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GUIDE TO GROWING YOUR INCOME

By Robin Beven
This article is published on: 10th March 2019

10.03.19

A NEW ERA FOR INCOME STRATEGIES

Income investing has moved into a new dimension. In the past, income-generating strategies were largely restricted to cash and fixed income so that, to a large extent, investors had to accept the need to sacrifice the opportunity for capital growth in order to obtain a higher yield.

Times have changed and now, an income strategy does not necessarily mean you have to accept a hit to your portfolio’s value – especially if you are in a position to take on a bit more risk with your capital.

There are plenty of choices of all persuasions available to income-seeking investors and this guide sets out a number of the available options.

FLEXIBILITY AND VERSATILITY
For many investors, an income-generating strategy forms the core of their approach. Some want a portfolio that will provide a regular income stream for them to spend. For others, an income-based approach is a consequence of their attitude to risk, rather than an instigator of their strategy, and these investors might choose to reinvest their income to boost their portfolio’s total return over the long term.

Still others might have a core investment strategy that focuses on capital growth, complemented and diversified by an income-generating segment.

Every investor will have their own unique needs – for instance, they might choose to draw the income or to reinvest it for the long term. However, an income strategy can easily be adapted to meet each investor’s changing circumstances as time moves on.

A WORLD OF CHOICE
Whatever your investment risk profile, there are a wide range of asset classes from which to formulate a diversified income strategy – from government and corporate bonds, through UK and global equities to property.

Please click on the headings below to read more:

FIXED INCOME (BONDS)

Fixed income investments provide a stable and predictable level of income many investors find reassuring. They pay a set rate of interest that does not change, regardless of the prevailing economic environment, and also have a fixed repayment date. Bond prices are influenced by fluctuations in interest rates and the rate of inflation. In addition, corporate bond prices are also affected by individual company or industry newsflow.

Changes to UK base rates, which are set by the Bank of England’s Monetary Policy Committee, will affect the level of interest paid on cash in a UK bank deposit account, but base rates will not affect the level of income paid on a bond. In an environment of rising interest rates, bonds become less attractive, because investors can more easily achieve a competitive rate of interest from their cash deposits.

Similarly, low interest rates increase the appeal of bonds, as it becomes harder for savers to generate an attractive level of income from their cash deposits. Funds investing in such bonds are freely available, of course, care should be taken in choosing the best-suited one that fits-the-bill. See, “Collective Bond Funds, below.

CASH: NOT NECESSARILY KING

A cash deposit account might be the first port of call for many investors who want to generate an income. In an environment of low interest rates, however, it is difficult for savers to generate a meaningful return from their cash deposits. How times have changed! Furthermore, the impact of inflation will erode the purchasing power of their capital over the longer term.

GOVERNMENT BONDS

As the name suggests, government bonds are issued and underwritten by a government. UK government bonds – also known as ‘gilts’ – may be regarded as lower risk investments as, to date, the UK has never defaulted on its debts.

However, because they are a low-risk investment, the level of return available on gilts tends to be relatively low and they offer little protection against inflation. Index-linked bonds are the only exception – they pay a rate of income that is partly influenced by the rate of inflation. If the rate of inflation rises, the level of income they offer is adjusted upwards while, in an environment of falling inflation, the level of income paid will fall.

CORPORATE BONDS

Corporate bonds are issued by individual companies as a way of raising capital for their businesses. As with gilts, a corporate bond is redeemed at a predetermined date for a fixed sum and, during the life of the bond, the investor receives a fixed amount of interest.

Corporate bonds carry a higher level of risk than UK government bonds but that level will vary from one company to the next. High-quality companies are regarded as relatively low-risk, whereas lower-quality companies are believed to have a higher risk of defaulting on their obligations to bondholders.

The level of income paid to bondholders tends to reflect the level of risk involved. Investors who take on a riskier investment are compensated for that risk with a higher level of income. If a company should go bust, bondholders rank higher than shareholders as the company has to meet all its obligation to its creditors – including bondholders – before it considers its shareholders.

It is important to understand the risks of investing in corporate bonds. There can be a substantial difference in quality between one corporate bond and the next. Many of the large fund management houses undertake research to evaluate the potential risk of each bond, but they also often rely on research produced by credit-rating agencies such as Standard & Poor’s, Moody’s and Fitch. These companies assign a rating to companies that offer bonds. A high credit rating indicates the company is believed to have a low risk of default while a lower credit rating suggests the company presents a higher risk of default.

