largest contributor to total return. The more dividends you reinvest, the higher your future dividend payments.

Take the following example of the FTSE100 index over the last 20 years (see graph below). The red line shows the pure performance of the index, not taking any dividend income into account. As you can see, the index value has increased by more than 40% over the last 20 years.

However, this performance is a fraction of the total return achieved over the same period, when dividend income from the FTSE100 constituents is reinvested. You can see the total return including reinvested dividends, shown in blue, has returned 193% over the same 20 year period, almost five times the return of the raw index.

The effect of compound interest on reinvested dividends is more powerful the longer you invest, as it multiplies the available returns on the original investment. Over time, the dividends reinvested in the early years have the largest impact on total returns, and you stand to benefit not just from the increased value of the company’s shares, which may fluctuate over time, but also from the larger shareholding as you’ve used the dividend proceeds to buy more shares, which means more dividend proceeds, and so on. It’s a great way to increase the value of your investment without lifting a finger.

Last thoughts

Of course, dividend payments received by investors are still liable for dividend tax, even if they are automatically reinvested. But for the time being, investors still have a dividend allowance of £2,000, which means for the first £2,000 of any dividends you receive you don’t need to tell HMRC or record the dividends on your self-assessment form.

If you’re unsure whether your investments will mean you pay dividend tax, please get in touch. We’d be happy to provide you with a report on your dividend situation, as well as recommending ways to get the most out of your tax-free allowances. You may not be able to avoid paying dividend tax, but we can help to make sure you get the best value from the dividends you earn on your investments.

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

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

Investment Pathways for Retirement Planning is a new initiative launched by the Financial Conduct Authority (FCA) in February 2021, designed for people who wish to draw their pension under a Drawdown arrangement, without first obtaining regulated financial advice. As we will explore, one size does not fit all, and forging your own bespoke path, whilst taking ongoing advice, may well lead to better outcomes.

Taking a flexible approach

Flexi-Access Drawdown is an alternative to the purchase of an annuity, which provides much greater flexibility in terms of how income is drawn in retirement. It is increasingly popular, as it can offer the potential for individuals to use their pension savings to best fit their needs and objectives, but unlike a pension annuity, does not provide a guaranteed income for life. As the pension fund continues to be invested throughout retirement under Drawdown, investment decisions and careful management of the fund are critical components of a successful Drawdown approach. Personal responsibility for the long-term viability of the pension drawdown plan rests with the pension holder, hence the importance of receiving initial advice on the level of income drawn and investment options, and reviewing the plan regularly to ensure that it continues to meet the initial objectives.

Choose a Path?

The idea behind Investment Pathways is to create four default investment routes for individuals who have already taken Tax Free Cash from their pension, leaving the remaining funds in Drawdown. The FCA hope the initiative will reduce the number of individuals, who decide to enter Drawdown without receiving advice, making poor investment decisions, such as leaving significant funds in Cash for the long term, or taking excessive investment risk.

Four Paths have been defined, with the first being aimed at those who have no intention of drawing an income in the next five years. This strategy is largely aimed at growth over the medium term. The second Path is designed for those who wish to purchase an annuity in the next five years and will aim to preserve capital. The third is for those who are considering drawing income in the medium term and will aim to provide a balanced approach. The final Path is for those who are looking to draw the full value of their pension in the next five years, and again aims to preserve the capital value.

For each defined Pathway, pension providers will produce a ready-made investment portfolio which aims to meet the objective of the Pathway, which is where we feel the proposals may begin to fall short of their objectives.

The majority of providers offering these Pathways are using a single passive investment fund, with no ability to vary the investment options within the Pathway selected. This limits the scope for an individual to select alternative funds within an individual Pathway, or to access funds that meet their own preferences, for example, to invest in a socially responsible manner.

Bespoke is best

But more importantly, the Pathways do not take into account an individual’s financial circumstances, objectives or attitude to investment risk. This is a vital element of the advice process that is missed by using this automated approach. Take an individual who prefers to take a cautious approach to investment as an example. They choose the third of the fourth automated pathways, as they are considering drawing income from the pension in the next five years. In this scenario, they could experience an increase in investment risk and volatility over their existing arrangements they held before entering the Pathway approach, which they may not be aware of, or may be contrary to their wishes.

Conversely, an individual who chooses the Pathway towards taking the full value of their pension in the next five years (option four) would be placed largely in a Cash fund with most providers, where negative real returns are more than likely to be achieved when charges, and the eroding effects of inflation, are taken into account. We don’t imagine someone who is planning to draw their fund out in five years’ time will be pleased to be missing out on the potential for investment returns over this period, even if they were taking a cautious investment approach.

Tailored to your needs

We understand the Regulator’s concerns. Without proper advice, individuals could leave their pensions in Cash over the longer term or take excessive risk with their pension arrangements, neither of which are likely to be appropriate. However, we feel that Investment Pathways are too rigid and inflexible for most individuals with at least modest sized pension plans, who are considering Flexi-Access Drawdown as an approach to retirement planning. For these individuals, we believe that Investment Pathways are no substitute to taking an alternative path, via independent advice, that is tailored to their own circumstances and objectives. Furthermore, regular reviews of any Drawdown are of high importance, to ensure the approach remains appropriate to any future change in circumstances.

