How can I diversify my investments to remove risk?
10 April 2008
Reader Writes:
I have spoken to my bank and they have told me to diversify my investments to take risk out. Can you explain how that can be done?
So much emphasis is placed on diversification of investments but, in fairness it is a very difficult task.
For the ...
10 April 2008
Reader Writes:
I have spoken to my bank and they have told me to diversify my investments to take risk out. Can you explain how that can be done?
So much emphasis is placed on diversification of investments but, in fairness it is a very difficult task.
For the insurance companies who offer their managed, or managed cautious funds, this may simply mean that, come what may, you still invest your money with them and they get their cut. Whether your investment is up or down is not relevant, at least you were diversified!
For the financial adviser it may mean a spread across a wide range of funds that can prove risk is reduced.
For the customer I suspect it means you maximise returns and minimise risk and outperform inflation.
Warren Buffet however believes diversification is for those who have no idea what they are doing.
I can understand what he means. If you believe interest rates are rising for example, it's easy to see why you might avoid some fixed interests. Moreover, Buffet's views are that you should know your subject so well, that diversification is not required, i.e. buy what you know will go up, don’t buy what will go down. Simple I suppose.
For most of us lacking Mr Buffet's skill, we have to rely on the fact that diversification is required and of course that brings with it huge potential to get things wrong.
For me, diversification equates to that old model of 'negative correlation' ie buying a perfectly good Wellington boot company and a perfectly good ice cream company. In normal conditions both will perform well, but in extreme conditions one will rebalance the other.
I must admit to being more than humoured by a recent report I read, where an adviser had recommended a customer to diversify their holdings. The customer was advised to invest in a with profits bond and technology. What a great idea - lose money or just watch inflation batter the remaining capital!
The backbone of most diversification models means you simply spread your cash across a wide range of sectors and assets such as property, fixed interests, overseas equities and UK equities for example. This is easy to get wrong, and another recent report I saw was ultimately flawed in the fact that the attempt at negative correlation failed. Boy had it failed.
Property is often seen as a diversification to equities and it is.
Whilst this may be a little scientific, bear with me. When we are measuring diversification we measure via a term called correlation coefficient. Effective diversification comes when the correlation coefficient is a low perfect positive, or perfect negative correlation to another asset class.
UK property as an asset for example has a 22% positive correlation to UK equities, 19% to overseas equities, 10% to fixed interest and 23% to global Real estate investment trust (REITs). All very good. This is clearly a good diversifier from most of the other asset classes. Overseas equities have a 90% correlation with UK equities and a 62% correlation with REITs showing a high positive correlation which is not good for effective diversification.1
The report I read was interesting in that the adviser had chosen a REIT and also Aberdeen property share (a spread of property shares) as a property diversifier with UK equities. A REIT and also the shares have very high positive correlation which effectively means there is no diversification at all - a point they will now understand very clearly because of the activities of the last few months. It is only the property assets as opposed to property shares that provide diversification.
In any event, asset allocation models are not prescriptive in diversifying. They are only as good as your ability to continue to use historic data regarding the economy for forward planning. For example a basic understanding of the economy would have directed you to offload property and fixed interests some twelve months ago. Easy isn’t it.
Source1: Lipper
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I have spoken to my bank and they have told me to diversify my investments to take risk out. Can you explain how that can be done?
So much emphasis is placed on diversification of investments but, in fairness it is a very difficult task.
For the insurance companies who offer their managed, or managed cautious funds, this may simply mean that, come what may, you still invest your money with them and they get their cut. Whether your investment is up or down is not relevant, at least you were diversified!
For the financial adviser it may mean a spread across a wide range of funds that can prove risk is reduced.
For the customer I suspect it means you maximise returns and minimise risk and outperform inflation.
Warren Buffet however believes diversification is for those who have no idea what they are doing.
I can understand what he means. If you believe interest rates are rising for example, it's easy to see why you might avoid some fixed interests. Moreover, Buffet's views are that you should know your subject so well, that diversification is not required, i.e. buy what you know will go up, don’t buy what will go down. Simple I suppose.
For most of us lacking Mr Buffet's skill, we have to rely on the fact that diversification is required and of course that brings with it huge potential to get things wrong.
