Wednesday, 16 December 2015

Handling stock market swings.

What’s the best way to handle swings in stocks and retain value within an investment portfolio?

This may seem like a silly thing to think about now, but you don’t start planning for a bear market after it occurs. If you prepare yourself psychologically for any investment environment ahead of time it decreases the chances of blowing up your portfolio by making unforced errors at the wrong time. Over the summer there have been a number of warning signs appearing in equity markets.

You don’t need to get fancy with disaster hedges. High quality intermediate-term bonds have been your best option for preserving capital during an economic disaster consistently in every neative market year since 1928. They do their job as the portfolio anchor during periods of stress to give investors dry powder for rebalancing purposes to buy stocks on sale or for spending purposes so stocks don’t get sold after a crash has occurred.

Stocks can fall far and fast but also tend to recover very quickly. That’s why bailing out of stocks after they crash just compounds your problems if you held them through the crash in the first place. If you have lost money on a stock investment hold the stock unless there is a fundamental reason why that specific stock will not recover.

Balance is the key to surviving these periodic crashes. The Balanced Asset Class Index which included large caps, small caps, value stocks and bonds fared much better than the all-stock options and outperformed the other options over the full cycle 4 out of 5 times. The key is always having a diversified portfolio of investments.

The biggest thing is to have a plan and stick with it (everyone says this but it’s true). You won’t know the exact reasons ahead of time as to why the market will fall, but understand that you will see a handful of market crashes over your lifetime.

There’s no way you can avoid risk in the financial markets if you hope to beat inflation over the long-term and earn a respectable return on your portfolio. Stocks outperform bonds over longer cycles, which in turn outperform cash but bonds provide stability when you need it the most. Stocks wouldn’t offer a risk premium over bonds if they didn’t have these periodic large selloffs.

It’s also important to understand your ability and willingness to take risk. Allocate more money to less volatile investments if you can’t handle losses, but understand that you will likely have to save more to reach your financial goals if you carry a more risk averse portfolio.

And for those investors that are in or approaching retirement, don’t have money tied up in stocks that you’ll need to use for spending purposes within 5 years or so. It’s too much of a risk that stocks could take a hit right when you need to sell if you have an all-stock portfolio.

There really are no one size fits all answers to this problem as every investor’s tolerance for risk and investment strategy is different. Investing really is a balancing act that’s full of trade-offs. There is a constant tug of war going on inside our brains between fear and greed depending on the market environment. We want to be able to sidestep losses in the markets and only participate in the gains but it’s impossible to to invest in stocks and not experience periodic losses.

Pick your position and understand your emotional swings. Maintain a balance of assets within your portfolio and always keep an eye open for a new entry point if stock markets do become cheaper.

Tuesday, 1 December 2015

5 investment funds set to rally in Europe.

Last week’s news that the European Central Bank (ECB) wouldn’t pump a greater amount of money into the economy each month disappointed many investors and the UK FTSE dipped as a result.
However, ECB chief Mario Draghi did pledge to continue quantitative easing until March 2017 or beyond, which is at least six months longer than the original deadline, and cut the region’s deposit rate in an attempt to boost the eurozone’s recovery.

European equities have been one of the best performing asset classes in 2015 despite issues surrounding the Greek debt negotiations and many market commentators expect another strong year for the continent’s market in 2016.

Now the ECB has committed to its quantitative easing program, the odds are European equities will make further gains from here are five fund picks that should benefit from a liquidity-fuelled rally.

Threadneedle European Select
For investors looking to buy into a big brand fund, Threadneedle European Select could be set to benefit from an EU rally. This has long been one of the highest rated, core European equity funds. It is a concentrated portfolio of circa 40 mostly larger European companies, with strong competitive advantages, recurring revenues and consistent above average earnings growth.

Well recognised brands often fit this profile and constitute a large proportion of the portfolio. These include Unilever, whose diverse brands include Marmite, Wall’s ice cream, Persil and PG Tips; Richemont, whose luxury brands include Cartier, Jaeger-LeCoultre and Montblanc; and brewer Anheuser-Busch InBev which is in the midst of a mega merger with SABMiller. 

Neptune European Opportunities
The immediate market reaction following today’s ‘underwhelming’ ECB announcement is totally in keeping with recent investment behavior. By falling short of expectations, the market is highlighting an investor addiction to central bank asset purchases (QE), with stocks and bonds selling off aggressively and the euro appreciating. By increasing longer-dated interest rates, banks can command more margin on their loans, which acts as an incentive to extend more credit.

In a more profitable environment for banks we would recommend the Neptune European Opportunities fund, a strategy which is firmly overweight retail banking.

Edinburgh Partner European Opportunities Fund
If you assume that value stocks are going to be better than safer growth stocks, though that might not necessarily be the case, then Edinburgh Partners European Opportunities is our value option within Europe. It’s had a tough year so far, but it stands a good chance of it catching a rebound in sentiment.

Argonaut European Enhanced Income
The two main reasons I’ve chosen this fund are that bond yields are going to remain compressed, meaning equity income will remain in demand with bond yields so low. In addition, the fund hedges out currency and further stimulus is likely to keep the euro weak.

As the name suggests, the fund aims to achieve a high income yield (by writing covered call options) as well as some capital growth, and does this through a concentrated portfolio of 47 holdings.

Hansteen Holdings
You may choose to opt for a REIT to utilise the continuation of QE. We saw property prices remain strong in both the UK and US during their own period of QE, so with further stimulus in Europe, demand should be strong.  We prefer to target holdings with industrial and office exposure.

As such our preferred option would be Hansteen Holdings, which invests in both UK and continental European industrial property. The properties it holds (it currently has 538 in the portfolio) are chosen for a combination of strong occupancy rates and high yields, and the team finds a majority of these in Germany, the UK, Belgium and the Netherlands.