If you are considering your retirement planning and would like to discuss your options with one of our experienced financial planners at FAS, please get in touch here.

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

Since the advent of electronic day trading, it has become increasingly popular among do-it-yourself investors to trade stocks on a short-term basis, hoping it will lead to spectacular returns. But trying to time the market is a risky gamble where the odds are seldom in your favour.

We’ve probably all thought about what life could have been like if we had invested a few thousand pounds the day after the ‘Black Monday’ stock market crash in 1987, or after the global financial crisis in 2008, or even during the lowest point during the COVID-19 pandemic in March of 2020 when stock markets fell heavily due to concerns about the global economy shutting down. These are the kind of hypotheticals that get people excited about the rewards associated with investing, and they are all examples where ‘timing the market’ would have paid off handsomely.

What is ‘timing the market’?

Timing the market is an investing strategy where investors hope to make profits by identifying the best times to buy investments, and the right times to sell them. The most popular advice associated with timing the market is the well-worn catchphrase: “buy low, sell high”. While that advice isn’t wrong exactly, the difficulty with trying to follow it is this: how can you be sure of when prices are low enough to buy, and high enough to sell? The simple answer is you don’t. You can only make a judgement based on your limited knowledge at the time. Just because you think something is priced at its absolute lowest, that doesn’t mean it won’t get any lower. Similarly, plenty of people have sold stocks at a point where they felt their value couldn’t get any higher, only for it to do precisely that.

The other great piece of advice about market timing comes from Warren Buffett: “Be fearful when others are greedy, and greedy when others are fearful”. The challenge with this wisdom, of course, is that it’s incredibly hard to do the exact opposite of what everyone else is doing.

Is timing the market achievable?

Cheerleaders for timing the market will tell you that it is possible to forecast the highs and lows of investment markets and that doing so will result in greater investment returns than available through more conservative strategies. However, in our view, timing the market is a risky strategy that leaves investors potentially exposed to volatility and unpredictable events that a more sensible investment approach will navigate relatively easily. At FAS, we work closely with our clients to help them grow their wealth by staying invested in the market, and we discourage our clients from thinking they can simply buy and sell their way towards long-term wealth.

Why is timing the market risky?

One of the biggest downsides to timing the market is that the timing is fiendishly difficult to get right. Getting it wrong means potentially missing out on the days when being invested in the market works firmly in your favour.

One of the most common market timing ‘missteps’ DIY investors often make is to pay attention to negative headlines and sell their equity investments ahead of an expected market ‘correction’ (a correction usually occurs when investments appear overvalued and subsequently fall by more than 10% but less than 20%). But the timing of a correction is never easy to predict. While the investor is sitting on the sidelines waiting for markets to fall, they could be missing out on a period when investments continue to rise.

This market timing error is often compounded by the investor – who has grown increasingly frustrated at missing out on returns – deciding to jump back in and start rebuying equities at the higher prices, only to then suffer even greater losses when the correction occurs. In such instances, staying invested and riding out the correction would have been a wiser, more profitable – and less stressful – course of action!

So what’s the alternative?

In our view, buying and holding a well-diversified collection of investments is a much more effective strategy over the longer term, and the research confirms it. A recent study by investment firm Schroders calculated the benefits of staying invested in the market over long periods, compared with attempting to time the market by dipping in and out. Their research included looking at the performance of the FTSE All-Share and FTSE 250 indices since the beginning of 1986.

If an investor had invested £1,000 evenly across the companies listed on the FTSE 250 back then and held their investment to January 2021 (a 35-year holding period) according to Schroders that grand could have been worth £43,595. Over the same period, if the investor had timed the market, and missed out on the FTSE 250’s best 30 days, Schroders estimated the same initial investment would be worth just £10,627, a shortfall of £32,968 (not adjusted for the effect of investment charges or inflation).

Schroders also revealed that buying £1,000 of FTSE All-Share stocks over the same timeframe would have resulted in the investment increasing in value to £19,452 provided it was held throughout the period. Alternatively, dipping in and out of the market, and missing out on the best 30 days means that £1,000 would only be worth £4,264 some 35 years later.

Of course, no one has a crystal ball that can tell them whether tomorrow will be one of the best days or worst days. And the irony with stock markets is that many of the ‘best’ days in return terms have followed shortly after some of the worst. That’s why the most sensible approach, and to prevent you from missing out on valuable potential returns, is to stay ‘in’ over the longer term, along with reviewing your investments regularly to check on their progress.

Staying the course

So, when it comes to managing your wealth, and investing with the aim of achieving long-term objectives, we think it’s important to take luck out of the equation, and that ‘staying the course’ will give you every chance of success. Choosing to ‘buy and hold’, doesn’t mean ignoring your investments, instead it’s about having a plan and sticking to it, even when things look rocky. The best way to do that is to agree on a long-term financial plan with us, that gets reviewed on a regular basis to ensure it remains on track.

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

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

This year’s Budget saw Chancellor Rishi Sunak announce the Government’s intention to start raising finance to fund projects designed to tackle climate change, and make the environment greener and more sustainable, by issuing Green Bonds. But are these Bonds worth the wait, or should environmentally conscious investors look to alternatives?

