What is risk? – Equities

By Peter Brooke
This article is published on: 12th June 2013

In this series of articles we are considering the different TYPES of RISK we take when investing in different assets. This should help to build a portfolio in which we fully understand what risks each part of the portfolio expose us to.

What are equities? – known as stocks or shares they are a ‘share’ in a company. As a part owner of that company we must therefore SHARE in its profits (and losses). If the company goes bust we cannot expect not to share in this and lose (normally) everything we put in! Likewise if it is very profitable then we would hope to be rewarded as owners should be (by dividend or share price growth… or both); the performance of shares is well documented and on average they outperform most other assets over the long term but do we really understand all of the different types of RISK we take as investors in shares?

Asset risk – if equities themselves, as an asset class, are out of favour then they tend to all fall together if concerns about future growth (and therefore profits) are prevalent, this can be irrelevant of the market or sector you are looking at, which may have robust fundamental reasons to invest in it but is still knocked by the market selling off all equities.

Market or Correlation risk – many major stock markets are very highly correlated, so even if you have a diverse portfolio of European, US and UK stocks, for example, you can lose on all of them if they are highly correlated.

Sector Risk – companies all do different things, provide different services and make different goods, but sometimes a whole sector will be out of favour so losing value in what is a good company may still happen if the sector it is in is not loved.

Company specific risk – this is primarily down to the quality of the board of the company and the vast majority of company directors want their companies to do well; but their share price can also be affected by regulatory changes, legal actions, competitors, patents etc. no matter how good a company may be it is not bullet proof and so different companies will perform better in different parts of the market cycle.

Liquidity Risk – if you decide to buy smaller companies which aren’t very well known then there may be a minimal ‘market’ for them… this means that if you can’t find a buyer then you either can’t sell them at all, or you accept a lower price. Most shares are traded on regulated stock exchanges and so liquidity of all but the smallest companies tends to be good.

‘Shares are the only things we don’t buy on sale’ so all of the above risks, like with most assets, can create buying opportunities. It is often best to access shares via funds as the daily choices and control are managed by a professional manager, you can then also access many different sectors and markets with relatively small portfolios.

It is vital to understand the different types of risk so your overall asset base is not over exposed to one type of risk. For example someone with a large property portfolio (liquidity risk) shouldn’t then invest in small companies but should have more money in cash (inflation risk), high quality bonds (interest rate risk) and ‘blue chip’ shares (market risk).

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

Beware: International Financial Advisers operating in Italy!

By Spectrum IFA
This article is published on: 5th June 2013

It has been brought to my attention recently that there has been a sudden increase in the number of financial advisers looking to provide advice to expats in Italy, and a number of you have been telling me that you have been solicited with unwanted phone calls.

So here are some words of caution!

International advice firms that advise expats in various countries around the world are not new. We have been around for a long time. In The Spectrum IFA groups case, 10 years. Even longer if you take into account the experience of some of the advisers in the group. However, there has been one important development in this field in the last 5 – 10 years, in Europe and that is regulation. The EU have regulated this area of financial advice a lot more.

The outcome of this is whereas International financial advisory groups might have once offered a raft of offshore products to everyone, no matter where they live, each and every product must now be tailored to meet the individual requirements of the country in which the client is living, in this case Italy. An offshore product is often NOT suitable as they are blacklisted for Italian tax purposes (although they can be suitable in some cases) and detrimental tax treatment will apply. (I will write more about this on another blog post).

Thank fully most groups now offer the right products for the respective country in which the client lives but there are still some risks in working with groups and more importantly individuals who do not have the correct tax status in Italy.

Firstly, you need to ensure that the group with whom you are working is correctly regulated in Italy. They should be registered either with ISVAP or the CONSOB, and/or have ‘passports’ from another European country to do business in Italy. Thankfully most do and so this is the least concerning area.

My biggest concern is that of the advisers themselves. Quite often advisers will live and work in Italy but without actually becoming resident here and without submitting tax declarations. This is worrying. Should you do business with these people and they are subsequently investigated by the Guardia di Finanza then I can see no other option than them leaving the country and leaving you high and dry.

At the Spectrum IFA Group it is important for us to understand exactly what our clients are going through and so we are all required to be resident in the countries in which we work, which means tax declarations.