Monday, 16 November 2015

Overcoming Suspended Funds In Your Investment Portfolio

Overcoming Suspended Funds in your investment portfolio

I regularly take on the management of investment portfolios for clients, either where they have been disappointed by returns or let down by their existing advisers. Surprisingly often in the offshore market, an expats investment portfolio will contain a portion of their money tied up in suspended funds – usually sold by advisers for the commissions they generate. These funds have redemptions suspended, meaning that the money invested into them cannot be recovered at the current time and in most cases there are serious issues with the underlying assets within the fund meaning the money may never be returned or only a very small percentage of your initial investment will be returned.

In total over £4bn of savers’ money is tied up in funds that currently have a “closed” sign since 2009. The most common “suspended” funds I have found investors to hold are: Four Elements Apollo, Axiom Legal Financing fund, Centurion Defined Return , Life Settlements fund and Argent Fund, CF Arch Cru Investment and Diversified Funds, Connaught Series 1 Income, EEA Life Settlements Fund, Harlequin Property, LM Investment Management, Managing Partners Limited Traded Polices Fund, Mansion Student Accommodation, Strategic Growth, The Glanmore Property, and Quadris Fixed Rate Distribution. All of these funds currently prevent investors withdrawing their money.
Most of the funds above invest in specialist or obscure types of asset, such as “traded life insurance policies”, loans or in various types of property. The specialist assets in investment funds like this are often difficult to sell and difficult to value, however, they were all open ended funds meaning, in theory, investors had access as and when required. This causes problems if many investors want their money back at the same time as assets need to be sold off quickly, usually below value or withdrawals must be restricted.

Several funds above, including Managing Partners Traded Policies, Centurion Defined Return, Life Settlements and Argent and EEA Life Settlements ran into difficulty after investing in second-hand life insurance policies where the buyer receives the insurance payout when they original policyholder dies. Often sold as “low risk”, a combination of policyholders living longer than expected and an inability to sell the policies when investors in the funds wanted to cash in their holdings created major difficulties. Alternative assets held in the suspended funds above  range from student property (Mansion Student Accommodation) to forestry (Quadris Fixed Rate Distribution), and in Arch Cru’s case, a Greek shipping company. Often allegations or investigations concerning fraud led to the suspension. This is the case for Axiom Legal Financing Fund, LM Investments and Harlequin Property. Axiom Legal Financing fund lent money to law firms, while Connaught Income Fund Series 1 invested in firms making bridging loans.

Will clients ever get their money back from the investment?

One of the biggest difficulties with these funds is getting any information on the status of the funds and the assets underneath after the closure. Investors who have money tied up in these funds face wait to find out if they will have their money returned. Out of the funds above, just one has currently given investors an indication of when they will reopen the fund for redemptions. For investors in the Quadris Fixed Rate Distribution fund it looks even worse. The fund, which invests in “forestry growth cells”, could remain suspended until a rather ridiculous 2026 “or at the very latest 2032”.
Where there is no current repayment date, there is still a chance investors could see some money back from the investments at some point in the future, once the hard to sell assets have been liquidated, however, rarely will investors not surfer some form of cash loss on the redemption compared to their initial investments, purely due to the costs associated with liquidating these funds. For funds subject to criminal investigation like Axiom Legal Financing, LM Investments and Harlequin Property its unlikely investors will receive much, if anything, back at all.

These funds have things in common that you should look out for when making investment decisions in the future. They often promise consistent returns (often with an almost straight line on the performance graphs) and usually offer returns in excess of 10% per annum. The funds are often issued by “unknown” investment companies that run only one or two funds. These funds often hold very niche assets or very specialist assets.  All the funds above paid the advisers a commission on the sale of the fund into your portfolio. Ask your adviser if they are receiving a commission or speak with the fund directly .When a fund needs to pay an adviser to place business with them, there is often a reason why they cannot attract funds under management in the normal way. When a potential investment ticks all these boxes you should be extra careful.

How to deal with suspended funds in your portfolio.

There are instances where compensation has been paid to clients invested in suspended funds, in particular investors in the Strategic Growth Fund and Arch Cru Investment funds where mis-selling has been proven and compensation received but this is often difficult.

In the meantime, I would suggest that you instead focus on trying to generate real returns within the remaining liquid money in the portfolio – both to try and claw back some of the value tied up in your suspended funds but also to enable your investment account to begin growing again as it is supposed to do.

The key things when building a new portfolio will be to ensure all assets not currently suspended are invested into funds and assets that are run by large, well-funded institutions (the Fidelities and JPMorgans of the world) and that the funds hold real assets underneath (for example some funds and etf’s (exchange traded funds) track their index by buying option and futures rather than buying the actual underlying shares within that index). By buying funds underpinned by real assets you will participate in the movements of the prices, while retaining 100% liquidity at all times so that should you need to make any changes, you can.

A good mix of funds and assets should be added to the portfolio. ETF’s can be a good option to add a low cost layer to your portfolio. The key to a successful investment strategy is simple – buy high quality assets that produce income, diversify the assets you buy and take a long term view. If you do that you will not go too far wrong.

If you want to discuss your current suspended funds to pursue compensation or discuss your portfolio allocations you can contact me on

Wednesday, 11 November 2015

QROPS – The Definitive Guide

QROPS – The Definitive Guide (6th April 2016)

If you have a UK pension and plan to move abroad shortly or already live outside the UK then there is a good chance you have heard about or been approached about exploring a QROPS (Qualifying Recognised Overseas Pension Scheme). There is a lot of misinformation and outdated guidance on QROPS (especially since the significant recent changes to UK pension rules in April 2015), their comparisons to UK pensions and the benefits available under a QROPS.

The aim of this guide is to give you a full, clear and concise understanding of what QROPS is and how it compares to other options from an unbiased, independent viewpoint. It is vital that people do their own due diligence. Pensions are complex investments and in the offshore market in particular there are many advisers offering a QROPS to clients without having taken any UK pensions qualifications or understanding the suitability of an arrangement for a client’s circumstances. In many cases, especially since the changes in April 2015, people may now be better off with a UK or International SIPP rather than a QROPS.