For me, diversification equates to that old model of 'negative correlation' ie buying a perfectly good Wellington boot company and a perfectly good ice cream company. In normal conditions both will perform well, but in extreme conditions one will rebalance the other.
I must admit to being more than humoured by a recent report I read, where an adviser had recommended a customer to diversify their holdings. The customer was advised to invest in a with profits bond and technology. What a great idea - lose money or just watch inflation batter the remaining capital!
The backbone of most diversification models means you simply spread your cash across a wide range of sectors and assets such as property, fixed interests, overseas equities and UK equities for example. This is easy to get wrong, and another recent report I saw was ultimately flawed in the fact that the attempt at negative correlation failed. Boy had it failed.
Property is often seen as a diversification to equities and it is.
Whilst this may be a little scientific, bear with me. When we are measuring diversification we measure via a term called correlation coefficient. Effective diversification comes when the correlation coefficient is a low perfect positive, or perfect negative correlation to another asset class.
UK property as an asset for example has a 22% positive correlation to UK equities, 19% to overseas equities, 10% to fixed interest and 23% to global Real estate investment trust (REITs). All very good. This is clearly a good diversifier from most of the other asset classes. Overseas equities have a 90% correlation with UK equities and a 62% correlation with REITs showing a high positive correlation which is not good for effective diversification.1
The report I read was interesting in that the adviser had chosen a REIT and also Aberdeen property share (a spread of property shares) as a property diversifier with UK equities. A REIT and also the shares have very high positive correlation which effectively means there is no diversification at all - a point they will now understand very clearly because of the activities of the last few months. It is only the property assets as opposed to property shares that provide diversification.
In any event, asset allocation models are not prescriptive in diversifying. They are only as good as your ability to continue to use historic data regarding the economy for forward planning. For example a basic understanding of the economy would have directed you to offload property and fixed interests some twelve months ago. Easy isn’t it.
Source1: Lipper
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
How green can we be?
19 March 2008
Reader Writes:
I read your article on green investments and how poorly they have performed and wondered if you had a view on where to invest to maximise any gain in this market?
Whilst many have dived onto the bandwagon of greenness and others have been careful not to ...
19 March 2008
Reader Writes:
I read your article on green investments and how poorly they have performed and wondered if you had a view on where to invest to maximise any gain in this market?
Whilst many have dived onto the bandwagon of greenness and others have been careful not to say what they really think about the big green marketing campaign, we pointed out some harsh facts in relation to green investment in a recent column.
Here we are, some six months later and governments are still no nearer to formalising a policy on green energy. We are, however, being battered for tax for what cars we use.
In the US, Republicans are of the view that only 20% of global warming relates to human agency.1
Some experts believe the world is simply getting hotter because the sun is getting hotter. You can agree or disagree. After all, Mars, Pluto and Jupiter are apparently heating up at the same pace as the earth and the last time I was there, I never saw one 4x4.2
The latest intergovernmental panel on Climate change however predicts warming of between 2-12 degrees Fahrenheit from greenhouse gases by 2100, yet no policies are in place!
I must have missed something. Where’s the urgency? The last thing I want as a 132 year-old is having to slap on sun cream on Christmas day whilst dipping my feet in the Atlantic ocean from my front door.
Worryingly, green fuels have a flat futures price (the market believes they will not go up in price), and dirty fuels have an upward curve in their future price – the market believes they will rise. How can that be? It can only really be if they believed that demand will increase and supply will fall. 1
A cynic could now find themselves becoming quite cynical.
Perhaps they could believe that it’s all simply a nice way to tax people, after all who wouldn’t want to take care of mother earth. Perhaps.
Consider that fuel prices are supposedly increased to discourage you from using your car. Well quite clearly this has not worked as there are record cars on the road, so surely a strategy change is required? In 1995 petrol stood at 54p of which 73% was tax. Today we are paying an unhealthy 105p, nearly a 100% increase. 3
Demand for energy is set to rise by over 50% in the next 25 years but the international energy agency believes that will be provided by the dirty fuels unless there is a policy regime change. 1
Oil and coal are the biggest co2 emitters and given that we are predicted to reach our highest temperature in three million years within the next 50 years, one would have thought there would be a sense of urgency about governments.1 Unfortunately not, we just have a strategy of higher taxation and you can take from that what you may.