Ready to launch

Following the initial announcement of the Green Savings Bonds, further details have emerged over the Summer. The Bonds will be issued by NS&I (National Savings) later this year (although no firm date appears to have been set for the launch) and will have a fixed three-year term. It appears there will be no option to access funds during the fixed term, following an initial cooling off period of 30 days. The Bonds will be open to investors aged 16 or over and will require a minimum investment of £100 and allow a maximum investment of £100,000. The Bonds will not be available through an Individual Savings Account, and interest will be paid gross. This means for individuals who have already used their Personal Savings Allowance to cover other savings interest, interest could be liable to Income Tax.

An interesting proposition?

The key announcement that investors are waiting for is the interest rate that will be offered by the Green Savings Bonds. Despite the green credentials, we feel this factor alone will largely dictate the success or otherwise of this initiative.

Many savers and investors will recall the Guaranteed 65+ Bonds, which were the last major product launch by NS&I. Forming a major part of the 2014 Budget announcement, these Bonds were launched in January 2015 and were only open to investors over the age of 65. The Bonds were offered for terms of one and three years, and were a roaring success, selling out in a matter of weeks. The reason for their success was the attractive rates of interest offered, with the one year issue paying a gross rate of 2.8% and the three year issue paying 4% gross per annum. At the time, this placed the Bonds way ahead of the competition, providing over a third greater interest over the best paying accounts of similar terms.

The Treasury have a difficult decision as to where to pitch the interest rate offered on this three-year issue. At the moment, the highest paying three year Bonds are paying 1.75% per annum and this is significantly higher than the current interest paid by the Treasury on other forms of Government borrowing, such as Gilts. This is one key reason why we suspect that the rate offered by the Green Savings Bond will be less headline grabbing. Furthermore, there are other factors that need to be considered by all cash savers in the current climate.

Inflating away

Increasing inflation is becoming a growing concern for all savers. The Consumer Price Inflation figure for August caught our attention, recording an increase over prices seen in August 2020 at 3.2%. This was a large jump from the 2% announced in July, leading some economists to predict higher inflation still later in the year. There are particular reasons for the spike in the August reading, particularly when you consider that August 2020 saw the “eat out to help out” scheme provide subsidised dining to help the economy recover from the pandemic. Beyond food prices, however, increases in energy and petrol costs, plus supply shortages, may well add to inflationary concerns over coming months.

For savers, this simply heaps more misery for those who have suffered from record-low interest rates since March 2020. Indeed, the landscape for individuals who rely on savings income has been bleak for some time, and there are no signs of the pain easing any time soon.

It has traditionally been difficult for savings income to match the prevailing rate of inflation, leading to a small “real” loss in value for savers. However, the jump in the cost of living seen over recent months means that savers are now set on receiving a deeply negative “real” rate of interest, meaning their savings are rapidly losing their spending power.

Look to alternatives

We have been contacted by many prospective clients, who find themselves in a position where cash savings just aren’t providing adequate returns. For those investors willing to take on a modest level of investment risk, there are alternatives that can look to produce attractive levels of income, with some prospect of capital appreciation over time, which aims to offset some of the effects of inflation.

These strategies tend to hold a good proportion in Fixed Interest securities – Corporate and Government Bonds – which usually offer a fixed interest for the term of the Bond. Whilst these Bonds are not without risk, prospective returns are more appealing than cash savings, and those who wish to invest with a conscience can concentrate their investment in Socially Responsible Bond funds. These Bond funds use screening to only provide loans to companies that meet stated objectives, from avoiding investing in fossil fuels, intensive farming and oppressive regimes, to focusing on those companies that make a positive impact to the environment, community, or human rights.

Stick or twist?

So, should savers hold on for the NS&I Green Bonds, or look to alternatives? As we wait for the announcement of further details from NS&I, the situation for cash investors generally gets more difficult due to inflation. It is, of course, possible that the Treasury offer a very attractive rate on the NS&I Green Bonds, compared to the savings market generally. We think this is unlikely as it could question the prudence of such a move by the Treasury, given that the Green Bonds are essentially another form of Government borrowing.

Perhaps the bigger question is whether cash savers should consider alternative options to try and generate better returns in this period of low interest rates. For those who have a wish to support green issues, alternatives certainly exist to allow investors to try and achieve returns in line with inflation, whilst investing with a conscience.

If you are interested in arranging a review of your existing cash savings or would like to discuss investing with a conscience with one of our experienced financial planners at FAS, please get in touch here.

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

Investing for the long term is a mantra that most investors understand, and therefore selecting good performing investments, and deciding on an appropriate asset allocation at the outset of any investment strategy, are fundamental to how the portfolio will perform in the early stages.

However, whilst the initial portfolio may well be appropriate for the conditions of the day, the world keeps turning. As the saying goes “nothing ever stays the same” and that is certainly true for investment markets. It is also the case for our lives, where our priorities, goals, and objectives change over time. For these reasons, reviewing an investment portfolio and strategy on a regular basis is key to ensuring the strategy remains current and appropriate in achieving those objectives.

