Viewing posts categorised under: Investment Risk

BEWARE: FADS AND FASHIONS

By Robin Beven
This article is published on: 5th March 2019

The best way to start diversifying your portfolio and to blend together the myriad options in a way that best suits your personal circumstances is to speak to a professional adviser. Not only are they able to offer vast experience of the investment market, but they can also advise on the most suitable structures and products for your investments to match your individual needs.

Nowadays there are many more esoteric investment choices than ever before to capture the attention of potential investors – but they can create unpalatable risks if bought alone.

A GUIDE TO DIVERSIFICATION
This guide is designed to help start you on the road to building an investment portfolio. With a little groundwork, a balanced, well-diversified portfolio ought to be able to weather short-term storms and fluctuations. It should smooth out the various peaks and troughs and help you meet your financial objectives over the longer term, without causing too many shocks along the way.

Diversification is a much-used term in the financial world and one that can be employed at many levels. Most fund managers claim their aim is to diversify risk by buying a range of different investments, even when the area they specialise in is quite small. A smaller-companies fund manager, for example, with perhaps only 500 potential investments from which to choose, would suggest their hand-picked selection of 70 holdings offers diversification.

At the same time, it is my job as a financial adviser to help you diversify your portfolio by guiding you through the range of different assets, allocating your portfolio across the different options and, ultimately, helping you meet your objectives while staying within a level of risk that is acceptable to you.

When looking to invest, it is important to acknowledge that, no matter what the type of asset, there will be risks involved. These risks are made up of two principal aspects: market risk (the impact of economic factors, say, or government changes) and investment risk (the uncertainty and volatility of returns). Diversification can help to reduce both of these.

Market risk cannot be eliminated but it can be reduced by spreading a portfolio over a range of different asset ‘classes’ that should behave differently in different market environments. By broadening a portfolio’s exposure across a range of asset classes, you raise your chances that, at any one time, some assets will be rising while others may be falling – and the two movements should, to an extent, offset each other.

The same holds true for investment risk. While, for example, all shares are similarly exposed to investor sentiment towards the stockmarket on which they are listed, the investment-specific risk will vary from company to company. This means the share prices of each company will not move in the same direction, by the same amount and at the same time. Each share plots its own path, resulting in a smoothing of returns.

Investing across different asset classes sounds like a good move but you should also be aware of the other side of the coin. By diversifying your portfolio, you will also lower the level of return you would have received if you were fortunate enough to be invested only in the best-performing asset class. The skill comes in balancing your asset allocation so the relative payoff matches your own attitude to risk and reward.

This might lead you to ask how diversified your portfolio should be and the answer will depend greatly on your attitude to risk. Given the lessons of history, we can with some confidence assume nobody can accurately predict the performance of markets to the degree they will know exactly where to be invested at any point in time.

If this were possible, we would of course all be millionaires. Therefore, in effect, we use diversification to hedge our bets. The extent to which we need to diversify depends on how much volatility we feel able deal with – put simply, how much we tend to worry or panic when the value of our portfolio starts to fall.

SPREAD YOUR EGGS ACROSS MANY BASKETS
Any portfolio can be diversified. Do remember, however, when you diversify your portfolio, risk is not the only thing you will reduce. You will also lower the level of return you would have received if you had been fully invested in just the best asset class. The skill comes in balancing your asset allocation so the relative payoff matches your individual attitude to risk and reward.

So that is the theory. In practice, once you know what risk you can deal with, the effectiveness of your diversification strategy will depend on the degree of ‘correlation’ between various elements in a portfolio – that is to say, the extent to which different investments move in relation to each other – and combining them appropriately so the overall movement is in line with your expectations.

Government bonds, for example, are perceived as being a safer haven when markets are rough and equities are volatile. Property, on the other hand, has tended to protect against inflation over the long term, while also not moving in line with equities. Then there is cash, which depends entirely on interest rates for the level of income generated. To a greater or lesser extent, each asset class responds differently to external influences such as interest rates and inflation.

