Brexit and your Investments

With the referendum result now known, short-term panic in the financial markets is likely and this is something we alluded to in previous blogs. The risks of investing in the markets may seem material, but they are limited if your investments are robustly structured and well-diversified.

Advent of crowdfunding

One of the main innovations in both finance and technology over the past few years has been the advent of crowdfunding.

Crowdfunding is a way of raising finance by asking a large number of people each for a small amount of money. Financing a business, project or venture in the past typically involved asking a few people for large sums of money, but crowdfunding switches this idea around.

Politics and Investment

“It promises to be a nervous week for global markets as trader’s mull over the relative performances of the US presidential candidates. With no clear favourite, the US stock market is unlikely to find any clear direction until the winner is named.”

Does that sound familiar? That line from an article by the Reuters news agency was carried in newspapers around the world. Last week? Last month? No. In fact, that article is from September, 1988 and was about the Bush-Dukakis debates of that year.

As in the 2016 campaign, that election pitted two non-incumbents against each other as President Reagan completed his requisite two terms. As 1988 began, the New York Times/CBS News Poll talked of a political mood of “drift and uncertainty”.

This isn’t to imply that every campaign is the same, but it does serve as a reminder that markets regularly navigate political uncertainty. As for supposed “patterns” in election years, research shows 12-month results are strikingly similar to overall averages.

The US is not the only country holding national elections or referendums this year. Closer to home, we in the United Kingdom vote on June 23 in a referendum on whether Britain stays in the 28-member European Union. The remain campaign has warned voters of a possible recession should they opt for a “Brexit”.

So is Australia, where again, two party leaders with no experience of leading a campaign are vying for a lower house majority in a race which pollsters say is too close to call. Prime Minister Malcolm Turnbull, leading the Liberal National Coalition, and Bill Shorten, leading the opposition Labour Party, are standing on diametrically opposed platforms—the former promising corporate tax cuts and the latter more spending on health and education.

In the Philippines, a new president and self-declared “strongman”, Rodrigo Duterte, has come to power advocating extra-judicial killings to stamp out crime and drugs.

What do all these events mean for equity markets, for government bonds, for commodities and for currencies?

Those kinds of questions get a real workout at these times in the financial media, which inevitably finds a wide divergence of opinion from market observers.

Figure 1 shows the performance of the S&P 500 in 22US election years dating back to 1928.

Politics and investments

You can see in four of those years, the market fell. In the other 18 instances, it rose. But the truth is this sample size is too small to make any definitive conclusions. And, in any case, it is extremely hard to extract the political from other influences on markets.

For example, the worst annual market outcome during a US presidential year in this sample was 2008 when Barrack Obama defeated Republican nominee John McCain. But if you recall that was also the year of the collapse of Lehman Brothers and the global financial crisis.

Another down year for the market was 2000, the year Republican George W Bush defeated Democrat Al Gore in a tight contest. But that was also the year of the collapse of the bull market in technology stocks, the so-called “tech wreck”.

The point is that at any one time markets are being influenced by a myriad of signals and events— economic indicators, earnings news, technological change, trends in consumption and investment, regulatory and policy developments and geopolitical news, to name a few.

So even if you knew ahead of time the outcome of an election in one country, how would you know that events elsewhere would not take greater prominence for the markets?

Keep in mind, also, that elections have a limited range of possible outcomes—a clear win for candidate or party ‘A’ or ‘B’, or an inconclusive result. Markets will adjust ahead of time to deal with risks around these outcomes. And the degree to which they move on the result will often depend on how much it varies from the consensus expectation.

So while we have responsibilities as citizens to take an interest in elections, it is by no means clear that these events have long-term implications for our decisions as investors.

That is much more a matter of our own goals and risk appetites, our investment horizons, the structure of our portfolios, our degree of diversification and the costs we pay.

While many people will have a keen interest in political outcomes, academic studies show little pattern in actual market returns during election years.

The value of great financial planning

Pretty much everyone we deal with worries about time, money and the decisions they make. Proper financial planning is the key to resolving these issues. A number of clients we have been introduced to have, in the past, approached a financial planner for advice and been sold commission laden products. Fortunately, these days many financial planners provide good quality financial advice which doesn’t rely upon the sale of a financial product.