As more and more groups decide to come to Italy and work with expats, expat financial advisers will come under more and more scrutiny to ensure that we have our own personal tax affairs in order. If not then it is problematic for the adviser but even more so for the client who is left wondering why their adviser cannot return to Italy.

I am all for good healthy competition that drives standards up and creates innovation in the market, but bad practice does not bode well for the reputation of a financial profession which has had its fair share of scandal in recent times.

My advice is always to ask the question to whom you are working with: Are you resident and paying tax in Italy?, ask to see their carta d’identita, and ask for evidence of F24 if required (to evidence that they pay their taxes). Don’t forget evidence of registration in Italy and do enough research in advance.

The Spectrum IFA group has a branch in Italy and is fully registered with ISVAP and the Camera di Commercio. (P.Iva 12418981002)

Safest way to double your money ….

By Spectrum IFA
This article is published on: 31st May 2013

31 may

UK Pensions and Living in France

By Amanda Johnson
This article is published on: 30th May 2013

When I see the Charente melons being planted in the fields near my house, I realise that the winter has finally left us and another year has flown by. To many people who now live in France, each year that passes brings us one step closer to retirement and being able further enjoy our French adventure. Working and living in France brings different factors to bear than being in the UK and without careful consideration and planning these can result in your pension being lower than anticipated.

People often ask me: “How much will my UK pension likely be & how can I maximise my pension when I come to retire in France?”

Helping people understand what their pension position is and how they get best manage retirement plans in France is a key part of my role. Here are some of the areas we discuss:

UK state pensions
Work & other private pensions
French retirement options (including returning to the UK)
Inheritance
Peoples increasing life expectancy
Property and other assets as a pension pot
Paying tax on your pensions (how & where)

Having left the UK, you may not have paid sufficient National Insurance (“NI”) contributions or if self-employed, paid a different NI class to qualify for a full state pension.

You may have pension pots from working at different companies and having moved to France want an opportunity to understand how these will mature and whether they can be better put to work for your retirement plans. Inheritance issues and any property you are thinking of using to supplement pension income is also worth noting.

Finally, how and where you pay tax on your pensions can be discussed to ensure that the tax you pay is as low as possible.

If you are living and working in France and have not considered your retirement plans, perhaps you would like me to visit you and have a free financial health check or simply email me with any questions and I would be happy to help.

“The goal of retirement … “

By Spectrum IFA
This article is published on: 26th May 2013

26-may

Take control of your UK pension: QROPS

By Craig Welsh
This article is published on: 24th May 2013

24.05.13

Many expatriates remain unaware that British pensions can be transferred out of the UK. Should you be looking at QROPS to take control of your UK pension?

Since April 2006, individuals who have left the UK – and left behind private or company pension benefits – are entitled to a QROPS pension transfer. HMRC introduced the ‘Qualifying Recognised Overseas Pension Schemes’ (QROPS) to allow non-UK residents to transfer their frozen pensions outside of the UK.

This has led to many expats contacting their advisers for further information on how to improve their retirement options. And it’s not limited to the British; there are many foreign nationals who have built up a pension pot while working in the UK that can benefit from a QROPS pension transfer.

Pension transfers under QROPS are a tax efficient way for expats to greatly enhance their pension flexibility. Pensions in the UK are subject to very restrictive tax rules when it comes to succession planning and this can be much improved by moving the pension to another jurisdiction.

In some circumstances it may not be appropriate to transfer your pension, therefore, It is essential that a proper analysis is carried by a licensed and fully qualified adviser. This is a highly specialist type of financial planning and should not be entered into lightly. Should I consider using QROPS?

If you fit the profile below, then you should consider contacting us for a free analysis of your situation:

You are no longer resident in the UK.
You do not intend to return to the UK.
You have a UK pension (or a number of pensions) with a total minimum value of GBP 50,000.

So what are the key benefits?

Succession Upon death most people would like to think that as much of their assets as possible would be passed onto their heirs. However, in the UK there can be a tax charge of 55 percent on your remaining pension if it is in drawdown and paid out as a death lump sum.

Furthermore, with many conventional final salary schemes, the widow’s/widower’s pension is only half the main pension, sometimes less if the spouse is quite a bit younger. A QROPS gives you the option to pass on the pension fund to your spouse, children and/or grandchildren as a pension or a lump sum, free of tax.