What is a QROPS and what is a SIPP?

Qualifying Recognised Overseas Pension Scheme (QROPS)
This is an overseas pension scheme that HM Revenue & Customs (HMRC) recognizes as being eligible to receive transfers from registered UK pension schemes. This allows anyone with a UK pension who is living outside the UK or is intending to leave the UK to transfer their UK approved pension to an offshore jurisdiction without the deduction of UK tax. It cannot be used to transfer UK state pension benefits.

Self-Invested Personal Pension (SIPP)
This is the name given to a type of UK government-approved, UK based personal pension scheme, which allows individuals to make their own investment decisions from the full range of investments approved by HM Revenue and Customs (HMRC).

QROPS benefits

What are the benefits of moving a pension from the UK into a Qualifying Recognised Overseas Pension Scheme?

1.       Up to 30% tax free lump sum instead of 25% in the UK.

In the UK, when you begin to draw your pension you can take up to 25% of the value of your pension fund as a tax free lump sum payment. (Assuming the lifetime allowance, currently 1m, has not been exceeded). With a QROPS you can take up to 30% of the value of your pension as a tax free lump sum once you have been a non UK resident for 10 years (5 years if your pension was transferred to a QROPS before April 6th 2013).

2.       Pay tax in the country of your residency of choice

Pay less tax on your pension income. Most UK pensions are set up to pay pension income under the UK PAYE system where tax is automatically deducted before being paid, while you can elect to have this paid gross with HMRC it can be complicated. By transferring to a QROPS you can choose how, where and when you pay any income tax due on your pension. You may elect to have it taxed in your country of residence or in the QROPS jurisdiction itself where appropriate tax agreements exist to take advantage of lower tax rates.  

3.       Advantages for those with final salary schemes

A final salary scheme (or defined benefit scheme) are often associated with being generous and secure. There are, however, circumstances where you may wish to consider a transfer to a QROPS or alternative UK scheme.  Importantly: Final Salary transfers must be advised upon by a qualified professional holding the necessary UK Pension Transfer Qualifications and by a UK regulated firm holding the relevant license. Final salary pension transfers CANNOT be completed without a UK regulated firm being involved.

Reasons for consideration to transfer a final salary scheme into a QROPS include the risks of underfunded schemes not being able to pay out, many schemes are now sitting in an underfunded position with benefits being reduced year by year. The protection scheme only covers that 90% of your benefit will be protected with a cap of £32,761 per annum. 

If you have a big pension pot you can use QROPS as a way of passing down that wealth to your beneficiaries while avoiding Inheritance Tax.

Where you or your family are reliant on the income from a final salary scheme you may want to consider a transfer to an alternative scheme (SIPP or QROPS) to protect the income level you are receiving and the value of the pension fund itself.

4.       If you return to the UK only 90% of the pension income from a QROPS is liable for tax

Income from a QROPS is classed as income from a Foreign Pension Scheme which is taxable in the UK on 90% of the amount paid thus reducing UK tax bills in the event you return home.

5.       Test the pension value against the falling Lifetime Allowance now

The lifetime allowance for UK pensions states the maximum value of a pension fund before additional taxes become due. This has been reduced year on year since 2011 from a high of 1.8m to only 1m now and 750,000 from April 2017. If the lifetime allowance is breeched any excess is taxed at 55% when taken as a lump sum or 25% when taken as income with additional income tax also applied.

When transferring a UK Pension to a QROPS its value is tested against the lifetime allowance at the point of transfer.  Any future growth is then ireelevent for testing against the lifetime allowance and the pension can grow to any amount without incurring punitive UK taxes.  In particular it should be noted that as the LTA keeps on dropping each tax year, anyone with a pension close to the LTA or who think they may exceed the amount of 1m before retirement should take the opportunity to review their postion immediately.  If a transfer to a QROPS today is already above the LTA and there is no protection already applied to the pension any amount above 1m (for the 2016/2017 tax yr) will be subject to tax at 25% immediately.

6.       Tax Free Growth

Once your pension funds have been transferred into the QROPS scheme they will continue to benefit from tax free growth on any capital gains and income received within the pension.

7.        No 45% Income Tax charge on death

When a pension does not exceed the lifetime allowance and the pension holder is under 75 the value of any pension funds can be passed to beneficiaries without tax.

After age 75 pension benefits are subject to a 45% tax charge if paid as a lump sum to a beneficiary with this value likely to be amended to the marginal rate of tax payable by the nominated beneficiary from April 6th 2016. If paid as an income then benefits are free from tax other than income tax due at the beneficiaries marginal rates.

With a QROPS there will be NO income tax charge imposed on the payment of a lump sum to the member’s beneficiaries on death as long as the QROPS pension holder has been non-resident for at least 5 complete tax years. The beneficiaries have any number of options to choose from including lump sum payments, taking income or remaining invested.

In the UK, the new pension rules from April 6th 2015 have changed the death benefits on UK pensions. In summary, they are now:

Benefit type
Payment made on or after 6 April 2015
Uncrystallised, member dies before age 75
The beneficiary can take a lump sum up to the limit of the deceased’s remaining lifetime allowance, paid tax free, or take tax free income from flexi-access drawdown, or buy an annuity with payments paid tax-free.
Uncrystallised, member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%
Crystallised (drawdown), member dies before age 75
The beneficiary can take income from flexi-access drawdown tax free, or buy an annuity, which will be paid tax free, or take a tax-free lump sum.
Crystallised (drawdown), member dies on or after age 75
The beneficiary can take income from flexi-access drawdown taxed at their marginal rate, or buy an annuity taxed at their marginal rate, or take a lump sum taxed at 45%

8.       Exchange rate risk

One of the big factors when living abroad can be the effect currency fluctuations can have on the value of your savings, investments and income and pensions are no different. UK pensions will be based in British Pounds – moving to a QROPS can allow you to hold alternative currencies within your pension to help reduce the effect of currency swings impacting your standards of living. Take the GBP / EURO rate over the last 10 years. If you had a pension paying 1,000 per month you would have seen your spending power reduced from 2005 to 2009 by 40% before rebounding back to where it started 10 years ago. By using a QROPS you can help alleviate currency risk by holding a mixture of currencies and using EURO denominated assets to produce the income in your country of residence.