Investment cycles

One of the main reasons we recommend regular reviews is that market economies revolve around an investment cycle, which means that underlying investment conditions are always evolving. In very simple terms, economies start to grow and move out of recession and then expand to a peak. At this point, the economy becomes overheated leading to a downturn, and eventually falls back into recession and then the cycle starts again. Of course, the mechanics of market economics are far more involved than this, and many factors can affect the length of each economic cycle, the severity of a recession, or the pace of growth during the boom years.

Think back over the last 25 years, and the different market conditions we have seen over that period, from the over-exuberance of the Dot Com boom at the turn of the Millennium to the depths of the Financial Crisis of 2007-2008. Over this time, we have seen very different conditions, from periods that are friendly to risk assets, to times where taking a more risk-averse approach is appropriate to protect portfolio values. And these can change at varying speeds, with the rapid plunge into recession at the start of the COVID-19 pandemic being a recent example.

Clearly, any given investment portfolio is unlikely to perform well in all of these different conditions, and therefore it is important to make sure your portfolio structure is well suited to the conditions of the day and those that are expected to follow, by reviewing the investment mix, structure, and assets held. Simply holding the same basket of investments during all these conditions is unlikely to be optimal and could lead to underperformance over time, together with exposure to higher levels of risk.

Keeping peak performance

Just like economic trends, choosing the right investments is a decision that needs to be revisited regularly, particularly when funds are actively managed. Over the years, fund managers’ reputations are built on their performance, and some achieve star status, having outperformed a particular sector consistently or achieving a stellar performance over a short period of time. But reputations can be damaged just as quickly, and the fund management industry is littered with names of former star managers who have fallen out of favour with investors. Similarly, individual fund managers often move between fund houses and fund objectives can alter significantly over time from their initial brief. In short, following an individual fund irrespective of performance is not likely to achieve a good outcome, and by regularly reviewing your choice of investment funds, underperformance can be weeded out with better performing funds taking their place.

What is your goal?

Every investor has a goal at the outset of an investment strategy. They could be looking to build a long-term investment fund towards retirement, start saving for children’s university costs, or generating an income in retirement. Each of these life stages has different priorities and a single investment approach is unlikely to be suitable for each stage. By keeping the investment strategy, fund choice and approach under regular review, you can help ensure that the appropriate funds are held in your portfolio to help achieve the goal at that particular stage in life.

Tax rules

Over the years, successive governments have made significant changes to the way investments are taxed, and introduced several different tax wrappers, from the TESSA to the ISA, Junior ISA, and Lifetime ISA. By regularly reviewing the structure of your portfolio, as well as the investments, you can take advantage of the most tax advantageous investment approach or undertake a re-structure to make a portfolio more tax-efficient in light of changes to rules and legislation.

Achieve your (re)balance

In a well-tended garden, plants that thrive begin to dominate their space and encroach on others. This is why regularly pruning and re-shaping is needed to keep the space tidy. The same is true for investment portfolios, where funds that perform well get bigger and take on a greater proportion of the portfolio. This can often lead to an increase in risk, and portfolios can quickly move out of line with the original goals and objectives.

By ‘rebalancing’ a portfolio, any positions that have grown too big can be pruned back into shape; however, a good rebalancing exercise needs to adopt a methodical approach, taking into account relevant factors before deciding to proceed.

Time for a review?

Many factors, such as underlying economic conditions, individual fund performance, and changes in circumstances, can knock a particular strategy off course; however, reviewing investment portfolios and strategies regularly can be beneficial in helping you to achieve those ultimate goals and objectives.

If you are interested in arranging a review of your existing investment portfolio or strategy with one of our experienced financial planners at FAS, please get in touch here.

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

If you are considering adding extra growth potential to your investment portfolio, it’s worth taking a look at UK smaller companies. Smaller companies offer greater potential for long-term growth than their larger counterparts, although this potential does come with greater investment risk.

A few years back, the then Prime Minister David Cameron called small companies “the lifeblood of the UK economy”. It’s not hard to see why. While large companies dominate the headlines, small businesses drive growth, create employment and encourage competition through innovation and disruption. According to the Department for Business, Innovation & Skills, small and medium-sized businesses (businesses with less than 250 employees) make up three-fifths of the employment and around half of the turnover in the UK private sector.

One of the key attractions of investing in smaller companies is their ability to adapt quickly to change. The events of the last 18 months have seen UK smaller companies stay resilient during the heightened uncertainty caused by Brexit and the Coronavirus pandemic. Even more crucially, because of their size, smaller companies are typically more innovative and agile. This means that they can rapidly adapt to new distribution methods or respond to changing customer needs. If they spot an opportunity, they can quickly capitalise on it.

The Alternative Investment Market

Of course, one of the challenges with trying to invest in smaller companies is that it is much harder to know where to find them. The London Stock Exchange is the natural location for larger, more established companies to list their shares, but if you are interested in investing in outstanding – but less well known – British smaller companies, the Alternative Investment Market (AIM) is really the best place to start.