Investment choice By moving an arrangement out of the UK, there is a much wider choice of international investments available. Some existing pension schemes can be very restrictive in the choice of funds (UK only), or permitted investments. Most QROPS transfers can provide access to a wide range of sophisticated funds to suit your risk profile and lifestyle stage.

Currency Risk The underlying investments and income payments from a QROPS scheme can be denominated in a choice of currencies to reduce the risk of currency fluctuations. Many British retirees have suffered as the British pound depreciated in recent years against the currency zone they are living in. A QROPS can help you manage this risk.

Flexibility in retirement Your circumstances can change during your retirement years, for example, you may still do some work or you may move countries again. You will therefore need a number of options when it comes to taking your pension benefits.

In such situations, pensioners need to consider the PCLS (Pension Commencement Lump Sum – up to 30 percent with a QROPS scheme) and the level of regular income you need. A good solution under QROPS will allow you to vary your income in the future, rather than fixing it at one rate. Professional Advice Above all, getting professional advice is crucial, as well as choosing the right jurisdiction in which to transfer under the QROPS provisions. The pension should still be treated as a pension, i.e. it is not intended to be a way to ‘cash-out’ early. HMRC will come down hard on individuals, schemes and jurisdictions which abuse the rules.

A suitably approved scheme provider is also essential. At Spectrum we offer a free analysis of your pensions by our highly qualified advisory team, as well as our ongoing advice on portfolio management and the various retirement options.

What is risk? – Property

By Peter Brooke
This article is published on: 20th May 2013

We, as Anglo Saxon and Northern European types tend to have a bit of an obsession with owning property; it is an important part of our culture and we feel secure in the knowledge we own real estate.

It is very understandable, especially for an Englishman, why owning your own home is a very good idea (control of what it looks and feels like, feeling of “home”, long term outlook etc) but I believe that many people will tend not to look at ALL of the basic investment factors when selecting a property to buy (to live in or as a pure investment)… including risk.

Of course, location (location, location), price, quality, taxes and running maintenance costs are normally considered to some extent but for some reason many investors tend to believe that property is in some way risk free; . Like all investments we should “buy with our heads” and “sell with our hearts”, too many of us get this the wrong way round and ignore some of the issues that can really cost us dearly. Let’s look more closely at the property specific risks.

Liquidity Risk – the biggest single risk when buying property! Can you get your money out if you need it (or if something better comes along)? On the whole the answer is ‘no’ – or at least not quickly. If you find a buyer tomorrow you are unlikely to have your money back within 3 months; if you are looking for a quick sale then you can seriously damage your return by taking a low offer.

Interest rate risk – if you are borrowing to buy, as most people do (and probably should) then there is a risk that your cash flow will be affected and the total cost of your property over its life could go up dramatically, if interest rates move.

Market/Investment risk – as we saw in 2008 the price of property can fall as well as increase…. Again many investors feel that property is in some way a sure fire investment guaranteed to make money – like all other forms of investment asset this is only true if you buy the right property, in the right place at the right price. When property markets crash they tend to do so heavily and take a longer time to recover than more liquid markets.

Tax/Governmental Risk – one of the easiest assets to tax more in times of economic strife are properties, especially those owned by investors (as they tend to be easy political targets). Increases in local rates and taxes on property are easy to push through and raise a significant sum for government.

This article is for information only and should not be considered as advice. This article is written by Peter Brooke The Spectrum IFA Group

‘Ask Amanda’ – The Deux Sevres Magazine & the Vendee edition

By Amanda Johnson
This article is published on: 15th May 2013

Welcome to “Ask Amanda”.

I have been writing regularly for the Deux Sevres Magazine and am delighted to be invited to now contribute to the Vendee edition. I want to start by introducing myself.

I am Amanda Johnson and have lived in the Loudun area, with my family, for the past 7 years. I am a Financial Planner working with the regulated Independent Finance company “The Spectrum IFA Group”. We specialise in helping expatriates understand the benefits and obligations of living in the French system. Bilingual, with 20 years of financial experience in the UK, I am authorised through Orias in France and The Spectrum Group is also registered with the AMF.