9.        Portability & flexibility

Expats often find themselves requiring the flexibility to adapt to changes in their lives more often than someone who is based in the UK. UK pensions are structured for those people living and working in the UK – which is a very sensible approach!

This does mean that our needs as expats are often overlooked. QROPS are specifically designed for those with UK pensions that live abroad. They allow you to take your pension anywhere in the world while still providing the flexibility to manage the pension assets you have built up in a way that suits you. Most QROPS providers can also offer ransfers between different jurisdiction and often between SIPPS and QROPS themselves ensuring you can adapt to changes in your life and changes made by the UK government in the future.

10.    Benefit from Worldwide investment options

A QROPS can hold a huge range of investment assets. As well as including traditional assets such as stocks, shares and bonds they can also hold alternative assets such as hedge funds, cash, structured products, life insurance, physical commercial property, art, wine and classic cars should you so wish. Investments can also be made in multiple currencies without restrictions.

11.   Consolidation

Many clients have worked at more than one company during their working life and as such have often accumulated multiple pensions. Transferring into a QROPS can be a good way to consolidate all your existing pensions into one place to ease administration in the future. You will normally have online access to your pensions allowing you to clearly see the current status.

12.   Securing a spouses pensions

Where you have a final salary scheme or a scheme with a tied annuity rate you may find a QROPS can offer much better protection to you spouses income levels. A spouse’s pension will often only be 50% of the income received while the main pension holder is alive. By transferring to a QROPS that income can remain at the 100% rate for the spouse after the scheme member’s death. 

13.   Pension Income Tax Advantages

In the UK, the income received form a pension is taxable at the recipient’s highest marginal rate (up to 45%). For an expat or internationally mobile client, using a QROPS can allow you to combine the use of low tax rates in other countries and / or jurisdictions to pay significantly less tax on their pension income. By taking advantage of the new flexibility rules this gives clients the greatest possible chance of receiving their pensions free of tax that at any other time previously.

14.   Specialist advice on your pension assets

Someone’s pension can often be one of their largest financial assets. It makes natural sense to move the assets into a scheme where you can continue to receive sound advice on changes to legislation and understand how, when and why your pension is growing. Transferring into a QROPS or SIPP can help consolidate all your advice and focus on creating the pension scheme that works the way you want it to.

15.   Clean Break from the UK (particularly for IHT purposes).

By using a QROPS you move your UK based pension assets outside of the UK thus creating more of a clean break when it comes to working out domicile for Inheritance tax purposes.

16.   Taking retirement early from a final salary scheme.

Usually a final salary scheme will have quite severe reductions in the benefits paid to a scheme member when they wish to take benefits before the normal scheme retirement date.
Using a QROPS can help you crystalize a transfer value from the scheme now which can allow you to take your retirement early without being detrimental to your income levels or the tax free cash you expect to receive.

17.   Getting away from UK legislation

The UK government claims it is not looking at pensions as a way of raising tax; however, many of the moves made so far have been contrary to that fact. We have seen the lifetime allowance almost halved from 1.8m to 1m and the amount of money that can be added into pensions without being taxable reduced from over 250k to less than 50k over the last 6 years. Moving to a QROPS ensures that further pension changes will not have a negative impact on your pensions and allow you peace of mind to plan clearly for the future.  

18.   Good for a divorce

QROPS cannot have a pension sharing order attached to them in the event of a divorce settlement. Therefore, should you get divorced at some point, your spouse will have no rights to any benefits occurring under the QROPS scheme and your pension benefits will be protected.

QROPS vs SIPP or other UK pension

There were huge changes made to the way pensions work in the UK that came into effect from the 6th April 2016. This introduced full flexibility to schemes to pay out income, removed the requiredment to buy an annuity and the removal of the 55% death tax. These changes have removed some of the appeal that QROPS enjoyed previously, however, as shown above there are still many reasons why QROPS can be a good choice over a SIPP.

A QROPS and a SIPP are now more similar than ever, although for those living abroad a QROPS can still offer distinct advantages over a SIPP.

The table below shows the key differences that now exist between a QROPS and a SIPP to help you work out which is best for your circumstances. 

QROPS vs SIPP: General

Full name
Qualifying Recognised Overseas Pension Scheme
Self-Invested Personal Pension
A tax advantageous non UK jurisdiction
UK based 
Year introduced
Country of residence for qualification
No requirement to buy an annuity
No requirement to buy an annuity
Depends on Trustee
Depends on Trustee – usually slightly cheaper than QROPS
What if you return to the UK?
Depends how long you have been out of UK. Will usually fall back under UK rules but retaining some tax advantages
No changes

QROPS vs SIPP: Income and Lump Sum options

Before retirement
Up to 30% tax free pension commencement lump sum from age 55 (and in some cases as early as 50). Tax may be due in the country of residence.
25% lump sum free from UK tax after age 55. Tax may be due in the country of residence.
Before age 75
Flexible Income drawdown
Flexible Income Drawdown
After age 75
Flexible Income draw-down continues
Some policies may still force annuity purchase otherwise drawdown
Income tax
Flexible. Can choose to be liable for tax in country of residence or UK or QROPS jurisdiction where double tax agreements are in place
Tax will either be due in UK or country of residence depending on tax agreements in place.

QROPS vs SIPP: What happens on death

Inheritance tax
Not subject to UK inheritance tax (IHT)
No penalty
45% tax charge if taken as lump sum after age 75.