DIVERSIFY WITHIN ASSET CLASSES
Within each asset class, there are further opportunities for diversification. Within equities, for example, the returns of some companies versus others are not related in any way. Generally speaking, there is little correlation between the performance of, say, biotechnology stocks and utilities – such as water and electricity companies – as the market forces driving these two sectors can be completely different. However, as both types of company are listed on the stockmarket, they are both exposed to factors that affect the overall equity market, such as the impact of a government’s monetary policy, or general investor sentiment.

DIVERSIFY BY GEOGRAPHY
Geography also allows some of the impact of stockmarket movements to be dissipated, as your portfolio is not only exposed to the economics and government decisions of one country. Different markets are affected by different economic and financial factors and are therefore not perfectly correlated with one another. If the Far East performs badly, for example, it does not necessarily mean European stockmarkets will have fallen. And within Europe, there is the possibility of further geographical diversification, as the performance of each underlying European stockmarket will not necessarily be aligned with that of its peers.

Even so, all equities are capable of being affected by global influences and particularly when investor sentiment is involved – just consider the boom in telecom, media and technology stocks in the late 1990s and their subsequent collapse in 2000. The effects were global – although markets such as the US, which had greater exposure to these sectors, were more heavily affected, almost all countries suffered from the somewhat depressed equity environment during the bear market that prevailed through to early 2003.

DIVERSIFICATION WITHIN BONDS AND PROPERTY
The same sort of thinking can go for fixed interest investments and property. Government bonds, for example – and particularly those of more highly-rated countries such as the US or the UK – do not tend to behave in the same fashion as the so-called ‘sub-investment-grade’ corporate bonds that are issued by less financially secure companies. Within property, meanwhile, even commercial and residential property are not always correlated in the returns they offer but both can be illiquid.

MAKING YOUR DECISIONS
Most investors should in general start by making a detailed assessment of their attitude to risk. If you could not live with the fluctuations of the stockmarket and would be very worried by the sight of prices going down, then you are a lower-risk investor and your portfolio should be biased towards correspondingly lower-risk assets, such as cash and perhaps some fixed interest.

If on the other hand you are comfortable with some volatility and are investing for the longer term – at least five years, say – you might decide to include a small element of equity exposure. Then again, if you are at the opposite end of the scale – a high-risk investor, who is perfectly happy with the ups and downs of markets – then you would most likely have the majority of your portfolio in equities.

USING COLLECTIVE INVESTMENT FUNDS
Collective investment funds are inherently diversified to some degree as they hold a number of different investments, generally in a particular market, industry sector or asset class. You could, to pick just a handful of examples, choose an emerging market equity, global technology, government fixed-interest, UK corporate bond or North American smaller companies fund.

As collective funds tend to hold 50 or more stocks, they automatically offer more diversity than just one or two stocks from these markets. By selecting funds, you hand over the job of stock diversification to expert fund managers, leaving you and your adviser to concentrate on the other main decision elements – asset class and geography.

If you are making your first steps into investment, or have only a small amount to invest, you can hand over even more of the decision process by targeting the broader portfolios of global equity or managed funds. Within these, the fund manager will diversify not only by type of company and level of exposure, but also by geography – and these portfolios usually involve some element of asset allocation as well.

Please note: The value of any equity, bond or property investment can go down as well as up and you may not get back the amount originally invested. Property is a specialist asset class and expert advice should be sought before making a decision to invest.

“the effectiveness of your strategy will depend on the extent to which different investments move in relation to each other.”

BRINGING IT ALL TOGETHER
When considering a portfolio’s proportions, many investors pursue simple strategies such as, for example, a ‘core & satellite’ approach. Typically, the ‘core’ portion would make up the larger part of your portfolio since it should be relatively less volatile and provide a solid base on which to build. The satellite investments would then add ‘spice’ to your portfolio by taking smaller positions in higher-risk regions, asset classes or industry sectors.

A lower or medium-risk investor might concentrate their core portfolio in cash, bond and property funds, or perhaps in an equity fund linked to larger, more highly regulated stockmarkets such as the US or the UK.