AIM was established in 1995 as a route to market for smaller, growing companies seeking access to capital. Over the years, it has become home to a broad and diverse range of smaller companies operating in a variety of different sectors and at different stages in their own development. Today, AIM is widely recognised as the best smaller companies market in the world – home to innovative, entrepreneurial companies that are challenging their large cap competitors.

Smaller doesn’t always mean small

Despite the name, most smaller companies are probably much larger than you think. For example, companies listed on AIM include well-established household names such as Hotel Chocolat, Naked Wines, and Fever Tree. Although the regulatory requirements for AIM are less stringent than for LSE-listed companies, it is still a highly-regulated market, and companies hoping to list on AIM must meet certain strict criteria before being granted a listing.

Investing in AIM also offers exposure to lots of innovative and fast-growing sectors, including  healthcare and bioscience, media, technology, and financial services.

Are smaller companies more risky?

Because of their high-growth nature, smaller companies, including those listed on AIM, are considered at the higher end of the risk/return investment spectrum. Their shares can be more volatile, particularly during general stock market downturns, and carry a higher risk of company failure. Smaller company shares can also be harder to buy and sell, as the market for the shares is considerably smaller. Because of this, AIM is considered as a market that requires an appropriate amount of investment knowledge and equity trading experience.

So, when we talk to clients about the investment potential available from smaller companies, we tell them that investing in AIM is better suited to investors who have a longer-term investment horizon, and are prepared to have their money invested for several years. Investors also need to be mentally prepared for the likelihood that some companies will not succeed, and that they are willing to accept the higher risks associated with investing in such companies.

What else should investors know?

For those investors prepared to accept the higher risks associated with investing in AIM-listed smaller companies, there are tax benefits to consider. For example, AIM shares can be held in an Individual Savings Account (ISA), and there’s no stamp duty to pay on AIM shares, whether they are held in an ISA or not. Also, most companies on AIM benefit from a government-approved tax incentive known as Business Relief, which means that the value of the shares in these companies should become exempt from inheritance tax when the investor dies, subject to minimum holding periods. However, as we’ve noted, investors should remember these tax incentives are intended to offset some of the risks of investing in AIM-listed companies. In other words, investors should think of the tax benefits as an added bonus, not the only reason to invest.

Is now a good time to invest in UK smaller companies?

There are lots of reasons to be positive on the future for UK smaller companies. With most of the world still recovering from the pandemic, central banks and governments are still providing support for their respective economies. As a result, there’s a good chance of a stronger recovery for the rest of this year, and into 2022 and beyond.

And as we have seen over the last 18 months, the pandemic has helped to accelerate a lot of the changing trends in society, increasing the need for remote working, more efficient technology, and a greater focus on health. These are all important trends that smaller companies are arguably best placed to capitalise on. Another important aspect to consider is that lots of successful smaller companies could get ‘snapped up’ by larger competitors, which could greatly increase the value of their shares. Of course, given the higher failure rate of smaller companies, it’s a good idea to find  a dedicated portfolio manager who is able to spot those smaller companies with potential and that stand the best chance of long-term success.

Final thought

Investing in smaller companies is a great way to add a dash of excitement and high-growth potential to an investment portfolio. Within the smaller companies universe, especially on the Alternative Investment Market, there are lots of outstanding companies – and entrepreneurs –that are on an exciting growth journey, and would welcome further investment to realise their ambitions. But it’s important to recognise the risks, and to appreciate that not all these great British companies will prove to be great investments. When it comes to smaller companies, finding the right companies is an art in itself.

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

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

It has been a difficult period for commercial property funds. According to data company Morningstar, the value of the property funds sector has almost halved in value since 2019. The troubles for the sector began immediately after the Brexit vote in 2016, when most property funds suspended dealing due to sustained withdrawal requests in the wake of the decision to leave the EU, and difficulties in accurately valuing property portfolios at the time. This suspension was relatively short lived, and most funds had reopened by the end of 2016.

Fast forward to December 2019, when a small number of funds again suspended trading just a few days before the last General Election. For example, M&G suspended its’ Property Portfolio – which invested in commercial retail parks and offices across the UK – after blaming “unusually high and sustained outflows” caused by Brexit uncertainty and the struggles of the beleaguered UK retail sector.

Next up came COVID of course, with the uncertainty created by the pandemic leading to a suspension of all property funds, as material uncertainty over the accuracy of the value of property portfolios, and lack of liquidity in some funds, forced a longer suspension. Whilst the largest players in the sector resumed dealing again in October 2020, several funds, including funds from AEGON and Aviva, have announced that they will be wound down and will return money to investors, although investors may have to wait more than a year to get their money back. So, what has caused so much damage to commercial property funds? The answer is in the fact that property behaves differently to other types of investment asset.

The reasons why commercial property funds are different

First, portfolios of ‘bricks and mortar’ properties are far less ‘liquid’ than other investments. If you own a large portion of a commercial property fund and you want to sell your investment, It is likely that the fund manager will have to sell some buildings to have enough money to pay back your investment. In periods of market volatility, this can cause huge problems. This is why a handful of commercial property fund managers were so quick to ‘shutter’ their funds back in December 2019, because they feared the sudden rush of investors looking for their money back would make them forced sellers of their best assets.