Bonds may be divided into two classes – ‘investment-grade’ for the highest credit ratings and ‘sub-investment-grade’ (also known as ‘high yield’ or sometimes ‘junk’) for the lower grades. A lower credit rating means a higher level of income paid, in order to compensate for the extra risk involved. Generally, investment-grade bonds are seen as a relatively lower-risk asset class, while higher-yielding sub-investment-grade bonds are regarded as higher risk.

COLLECTIVE BOND FUNDS

Collective funds that focus on government and/or corporate bonds will invest in a managed portfolio that can help you to reduce your risk by diversifying across a range of investments, rather than owning just one or two. Some funds will focus on a specific area of the market while ‘strategic’ bond funds are ‘go-anywhere’ portfolios, whose managers take a view on the bond market and focus on the areas they believe offer most value. If you are interested in adding an element of additional risk to your overall portfolio, therefore, strategic bond funds can offer an introduction to the sub-investment-grade arena or to overseas opportunities.

EQUITY INCOME

Over the long term, equities offer the potential for superior returns compared with many other major asset classes. An equity income strategy focuses on shares in companies that pay consistently high and rising dividends and typically aims to generate a consistent, above-average income stream, accompanied by the potential for capital growth over the long term.

Dividends are paid – usually in cash – by companies to investors and are taxable. By law, dividend payments must be paid out of the company’s profits or from profits generated in previous years. Companies are not obliged to pay a dividend, but a high dividend payout can provide an incentive for investors to take a stake in the company.

A company does not have to pay a dividend, and many, particularly small- and medium -sized ones, prefer to reinvest surplus cash into the business. The profits of a relatively young company, for example, can be unpredictable as it seeks to establish itself – and any profit it does make will probably be used either to repay start-up costs or as a reinvestment to help growth. Even as a company grows older, its management might decide to retain profits to finance debt, expansion or product development.

Longer-established companies tend to pay higher dividends – hence an equity income strategy tends to focus on large, high-quality companies, rather than smaller, younger firms. Nevertheless, a small but rising proportion of dividend payouts are coming from medium-sized and smaller companies.

Even large, well-established companies can fall on hard times, however, and the management might decide to shore up their firm’s finances by reducing its dividend payout or cancelling it completely. Furthermore, a diminished or cancelled dividend will undermine confidence in the company and its share price is likely to be negatively affected, cutting the value of your capital investment.

OVERSEAS OPPORTUNITES

While there is a longstanding culture of dividend payments among UK companies, a growing number of companies in overseas markets are returning value to their shareholders in the form of dividend payouts. The US has, for example, traditionally been home to a core of large companies that pay high dividends. More recently, Asian companies have sought to attract and meet the needs of international investors by focusing on dividend payouts, with countries such as Hong Kong and Taiwan establishing solid dividend regimes in this exiting region of the world.

A global equity income approach has become increasingly achievable, and many investment houses have launched funds to tap into this trend. Equity income investors now have much greater scope to diversify across a broadening range of countries by investing in collective funds.

EQUITY INCOME FUNDS

An equity income fund invests in the shares of companies that pay consistent and attractive dividends and then combines the dividend payouts in order to pay a regular income to investors. Diversification across a broad range of companies reduces the danger a single company’s decision to cut or cancel its dividend might drag down the overall yield of the portfolio.

PROPERTY

As an asset class, property can polarise opinion. It is often viewed as a relatively illiquid asset in that it can be time-consuming and expensive to trade. Some experts also believe investors are already overexposed to the property sector if they own their own home or a buy-to-let property, or if they are invested in commercial property through their business. However, property can play a part in an income portfolio for those investors who are not overexposed or who are attracted to its potential benefits.

RESIDENTIAL PROPERTY

‘Buy-to-let’ is a popular means by which investors gain exposure to residential property. Traditionally, buy-to-let has enabled investors to generate income through rents negotiated on short-term tenancy agreements. More recently, many buy-to-let investors have chosen to use their rental income to finance their own mortgage payments and to wait for the bigger profit in the form of a capital gain when the property is sold. Of course, as some investors have found to their cost, there is no guarantee a property’s market value will rise over the long term as we’ve seen along the Costas.

COMMERCIAL PROPERTY

In contrast, commercial property investment focuses principally on the generation of a high and consistent income that is generated through rents. Whereas residential leases typically operate on a series of short-term agreements, however, commercial leases tend to be much longer – perhaps 10 or 20 years.

Income from commercial property can derive from a variety of different sectors – ranging from City real estate, through shopping centres, to industrial parks and warehouses. Each sector commands a different level of rental yield and will react differently to the prevailing economic climate.