Key considerations:

-          How long will you be staying out of the UK? If less than 5 years = SIPP

-          How big is the pension scheme? Generally the bigger it is the more valuable a QROPS becomes

-          Do you want to protect income or pension value benefits of the scheme for your spouse / family members? If so, usually a QROPS

-          Remember, not all advisers offshore are available to advise on a SIPP and not all advisers in the UK are able to advise on a QROPS! So make sure you speak to someone who is qualified to give advice on UK pensions. Final salary transfers MUST be dealt with by a UK regulated firm.

Get unbiased advice on your money 

Monday, 26 October 2015

Using Bond Ladders for Income

Using Bond Ladders for Income

Bond ladders are just one of many options for investors looking for predictable income. Like all these options, bond ladders have their advantages and disadvantages, but many investors decide to build a bond ladder because it can help manage the risks of changing interest rates and customise a stream of income, without ongoing management fees.

Building a bond ladder that diversifies across a number of bonds that mature at different intervals has the potential to decrease reinvestment risk. As yields and interest rates increase and decrease, a ladder may provide an advantage allowing you to adapt to changes with small parts of your portfolio instead of having to commit all of it at a single time.

Bond ladder considerations
While a bond ladder may help you to manage interest rate and reinvestment risk to some extent, there are six important guidelines to consider to make sure you are diversified, to protect yourself from undue credit risk or both.

1. Hold bonds until they reach maturity.
It’s important that you have enough money set aside to meet your short-term needs and deal with emergencies. Many of the benefits of bond ladders—such as an income plan and managing interest rate and credit risk—are based on the idea that you keep your bonds in your portfolio until they mature. If you sell early—either because you need cash or you change your investment plans—you will be exposed to additional risks including the risks of loss or decreased yield from your ladder.

2. How many issuers might you need to manage the risk of default?
This isn’t a hard-and-fast rule, but because bonds generally must be purchased in minimum denominations (often €1,000). €20,000 or more is often required to achieve a degree of diversification across a broad range of different issuers in different sectors.

3. Build your ladder with high-credit-quality bonds.
Because the purpose of a bond ladder is to provide predictable income over a long period of time, taking excessive amounts of risk probably doesn’t make sense. So you may want to consider only higher-quality bonds.

4. Avoid the highest-yielding bonds at any given credit rating.
You may feel tempted to choose the highest-yielding bonds for whatever credit rating you have chosen, figuring they represent a bargain—more yield for the same amount of risk.
Resist that temptation. You need to understand why a bond is offering a higher yield. An unusually high yield relative to other bonds with the same rating is often an indication that the market is anticipating a downgrade or perceives that bond to have more risk than the others and therefore has traded the bond’s price down (thereby increasing its yield).

5. Keep callable bonds out of your ladder.
Part of the beauty of a bond ladder is the scheduled cash flow; you know when the bonds will mature, when the interest will be paid and you know how much you will need to reinvest. But when a bond is called prior to maturity, its interest payments cease and the principal is returned as of the call date—altering both your cash flow schedule and the schedule of principal coming due.

6. Think about time and frequency.
Another important feature of a bond ladder is the total length of time the ladder will cover and the number of “rungs,” or how often the bonds in the ladder are scheduled to mature, returning your principal. A ladder with more rungs will require a larger investment but will provide a greater range of maturities, and if you choose to reinvest, this means you will have more opportunities to gain exposure to future interest rate environments.

Friday, 2 October 2015

How to invest like Warren Buffett

Investors have long praised Warren Buffett’s ability to pick which companies to invest in. Lauded for consistently following value investing principles, Buffett has accumulated a fortune of over $60 billion dollars over the decades. He has resisted the temptations associated with investing in the “next big thing”, and has also used his immense wealth for good by contributing to charities.

Understanding Warren Buffet starts with analyzing the investment philosophy of the company he is most closely associated with: Berkshire Hathaway. The company has a long-held and public strategy when it comes to acquiring shares: the company should have consistent earning power, good return on equity, capable management, and be sensibly-priced.

Buffett belongs to the value investing school, popularized by Benjamin Graham (whose book The Intelligent Investor is well worth a read for anyone looking to emulate Buffets’ investment style). Rather than focusing on technical indicators, such as moving averages, volume or momentum indicators, value investing looks at the intrinsic worth of a share. Determining intrinsic worth is an exercise in understanding a company’s financials, especially official documents such as earnings and income statements.

How has the company performed? Companies that have been providing a positive and acceptable return on equity (ROE) for many years are more desirable than companies that have only had a short period of solid returns. The longer the number of years of good returns, the better potential for investment.

How much debt does the company have? Having a large ratio of debt to equity should raise a red flag because more of a company’s earnings are going to go toward servicing debt, especially if growth is only coming from adding on more debt.

How are profit margins? Buffett looks for companies that have a good profit margin, especially if profit margins are growing. As is the case with ROE, examine the profit margin over several years to discount short-term trends.

How unique are the products sold by the company? Buffett considers companies that produce products that can easily be substituted to be riskier than companies that provide more unique offerings. For example, an oil company’s product – oil – is not all that unique because clients can buy oil from any number of other competitors. However, if the company has access to a more desirable grade of oil – one that can be refined easily – then that might be an investment worth looking at.
How much of a discount are shares trading at? This is the crux of value investing: finding companies that have good fundamentals, but are trading below where they should be. The greater the discount, the more room for profitability.

Buffett is also known as a buy-and-hold investor. He is not interested in selling stock in the near-term to realize capital gains; rather, he chooses stocks that he thinks offer good prospects for long-term growth. This leads him to move focus away from what others are doing, and instead look at whether the company is in the position to make money.

From being a failing textile business, Berkshire Hathaway is now a multinational conglomerate holding company that oversees and manages a number of subsidiary companies. Among others, the company wholly owns GEICO, BNSF, Lubrizol, Dairy Queen, Fruit of the Loom, Helzberg Diamonds and NetJets, owns half of Heinz and an undisclosed percentage of Mars Inc. It has significant minority holdings in American Express, The Coca-Cola Company, Wells Fargo, IBM and Restaurant Brands International. Berkshire Hathaway averaged an annual growth in book value of 19.7% to its shareholders for the last 49 years. 