If we are to believe that governments will wake up and take a speedy, responsible approach we will see that considerable investment is required – over $20 trillion to be exact, of which a staggering 50% is for infrastructure.1
Whilst many green funds are geared to try and make money from this, they haven’t been that successful.
The Schroder global climate change fund is not a green fund, it is simply a fund that aims to make money out of the industrial transformation required above to support climate change.
Whilst there are numerous environmental bills and acts under consideration, their enactment will drive strong returns to those companies meeting the demands of the future climate. The two managers of the fund, Simon Webber and Matthew Franklin have experience in technology, industrial, utility and material stocks.
They have simply segmented the stocks into five themes of investment, namely: energy efficiency, low carbon fossil fuels, clean energy, sustainable transport and environmental resources. Furthermore they segment into adaptation and mitigation, the latter referring to those companies who are preventing climate change such as carbon fuels and energy waste saving companies.
For a fact sheet on green investing or if you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on ethical and green investment.
Source
1 Barclays equity gilt study
2 Times
3 www.petrolprices.com
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I read your article on green investments and how poorly they have performed and wondered if you had a view on where to invest to maximise any gain in this market?
Whilst many have dived onto the bandwagon of greenness and others have been careful not to say what they really think about the big green marketing campaign, we pointed out some harsh facts in relation to green investment in a recent column.
Here we are, some six months later and governments are still no nearer to formalising a policy on green energy. We are, however, being battered for tax for what cars we use.
In the US, Republicans are of the view that only 20% of global warming relates to human agency.1
Some experts believe the world is simply getting hotter because the sun is getting hotter. You can agree or disagree. After all, Mars, Pluto and Jupiter are apparently heating up at the same pace as the earth and the last time I was there, I never saw one 4x4.2
The latest intergovernmental panel on Climate change however predicts warming of between 2-12 degrees Fahrenheit from greenhouse gases by 2100, yet no policies are in place!
I must have missed something. Where’s the urgency? The last thing I want as a 132 year-old is having to slap on sun cream on Christmas day whilst dipping my feet in the Atlantic ocean from my front door.
Worryingly, green fuels have a flat futures price (the market believes they will not go up in price), and dirty fuels have an upward curve in their future price – the market believes they will rise. How can that be? It can only really be if they believed that demand will increase and supply will fall. 1
A cynic could now find themselves becoming quite cynical.
Perhaps they could believe that it’s all simply a nice way to tax people, after all who wouldn’t want to take care of mother earth. Perhaps.
Consider that fuel prices are supposedly increased to discourage you from using your car. Well quite clearly this has not worked as there are record cars on the road, so surely a strategy change is required? In 1995 petrol stood at 54p of which 73% was tax. Today we are paying an unhealthy 105p, nearly a 100% increase. 3
Demand for energy is set to rise by over 50% in the next 25 years but the international energy agency believes that will be provided by the dirty fuels unless there is a policy regime change. 1
Oil and coal are the biggest co2 emitters and given that we are predicted to reach our highest temperature in three million years within the next 50 years, one would have thought there would be a sense of urgency about governments.1 Unfortunately not, we just have a strategy of higher taxation and you can take from that what you may.
If we are to believe that governments will wake up and take a speedy, responsible approach we will see that considerable investment is required – over $20 trillion to be exact, of which a staggering 50% is for infrastructure.1
Whilst many green funds are geared to try and make money from this, they haven’t been that successful.
The Schroder global climate change fund is not a green fund, it is simply a fund that aims to make money out of the industrial transformation required above to support climate change.
Whilst there are numerous environmental bills and acts under consideration, their enactment will drive strong returns to those companies meeting the demands of the future climate. The two managers of the fund, Simon Webber and Matthew Franklin have experience in technology, industrial, utility and material stocks.
They have simply segmented the stocks into five themes of investment, namely: energy efficiency, low carbon fossil fuels, clean energy, sustainable transport and environmental resources. Furthermore they segment into adaptation and mitigation, the latter referring to those companies who are preventing climate change such as carbon fuels and energy waste saving companies.