However, “multi-asset” funds are becoming the first choice for investors, be they lower, medium or higher risk investors, because the fund manager runs the fund for you without the distraction market noise.

Putting financial concerns in perspective

By John Hayward
This article is published on: 25th February 2019

25.02.19

Perspective ( /pəˈspɛktɪv/)
– To compare something to other things so that it can be accurately and fairly judged

We know that there is much going on with Brexit negotiations; we know that Trump is having issues with the Chinese and the Mexicans; and there are plenty of other things which we don´t yet know about, that could have an effect on our lives. When investing in stockmarkets, either directly or indirectly, there tends to be a focus on performance, whilst ignoring all other financial factors such as interest rates and inflation. It is regularly reported that markets are up, down or flat. It is rarely pointed out that interest rates have been low for a long time and that inflation has been consistently eating into the value of savings. There is also the fact that shares can receive dividends, which is pretty much ignored in reporting.

Another point to consider for those receiving pensions (or other income) from the UK in pounds, but spending in euros, is the GBP/EUR exchange rate. In this case, fluctuations in the exchange rate can seriously affect your disposable income.

In order to clarify my point, the charts below illustrate the behaviour of these factors over the last 15 years. This period includes arguably the worst period for all aspects over the last 15 years: 2008 and 2009.

I have accessed the information that makes up the basis of these charts from a variety of sources(*).

Interest Rates and Inflation

GBP/EUR Exchange Rate

FTSE100 Index Level

Comparison: inflation rate, interest rate and annual percentage changes in the GBP/EUR exchange rate and the FTSE 100

So what do we learn from this exercise? Putting them all together, apart from it being a pretty busy chart, we can see that, in the financial world, things go up and down. Nothing amazingly newsworthy there, but it is appreciating the size and frequency of these movements, in either direction, which is key. Then it is a case of seeing how these movements compare with the other factors. For a British immigrant in Europe who is paid in sterling, there has been a 20% fall in the spending power of his pounds since 2004. Interest rates have been below 1% for 10 years. Inflation, on the other hand, has averaged almost 3% since 2004. Put all of these together and for the cautious investor, finding the right home for savings has been more than tricky.

As much as people may be fearful of investing in stocks and shares, the fact is that over time, especially in the last 15 years, people have seen good returns when a considered and careful managed approach is taken. For those who are nervous about putting their money directly into stocks and shares, but want to, or even need to, have their money grow at least at the rate of inflation, we feel that we have the solution. As you will see from the chart below featuring a fund available to both UK and Spanish residents, keeping on top of inflation has been possible in almost every year in the last 14 and people have seen their funds grow consistently but with only a fraction of the risk of stockmarkets.

A Solution

The Spectrum IFA Group has been operating in Europe for many years; I have been with them since 2004 helping my clients through the volatility described above. With so much uncertainty, why not see if what we have available to us will be of interest to you?

Let us help you to put everything in perspective.

* Sources
Interest rates – Mortgage Strategy
Exchange rates – XE Money Transfer
FTSE100 – Yahoo Finance
Inflation – Iamkate
PruFund – Prudential

No warranty is made as to the accuracy of any information on third party websites and no liability is accepted for any errors and omissions or for any damage or injury to persons or property arising out of the use or operation of any materials, instructions, methods or ideas contained on such websites.

The danger of waiting for Brexit

By John Hayward
This article is published on: 22nd February 2019

22.02.19

There are many questions that we don´t know the answers to regarding Brexit. There are also questions that we don´t yet know. However, some facts are known. One of these is concerning investing, or not, since 20th February 2016.

This was the day that David Cameron, the then Prime Minister, announced that there would be a referendum on the UK´s membership of the EU. People have been fearful due to the uncertainty as to what will happen post-Brexit.

In the last three years, life has continued in the financial world and investment markets have risen significantly. At the same time, inflation hasn´t disappeared just because Brexit is on the menu. Figure 1 below shows how the FTSE100 has performed since 20th February 2016 along with the UK Retail Price Index.