Many people don’t know what true financial planning is, or how this could help them. Rather than put together a few clever words to explain this, it’s better to consider the questions financial planning aims to answer. Here are a few examples:

  • Will we be able to maintain our standard of living?
  • When will I be able to retire or, more importantly, achieve financial freedom?
  • Will we need to downsize our property or sell other assets to live the life we want?
  • What happens if one or both of us require long-term care?
  • What is the position if one of us dies?
  • Can we help support our children and grandchildren?
  • What happens if there is a fall in investment returns?

Good financial planning helps to resolve many of these issues as it can provide clients with the confidence that they have the financial flexibility to survive whatever life and the markets throw at them.

It’s also comforting to know they have a trusted financial expert who understands both the client and their family’s circumstances and goals, who will review their finances over time and help them make the tough decisions they will almost certainly face. Lifetime cash flows, properly structured portfolios, tax efficiency and contingency planning are all areas which a good quality financial planner will use to help build a proper financial plan.

We look to build a long-term relationship from when you arrive with a bag full of the financial products that you have bought (or been sold) over the years to such time when these have all been analysed, improved upon if necessary and the initial financial plan implemented.  The annual review meeting will be more than a discussion about the last 12 months of market noise and will focus on whether you continue to be on the right track. Meeting your financial and lifestyle goals is what it’s all about and having the confidence to enjoy the opportunities that your wealth allows is what really matters.

The greatest wealth is your peace of mind and that’s what financial planning is really about.

Testing Market Timing

Equity markets tend to be cyclical. Positive periods are followed by negative periods, which are then followed by positive periods. Because of this, it is common when markets are falling to ask whether it is possible to time investment decisions to sell at the peaks and buy back at the troughs.

One way to do this might be to analyse forward-looking information such as economic and corporate data and make predictions about the direction of the markets. But it is hard to make predictions, especially about the future.

Another approach might be to look back at data from previous cycles and identify patterns that could be repeated going forward. Researchers at Dimensional Fund Advisors did exactly this, running almost 800 tests on data from 15 world equity markets to identify signals that might point to a change of market cycle and simulating the trading activity that might improve investment returns.

Most of the 800 tests failed and resulted in worse performance than would have been achieved by just going with the flow of the market. But some of the tests worked and produced positive performance results.

You might think this is good news for investors—that they can replicate the trading patterns suggested by the positive tests. Unfortunately, the number of positive results was no greater than one might expect with such a large number of tests.

As the researchers explain, the odds of one-person coin flipping 10 heads in a row are small. But if you asked 100 people to try, you would expect around five of them to be successful. The same proportion of the 800 market tests were positive and the research was unable to determine if any of them were more than just a sequence of lucky coin tosses.

The research concluded that, on average, investors are better off sticking to their long-term investment goals and riding out short-term market volatility, rather than trying to time their trading to coincide with the peaks and troughs of the market. This is also the approach we advocate at volatile times such as these.

Keep it in the family- Succession Planning

As a company we deal with many family businesses. One of the key benefits of a family business is the ability to ‘keep it in the family’ for future generations. This can however lead to a succession problem when the current generation is not letting go of the power. The next generation are preparing to take over the business for many years, whilst often the current generation has to come to terms with a number of issues of their own before they can let go of the reigns.  Two of the most common issues are: –

  1. Are the seniors financially secure independent of their stake in the family business? If not, they are unlikely to take a back seat.
  2. What will they do after they spending so much time running the family business which includes them enjoying the reputation and status this enables?

These issues cannot be solved simply by spending more time and cost preparing the next generation to take over. As much effort needs to be invested into helping the seniors face up to the financial and emotional challenges they will encounter in their next stage of life. In many cases family members will often find that the answers they need in succession planning are dependent upon what the other generation plan to do, such as: –

  • Seniors cannot feel they can plan for retirement until the next generation decide about whether they want a career in the family business. This sounds pretty obvious but many of the next generation feel that whilst they want to work in the business (it could be the easy option) they do not wish to run it.
  • The next generation wants to take over and has planned to do so, but the seniors are not ready to commit to succession and retirement planning.
  • The next generation are perhaps too young to make the choice to run the business but feel pressured to do so because that suits older parents.

