Topic: Investment

Looking at the big retirement picture

Considering making pension contributions ahead of the tax year end?

Investing for the future is vital if you want to enjoy a financially secure retirement, and it requires you to look at the big picture. Although pensions can be complicated, we will help you get to grips with the rules if you are considering making contributions ahead of the tax year end. Here are our top pension tax tips.

Annual and lifetime limits

Getting tax relief on pensions means some of your money that would have gone to the Government as tax goes into your pension instead. You can put as much as you want into your pension, but there are annual and lifetime limits on how much tax relief you receive on your pension contributions. Please note that if you are a Scottish taxpayer, the tax relief you will be entitled to will be at the Scottish Rate of Income Tax, which may differ from the rest of the UK.

Provided that you stay within your pension allowances, all pensions give you tax relief at the rate that you have paid on your contributions. For personal pensions, you receive tax relief at the basic rate of 20% inside the pension. That means for every £800 you pay in, HM Revenue & Customs (HMRC) will top it up to £1,000. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% on top of the 20% basic rate tax relief through your self-assessment tax return.

Benefit from tax relief

For workplace pensions, your employer normally takes your pension contribution direct from your salary before Income Tax so that the contribution is not taxed at source like the rest of your employment income, and therefore the full benefit is received inside your pension immediately. If your employer does not handle your contributions before tax, then these would benefit from tax relief in the same way as for a personal pension contribution.

You’re still entitled to receive basic rate tax relief on pension contributions even if you don’t pay tax. The maximum you can pay into your pension as a non-taxpayer is £2,880 a year, which is equivalent to a £3,600 contribution once you factor in tax relief.

Total amount of contributions

The annual allowance is a limit to the total amount of contributions that can be paid in to defined contribution pension schemes and the total amount of benefits that you can build up in a defined

Brexit and your Portfolio

This week I thought I’d hand over the floor to a guest writer. So, if like me you are becoming a bit of a BOB (Bored of Brexit), here are some words of wisdom from our Investment Analyst – Tim Hale of Albion Consulting.

Whichever way one voted, it is hard not to be dismayed by the shambles that is Brexit, concocted by all sides. In the event that the current deal agreed gets voted down in Parliament, or there is no deal, there is a material chance that the government could fall. One or both of these events would come with great uncertainty.

We set out three key investment risks relating to Brexit and how sensible portfolio structures can mitigate them.

Risk 1: Greater volatility in the UK and possibly other equity markets
In the event of a poorly received deal or no deal, it is certainly possible that the UK equity market could suffer a market fall as it tries to come to terms with what this means for the UK economy and the impact on the wider global economy. A collapse of the Conservative government and a Labour victory would add further uncertainty.

Risk 2: A fall in Sterling against other currencies
In 2016, after the referendum, Sterling fell against the major currencies including the US dollar and the Euro. There is certainly a risk that Sterling could fall further in the event of a poor/no deal.

Risk 3: A rise in UK bond yields (and thus a fall in bond prices)
The economic impact of a poor/no deal and/or a high-spending socialist government could put pressure on the cost of borrowing, with investors in bonds issued by the UK Government (and UK corporations) demanding higher yields on these bonds in compensation for the greater perceived risks. Bond yield rises mean bond price falls, which will take time to recoup through the higher yields.

Mitigant 1: Global diversification of equity exposure
Although it is the World’s sixth largest economy (depending on how you measure it), the UK produces only 3% to 4% of global GDP, and its equity market is around 6% of global market capitalisation. Well-structured portfolios hold diversified exposure to many markets and companies. Changing your mix between bonds and equities would be ill-advised. Timing when to get in and out of markets is notoriously difficult. Provided you do not need the money today, you should hold your nerve and stick with your strategy.

Mitigant 2: Owning non-Sterling currencies in the growth assets
In the event that Sterling is hit hard, it is worth remembering that the overseas equities that you own come with the currency exposure linked to those assets. Remember too that a fall in Sterling has a positive effect on non-UK assets that are unhedged. The bond element of your portfolio should generally be hedged to avoid mixing the higher volatility of currency movements with the lower volatility of shorter-dated bonds.