With dividends reinvested, £100,000 would be worth around £136,000 as at 18th February 2019. If we allow for inflation, this would be more like £128,000 but still 28% up. If the £100,000 had been left in a bank account, with no interest which is commonplace these days, the true value would now be more like £91,000. Waiting for Brexit has cost the wait and see person £9,000.

Figure 1. Performance of the FTSE100 since the referendum announcement in February 2016 along with the UK Retail Price Index.

There are people who are not happy taking on investments which carry risk.

If we ignore the risk of inflation for the time-being, we have solutions which can cater for those who are happy taking some investment risk but without the volatility of stocks and shares.

Figure 2 illustrates that an investment with approximately an eighth* of the risk of the FTSE100 has still managed to perform well, certainly when compared to inflation. One must bear in mind costs but, even allowing for these, people who were invested in this type of investment on 20th February 2016 would have seen an increase of around 23%.

Taking inflation into consideration, it would still have produced growth of around 14%; a lot better than “losing” 9% by leaving the money in the bank.

Bottom PruFund vs RPI 20.02.16 to date-1

Figure 2. Performance of a low risk investment along with the UK Retail Price Index

With the exchange rate between GBP and Euros down about 11% over the same period, the need to receive more in income has become even more important. Losing 20% or so in real spending power has proven to be a tough pill to swallow. Get in contact so that the possible “Never Ending Story” of the Brexit can being kicked down the road doesn´t lose you even more over the coming years.

To find out how we can help you with our financial planning in a manner protecting you and your loved ones, contact me at john.hayward@spectrum-ifa.com or call/WhatsApp 0034 618 204 731

* Source: Financial Express

Emotional Challenge

By Chris Webb
This article is published on: 28th February 2018

28.02.18

THE RATIONAL, IRRATIONAL AND EMOTIONAL STRUGGLE
In such challenging times, emotions may play a significant role in investment decisions. Investors feel the variances in their portfolios’ performance much more than the average return over the life of their investments. Rationally, investors know that markets cannot keep going up indefinitely. Irrationally, we are surprised when markets decline.

IN VOLATILE MARKETS STAYING INVESTED MAY BE CHALLENGING
It is a challenge to look beyond the short-term variances and focus on the long-term averages. The greatest challenge may be in deciding to stay invested during a volatile market and a time of low consumer confidence. History has shown us that it is important to stay invested in good and bad market environments. During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold.
Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.

DECLINES MAY PRESENT OPPORTUNITIES
An emotional roller coaster ride is especially nerve-racking during a decline. However, the best opportunity to make money may be when stock prices are low. Buying low and selling high has always been one of the basic rules of investing and building wealth. Yet during these emotional and challenging times it is easy to be fearful and/or negative so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:

“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up…Chances are that certain other
indexes will have grown even more. Despite all the current gloom about the economy, and about the future, more people will have more money than ever before in history. And much of it will be invested in stocks. And throughout this wonderful time, the basic rules of building wealth by investing in stocks will hold true. In this century or the next it’s still ‘Buy low, sell high’.”

Watching from the Sidelines May Cost You
When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.

Euro / Dollar Cost Averaging Makes It Easier to Cope with Volatility
Most people are quick to agree that volatile markets present buying opportunities for investors with a long-term horizon. But mustering the discipline to make purchases during a volatile market can be difficult. You can’t help wondering, “Is this really the right time to buy?” Euro / Dollar cost averaging can help reduce anxiety about the investment process. Simply put, Euro / dollar cost averaging is committing a fixed amount of money at regular intervals to an investment. You buy more shares when prices are low and fewer shares when prices are high, and over time, your average cost per share may be less than the average price per share.

Euro / Dollar cost averaging involves a continuous, disciplined investment in fund shares, regardless of fluctuating price levels. Investors should consider their financial ability to continue purchases through periods of low price levels or changing economic conditions. Such a plan does not assure a profit and does not protect against loss in a declining market.

Now May Be a Great Time for a Portfolio Checkup
Is your portfolio as diversified as you think it is? Meet with me to find out. Your portfolio’s weightings in different asset classes may shift over time as one investment performs better or worse than another. Together we can re-examine your portfolio to see if you are properly diversified. You can also determine whether your current portfolio mix is still a suitable match with your goals and risk tolerance.