Another important reason behind the closure of several commercial property funds is that the assets held within them are valued significantly lower than they were before the pandemic. You don’t have to be an investment genius to work out that changes to the way people live and work – especially with more flexible options for people who can work from home – mean that demand for office buildings could be considerably lower in future.

Whether you are talking about offices, warehouses, shops or industrial locations, the value of the underlying assets (the buildings) is dependent on the demand for that type of property. This is determined by economic growth and the economic viability of the businesses who might want to use those buildings. Other factors, such as the quality and location of the building, also help to determine the yield (rental value) that the building can achieve.

At the same time, commercial property is a broad and varied sector. While shops and traditional office buildings were hit hardest by the lockdown restrictions, there was vastly increased demand for industrial buildings and warehouses linked to e-commerce and distribution. It is therefore highly likely that those remaining open-ended funds will gradually adapt to the new normal and take advantage of the different types of properties that are increasingly in demand.

Is the worst over for UK property?

Just because some commercial property funds have closed, it doesn’t mean that the sector itself is about to collapse. In fact, most funds in the sector are in positive territory for the year so far, and the current economic conditions could leave them well-positioned to benefit from the theme of inflation that is dominating investor sentiment. Real estate in all its forms tends to do well during periods of inflation. This is because as the economy expands and the demand for goods and services increases, rents tend to grow. In addition, many leases on commercial property are linked to inflation, which ensures the owners of the buildings receive a higher income should the cost of living rise.

Regulation, Regulation, Regulation

The suspensions within the property sector caught the attention of the regulator, the Financial Conduct Authority (FCA), who launched a consultation in August 2020 to consider proposals to try and avoid a repeat of the suspensions that were seen in the property sector after the start of the pandemic. The FCA have proposed that investors would need to give notice of withdrawal from funds – of between 90 and 180 days – so that property fund managers are aware of withdrawal requests and could manage their property portfolio more effectively, to ensure liquidity is sufficiently available to meet the expected withdrawal demands.

The consultation period has now ended, and an announcement is due later in the year. Amongst the current issues that need to be resolved include the ability to continue to hold property funds in an ISA (as the withdrawal notice would be incompatible with existing ISA rules) and the difficulties platforms and providers would have in managing withdrawal requests.

We await the outcome of the consultation to see the impact of any new rules introduced. Nevertheless, we feel it is clear that commercial property remains a varied and diverse asset class, that could benefit from the prevailing economic conditions and opportunities the new way of working could present.

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

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

Bonds have a reputation for being boring. But sometimes boring is just what’s needed, especially in a well-diversified investment portfolio.

When most people consider an investment strategy, they are naturally attracted to those markets and sectors that are likely to produce the best performance. Generally, over time, growth in the value of company shares would outperform other asset classes, and it is, therefore, this asset class that tends to get the most attention. But higher returns often come at a cost, in terms of additional risk and volatility.

To dampen the overall risk of an investment portfolio, to provide a solution for those who are not necessarily looking for the highest returns, or to satisfy investors who want to limit the level of risk they are taking, introducing bonds to a portfolio is often the answer. Yes, they may have a boring reputation, but they are a key component that really cannot be overlooked.

So, what is fixed income investing?

Fixed income is an investment approach that prizes capital preservation and a steady stream of income above all other considerations. Within the world of fixed income, you can invest in government bonds (bonds issued by governments, such as UK Gilts or US Treasury Bonds) or corporate bonds (bonds issued by companies), along with other investments that pay a fixed income, such as certificates of deposit and money market funds.

How do bonds work?

The easiest way to think of bonds is to consider them as an IOU between a borrower (so, a government or company) and the lender (the investor). As an example, let’s say the borrower wants to borrow £10,000. They can issue a bond for that amount and agree to pay the lender interest at 3% per year for ten years. The investor knows that they will earn £300 a year in interest, and get their original £10,000 back in ten years’ time. If the borrower does not pay the loan back, or fails to make any of the interest payments, it is considered to be ‘in default’. Of course, some borrowers are a bigger credit risk than others, which is why bond issuers all have a credit rating to demonstrate their credit worthiness. Generally speaking, the lower the borrower’s credit rating the higher the rate of interest they will have to pay to investors.

Still with us? Good…

The most important point to remember is that fixed income assets such as bonds behave very differently to other types of assets, such as equities. This makes them a valuable asset to hold within an investment portfolio, for several reasons.

First, fixed income assets are generally considered to be lower risk when compared to equities. That’s because a bond is a promise from the borrower to repay the interest and the principal over time. Defaults within the fixed income world are relatively uncommon events, in particular for investment grade issues. In addition, a bond holder usually ranks ahead of ordinary shareholders in the event of a company falling into liquidation, meaning that they are further up the queue to receive a payment from the sale of assets held by the company.

Second, fixed income assets behave differently to other types of assets. For example, they are generally less sensitive to market risks, such as economic downturns and geopolitical events. This makes them useful to hold within an investment portfolio, because holding fixed income assets means you can potentially offset losses when stock markets are falling, and your equity investments are not doing so well. Instead, bond prices usually rise or fall in value in anticipation of changes in interest rates and inflation.