Mitigant 3: Owning short-dated, high quality and globally diversified bonds
Any bonds you own should be predominantly high quality to act as a strong defensive position against falls in equity markets. Avoiding over-exposure to lower quality (e.g. high yield, sub-investment grade) bonds makes sense as they tend to act more like equities at times of economic and equity market crisis.

Some thoughts to leave you with ..

Even if you cannot avoid watching, hearing or reading the news, it is important to keep things in perspective. The UK is a strong economy with a strong democracy. It will survive Brexit, whatever the short-term consequences that we will have to bear, and so will your portfolio. Keeping faith with both global capitalism and the structure of your portfolio and holding your nerve, accompanied by periodic rebalancing is key. Lean on your adviser if you need support.

‘This too shall pass’ as the investment legend Jack Bogle likes to say.

If you would like to chat to us further about Tim’s words of wisdom or indeed our model portfolio’s, please do contact us.

Warnings – This article is distributed for educational purposes only and should not be considered to be investment advice.  The article contains the opinions of the author but not necessarily the firm and does not represent a recommendation of any security, strategy or investment product.  Past performance is not indicative of future results.  The value of investment can fall or rise.  

Corrections and the Nature of the Markets

Currently, markets around the globe are ‘selling off’ due to worries ranging from trade policies and tariffs to rising U.S. interest rates to geopolitical concerns. Rather than be alarmed, however, we should consider whether this is merely a return to more “normal” conditions and not necessarily a sign of worse to come.

Why do we say a return to more “normal” conditions?

First, let’s think about the nature of investing and the relationship between risk and return. Also, remember that risk and uncertainty are related: the latter brings about the former, and with more uncertainty, the potential for future payoff may also be greater.

We have all been vulnerable to forgetting the nature of risk and uncertainty in the markets; the Central Banks interventions into the markets has pushed the stock market seemingly straight up since March 2009, with just a couple of corrections in between.  With higher expected returns, we should expect volatility, as that is the mechanism through which investments ultimately find their true value. When discussing corrections, we should consider three basic issues:

Why they exist,
Why they are natural, and
Why they are necessary.

Corrections (when they occur) exist because facts become more widely known and understood, or alternatively, they change altogether. News flows are constant and are almost always unpredictable. Random events confound even the most carefully-made forecasts, which then must be discarded. Conventional wisdom is re-examined, and new data provides investors with deeper ways of thinking about an investment, or even the markets as a whole. Armed with fresh knowledge, investors may change their minds. And that may mean responding with “sell” instead of “buy.”

Market movements are natural because the data does change and people, in turn, change their minds in response. In a static world, there would be no corrections – nor would there be many opportunities, either. In that world, all investments would always be priced at their “fair value” and would never deviate in a way to provide an entry point to buy a new opportunity. Investors constantly research, analyse, and evaluate investment opportunities. Information on those opportunities is constantly being released and thus is constantly changing.
Being early to capitalize on that changing information means some investors are quick to act – and when they all act at once, then the market may either surge higher or plunge lower. It is a natural course of action for market participants, upon realising the same new information, to act quickly to buy or sell.

Corrections are necessary because it is through this mechanism that risk is fairly priced. What do we mean by this? Quite simply, stocks, bonds and other investments are determined by what investors are willing to pay for them; this depends in turn on what people expect will happen in the world. The more uncertainty there is, the lower the price one is willing to pay for an investment, because there are more ways that the investment can be pushed off course. In this situation, most investors want a greater degree of protection when buying a stock – and that means a lower price. A correction, thus, is a way in which a sign that says “Special! Sale Now On!” is hung over the market, perhaps signalling buying opportunities. Indeed, it’s often the time when many investors go shopping for things they might not otherwise have bought when they were more expensive. It’s simply how the market works, much as in a department store.