For a fact sheet on green investing or if you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on ethical and green investment.
Source
1 Barclays equity gilt study
2 Times
3 www.petrolprices.com
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Multi Managers - A good idea?
11 March 2008
Reader Writes:
I have a range of investment funds across a wide selection of companies and I have heard about multi managers and how they manage all my money for me. Is this a good idea?
Multi management is a basic evolution from the old monkey world of large ...
11 March 2008
Reader Writes:
I have a range of investment funds across a wide selection of companies and I have heard about multi managers and how they manage all my money for me. Is this a good idea?
Multi management is a basic evolution from the old monkey world of large insurance company funds. You’ll find these without any difficulty in your old and new pensions as well as many insurance bonds.
In 2006 £24 billion was invested in onshore insurance bonds of which, I suspect, a high proportion was invested into such managed funds.1 That’s amazing given their poor performance.
The difficulty with these arrangements is well documented. They are typically large funds with massive holdings in individual stocks which are very difficult to manage quickly.
If, for example, a fund has £4bn invested, they may have a spread across 100 stocks. If so, they may have £40,000,000 invested in one stock. How can they possibly move that cash quickly if they want to consolidate gains. Often the manager simply maintains a position of just investing and holding the cash, and of course thanks you for your payment for that. The consequence is a consistent underperformance of the market.
The other key issue here is the fact that each of these funds spread their capital across a range of financial and geographical sectors such as the UK, U.S. banking, technology etc. In this respect how can we reasonably expect a fund manager to be the best at each area?
Many of the managers have few, if any people on the ground in the countries they are investing into. How are they supposed to visit and keep a close eye on the companies they are investing into? The answer is they can’t.
And so the next stage arises where we need a specialist fund manager for each area. It makes sense after all to pick the best UK manager, best US manager and so on.
A multi manager claims to do that for you. They also claim to know how to decide which sectors your cash should be in (asset allocate).
For the most part however, the numbers are more than disappointing with very few adding value on a consistent basis.
Let’s take F&C multi manager for example. I measured its performance over twenty quarters. On average it was fifth decile (getting five out of ten) in each of the quarters.2 Its risk was sixth decile and its performance was also 5th decile.
So here we have a fund that is supposed to be adding value but is actually underperforming at best. Many of these funds can also have quite expensive charges layered on top of the normal fund charge making them riskier again in that they have to go that little bit extra to recoup the charges.
There is also the issue with their strategies. Whilst you may look at the performance of a fund today and see that they have actually done very well, the truth is that return may well have come from taking an undue risk or indeed from a good call.
Take the New star team. They have a very clear strategy and their Alpha fund is showing just rewards. Whilst their tactical fund is also showing good returns it must be borne in mind that the underlying investments have had an exposure of c40% in Asia.3 This has proved to be a good call but the same call could easily have turned against them.
We like Jupiter Merlin Growth, M&G managed, New star active portfolio all of which pass our criteria on risk and qualitative analysis.
It’s fair to say that to dwindle to just three from all the options available tells you something.
Few add value and these should not be a dumping ground for financial advisers to park money whilst relinquishing their responsibilities.
For a fact sheet on the better performing multi manager funds call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment
Source
1 Standard Life
2 Lipper
3 Sesame
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I have a range of investment funds across a wide selection of companies and I have heard about multi managers and how they manage all my money for me. Is this a good idea?
Multi management is a basic evolution from the old monkey world of large insurance company funds. You’ll find these without any difficulty in your old and new pensions as well as many insurance bonds.
In 2006 £24 billion was invested in onshore insurance bonds of which, I suspect, a high proportion was invested into such managed funds.1 That’s amazing given their poor performance.
The difficulty with these arrangements is well documented. They are typically large funds with massive holdings in individual stocks which are very difficult to manage quickly.
If, for example, a fund has £4bn invested, they may have a spread across 100 stocks. If so, they may have £40,000,000 invested in one stock. How can they possibly move that cash quickly if they want to consolidate gains. Often the manager simply maintains a position of just investing and holding the cash, and of course thanks you for your payment for that. The consequence is a consistent underperformance of the market.