Tune Out the Noise and Gain a Longer-Term Perspective
Numerous television stations and websites are dedicated to reporting investment news 24 hours a day, seven days a week. What’s more, there are almost too many financial publications and websites to count. While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer-term perspective and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income-oriented investments (such as bonds) over longer time periods.

Believe Your Beliefs and Doubt Your Doubts
There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio. But sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long-term goals. To keep from falling into this trap, call me before making any changes to your portfolio

Has your bank in Spain paid you over 3% p.a. interest on your savings recently?

By John Hayward
This article is published on: 19th September 2017

The probability is that it hasn´t. However, you could have made more than 3% a year in a low risk savings plan with one of the biggest insurance companies in the world. We have many happy savers who have seen steady growth of over 3% a year for the last few years. How? Read on…

Saving money in a low interest world

Losing spending power to inflation
With special offers currently being offered by banks of 0.10% APR interest and inflation in Spain running at 1.6%, there is a guaranteed loss of the real value of money at the rate of 1.5% a year. There are some who would be disappointed, if not angry, if their money in an investment had lost 7.5% over 5 years yet this is exactly what has been happening to people over the last few years without them really appreciating it. 3% a year is not only an attractive rate of return but it is necessary to cope with inflation and provide real growth.

Spanish compliant insurance bonds
ISAs, Premium Bonds, and some other investments in the UK are tax free for UK residents. They are not tax free for Spanish residents. We are licensed to promote insurance bonds in Spain which are provided by insurance companies outside Spain but still in the EU. In fact, even after Brexit, these companies will still be EU based and so Brexit will not have the impact on these plans that it could have on UK investments. As the bonds are with EU companies, and the companies themselves disclose information to Spain on the amount invested, as well as any tax detail, the bonds are Spanish compliant which makes them extremely tax efficient. We do not deal with companies based outside the EU as we are satisfied that the regulation within the EU is for the benefit of the investor. We do not have the same confidence in some other financial jurisdictions and neither do Spain.

What investment decisions do you have to make?
Although we have the facility to personalise an investment portfolio within the parameters laid down by the EU regulators, offering discretionary fund management with some of the largest and best known investment management companies, we can also use a more simple approach for those who do not require any input into the day to day investment decisions.

So what has happened over the last 5 years?
The chart below illustrates the performance of one of fund’s available to you compared to the FTSE100 and the UK Consumer Price index. The argument to stay invested when markets fall is valid when one looks at the FTSE100 roller coaster line with the increase we have seen over the last year or so since the Brexit vote. However, anyone accessing their money around the time of the vote could have seen a 25% drop in the investment values. Not so with the fund in the insurance bond.

Real cases

Real case 1 – £40,000 invested 24/07/12. £50,770 as at 14/09/17. Up 26.92% in 5 years

Real case 2 – £356,669 invested 10/09/14. £431,177 as at 14/09/17. Up 20.88% in 3 years

Real case 3 – £316,000 invested 05/04/16. £334,422 as at 14/09/17. Up 5.82% in 18 months

Real case 4 – £80,000 invested 13/07/16. £86,160 as at 14/09/17. Up 7.70% in 15 months

Real case 5 – £20,000 invested 27/01/17. £20,712 as at 14/09/17. Up 3.56% in 8 months

These growth rates are not guaranteed but are published to illustrate what has actually happened and that the percentage returns on the fund are irrespective of the amount invested.

How can they produce such consistency?
Each quarter, the insurance company estimates what the growth rate will be for the following 12 months. This rate is reviewed based on the views of the underlying management company with people situated in all parts of the globe specialising in their own particular area. In good times, the company will hold back money that it has made so that, when things are not so good, they are still able to pay a steady rate of growth to their savers.