In fact, it’s completely abnormal not to have corrections. We’re quite overdue, in fact. We’ve become complacent, forgotten how they feel or even what they look like. Having one, or even more of them would be a return to normal. In this case, “normal” means an environment with more volatility; that is, the very thing which investors undertake in order to receive the returns they expect. It’s a natural, expected, and customary trade-off.

What do we do about Bonds…

 

‘You don’t need bonds, until you need them!’

Anon

Challenging times

I sat in our Investment Committee meeting for most of yesterday morning and amongst many things we discussed the current thoughts on Bonds (these include Government Gilts and Corporate bonds). You may feel I am a glutton for punishment on a Monday morning but really …. it was quite interesting!

In response to the very low yield on fixed interest investments (bonds), some investors have been tempted to chase higher yielding bonds, in an attempt to squeeze some return out of what feels like an unproductive portfolio allocation.  This is, unfortunately, an accident waiting to happen.  The phrase ‘picking up pennies in front of a steamroller’ comes to mind.

Others are asking whether they should be holding cash as bond yields are ‘inevitably’ going to rise, denting bond returns, at least in the short term.  Neither, approach according to the research conducted by Albion Consulting who provide the research which helps build our investment portfolios for clients, makes much sense.

We should be looking forward to yield rises

At some point in the future, yields (income) are likely to rise back to higher levels.  The problem is that no-one knows when, how quickly and with what magnitude it will happen.  Investors should be looking forward to yield rises, because in the future their bonds will be delivering them with a higher income, hopefully above the rate of inflation.

When income yields do rise, bond prices will fall, creating temporary losses.  At that point bonds now earn an investor more than they did before the rate rise and they reach a breakeven point where the new higher yield has fully compensated them for the temporary capital losses suffered.  The time to break even is equivalent to the duration (similar to maturity) of an investor’s bond holdings.  Short-dated bonds with a three year duration will breakeven after three years.  Below is a hypothetical example.  Follow it through.

Table 1‑1: The impact of a 2% rise in yields on a 3 year duration bond portfolio

Year end Today Year 1 Year 2 Year 3 Year 4 Year 5
Yield-to-maturity 1.5% 3.5% 3.5% 3.5% 3.5% 3.5%
Immediate yield rise % 2.0%
Capital loss* -6.0% 0.0% 0.0% 0.0% 0.0%
Yield during year 3.5% 3.5% 3.5% 3.5% 3.5%
Total return for the year -2.5% 3.5% 3.5% 3.5% 3.5%
Cumulative total return -2.5% 0.9% 4.4% 8.1% 11.9%
Annualised total return -2.5% 0.5% 1.5% 2.0% 2.3%

Note: * We have assumed that the capital loss is approximated by the rise in yields times the duration.  In reality due to convexity – capital losses would not be quite so great.

The bonds within our portfolios are generally within a 3-5 year duration period.

 Holding cash deposits is not the solution

Imagine that an investor felt that rate rises were likely to occur, with a detrimental – albeit temporary – impact on bond returns in the near future.   They decide to place a deposit for three years, receiving interest of 1.5% p.a., comparable to the current yield on three-year bonds.  In three years’ time when their deposit matures, they end up with the same return as the bond portfolio (green-coloured cell in the table above).  Why bother?

Our view is that long-term investors should stick with their bond holdings.  At some point they will need them to protect against turmoil in the equity markets and that is what they are there for. Remember ‘You don’t need bonds until you need them!’.

Warning – The above information is based upon the views  of Carpenter Rees Limited.  It is not intended as a personal recommendation and should not be relied upon as such.  The value of your investment can go down as well as up, and you can get back less than you originally invested.

Is Your Money Being Used to Improve Your Life?

There’s a movement toward redefining money: instead of accumulating money for what it can buy, more of us want to use money to live the best life possible with what we have––a concept known as Return on Life™ (ROL).

With ROL, money becomes a tool to help you live the life you want. Accumulating as much wealth as possible is no longer the primary objective of your financial plan.