Third, as they are less volatile than equities investments, they are an ideal anchor for a portfolio, to reduce the overall portfolio risk. Investors who are closer to retirement usually aim to switch more of their investment portfolios or pension into fixed income assets, because this is a better way to preserve capital than staying invested in more volatile equities.

And fourth, fixed income investments can be relied upon to deliver a steady – and known – stream of income. Again, this is particularly valuable for those who are entering retirement or are already retired, and want to prioritise getting a reliable, regular return from their investments over more risky growth strategies. However, investors should always be careful that inflation does not cause their fixed income investments to lose value over time.

Those are the benefits, but what about the risks?

Of course, all investments come with an element of risk, and fixed income is no exception. There are three key risks to be aware of. As we have already mentioned, interest rate risk is worth keeping an eye on. We have been living in a low interest rate environment for over a decade now – which has been very positive for bond investors. But when interest rates rise, bond prices tend to perform less well. Interest rate movements are the major cause of price volatility in bond markets.

The second key risk to bear in mind is inflation risk. In periods when inflation (the rate at which the price of things goes up or down) is on the rise, this makes the fixed amount of income paid by bonds and other fixed income assets worth less than it was. If the rate of inflation is higher than the rate of income paid out, bonds become much less attractive from an investment perspective.

The third most important risk for fixed income investors is default risk, also known as credit risk. This is the risk that the issuer will not repay the principal at the maturity date and therefore default on its debt obligation.

Should fixed income investors be worried about inflation?

Inflation has become a hot topic this year, as prices for goods and services have been pushed up following the coronavirus pandemic. This has caused some people to question the long-term value of fixed income assets, which is understandable. However, this doesn’t mean fixed income assets have become poor value overnight. They should still be considered as a key element within an investment portfolio, especially if you’re looking for income, lower volatility, or much-needed diversification that spreads the risk.

They may not be the raciest of investments, but they are a sensible way to take some of the uncertainty and volatility out of investing and should be considered as a key component in most diversified strategies.

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

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

When it comes to investing, British isn’t always best. To get the most consistent portfolio returns, it’s important to have a spread of investments across multiple regions and locations.

As independent financial planners, one of the tasks we are often asked to perform for new clients is to review their existing investment portfolios and to recommend any necessary changes. In almost all cases, a common theme is for portfolios to have a significant bias towards UK investments, rather than holding a more well-diversified spread of global investments. In recent years, this would often lead to underperformance.

Why is diversification so important?

As most investors are aware, diversification is one of the most important principles of modern investing. And it’s another name for making sure you don’t have all your eggs in one basket. And from a consumer’s point of view, diversification makes sense. After all, most of us don’t only buy UK products at the expense of products from other countries, so why would we limit our investment portfolios to just UK companies?

Even so, most investors still tend to gravitate towards investments in UK companies, or in funds that are weighted towards the UK. While it’s understandable to prefer to invest in the location you know best, no one can know which markets will do well from year to year. By choosing to hold a globally diversified portfolio, investors are giving themselves the best possible chance to capture investment returns wherever they occur, and gain exposure to some of the world’s largest companies.

The need for geographical diversification

A diversified investment strategy is one that aims to ensure your portfolio has the right balance between risk and return. And right now, global diversification is of particular importance for investors.

You don’t need us to tell you that the COVID-19 pandemic has been responsible for the largest and most abrupt shock to global growth in modern times – and the deepest global recession on record. But the timing and the sweeping nature of the pandemic means it has had an uneven – and at times unpredictable – impact on various countries and regions of the world.

While some areas were affected earlier, particularly China and the Far East, and have since by and large recovered, other areas, most notably the US, Europe, and the UK, are still dealing with the crisis. Some countries have emerged relatively unscathed, while others thought they had seen the worst of the pandemic pass, only to experience second (and third) waves. While countries continue to roll out their own vaccination programmes, there continues to be plenty of uncertainty, particularly around the potential for virus variants to continue to spread throughout the world. This uncertainty means volatility will likely remain high as the global economy and markets throughout the world continue to recover from the impact of the pandemic at their own pace.

So, from an investment perspective, the best way to deal with this uncertainty is to spread investments across different regions and within different asset classes. This approach could help to reduce the impact of volatility in specific regions or markets and to help to diversify returns across all areas.

Looking at historic returns over the last decade, it is clear that no single investment region has consistently outperformed others, although research reveals that a diversified portfolio, with allocations to all geographic locations, demonstrates less portfolio volatility than just investing in one or a handful of asset classes or markets.

Size is everything?

Within the UK, investors can hold stakes in household names such as Unilever, AstraZeneca and Royal Dutch Shell, which are familiar to UK investors. However, it is important to remember these companies are tiny compared to the market capitalisation of the largest stocks listed in the US, China and Europe. By way of example, in March 2021, the capitalisation of Apple, the world’s largest company was $2,051bn, closely followed by Microsoft ($1,778bn) and Amazon ($1,558bn). China’s largest companies, Tencent and Alibaba, also rank in the top 10 companies by capitalisation. In stark contrast, the UK’s largest holding by capitalisation was Unilever at just $147bn, leaving it ranking 85^th in the world in terms of size.