COLLECTIVE PROPERTY FUNDS

Direct investment in commercial property is very expensive but smaller private investors can access the asset class through diversified collective funds. Diversification helps to reduce the extent to which the loss of a tenant from one particular property might negatively affect the overall performance of the fund.

REAL ESTATE INVESTMENT TRUSTS

A real estate investment trust or ‘REIT’ is a company that manages a property portfolio on behalf of its shareholders. A REIT can contain residential and commercial property. Its profits are exempt from corporation tax, but it must pay out at least 90% of its taxable income to shareholders.

KEY FACTORS TO CONSIDER BEFORE YOU INVEST

Before deciding on the right blend of assets to generate an income stream, you should consider the following factors, which might affect the decisions you make:

INFLATION
The rate of inflation measures how the price of a basket of goods has changed over time. So, for example, if the cost of running your home increases by 5% in a year, you will need to earn 5% a year more to pay for the same level of comfort.

If you are aiming to maximise the income from your investments in order to pay for everyday expenses, you should consider the impact of inflation and – particularly over the longer term – whether you require a specific form of protection against inflation.

However, if you decide to invest in a fixed-rate investment – for example, a gilt or a corporate bond – be aware inflation will definitely have an impact. As an example, a fixed rate of 4% is attractive when the rate of inflation is 2%. However, if inflation rises to 5%, that return of 4% becomes less appealing.

RISK
Investment risk is a very personal thing as it can mean different things to different people. Some investors are not prepared to tolerate financial loss in any form while, at the other end of the spectrum, some investors most fear missing out on an opportunity. For still other investors, risk means not being able to meet future financial commitments.

Before formulating an investment strategy, every investor needs to be clear about their investment goals and their tolerance for risk. No investment is risk-free – the lowest-risk investments might guarantee the preservation of capital and/or regular income payments, but they cannot necessarily protect your money against the erosive effects of inflation.

Ultimately, in order to enjoy an absence or reduction of risk, a cautious investor has to accept the prospect of lower returns. Equally, an investor who is willing to pursue higher returns will also have to accept the possibility of increased potential for risk to their capital.

DIVERSIFICATION
Since every source of income carries some form of risk, it pays to diversify your portfolio across a range of different asset classes. Diversification helps to reduce the possibility that especially weak (or even strong) returns from a particular investment or asset class might have a disproportionate effect on the overall performance of the portfolio.

There is a world of choice out there for income investors. Whether you are a more cautious person or someone willing to take on higher levels of risk in the hope of achieving, ultimately, higher returns, please do get in touch so we can help you find a solution that meets your individual needs.

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.

10 Rules of Successful Investments

By Robin Beven
This article is published on: 15th February 2019

15.02.19

Successful long-term investment is not just about buying low and selling high – although that is always a good principle to bear in mind.

Share prices can be susceptible to unpredictable external factors ranging from political newsflow to the weather, which can lead to investing – particularly during times of high volatility and uncertainty – feeling a bit like negotiating a minefield.

One way to make sense of such a potentially confusing world is to go back to basics – markets may rise and fall but the rules of sensible investment remain constant.

Buy what is right for you
Just because an investment works well for somebody else does not mean it is necessarily right for you. Consider your own situation – your future liabilities, your investment goals,
timeframes and, most importantly, your appetite for investment risk be it lower, medium or higher – and then make your decision.

Diversify
Spread your risk by diversifying your portfolio across a mixture of asset classes, industry sectors and areas of the world. If you put all your money into a single asset class,
sector or company, your portfolio becomes vulnerable and performance is likely to be volatile. However, mixing it up means that, when the value of one asset is falling, another
might be rising and so could help to compensate towards your expected returns.

Never buy what you do not understand
History is littered with funds that promised a great deal but when faced with pressure from the market, collapsed with all those promises broken. Some shares or funds might sound
very exciting – and perhaps straightforward – but if you do not really understand exactly what the company does or how the fund works, steer clear.

Do not become emotionally attached
It is wonderful if a holding has worked for you, but you do not have to feel too attached – the share or fund does not know you own it. You should look at every existing investment with the same clear-headed objectivity as you did before you bought it – and, when it is time to sell, do so with a clear conscience.

Be your own person – do not follow the herd
Many investors became caught up by the euphoria that surrounded the ‘dotcom’ boom of the late 1990s, simply because everyone else was excited and they did not want to miss out. Consequently, they bought into companies that promised much and delivered little or nothing. It is hard to swim against the current but always take a step back and consider not only what you are buying but why. There are a number of “multi-asset” funds in which to invest and are a good starting place for most. These offer a blend of equities, bonds and cash that are managed for you by very large institutions and cover most investment risk parameters.