Nobody said it would be easy but everyone has to start somewhere! Investment carries risk, seek advice of a professional when required. 

Thursday, 10 September 2015

How China’s Yuan Devaluation Affects Us All

After China unexpectedly devalued its currency last week, City analysts shrugged and said: “It’s August.” But China’s move represented the largest yuan depreciation for 20 years; and the ripples may yet be felt thousands of miles away. So what difference will it make to the rest of the world?

1. China’s devaluation may be best seen as a distress signal from Beijing – in which case the world’s second-largest economy may be far weaker than official figures suggests. If its economy really is much weaker, it would be alarming for any company hoping to export to China. China will remain a vast market; but it may not be quite such a one-way bet as some analysts have suggested.

2. China has been trying to shift from being a vast factory producing cut-price consumer goods for the rest of the world. With Chinese wages rising, making its products less competitive China’s Asian rivals, such as Indonesia and South Korea, will compete even harder in response; and the result may be a reduction in price of Chinese-made goods.

3. China’s demand for natural resources has been supporting the price of oil in recent years. So fears that China’s economy is in trouble tend to undermine oil prices – and that probably means cheaper petrol. In coming months, weak Chinese demand could force down the cost of many commodities, from oil to iron ore.

4. Central bankers in the US and the UK have been issuing warnings for months that, with growth strengthening, they are preparing to start pushing up interest rates, however, if the cheaper yuan cuts the price of imports, this will undermine inflation, which is already low; and could delay a rate rise. A renewed bout of market turbulence as global investors assess the implications of China’s decision could have the same effect.

5. In the short term, lower-than-expected borrowing costs will benefit indebted consumers in the west. But some believe China’s decision is evidence of a lack of demand in the global economy, which will unleash deflation and undermine consumer spending. If a fresh downturn does come, central bankers have little ammunition left to tackle it, since interest rates in the US, the UK and Europe are already on the floor.

6. Australia has experienced an impressive economic boom in recent years on the back of selling natural resources, including coal and iron ore, to its Asian neighbors, and China accounts for more than a quarter of its exports. So weakness in the Chinese economy is bad news for Australia.

7. If the Chinese devaluation does bring deflation to the global economy, the most vulnerable countries will be those that are heavily in debt – because while wages and profits fall in a deflationary period, the value of debts remains fixed, making them harder to service (to pay interest on). Greece, for example, is already suffering deflation after repeated cuts in wages and benefits as the government tries to balance the books, and if it worsens, that will only make its huge debts even harder to service.

8. Beijing’s move was offered as part of measures to open up its financial system, and allow foreign exchange markets more say over the value of the yuan. However, if Beijing allows the yuan to decline further it could cause a currency war, in which the world’s big trading blocs face off.

For now, a 4% devaluation in the yuan is more of a hairline crack in the world economic order than a seismic shift; but policymakers will be weighing up its consequences long after they return from their summer break.

Saturday, 29 August 2015

Building a retirement portfolio

Retirement is something everyone should be considering no matter what age they are. But how do you begin to build a retirement portfolio? These 6 steps should help you get started.

1. Figure out what you need. This is particularly important when you reach the age of 50 – by this point you should have a good idea about what your retirement costs will be on a monthly basis and therefore how much money you will need to maintain your desired lifestyle. If you are unsure a good rule of thumb is a minimum requirement of 50% of your current income. If you are under 50 you should be aiming to save around 20% of your monthly income to provide for your retirement.

2. Save more, and extend your working life. The biggest lever you can use to bulletproof you retirement portfolio is to put more money into it, which you can do by saving more. And the simplest way to do that is to work longer. The reality is that most people will not have enough money saved in their retirement fund at 55 / 60 to be able to retire comfortably. By working to 65 you may be able to add a significant portion of savings to help with extra income production on retirement.

3. Diversify. If you want to lower the volatility of your portfolio, diversify within and among asset classes. That means owning funds instead of individual stocks, and owning multiple asset classes instead of just one: a portfolio of emerging markets stock and bond funds, plus domestic stock and bond funds. As always, keep your fees low.

Projected returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 4.5 percent and 8.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of a full 18 percent. Bonds expected returns are centered in the 1.5 percent to 4 percent range. The translation: You'll probably earn nearly as high returns with a balanced portfolio, but you'll face much less volatility.

4. Design your asset allocation with an eye to taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You'll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you rebalance—in your retirement portfolio. But don't make your portfolio decisions around your tax savings; maximizing your investment returns and keeping your principal safe is a higher priority. If you are an expat there are several ways to mitigate taxes on investments and future retirement income.

5. Keep a healthy portion of equities. Don't make the mistake of getting rid of all of your equities and shifting into money market funds because you think they are safer. We recommend that in retirement you have at least a 20 percent allocation to equities, often we recommend closer to 50% depending on an individual’s attitude to risk.

6. Relax and set yourself up for automatic rebalancing. You'll be retired for a long time, so in order for your money to keep working at the highest possible pace, you need to continue selling high and buying low, which is what rebalancing automatically does for you. This can be achieved by purchasing appropriate investment funds.

As always, seek advice of a professional where required.

Tuesday, 4 August 2015

How to profit from volatility

Relentless easy monetary policies and short-term bank rates at virtually 0% have kept market volatilities at remarkably low levels for the past few years. Preparing for the next spike may not be such a bad idea, as the effects of central banking measures start to wane.

The financial world has entered unchartered waters in the past years with high levels of monetary easing skewing markets and volatility alike. More precisely, the ongoing central bank interventions, a significant belief in quantitative easing and a lack of alternatives have significantly influenced asset flows.

More than an estimated 80% of global equity market capitalisation is located in countries in which central banks have kept interest rates at virtually 0% or where they have even slipped into negative territory. A lot of funds have been rotating into equities, driving up indices with only very moderate and shallow pull-backs meaning equity volatility has been reigned in.