The traditional path to saving and investing has been to focus on the future (retirement), and rely solely on numbers and return on investment (ROI). However, this approach often can be misleading because it doesn’t consider your individual circumstances. “Beating the market” is often an artificial objective because it is not likely to have a substantive impact on your unique situation. Consider this: what does beating the market by one percent less (or more) mean to how you live your life? Do market returns have an impact on how you live your life?

What is relevant is developing a financial plan that considers the following:

  • How much do you currently have invested?
  • What is your current cash flow?
  • What transitions are you currently experiencing, or expect to experience (examples include paying down debt, divorce, concern about illness, job loss, retirement, purchasing a home, providing financial assistance to a family member)?
  • Do I feel comfortable with my level of financial obligations (examples include housing expenses, leisure activities, and healthcare expenses)?

By incorporating these factors into your planning, we can begin to understand what needs to change (or not change) in order to live the best life possible without overextending yourself. You may even be pleasantly surprised to learn you can enjoy the fruits of your labours sooner than expected!

Money does not exist for its own sake. Money exists as a utility that we use to improve our lives.  How your returns compare to any index, fund, investment category, or another person are less consequential than whether you are meeting your own ROL goals. Measure your success against your objectives, not someone else’s. You don’t need to keep up with the Jones’—or anyone else.

In order to enjoy ROL, you need to understand where all your money is coming from and where all your money is going––and why.

Understanding the “why” enables us to create a plan that works for you and your individual circumstances. You may be living above your means and need to make changes to your lifestyle. Or you may already have enough, and be able to take a trip or enjoy another experience you have been putting off.

Together we can address the following questions:

  • What challenges and opportunities are you currently facing?
  • What key transitions are looming on the horizon?

Your answers to these questions will determine the inflow and outflow of money, as well as your financial progress or decline. Knowing your age, and how long you expect to live isn’t enough to develop a financial plan that works.

With ROL, you don’t give up the best of life or the best parts of yourself just to get money. The money is there to serve you, not vice versa. Instead of focusing on someone else’s definition of success, write our own. ROL puts quality before quantity by managing your assets in a way that improves your life and provides peace of mind.

In traditional financial planning, the primary components include asset, risk, and debt management, as well as tax, estate, and income planning. All of these areas are essential and necessary for a strong financial plan, but there is more to developing a strong financial plan than numbers.

We all have different values and principles regarding money. Each of us has a history, present circumstances, and future hopes that are unique. By focusing only on numbers, we miss enjoying life now and in the future because we only concentrate on accumulating wealth. A financial plan designed with ROL as its foundation is designed to build freedom, relieve the pressure of ROI-focused planning, and ensure your plan meets your goals.

There is no greater freedom, and no greater wealth, than living the best life you can with the money you have.

 

10 Tips for surviving inevitable market falls

It is an inevitable part of investing that at some point markets will fall by an alarming, if not unexpected, degree.  We haven’t seen large market falls for a decade but should expect that at some point we will.  When, and in what magnitude, no-one knows, but remembering the following can help:

  1. Embrace the uncertainty of markets – that’s what delivers you with strong, long-term returns.
  2. Don’t look at your portfolio too often. Once a year is more than enough.
  3. Accept that you cannot time when to be in and out of markets – it is simply not possible. Resign yourself to the fact. Hindsight prophecies – ‘I knew the market was going to crash’ – are not allowed.
  4. If markets have fallen, remember that you still own everything you did before (the same number of shares in the same companies, and the same bonds holdings).
  5. A fall does not turn into a loss unless you sell your investments at the wrong time. If you don’t need the money, why would you sell?
  6. Falls in the markets and recoveries to previous highs are likely to sit well inside your long-term investment horizon i.e. when you need your money.
  7. The balance between your growth (equity) assets and defensive (high quality bond) assets was established by your adviser to make sure that you can withstand temporary falls in the value of your portfolio, both emotionally and financially, and that your portfolio has sufficient growth assets to deliver the returns needed to fund your longer-term financial goals.
  8. Be confident that your (boring) defensive assets will come into their own, protecting your portfolio from some of equity market falls. Be confident that you have many investment eggs held in several different baskets.
  9. If you are taking an income from your portfolio, remember that if equities have fallen in value, it is likely that your adviser has set up your portfolio so that you will be taking proportionately more of your income from the cash held within your portfolio or your bonds; not selling equities when they are down.
  10. Your adviser is there – at any time – to talk to you. He or she can act as your behavioural coach to urge you to stay the course.  They are a source of fortitude, patience and discipline.  Be strong and heed their advice.