Living in France is very rewarding but many of the rules and regulations, especially when it comes to taxation, inheritance, retirement planning, buying and renovating your home, differ from the UK. Working closely with colleagues throughout France ensures I can share experiences, best practices and keep you abreast of changes in French financial law. This is why I consider it important to have a servicing strategy of regular face to face meetings with my clients.

I am frequently asked about Inheritance tax planning and can usually make recommendations that ensure when you have lost a loved one any financial loss is kept to a minimum? I can help you optimise your savings by offering a range of investments in major currencies, protecting you from exchange fluctuations and from inheritance tax should the worst happen. I can also review existing pension arrangements giving advice on your future retirement plans.

Over the coming months I will be detailing questions I am asked and providing answers which have helped my customers & I hope will assist you. For a Free Consultation, on Inheritance tax, investments, retirement planning and tax efficient buying or renovating your home, or to review your current circumstances, please contact me.

What is risk? – Bonds

By Peter Brooke
This article is published on: 23rd April 2013

The term bond is broadly used in the financial industry; here we concentrate on the “investment asset” often known as fixed interest, fixed income or debt securities. Government Bonds have their own specific names too; e.g. UK GILTS, US T-Bills & German BUNDS.

If a company or government needs to raise money and doesn’t want to (or can’t) issue new shares or borrow from a bank they may issue a bond. It promises to repay the bond holder its face value on a set date in the future and until then will pay interest for the loan (the coupon). Bonds are issued on the ‘issue date’ but can be freely traded on the bond market so their price can fluctuate with normal market conditions. The fluctuation in price means that the ‘yield’ changes too – this is the fixed coupon but if bought at a different price gives a different actual yield.

When a company is wound up (e.g. on bankruptcy) the bond holders, as creditors, are repaid from the assets of the company before shareholders; this means that bonds are considered safer to hold than shares. The coupon must also be paid before any dividends. So what risks should we consider before buying bonds:

Default Risk – can the bond issuer repay me my coupon every year AND can they pay me back at the end of the term?

Interest rate risk – as rates go up, bond values fall (and vice versa). In a low interest rate environment are we exposing the value of our capital to risk if interest rates are increased?

Market risk – these are investments, and though considered safe a flow of money out of the bond markets because of lack of confidence can affect prices.

Issuer specific risk – a lack of confidence in the future of the company can, like shares, create a selling of the bonds too.

Liquidity risk – if buying smaller company or peripheral government bonds, it can be tricky to sell them should you need to quickly.

SAFETY vs RISK – at the moment developed government and many ‘blue chip’ company bonds are trading at record low yields, and though they are considered SAFE (as they are unlikely to default) this doesn’t mean they are without RISK. If a bond has a yield of 1.5% and interest rates go up by 1% it is possible to lose 10% of the capital value… this is now not LOW RISK.

Buying bonds through a fund can often help reduce many risks; the manager can choose which sectors to invest in or not and can manage the specific risks appropriately. We favour global strategic bond funds as they have a very broad remit and a very large bond universe to invest into.

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

How can expats can get their ‘nest-egg’ savings working harder despite low-interest rates

By Craig Welsh
This article is published on: 2nd April 2013

02.04.13

Returns from bank savings accounts are at an all-time low, and savers are becoming increasingly frustrated. Interest rates in the western world are at extremely low levels, with the euro base rate at 0.75 percent. In the UK it is even lower, at 0.5 percent. While this helps some people, such as mortgage holders with tracker rates, savers are being punished as banks have continually cut the interest rates paid on savings accounts. Retirees drawing a pension, or looking to buy an annuity, have also been hit hard in this low-interest rate environment.

Low interest rates are here to stay
First, it doesn’t look like this will change for quite some time. The prevailing policy of central banks has been to increase money supply (quantitative easing), maintain liquidity in the banking system and keep interest rates low. Even a slight increase in the base rate over the next couple of years is unlikely to result in decent interest rates on savings.

Second, inflation is running at around 2 – 3 percent depending on which part of Europe you live in. It just feels like everything is getting more expensive, especially food and energy costs. The end result is that we are effectively losing money by leaving it in the bank.