Review your portfolio regularly
Your portfolio should have been constructed to meet objectives based on your existing needs and your goals for the future. However, over time, your needs and circumstances can change – as indeed can the markets – and your portfolio may require the odd tweak to make sure it keeps up. Review it regularly – perhaps every one to three years – and make sure
it stays on track.

Do not believe everything you read or hear
Headlines on television and in the newspapers can initially be just as misleading with regard to finance and investment as they are to, for example, sport or celebrity gossip. Try not to
be distracted by day-to-day ‘noise’. Instead, make sure you keep a clear head, remain focused on your objectives and take advice from a qualified professional to ensure you are making the most of your investment portfolio.

BRANCH 23 – Tax Efficient Investment In Belgium

By Spectrum IFA
This article is published on: 11th February 2019

11.02.19

While you are living in Belgium, you have a number of valuable investment options available to you. If you wish to maximise tax efficiency, Branch 21 or Branch 23 products are very attractive. These are life insurance products widely used in Belgium for saving and investment. While Branch 21 can provide security through guaranteed returns, Branch 23 offers access to a wide range of assets which can provide you with excellent long-term capital growth.

Branch 21 vs Branch 23
Branch 21 products provide the investor with a guaranteed return (at the time of writing, between 0.1% and 1%), with a possible bonus. However, the bonus is not guaranteed and is dependent on the insurer’s terms and conditions. This solution is popular as a pension strategy, but crucially the effect of inflation should always be taken into account when calculating the real rate of return.

By taking out a Branch 21 policy, you qualify for tax relief, which can mean a tax saving of up to 30% on the amounts invested. Currently you can invest up to €980 per year and receive tax relief on it. You can invest more, up to €2,350 per year, in the long-term savings system.

A Branch 21 policy can have a fixed term of, say, ten years, or it can be open-ended. An open-ended policy ends when the policy is surrendered, or on the death of the life assured. You are also able to take out additional guarantees, such as death or disability cover. Note that as this is a life insurance policy, there is a 2% tax on premiums unless it is a pension savings insurance policy.

If Branch 21 is the no-frills option, then its sibling, Branch 23, is the all singing, all dancing alternative that offers broader investment scope and the prospect of higher returns (with of course the increased risk that comes with foregoing a guaranteed yield). A Branch 23 policy can invest in a wide range of assets including:

1. International, multi-asset mutual funds
2. Discretionarily managed portfolios
3. Active or passive investments

Importantly, there is no maximum investment in a Branch 23 product, and for larger amounts you can also access personalised, discretionary investment management.

Returns will vary, depending on market conditions, your attitude to risk and the length of time you remain invested. With the help of a financial professional, you have the opportunity to design a portfolio to suit your personal circumstances, maximising potential returns whilst managing and understanding the principles of investment risk and reward.

The time horizon is key here ie. how long before you envisage needing access to your money. You should not be investing in a portfolio like this unless you have a time horizon of at least 5 years.

Tax efficient investment
As mentioned previously, these solutions are very tax efficient. A 2% tax is payable on premiums if it is not a pension savings insurance policy, but in addition to up to 30% tax relief enjoyed by Branch 21 investors, you will not have to pay withholding tax (based on a notional return of 4.75%) if you leave your funds invested for at least eight years. If you did not received a tax benefit on the premiums, then there is no tax to pay on the money that has accumulated.

With Branch 23, you still pay 2% on your premiums (like Branch 21), but you do not pay a withholding tax on your investments unless it has additional performance guarantees (for example, from structured products). In that case, the withholding tax will then be calculated on the actual return and not a notional 4.75%.

Other than that, there is no tax to pay on the final amount, or on any withdrawals.

Furthermore, these products can also be very useful when it comes to estate planning, since the beneficiary and the life assured do not necessarily have to be the same person. Let’s walk through an example: a parent wishes to gift a substantial amount of money to their child. The child can be designated as the beneficiary of the policy and the parent as the life assured. At the time of the parent’s death, no inheritance tax is due if the parent passes away at least three years after gifting the sum of money to the child (the beneficiary). This is a straightforward and reliable way of ensuring that your wealth is passed on to the people you care most about, without them having to pay inheritance tax on the bequest.

Additional benefits
On top of tax efficiency, estate planning opportunities and the freedom to invest in a wide range of international, multi-asset funds, if you have existing investments these can also be transferred into your Branch 23 policy, with flexible access when you need it.

Cash Is Not King….

By Chris Webb
This article is published on: 23rd February 2018

23.02.18

I think that it is fair to say that the global economy has been ill for some time! Central banks throughout the developed world have tried to cure the illness in the form of ultra-low interest rates and other extraordinary measures, aimed at stimulating economic growth.