Warning – The above information is provided for information only. It does not constitute investment advice, a recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.  The value of investments may go down as well as up and you may not get back the full amount invested.

Where are we now?

I feel the above sketch by Carl Richards explains what we do for clients and what they can do for themselves at the beginning of our relationship so that we can work out where they are today.

When it comes to money, what we don’t know can hurt us. I’ve seen this truth play out time and again when people tell me that they want to take their finances seriously by investing and making plans for the future.

“Excellent,” I’ll say. “So, what can you tell me about your current finances?” Occasionally I have a client who is fully aware of what they have, but the most common response is a blank stare.

I’m not surprised.  Sometimes we just don’t want to know.  As soon as we start listing our current assets and liabilities, we come face to face with both our good and bad financial decisions.

Maybe we’ve done a great job of saving money every month, but we’ve also had a credit card balance for over a year. We need to know both the good and the bad. Otherwise, we can’t plan for the future. Getting a handle on our current reality starts with something simple: a personal balance sheet.

To start, grab a piece of blank paper. Draw a line down the middle. Write “Assets” on the left, “Liabilities” on the right. Then, make a list.

Assets are anything we own. Liabilities are any debts we owe. On the asset side, list things like savings accounts, ISA’s, Pensions and the value of a home. On the liabilities side, list things like credit card debt, a mortgage balance, and any other loans. For this process to work, we need exact numbers, especially for our liabilities. Be prepared to call credit card companies and banks if needed to get this information. Again, not knowing these numbers can hurt us.

Of course, the personal balance sheet may also reveal we’re better off than we think. That’s a good thing. We may have saved more and have less debt that we assumed. Once we have all the numbers, add them up. Then, subtract all the liabilities from the assets. This number equals our net worth and our current reality. This process seems simple enough.

The next step is however a little more complex. It needs discussion and some analysis. The “how do you get there?”; that all important middle step is where the advisor with a wealth of experience can help. However, if we keep avoiding or skipping this first step, we’ll have a difficult time figuring out where we want to go, let alone how to get there!

So if you’d like help understanding where you are now, or working out how you get to where you want to be, please do contact us.

 

Financial freedom- Creating and maintaining the right investment strategy

Our life is an endless series of daily choices, and how we manage those choices determines the outcome of our life. We all want financial freedom, but how will we achieve it? Financial goal-setting is the key to building wealth.

There are always going to be bumps in the road on every journey, which is why it’s essential to be flexible enough to adjust your plans when the unexpected happens. Your wealth creation objectives need to be able to adapt to whatever’s going on in your life. Nothing should stand between you and your long-term goals.

Creating and maintaining the right investment strategy plays a vital role in helping to secure your financial future. Whether you are looking to invest for income, growth or both, we can provide you with professional expert advice to help you achieve your financial goals. So what do you need to consider?

Set a goal and start early

Short term, ultra-specific goals are generally very easy to achieve as they don’t really involve any planning, but longer-term goals on the other hand require you to actually plan out how you are going to achieve the goal. Remember that wealth creation is about creating a lifestyle of your choosing, and the earlier you start to invest, the sooner you can enjoy the benefits of compound growth working for you to build value and make your money work harder for you.

By taking the time to step into your future, you can look back and visualise what needs to happen today for you to enjoy the lifestyle you want tomorrow. Ask yourself these three questions to help you visualise your future needs: what do I have? What do I want? When do I want it?