I don´t want to take any risk
It is difficult to avoid risk. In fact it´s practically impossible. A risky investment is seen by many as something which has a good chance of failure, either in part or completely. Stocks and shares are seen as risky whilst putting money into a bank deposit account is not. It is generally known that stocks and shares can go down as well as up but some people are unaware, or simply ignore, the risk of keeping money in a perceived “safe” bank deposit. Bank accounts have limited protection against the bank going bust. Then, if it came to the situation where a bank had to be bailed out by the government, it could take months, if not years, to access your money. As already mentioned, if the account is making less than inflation, you are losing money in real terms. So a bank account is far from risk free. The fund illustrated above is rated by Financial Express as having a risk rating of 22% of that applicable to FTSE100, much further down the risk scale and in an area that many people feel comfortable with.

What are the charges?
We explain in detail the underlying costs. In my experience, far too many people commit to a contract without understanding what they have, having received little explanation of the terms and conditions. This is where we differ to most. Different companies have different ways of charging and we run through all of the charges so that you are happy with what you have. The real examples above have had charges deducted and so these are the real values. Your bank may not charge you for the 0.10% interest (less tax) they are paying you but they are making money through investment but not passing anything on to you even though you supplied the money they invest.

What do I need to do next?
Contact me and I can review your savings, investments, and pension funds. I can then explain how you could arrange these in a tax efficient way whilst giving you the opportunity to access the growth that is available, for an improved lifestyle and to cope with rising costs.

Is lending money to a government still low risk?

By Peter Brooke
This article is published on: 26th July 2017

26.07.17

If you buy a government bond, sometimes called GILTS (UK), BUNDS (Germany) or T-Bills (US), as an investment, then you are effectively lending that government money. Most portfolio managers say investors should have some bond exposure in their investment portfolios as they diversify away from other assets like shares.

How do Bonds work?
You start by buying a bond on ‘issue’ for a set issue price with a ‘promise’ to pay you back the same amount in a date in the future. In the meantime, the bond pays you a ‘coupon’ or interest in payment for you lending your money. The bonds are also traded on a ‘secondary bond market’ where the price fluctuates according to supply and demand but the coupon remains the same… this means that your interest rate changes depending on what price you pay for the bond.

You can also invest in ‘funds’ of government bonds which are managed by professional managers using new issue and secondary market bonds around the world to build a diversified portfolio… but are they as low risk as they are made out to be?

Traditionally these forms of investment have always been viewed as low risk, as governments, unlike companies or individuals can always ‘print money’ and so can always pay you back. This also means that the interest rate you receive (the coupon) will be lower than company bonds.

If we consider that RISK is the chance of loss then I would argue that these investments are no longer low risk. Right now, we are in an environment where interest rates are at all-time lows around the world, inflation is starting to bite and so the chance of an interest rate increase by central banks is high; even though the rate increases may be low.

If you are holding any bond and interest rates go up, then bond values will drop, therefore I would argue that at some point you are risking a capital loss by holding government bonds. Some analysts believe that a 1% increase in interest rates could lead to a 10% capital loss on most bonds. If this is the case are you now being compensated for this risk of loss? Well, no… interest rates on government bonds are around 1% now and so with inflation higher than 1% in most countries you are losing money on an annual basis too.

So, what can you do about it? The first option is to take a little more risk and swap your government bonds for high quality corporate bonds… the coupon will be greater and as long as the companies are in good health then they should be able to repay you at the end of the term… there are also funds of corporate bonds which diversify risk.

The corporate bond market is segmented by credit rating so be aware of the level of risk this can bring to your savings… “high yield” (Europe) or “junk bonds” (US) tend to behave more like shares.

Another option would be to diversify away from western government bonds into emerging market government bond funds… there is some extra currency risk, though this can help performance too. Finally, you can outsource the choice of the bonds you buy by using a Strategic Bond fund… this will invest in corporate, government and emerging markets bonds on a strategic basis and would be very diversified.

This article is for information only and should not be considered as advice.