What is crucial is that those largest global mega-cap stocks, such as Apple and Amazon, have performed well over the course of the pandemic, and their stock price performance has made a significant contribution to the overall recovery seen in global markets since last March. By not holding a suitably diversified global portfolio, and focusing on UK companies, you are limiting your exposure to these potentially strong performing global giants.

Global diversification is key to long-term success

As the past 18 months have shown, life is unpredictable – and so are investment markets. Uncertainties are bound to continue, and it is very difficult to predict how events will play out. This makes it even more important to have a globally diversified investment portfolio that balances out those risks. And, while it’s good to back British businesses and invest in ways that help to support the UK economy, it’s also equally important to make sure your investment portfolio is positioned as well as it can be to deal with the ups and downs or markets, without putting all your eggs in one basket.

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

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

Ever since index tracking funds overtook active funds in popularity with UK investors more than two decades ago, there has been a continuous debate over which approach is better. But while index funds are an essential investment tool, we don’t believe they should be replacing active funds just yet.

What is an index fund?

As the name suggests, an index fund is an investment created with one objective in mind – to track the performance of an index. An index fund is also known as a passive investment because there are no active investment decisions to be made. For example, a FTSE 100 index tracking fund will feature the same 100 companies as are listed at any given time on the FTSE 100 index. Should the companies featured in the FTSE 100 change, so too will the companies featured in the index fund.

Why choose an index fund?

There are several reasons why it makes sense to invest in an index fund. Firstly, an index fund is a relatively inexpensive way for an investor to gain exposure to a particular asset class or market. Because there are no fund manager salaries to pay, the cost of owning an index fund is considerably less expensive than the management fees you would expect to pay for owning an actively managed fund.

Second, an index fund will invariably cost less in transaction charges. While an active fund manager is free to buy and sell investments as often as they think is suitable for their portfolio, an index tracking fund will only buy and sell when index constituents are reshuffled (as an example, the companies in the FTSE 100 are reviewed every quarter to determine whether they still merit a place in the index).

Finally, investing in an index fund is a good way to invest if you plan on staying invested for the long term, or if you don’t want to keep actively monitoring your investments regularly. You can simply buy shares in the index fund and hold them for as long as you choose to.

What are the disadvantages of index funds?

While index funds definitely have their advantages, there are some important disadvantages that investors should also be aware of.

Underperformance

The first is that index funds – by their very nature – will only ever deliver an underperformance. That’s because passive investments are not designed to beat the performance of the market they focus on, they can only track it. And, when you add in the cost of investing in an index fund, this means it will always fall slightly short of the market’s returns once those fees are paid. The advantage of an active manager is that their goal is to outperform the market they invest in, by making decisions – but of course, attempting to achieve greater rewards carries greater risk too.

Lack of protection during the bad times

If you’re invested in an index fund, your investment is heavily dependent on the fortunes of the market your fund is invested in. While stock markets have proven to be a good investment over the long term (by this we mean at least ten years), they can be much more volatile over shorter periods. Investing in an index fund means that your investment will do well when the market is doing well, but will invariably suffer when markets are facing difficult conditions.

Lack of choice or control over the investments you hold

An index fund is a ready-built portfolio featuring all of the constituents of a particular market or index. So, if you own a FTSE 100 index fund, this means you own a small percentage in 100 different companies. You have no control over the companies you ‘own’, and you do not get a say on whether you believe those companies are in line with your personal principles or not (tobacco companies, oil companies, or weapons manufacturers, for example). The components of any index fund are effectively out of your hands.

Lack of flexibility

Another point worth mentioning is that investing in an index removes the opportunity for ‘advantageous behaviour’ or what is known as “buy low, sell high”. The downside of owning an index fund is that if a stock within the index becomes overvalued, it starts to carry more weight within the index, and your fund will be forced to purchase more of it, at the higher price. So, even if you have a personal view that a particular stock is overvalued or undervalued, by investing solely through an index fund, you do not have the ability to act on that knowledge, and nor can a fund manager do so on your behalf.

Here is an interesting example of how index investments can sometimes work against investors. When Tesla was admitted into the S&P 500 index in November 2020, within a matter of weeks it had already overtaken Facebook to become the fifth-largest company in the index. Once it gained entry into the S&P 500 index, every S&P 500 Index tracker automatically had to include Tesla as a new constituent, and this ‘forced buying’ helped to propel the Tesla share price upwards.

Why is this important? Well, Tesla had been close to gaining entry to the S&P 500 previously, meaning that many active fund managers made big profits by owning Tesla shares bought in advance knowing that once it entered the S&P 500, index tracking funds would have to start buying the shares at inflated prices. In the case of a company like Tesla, active fund managers had the maneuverability to make a smart rational decision, and this left them able to make a profit at the expense of index funds and, ultimately, their investors.

Overview

The debate over whether active or passive funds offer the best value for investors will no doubt rumble on. But investors do not need to see it is a decision to adopt either one approach or the other. A better way is to consider them both as valuable tools that deserve their place within a well-built investment portfolio. We believe that holding a blend of both actively managed funds as well as a carefully chosen selection of index tracking funds, is the best way to build a well-balanced, cost-effective, and risk-managed investment portfolio.

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

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