Develop an investment habit

If you think that investing a few hundred pounds every month will offer little in return, you should change your mindset. To start your investment strategy, you should adopt a stable and organised investment routine that will help you achieve your goals. Compound growth is the central pillar of investing. It is why investing works so well over the long term.

The more you invest and the earlier you start will mean your investments have that much more time and potential to grow. By investing early and staying invested, you’ll also be able to take advantage of compound earnings. Making money on your money is the concept behind compounding. Compounding is when the money you earn from your investments is reinvested for the opportunity to earn even more. However, you need to keep in mind that while compounding can make an impact over many years, there may be periods where your money won’t grow.

Be consistent

Many people stop their investment planning particularly during market downturns, as we’ve seen in recent weeks. By doing this, they often miss out on opportunities to invest at lower prices. If you keep to your investment strategy and keep moving ahead consistently, this helps spread risk and enables you to grow your wealth for the long term through pound-cost averaging and careful asset allocation.

It’s important to remember that investing is an ongoing process, not a one-time activity. The right way to begin your investment strategy is by establishing goals that need to be achieved over the short, medium and long term. Secondly, it is necessary to assess your current position in the financial lifecycle. Thirdly, you must ascertain your risk profile, as that decides how much risk you should take while investing. This is particularly important as different financial objectives require different investments approaches.

Maintain a well-diversified portfolio with regular reviews

Regular reviews of your portfolio enable you to adjust your portfolio to meet your changing needs and risk appetite at different stages of your life and in different market conditions. This helps you keep up your investing momentum towards achieving your long-term financial goals. It’s also important not to put all your investment eggs into one basket.

Investing randomly into different asset classes without ascertaining their asset allocation, not following a disciplined approach to investing, exiting abruptly from an asset class and investing without a clear time horizon are some of the most apparent inconsistencies in any investment process.

Create the right investment strategy

We recognise that choosing how to invest your money can seem daunting. When it comes to planning for your future and that of your family, you’ll want to be sure that you have everything covered. We help our clients set goals and then create the right investment strategy to achieve them, whether it’s growing family wealth or leaving a legacy. We know everyone is unique and has different priorities. To discuss your future dreams, please contact us.

 

 

The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.

Avoiding hidden dangers in retirement

Make sure you don’t run out of money or face a reduced standard of living

Increasingly, more and more pensioners are keeping the bulk of their pension fund invested after they retire. This means they’re faced with two very different risks when deciding what to do with their savings in retirement in a world of ‘pension freedoms’. Since April 2015, people who reach retirement have had much greater flexibility over how they use their funds to pay for their later years.

A recent report [1] identified that many savers in retirement are either taking ‘too little’ risk (the ‘risk averse’ retiree) or taking ‘the wrong sort’ of risk (the ‘reckless’ retiree). Each of these approaches increases the danger of a saver either running out of money during their retirement or having to face a reduced standard of living.

The risk-averse retiree – how can you take too little risk?

An example of taking ‘too little’ risk is the saver who takes their tax-free cash at retirement and invests the rest in an ultra-low-risk investment such as a Cash ISA, believing this to be the safe approach. The report points out that ‘investing in retirement is still long-term investing’ and shows that decades of low-return saving can seriously damage the living standards of retirees.

It highlights the case of someone who retired ten years ago with an illustrative pension pot of £100,000 which they invested in cash. Assuming they withdrew money at £7,500 per year (in line with annuity rates at the time), they would now be down to £27,000 and likely to run out in around four years’ time, less than fifteen years into retirement. By contrast, if the same money had been invested in just UK shares, there would still be around £48,000 left in the pot, despite the 2008 stock market, and market volatility.

The reckless retiree – what is ‘the wrong sort’ of risk?

In an era of low interest rates, some retired people may be tempted to seek out more unusual forms of investment with apparently high rates of return but accompanied by much greater risk to their capital. Examples could include peer-to-peer lending, investment in aircraft leasing or even crypto currencies such as bitcoin.