Investing in turbulent times – presentation, Costa del Sol

By Spectrum IFA
This article is published on: 15th June 2017

15.06.17

The Spectrum IFA Group and Tilney Investment Management co-sponsored an excellent presentation and lunch on 13th June at the exclusive Finca Cortesin Hotel & Spa on the Costa del Sol. The Spectrum IFA Group was represented by our local adviser, Charles Hutchinson, assisted by his wife Rhona and Jonathan Goodman who attended along with Richard Brown, Lewis Cohen and Harriette Collings from Tilney.

For this event, around 25 attendees were invited and selected for this exclusive venue. They were given a very interesting interactive talk by Richard and Lewis on investing in these turbulent times, followed by a mingling lunch and refreshments in the Moroccan Room where everyone was able to personally discuss their questions with staff from both companies in a glorious and relaxing setting with gardens and fountains close by. The feedback from the attendees has been most impressive.

Spectrum was very proud to be involved with Tilney in this superb event. It is hoped this will be repeated again in the future.

Smoothing out the bumps of market volatility

By Sue Regan
This article is published on: 9th June 2017

09.06.17

In today’s environment of very low interest rates, is it wise to leave more than “your rainy day fund” sitting in the bank, probably earning way less in interest than the current rate of inflation, particularly after the taxman has had his cut…..?

In the above scenario, the real value of your capital is reducing, due to the depreciating effect on your capital of inflation. So, if you are relying on your capital to grow sufficiently to help fund your retirement or meet a specific financial goal, then you should be looking for an alternative home for your cash that will, at the very least, keep pace with inflation and thus protect the real value of your capital.

In order to achieve a better return than a cash deposit, by necessity, there is a need to take some risk. The big question is – how much risk should be taken? In reality, this can only be decided as part of a detailed discussion with the investor, which takes into account their time horizon for investment, their requirement for income and/or capital growth, as well as how comfortable they feel about short-term volatility over the period of investment.

Although inevitable, and perhaps arguably a necessity for successful investment management, it is often the volatility of an investment portfolio that can cause some people the most discomfort. Volatility often creates anxiety particularly for investors who need a regular income from their portfolio, and for this reason some people would choose to leave capital in the bank, depreciating in value, rather than have the worry of market volatility. However, this is very unlikely to meet your needs.

There is an alternative, which is to have a well-diversified investment portfolio that provides a smoothed return by ironing out the peaks and troughs of the short-term market volatility. Many of our clients find that this is a very attractive proposition.

What is a smoothed fund?

A smoothed fund aims to grow your money over the medium to long term, whilst protecting you from the short-term ups and downs of investment markets.

There are a number of funds available with differing risk profiles, to suit all investors. The funds are invested in very diversified multi-asset portfolios made up of international shares, property, fixed interest and other investments.

The smoothed funds are available in different of currencies, including Sterling, Euro and USD. Thus, if exchanging from Sterling to Euros at this time is a concern for you, an investment can be made initially in Sterling and then exchanged to Euros when you are more comfortable with the exchange rate. All of this is done within the investment and so does not create any French tax issues for you.

As a client of the Spectrum IFA Group, this type of fund can be invested within a French compliant international life assurance bond and thus is eligible for the same very attractive personal tax benefits associated with Assurance Vie, as well as French inheritance tax mitigation.

Stop Press!!! Since writing this article the UK Election has taken place resulting in a hung parliament that brings with it more political uncertainty, but also the possibility of a softer Brexit or even a second election. This makes for a testing time for investment managers and the option of a smoothed investment ever more attractive.

Why robots will never replace Investment Advice

By Chris Burke
This article is published on: 7th June 2017

07.06.17

Particularly when markets are/have done well like recently, Stock picking (A situation in which an analyst or investor uses a systematic form of analysis to conclude that a particular stock will make a good investment and, therefore, should be added to his or her portfolio) is somewhat discredited these days, because low-cost passive fund managers argue that their tracker model delivers better value to savers by betting on an index, not individual companies.

And there is good argument to back it up

An article in The Wall Street Journal shows that between 1926 and 2015, just 30 different shares accounted for a remarkable one-third of the cumulative wealth generated by the whole market — from a total of 25,782 companies listed during that period. These statistics demonstrate that “superstocks” are what produce the true profits in the long run.