Fear-indicators of equity risk such as the VIX, which measures the implied volatility of S&P 500 index options, have been moving through a long trough ever since the last spike in 2011. Back then, a possible Greek default had unleashed a market correction and provoked a sudden spike in volatility. But ever since ECB head Mario Draghi’s infamous promise to “do whatever it takes” to save the euro, things have clearly changed. Due to the lack of alternatives to equities, investors have possibly become somewhat complacent. 

Demand from institutional investors for some form of protection against a possible return of volatility has picked up. ETFs that track the VIX are one of several possibilities. These funds typically move in the opposite direction to the broader market indices and are therefore used primarily by investors who want to capitalise on volatility spikes following sharp market pullbacks.

However, timing is critical, as these instruments lose with every rollover during periods of stable volatility. Volatility ETFs, which invest in volatility futures, are often being seen as a hedge tool when volatility spikes, but the opposite can be true. That is because of ‘contango’, where by contracts further along the futures curve are more expensive than current month contracts. That in turn would not always lead to the desired result, since timing can work against them, which is precisely why some investors are opting for different insurance methods. 

Current low volatility levels offer a cheap opportunity to buy some portfolio insurance by way of purchasing put options. Being a little on the safer side may not be such a bad idea at this point as equity valuations, although not at extremes, have reached a point where any bad news could provoke a small market correction.

Other clients, however, are taking on more risk and are also more willing to sit through short-term turbulences as a trade-off for higher long term performance. We are advising clients to take some risk off the table and to consider alternatives such as real estate, absolute return funds or long/short funds within both equity and fixed income.

That is not to say that volatility may not spike at some point in the future as there are possible triggers such as an unexpected event on the geopolitical landscape or a worsening of the Greek debt situation. How far down the road a serious sell-off may actually lie, obviously remains to be seen – this is why it may not be such a bad time to start thinking about some form of protection against any return of volatility. As always clients should seek advice on the suitability of an investment for their own circumstances where appropriate from a professional advisor.

Wednesday, 29 July 2015

Managing Debt

Debt, even a little, can cause lots of problems both financially and emotionally but there are steps you can take to try and reduce or even eliminate debt from your life. If you just have a little debt, keep up your payments and make sure it doesn’t get out of control. If you have a lot of debt you must put more effort into paying it off.

The first thing to do is list all your debts including who do you owe, total amount of the debt, interest rate, monthly payment, and payment due dates. Refer back to your debt list often, especially as you pay bills. Update your list every few months as the amount of your debt changes.

Late payments make it harder to pay off your debt since you’ll have to pay a late fee. Miss two payments in a row and your interest rate and finance charges will usually increase. Use a diary system on your computer or smartphone and an alert to remind you several days before your payment is due. If you miss a payment, don’t wait until the next due date to send your payment. Instead, send your payment as soon as you remember to.

At least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt. But, it keeps your debt from growing. When you miss payments, it gets harder to catch up and eventually your accounts could go into default.
If you cannot afford to make all of your payments then speak to the people or companies that you owe money to. Explain your situation and try to negotiate a new payment plan or ask them to reduce the interest being charged.

Decide which debts to pay off first. Credit card debt is the best candidate for priority repayment. Of all your credit cards, the one with the highest interest rate usually gets priority because it's costing the most money. Use your debt list to prioritise your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first. You may want to consider consolidating your debts into a more affordable payment.

Budget well and use an emergency fund to fall back on. Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while. First, work toward creating a small emergency fund. Once you have that, make it your goal to create a bigger fund, like six months of living expenses.

Keeping a budget helps ensure you have enough money to cover all your expenses each month. Plan far enough in advance and you can take early action if it looks like you won't have enough money for your bills this month by speaking to the creditor in advance of missing a payment. A budget also helps you plan to spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.

Try looking for additional sources of income. If your debt payments are unmanageable then either reduce your regular expenditure or try to find a little extra work, a part time job, online work or sell some belongings to help pay off that debt. In very extreme circumstances it may be even be best to clear the decks and start again with an insolvency order.

Doing nothing is not the answer to becoming debt free. Follow the advice above and hopefully you should start to see things getting brighter.

Friday, 10 July 2015

QROPS vs SIPP - Updated July 2015

As a follow up to my previous post regarding the new UK pension rules we are now in a position to understand exactly how QROPS will change to fit with the new UK rules so I have updated this accordingly:

As you are probably aware there have been a lot of changes to the UK pensions legislation throughout 2014/2015. The proposed changes to UK pensions and changes already made, such as removing the requirement to buy an annuity and the removal of the 55% "death tax", means that QROPS (Qualifying recognized overseas pension scheme) could have lost some of their appeal for clients compared to a UK based pension such as a SIPP (Self invested personal pension).

A QROPS and a SIPP are very similar, even more so than ever, however, for people residing outside the UK, in particular those intending not to return and expats with large (£1m +) UK pensions, a QROPS can still offer some advantages over a SIPP.

Below are the key questions that a client should consider when discussing their UK pensions and particularly when deciding between QROPS and SIPPs. It should help you to understand the key differences in a simple format.

As always, pensions are a very complex area and before you make a decision about any financial product you should seek independent advice. Ideally try to find an adviser who is FCA regulated in the UK and actually able to recommend a SIPP and give regulated advice on final salary / defined benefit schemes (these transfers can only be signed off by a suitably qualified FCA regulated pensions expert).

What Benefit applies to you?New Rule – Contact us for more information
PENSION FUND FLEXIBILITY – As of 6th April 2015, if you are aged 55 or more, you can have 100% access to your investment based pension (Income taxes will apply in the country you are resident in) . This does not apply to Defined Benefit schemes.Deminimus limit removed / Trivial commutation is no longer necessary for UK pensions.

INCOME INCREASE - If you are seeking a tax efficient high income as against large lump sum then this is possible, although beware having no fund left!Unlimited income options available once you are aged 55 or over, taxable in the UK or under the DTT with the country you are in.