Of course, we all need to leave some cash in the bank as our emergency fund (most financial planners would recommend around six months of income). But it is the ‘nest egg’ money (the savings that we don’t really need in the short-term) that we can do something about.

How can you get your nest egg working harder?
With the objective of ‘beating the bank’ over the longer-term, you can build a diversified portfolio of investments. In plain English this means spreading your money around and not having ‘all of your eggs in one basket’. Assets primarily fall into one of the following categories: equities (shares in companies), fixed-interest bonds, property, cash or commodities.

Lifestyle investing
You need to be clear about your ‘Risk Profile’. At Spectrum, we carry out a ‘Risk Profiler’ exercise which aims to establish the level of risk you are comfortable with and helps you understand the relationship between risk and reward. We then employ a forward-looking ‘Life-styling Process’ which means building a portfolio to match your own personal situation and objectives.

The eventual portfolio should therefore match your risk profile, usually measured from ‘cautious’ at the lower end of the scale, ‘balanced’ and then ‘adventurous’ at the higher end. The investment strategy should therefore be appropriate for your stage of life.

What assets to invest in
There are literally thousands of investment funds and vehicles to choose from. At Spectrum, we filter these by using strict criteria when choosing clients’ investments. For example we only use: UCITS compliant, EU regulated funds. This ensures maximum client protection and highest levels of reporting. Daily priced, liquid funds, so that clients do not get ‘locked-in’ to funds. Financially strong and secure investment houses. Funds which are highly rated by at least two independent research companies.

Multi-asset funds
Multi-asset funds are popular with clients as they are managed by experienced asset managers who, through active daily management, can offer access to all asset classes within a single fund. Their job is to capture capital growth while also protecting investors when markets suffer a downturn. Some fund managers have a great track record of doing this, for example Jupiter Asset Management’s Merlin International Balanced Portfolio, which has returned +34 percent (euro share class, as at end Feb 2012) since launch in late 2008, with relatively low volatility.

Multi-asset funds can be used as a ‘core’ holding within a portfolio, with more specialised and sector-focussed funds making up the rest of the portfolio.

Equities (shares)
Many blue-chip companies have very strong balance sheets and pay dividends of around 4 percent, which is higher than current interest rates. This dividend income can be re-invested into your capital (unless you need the income). The capital value of course will fluctuate but if you are investing for the longer-term you have time to ‘ride out’ any volatility.

Equity funds can be global in nature, regionally specific (for example focussing on emerging market countries) or even country specific. Other types of equity funds focus on smaller ‘growth-orientated’ companies rather than blue-chip, dividend paying stocks.

Ethical investing
Ethical funds are also an option. These are funds which only invest in ‘ethical’ companies. They are screened and assessed on criteria such as environment, military involvement or animal welfare.

Fixed-interest bonds
These include government bonds and corporate bonds. Western government bonds were traditionally seen as ‘safe havens‘, however yields are now currently as low as cash. You could consider corporate bonds, which are categorised in terms of risk (higher-yielding bonds means higher capital risk). Emerging market bond funds (with exposure to local currencies) could also be considered.

Many investors like to get exposure to bonds via a fund, which is a diversified mixture of bonds. One good option may be Kames Capital’s Strategic Bond Fund, with a return of +57 percent (euro share class, as at end Feb 2013) since launch in November 2007.

Commodities Commodity-focussed funds can be volatile and would normally make up only a small part of a portfolio. However there is potential for long-term growth by investing in companies with exposure to precious metals and resources (gold, silver, iron ore, copper) as well as other ‘soft’ commodities such as agricultural resources and the food sector.

Property
Collective property funds or property-related shares could also form a small part of your portfolio. Physical property by its nature is illiquid but by using a property fund you can obtain exposure to shares in property companies, keeping your money liquid.

Review your portfolio regularly

It is vitally important that your portfolio is regularly reviewed. One reason why people do not get the most from their finances is the lack of regular attention paid to their arrangements. Consider using a regulated, independent adviser who should offer regular reviews as part of their ongoing service.

At Spectrum we have an in-house Portfolio Management team, helping advisers and clients monitor client portfolios regularly for performance and suitability. One aspect of our regular reviews is ‘profit-take alerts’; when one area of your portfolio has out-performed, then why not take some profits? Investors can really benefit from such active management.