The research also calls into question the cult of equity, which has been followed by professional investors for more than 50 years. The experts argue that shares decisively outperform bonds and cash over time. But Bessembinder’s research shows that the returns from 96% of American shares would have been matched by fixed-interest instruments, which generally offer more security and liquidity, and suffer from lower volatility than stocks.

Spotting a business that can grow 10 or 20-fold over a period of years is a rare art

Of course, getting stock selection right is very difficult indeed when such a tiny proportion of shares contribute so much to total performance. It requires investors who are truly patient and at times extremely brave.

Amazon is one of the heavy hitters that delivered a quarter of all wealth creation in the stock market during the 90 years to 2015. Yet between 1999 and 2001, the online retailer’s shares fell by 95%. Many investors probably gave up then, and having been burnt once, shunned its 650-fold appreciation over the past 16 years.

While empirically that may appear to be correct, intuitively it feels questionable

Economies grow thanks to new technologies and entrepreneurs, who run a fairly small number of outstanding companies funded through private capital. Half the top 20 wealth creators referred to above are in sectors such as pharmaceuticals and computers. Identifying those sorts of promising industries is not too hard. But I do not believe there is a computer program — or robotic system — that can pinpoint the great achievers of the next 10 or 20 years.

Choosing the special businesses and executives that will create enormous value, and probably large numbers of jobs, is as much a creative undertaking as a scientific one.

Rigorous analysis must include a host of variables that artificial intelligence would struggle to understand — adaptability, trust, motivation, ruthlessness and so forth. I suspect all the best investors emphasise the importance of judging management when backing companies; I am not confident that computers can do that better than humans. In mature economies such as the UK, such sustained compound growth happens all too rarely.

To achieve it, a business should enjoy high returns on capital, strong cash generation, plentiful long-term expansion opportunities and a powerful franchise. And you need to buy the company at a sensible valuation. In a world awash with cash, such attractive businesses command very high prices. But if you believe the model can endure, they might be worth it.

Article written by Luke Johnson, who is chairman of Risk Capital Partners and the Institute of Cancer Research.
Sources: Bessembinder’s research and The Wall Street Journal
To read the article in full, click here:
Why a robot will never pick the superstocks of the tomorrow

Reasons to Wrap

By Sue Regan
This article is published on: 3rd March 2017

03.03.17

It’s no secret that the Assurance Vie (AV) is by far and away the most popular investment vehicle in France……….and for good reason! Most of you will already be familiar with these investments, or at the very least, have heard of them, but it doesn’t harm to be reminded now and again as to why they are so popular.

What are they? – An AV is simply a life assurance wrapper that holds financial assets, often with a wide choice of investments, and there is no limit on the amount that can be invested.

What’s so good about them?…..quite simply, their huge tax advantages, such as:

Tax-free growth – funds remaining within an AV grow free of French Income and Capital Gains tax

Simplified tax return reporting – considerable savings in terms of time and tax adviser fees

Favourable tax treatment on withdrawals – only the gain element of any amount that you withdraw is liable to tax. There is an additional benefit after eight years in the form of an annual Income tax allowance of €4,600 for an individual and €9,200 for a married couple

Succession tax benefits – AV policies fall outside of your estate for Succession tax and the proceeds can be left directly to any number of beneficiaries of your choice (not just the ones Napoleon thought you should leave them to!). There are very generous allowances available to beneficiaries of contracts taken out before the age of 70.

Why invest in an International Assurance Vie?

There are a number of insurance companies that have designed French compliant international AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. Some of the advantages of the international AV contracts are:

The possibility to invest in multiple currencies, including Sterling and Euros.

A large range of investment possibilities available.

The majority of international AV policies are portable, which means that should you return to the UK, it will not be necessary to surrender the bond.

The documentation for international bonds is available in English.

At Spectrum, we only recommend products of financially strong institutions and domiciled in highly regulated jurisdictions. If you would like to know more about these extremely tax efficient investments, or would like to have a confidential review of your financial situation, please feel free to contact me.

The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter at spectrum-ifa.com/spectrum-ifa-client-charter