Age and adult development add to the intergenerational dynamics of family businesses. Transitions tend to be smoother when the generations are what we would term as ‘In sync’ in that each generation is at the age and life stage to make the personal changes required for succession planning. The transition will be smoother when seniors aged between 60 and 70 are looking to structure retirement when the next generation are between the ages of 35 and 45 than it would be if the next generation was 19 to 25. The 19 to 25 year olds are exploring the options for the life they want so settling for a role on the family business may seem unattractive. When mid-life approaches, there is a stronger desire to make choices and have a more established life structure.

The transition of a family business is therefore far easier when the generations are in sync and when this is not the case, it may be better to take time over succession rather than put pressure on the generations. It is also very helpful if both generations discuss and understand the wishes of the other which are based around their life stage. These discussions must take place together and all must be frank and honest as to what they enjoy or dislike about their current stage of life and how they feel about the succession process.


Life with LISA

The new Lifetime ISA (which is the LISA I am referring to here) was introduced in the 2016 Budget and is not to be seen as the death of pensions as many people have announced.

Firstly, some facts about LISA:

  • Any UK individual aged 18 to 40 can open one from April 2017
  • The maximum contribution to LISA is £4,000 per annum, and the Government bonus will top this up by a maximum of £1,000, although the bonus will only be added until the age of 50
  • This £5,000 LISA amount is not subject to pension allowances , it is on top of the pension limits
  • Contributions into LISA will utilise part of the individual’s ISA allowance each year, although this is due to increase to £20,000 from April 2017
  • The underlying investment in LISA will grow tax free
  • The fund built up in a LISA can be accessed from age 60 with no penalty, or on purchase of a first home (subject to other restrictions)
  • Access to the funds at other times comes with a reclaim of the Government bonus, the growth on that bonus, and a 5 per cent further penalty
  • On death, the full LISA value can be inherited tax free by spouse/civil partner.

So, LISA sounds pretty fantastic, but why this isn’t the death of pensions?

  • Any UK individual from birth can have a pension, they must be between 18 and 40 for a LISA
  • Pensions give tax relief at the highest marginal rate of the individual (i.e. 20 per cent, 40 per cent or 45 per cent), whereas the Government bonus is a set amount starting at the equivalent basic rate for pensions
  • Pension tax relief is claimable up to age 75, the Government bonus is only claimable up to age 50
  • An individual can pay a maximum contribution of between £3,600 and £40,000 gross into a pension each tax year (including the tax relief); whereas LISA is only £5,000
  • Your employer cannot pay into your LISA so, for now at least, workplace pensions (as opposed to workplace LISAs) will still be around
  • National Insurance Contributions cannot be redirected to your LISA either, but they can if your employer offers Salary Exchange with their pension
  • The lifetime allowance on pensions is £1 million, which is a lot more than the majority of the UK working population will achieve.

In our opinion, whilst LISA does not signal the end of pensions, she could carve a good niche for herself as another planning tool for individuals, namely:

  • Those who have made the maximum tax relievable pension contribution
  • Those saving for their first home
  • Those who are likely to exceed the pensions lifetime allowance
  • Non-taxpayers who don’t qualify for other tax reliefs due to no, or very little, earnings
  • Non-earning spouses who have already utilised the £3,600 gross into pensions.

Whilst there are still some details that need to be confirmed before they become widely available next tax year, I am sure you will agree that LISA could become a household name.


Brexit: the financial implications

The outcome of the in/out EU referendum on 23 June is far from certain. The bookmakers still suggest that the in campaign should prove successful but, with weeks of political posturing ahead, we have been considering what the financial implications of a Brexit could be.

There have been a range of previous studies published on the subject with a wide variety of potential outcomes forecast. Capital Economics were commissioned by Woodford Investment Management to examine the United Kingdom’s relationship with Europe and the impact of Brexit on the British economy, and their report draws a measured and neutral conclusion. The report considers several of the most important elements of the Brexit debate including immigration, trade, financial services, regulation and the public sector.