Concentrated exposure to a single, potentially volatile investment can produce very poor outcomes, particularly if bad returns come early in retirement.

The rational retiree – what is the best way to handle risk in retirement?

Rather than invest in an ultra-low-risk way or chase individual high-risk investments, the report identifies a ‘third way’ of spreading risk across a range of assets, including company shares, bonds and property, both at home and abroad. This multi-asset approach can be expected to provide better returns over retirement than cautious investing in cash but also helps to smooth the ups and downs of individual investments.

The pension freedoms introduced in 2015 opened new possibilities for people in retirement, but they created new dangers as well. There is the danger of being too cautious and not making your money work hard enough – investing in retirement is still long-term investing. There is also the danger of taking the wrong sort of risk, seeking high returns but putting your capital at risk. Spreading money across a range of asset classes and in different markets at home and abroad is likely to deliver better returns in retirement – and a more sustainable income – than remaining in cash, without exposing you to the capital risks that can come from chasing after more exotic or risky types of investment.

Help to ensure your expectations are fulfilled

By understanding your retirement plans, we can help ensure your expectations are fulfilled by establishing tailored plans to preserve your capital, produce income and pass on wealth securely and efficiently. If you would like to review your current planning provision, please contact us – we look forward to hearing from you.

 

 

Source data

[1] Research report published 13 January 2018 by mutual insurer Royal London

Warnings

  •  The article above is provided for information only. It does not constitute advice, a personal recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make a decision.
  • These investments do not include the same security of capital which is afforded with a deposit account.  You may get back less than the amount invested.
  • The value of investments and income from them may go down.   You may not get back the original amount you invested
  • Assessing pension benefits early may impact on levels of retirement income and is not suitable for everyone.  You should seek advice to understand your options at retirement

 

Green and Pleasant Investing

There is a growing interest among clients in the concept of green and socially responsible investment. This has led to an increase in money managed under responsible investment strategies of 25% between 2014-16 according to the 2016 Global Sustainable Investment Review.

As individuals we can all express our views around sustainability via the ballot box; as investors we can express our preferences through participation in the global capital markets.

The main issue is how this can be done without compromising the desired investment outcomes. How can portfolios reduce their investments carbon footprint, ensure investments are not being made into companies associated with undesirable issues like arms tobacco child labour etc and still have a diversified portfolio proving the desired long-term returns?

There is a challenge in achieving the dual goal of sustainability and social consideration are met while building investment solutions aimed at growing wealth for the future.

For clients who request this type of investment, Carpenter Rees often incorporate a sustainable fund from Dimensional Fund Advisers into their portfolio’s.  The Dimensional solution to sustainable investment is to first focus on concentrating on the sources that generate high returns for clients while minimising costs. This is a philosophy that sits across all our model portfolios.

From this base, Dimensional then evaluate companies on a broad array of sustainability measures (such as carbon emissions, land use, toxic waste and water management). That means looking at companies across the whole portfolio and within individual sectors and ensuring that the worst offenders, based on a low sustainability score, are removed altogether. Those that are left are over weighted or under weighted based on how well their score ranks on a set of key sustainability criteria. This process ensures that diversification can be maintained while encouraging good behaviour.

The outcome from research shows that this enables a dramatic reduction in investment into Companies not addressing carbon emissions whilst maintaining diversification and ensuring the focus remains on the drivers of investment return.

In the socially responsible area of factory farming, cluster munitions, tobacco, and child labour there are clearer factors which excludes them. Companies deriving a significant proportion of their income from these areas or from gambling tobacco, or any of the other non-socially sustainable activities can be excluded altogether.

The two functions of return and sustainability need not be incompatible concepts. There is a systematic process to ensure diversification and targeting the sources of higher expected investment returns to ensure a green and pleasant investment portfolio.

 

Warning: The above information is provided for information only. It does not constitute investment advice, recommendation or an offer of any services and is not intended to provide a sufficient basis on which to make an investment decision.