IS THERE A 45% or 55% DEATH TAX in the UK under 75? - From 6th April 2015, the ANSWER IS "NO", if upon death your investment based pension funds are passed to anyone’s pension; there is no charge, no age limit, and is irrespective of whether you have taken any benefits. If when you die you are UNDER 75, the beneficiaries can choose to take the entire fund as a lump sum tax free in the UK.

Although QROPS are similar, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries!
There is a 100% return of a DC fund, free of any UK tax as long as the fund is not distributed before 6 April 2015.

This will apply to someone dying before the 6 April 2015 as long as the fund remains untouched until after that date. If aged over 74 see RULE BELOW.

Does not include public and private final salary (defined benefit) schemes.

IS THERE A 45% DEATH TAX CHARGE in the UK over age 74? - The ANSWER IS "NO", if your investment based pension funds are passed to anyone’s pension, irrespective of whether you have taken any benefits. We are finding people are being mis-led about this option!

QROPS offer the same flexibility and options, but QROPS allow a full transfer out without applying any 45% tax charge, BUT the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries!
If you are 75 or over when you die, there is a 100% transfer of a DC fund, free of any UK tax, to any other qualifying pension of another individual.

The beneficiaries can choose to take the entire fund as a lump sum, but until 5th April 2016, a 45% tax charge will apply.

From 6th April 2016, the 45% tax charge is removed and the recipient / beneficiaries are charged at their own rate of income tax.

Does not include public and private final salary (defined benefit) schemes.

QROPS vs SIPPs at point of death - Up to the age of 75 upon death, there are no longer any advantages for a QROPS over a SIPP.

This assumes the fund is being distributed after 6 April 2015.

If death occurs at age 75 or older then QROPS rules are more flexible, and better in some jurisdiction but not all.
QROPs can provide the same full access to 100% of the pension fund if the jurisdiction that the QROPs is registered and held in changes the pension legislation in that jurisdiction to match the UK’s.

QROPS rules are better in some jurisdiction where there is reduced Income Tax and a DTT for the beneficiaries.

So, the main issue is that distributions from QROPS may not be recognised as tax free in the country of your beneficiaries and become taxed at a higher rate than if it had been left in the UK. BEWARE!

INCOME TAX EFFICIENCY (QROPS vs SIPPs) – By combining your personal income allowance (still available if you are an expat) of over £10,000, along with 25% tax free cash means that consideration should be given to taking funds annually utilising maximum UK zero tax income level and segments of 25% tax free cash.

Taking into account offshore QROPS trustee and investment charges, many people will be better off with a SIPP from the UK and have greater flexibility, matching that of QROPS up to age 75.

Contact us to see how this benefits you and for a personal calculation.
The 55% capital charge on “excess” pension entitlements has been removed from April 2015. Individuals will be given the right to choose which form of pension they want, and different rules apply to the options selected.

You will be able to choose between applying to take "segments" of 25% tax free cash with further income taxed at your marginal rate each year,
or, taking the full fund with an income tax charge on 75% of the fund at highest assessed marginal UK rates.

Both tier options would currently include any annual 0% personal allowance, even for expats, making it very competitive form of taking income for most people.

FULL LIFETIME PENSION FUND ACCESS - From 6 April 2015, people over 55 will have full access to their DC and private pension fund, although it will be part taxed, as detailed above in the previous RULE "Lump sum access".Income tax on any funds taken in excess of the tax free limit will apply in the country that you are resident in.
PENSION TRANSFERS - Funded Private and Public final salary (defined benefit) schemes can continue to be transferred to take advantage of the new rules. Unfunded schemes cannot be transferred.Any transfer of one of these pension schemes can only be done if it is advised and signed off by a G60 / AF3 qualified individual who also is currently regulated by the UK Financial Conduct Authority.
UK PENSIONS versus QROPS – Initial calculations show that UK SIPPS are likely to become a better solution than QROPS for anyone with funds of less than £70,000 and who have tax rates in their home country of 5% or more. Double Tax Treaties for your home country need to be considered of course – contact us for full DTT analysis.QROPS are still likely to be attractive for people with funds greater than £250,000. QROPS are in the dock with regard to Lifetime allowance calculations.

AVOID BONDS (investment or insurance bonds) with high commissions to ensure that your funds do not decrease due to high income levels. High charging investment bonds with extra charges and surrender or access penalties in the early years eat into the investment though charges that are not declared by salesmen, leading to a decrease in investment returns and usually value as well!Re-assessment of maximum income will cease, as will GAD rules, in April 2015, meaning the investment management, flexibility, access, charges and portfolio is more important than ever. Bonds are a step behind platform custodians (often known as WRAP platforms).
AVOID UK IHT (Inheritance Tax) – for everyone under the age of 75, 55% death taxes are removed from 6 April 2015 from UK pensions, even if they die before and their fund is left until then.QNUPS rules are being reviewed currently for IHT benefits. Jurisdictions who have QROPS have to alter their legislation to match the new UK rules for QROPS to qualify in each particular country where the Trustees are based.

FURTHER REVIEWS – the government will now review many of the declared aspects to ensure that their intention to make funds available to pensioners is not abused. There are some examples of the latest position on the right hand side:They announced the outcome of one review in July 2014 and confirmed funded final salary (Defined Benefit) schemes can only be considered by UK regulated qualified advisers. They are separately reviewing SIPP operators to ensure they comply with best client outcomes.
RETAIN FUNDS IN PENSIONS – Wherever possible it will remain advice to retain funds within the tax efficient environment of a pension rather than access it to invest elsewhere. Certain countries (like the US) will continue to recognise UK SIPP’s, although it is questionable if they will recognise non-contractual QROPS as the pension funds will have crossed international boundaries and may not be recognised as pension funds.Initial research says that the introduction of the new rules will lead to a resurgence in UK based pension vehicles. However, much can happen between now and April 2015, so we would advise people considering their options now, not to rush to a decision without quality advice, and not mere guidance.