The outcome is that it has ‘dethroned cash from its former place as king’
For all of us today, wealth preservation is key to the decisions that we make regarding the investment of our financial assets. This is even more important if you are approaching retirement and no longer have the possibility of increasing your wealth by saving from disposable income.

For risk-averse investors, the traditional way of saving has usually been bank deposits, feeling this is the safest and most secure way. Understandably, when you could get a decent rate of interest – especially if index-linked – then this was often sufficient for their needs. However, today, this is no longer a viable solution, particularly if the investor needs to supplement their pension income from their investment income. Even for those who do not need to take the income from their capital, the real value of their capital is not being protected in the low-interest rate environment that we are experiencing.

I am not saying that cash is entirely bad, only that the role of cash has changed and it can no longer be depended on to provide income or protect the real value of capital
I am finding more and more that negative investor sentiment, during the last year or so, has led to a situation whereby many investors are holding too much cash, i.e. in excess of what can be considered as prudent, given the very low level of interest rates. Keeping too much cash – beyond what someone may need to meet short-term capital and emergency needs – can be disastrous for savers. The decline in income generated by deposit accounts and some other ‘perceived safe-haven’ fixed interest investments have all but completely dried up. The decline is not imaginary or hypothetical and the lost income means less money to meet the household needs. Combined with a stronger Euro, which we are also currently experiencing, this can make it more difficult for the expatriate to meet their income needs.

So how do we avoid the ‘cash trap’?
The simple answer is to invest part of your financial assets in investments that are delivering a real rate of return (i.e. after allowing for inflation).Naturally, this means taking some risk, but there are different types of risk. What is clear is that investing in cash for the long-term is not a risk-free strategy.

Cash no longer delivers a ‘risk free rate’ but instead creates a ‘rate free risk’
Hence, finding the appropriate risk strategy will depend entirely upon the investor’s individual circumstances. If you need to take income from your capital, since bank deposit returns no longer meet your requirements, you need to cast a wider net than was historically needed. This will result in a move up, not down, the risk spectrum.

For the year to the end of December 2012, Headline CPI (Consumer Price Index) in the Eurozone was 2.2%, despite the fact that the European Central Bank target is to be below 2%.With cash only earning say 0.5%, this is a negative real rate of return of -1.70%. By comparison, the FTSE 100 dividend yield was 3.7% in 2012; emerging market debt and high yield debt yielded 4.5% and 6.7%, respectively, compared to UK gilts yielding 1.8%.

Looking over a longer period, the annualised change in the dividend yield of companies included in the ‘MSCI Europe ex UK Index’, over the period from December 1999 to 2012, was 4.1%. Dividends have generated constant income over decades for investors, as well as long-term capital growth.

This can be seen in the table below, which shows the proportion of the average annualised return made on the S&P 500 Index since the 1920’s that has come from dividends and capital appreciation.

Period	Dividends %	Capital Appreciation %	Total %
1926-29	4.7	13.9	18.6
1930’s	5.4	-5.3	0.1
1940’s	6.0	3.0	9.0
1950’s	5.1	13.6	18.7
1960’s	3.3	4.4	7.7
1970’s	4.2	1.6	5.8
1980’s	4.4	12.6	17.0
1990’s	2.5	15.3	17.8
2000’s	1.8	-2.7	-1.9
2010 – 2012	2.1	8.5	10.6
1926 – 2012	4.1	5.6	9.7

So despite any short-term volatility in stock markets, which may result in a short-term reduction in the value of the capital, income can still be delivered in the form of dividends.If income is not needed and instead the dividends are re-invested, the compounding effect will increase the amount of capital growth.

For example, the FTSE 100 actually resulted in a negative return of -15% during the period from December 1999 to 2012, based on the index prices. However, where the dividends were re-invested, this resulted in a positive return of 32% over the same period. Clearly, it is not a good idea to ‘put all eggs in one basket’. Therefore, it is very important to have a diversified portfolio of investments that is structured to meet the objectives of the individual investor. Avoiding the ‘cash trap’ is an essential part of that process.

If you would like more information about investing or saving on a tax-efficient basis for Spain (whether for investing an amount of capital and/or saving on a regular basis), or any other aspect of retirement and inheritance planning, please contact me by telephone on + 34 639 118185 or by e-mail at chris.webb@spectrum-ifa.com to discuss your situation, in confidence.

The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of investment of financial assets or to mitigate the effects of Spanish taxes.The Spectrum IFA Group advisers do not charge any fees for their time or for advice given, as can be seen from our Client Charter

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