Benefits for certain industries

Annual net migration from Europe has more than doubled since 2012, reaching 183,000 in March 2015 and boosting the workforce by around 0.5 per cent. Currently, labour movement within the EU is free, whereas leaving the EU could allow immigration policy to be restricted and focused on certain skill bases, which could benefit certain industries. Restriction of low-skilled worker immigration could, however, be detrimental to low-wage sectors such as agriculture, and could increase wage growth and inflation.

Free trade with EU countries would be impacted. Under the Lisbon Treaty, a country leaving the EU has two years to negotiate a withdrawal agreement and it’s very likely that a favourable trade agreement would be reached in a Brexit scenario, albeit with some potential additional costs to exporters. Indeed, the ability to negotiate our own trade agreements with other non-EU countries may be preferred to going via the bureaucratic processes of the EU, and this could potentially offset some of the additional cost of dealing with EU members.

Saving on red tape

The City’s position as a global financial hub is certainly helped by being part of the EU, allowing unfettered access of European markets to London-based firms. The City currently exports £19.4 billion of financial services to the EU and this would be significantly disrupted in the short term. Over the long term, the UK could broker deals with emerging markets to help allay this impact.

Saving on the red tape and regulation emanating out of Brussels is often cited as a potential positive of Brexit. This might, however, prove to be a smaller boost to productivity, as exporters will still need to comply in order to easily access the EU, and the UK may therefore decide to retain many EU rules.

Similarly, the UK’s significant £10 billion contribution could be saved through Brexit, but in reality, this saving may not be fully felt. The economic impact on other areas may offset some of this and indeed the Government may have additional costs in compensating certain sectors and regions that current receive EU subsidies.

Uncertainty will dominate

In summary, the effect on the UK economy of a Brexit may not prove to be too significant in the long term. However, much will depend on how an unprecedented exit is handled and how the UK can then independently negotiate with other parts of the world.

As the vote draws ever closer, it will be interesting to see whether economic impacts draw more headlines than the current focus on political issues. However, it is hard to currently see how the debate will be dragged too far away from the emotive issue of immigration.

Until the outcome is clear, uncertainty will dominate – something which will not be beneficial for financial markets. In the event of an out vote, the uncertainty will continue for some time, whereas a vote to remain in will provide some quicker clarity. This suggests that financial markets may continue to demonstrate volatility in the weeks ahead.


All figures sourced from Capital Economics report, published February 2016 –

Tales of the Unexpected

All investors know that risk and return are related – taking on more sensible risk should provide higher returns over time, however, there are no guarantees.

We, as advisers, will often talk to you, about target or expected returns from portfolios needed to deliver your financial goals, but these forward looking assumptions are best based on a term of 20 years or more.

It is almost impossible to make short-term guesses as to market returns over the next year or two, as that would be speculation. Putting it simply, the expected rate of return of an investor’s portfolio is the sum of the expected returns of each asset class in the portfolio weighted by the allocation made to it. It is not any form of guarantee or promise that this level of return will be delivered consistently, year on year.

The hard part is deciding what long-term returns are likely to be achieved but fortunately, investors can look at data going back to the beginning of the last century – more than 100 years’ worth of insight into the long-term investment returns of shares and bonds (fixed interest). This data shows that the long-term real returns for bonds as being 2 per cent and 5 per cent for equities (source: Credit Suisse Global Investment Returns Yearbook 2015).

Based upon these expected real rates of return, it is therefore reasonable to assume that financial planning decisions can be made using these numbers and any decisions made based upon returns materially higher than these should be viewed with caution. Sadly, it is not unusual to hear stories of less scrupulous advisers and product providers tempting investors with promises of spectacular investment returns. A good rule of thumb is that if it sounds too good to be true, then it probably is.

By and large, a return of 1 per cent to 2 per cent above inflation for bonds and 5 per cent to 6 per cent for equities is a sensible litmus test. Returns higher than these imply a material increase in the level of risk being taken. It is important to remember that nobody has a crystal ball and expected returns come with a high degree of uncertainty in the short-term, and maybe even longer. As financial planners, that is why we often run a number of return scenarios to establish what lower returns would mean to them and halving expected returns is not a bad starting point for a basic stress test.

As a result of this, please remember not to be too hard on your adviser because the portfolio has not delivered its expected return since you last met – it is not expected to!