The other key issue here is the fact that each of these funds spread their capital across a range of financial and geographical sectors such as the UK, U.S. banking, technology etc. In this respect how can we reasonably expect a fund manager to be the best at each area?
Many of the managers have few, if any people on the ground in the countries they are investing into. How are they supposed to visit and keep a close eye on the companies they are investing into? The answer is they can’t.
And so the next stage arises where we need a specialist fund manager for each area. It makes sense after all to pick the best UK manager, best US manager and so on.
A multi manager claims to do that for you. They also claim to know how to decide which sectors your cash should be in (asset allocate).
For the most part however, the numbers are more than disappointing with very few adding value on a consistent basis.
Let’s take F&C multi manager for example. I measured its performance over twenty quarters. On average it was fifth decile (getting five out of ten) in each of the quarters.2 Its risk was sixth decile and its performance was also 5th decile.
So here we have a fund that is supposed to be adding value but is actually underperforming at best. Many of these funds can also have quite expensive charges layered on top of the normal fund charge making them riskier again in that they have to go that little bit extra to recoup the charges.
There is also the issue with their strategies. Whilst you may look at the performance of a fund today and see that they have actually done very well, the truth is that return may well have come from taking an undue risk or indeed from a good call.
Take the New star team. They have a very clear strategy and their Alpha fund is showing just rewards. Whilst their tactical fund is also showing good returns it must be borne in mind that the underlying investments have had an exposure of c40% in Asia.3 This has proved to be a good call but the same call could easily have turned against them.
We like Jupiter Merlin Growth, M&G managed, New star active portfolio all of which pass our criteria on risk and qualitative analysis.
It’s fair to say that to dwindle to just three from all the options available tells you something.
Few add value and these should not be a dumping ground for financial advisers to park money whilst relinquishing their responsibilities.
For a fact sheet on the better performing multi manager funds call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment
Source
1 Standard Life
2 Lipper
3 Sesame
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Shakey markets & the reporting season
6 March 2008
Reader Writes:
What is your view on the market given the last bout of instability and the banking reporting season?
At the time of writing the final numbers for the banks are not through but there is clearly plenty of unexpected news out there to come. I will separate the ...
6 March 2008
Reader Writes:
What is your view on the market given the last bout of instability and the banking reporting season?
At the time of writing the final numbers for the banks are not through but there is clearly plenty of unexpected news out there to come. I will separate the question above as they are related but different.
Firstly the concerns on the market relate mainly to the US and recessionary fears. The US going into recession is the main concern, and will the UK follow is another. The truth is the US is probably already in recession and that should come as no shock. Weak retail numbers at supermarkets, an increase in unemployment and a struggling housing market will probably show in a few months time that the US is indeed already there. On a positive note, the Fed reacted strongly and that should make its way slowly to the market to stabilise before the year end so as to ensure we don’t have a continued recession in 2009. The housing market is still an issue and it’s well known that rate drops take up to eighteen months to have their true impact on the economy, so we should keep a keen eye on that. The only risk is that the Feds keenness to avoid recession may see its way through to inflationary pressures later.
Considerable risk still remains in the banking sector, particularly through opacity. Whilst banks have injected large amounts of liquidity into the system, and this has reassured the market, we worry about what we can’t see.
Take the situation at Bradford and Bingley. The bank has just announced it has impairment charges of £226m of which £94 million where in relation to complex derivatives backed by sub prime mortgages in the US.1 Many were surprised they had such an exposure. It is precisely this lack of clear information that concerns investors and the market. News that it had a 42% increase in arrears and a trebling in charge to cover sour loans of £22.5m is transparent and whilst bad news, is easy to understand. For many the fact they have had such an exposure to complex structured investment vehicles and collaterised debt obligations in the US is too much opacity to handle. Their pre tax profit was cut by £121m and its share price plummeted by 23% to an all-time low of 187p. The concerns about the debt and opacity have then pushed other banks share prices down further.
So is it all over? Unfortunately not. The G7 finance ministers recently announced they believed the total losses from credit problems could reach $400bn but as yet we have only had $150 – 175bn written off by the banks.2 There is further bad news to come. Concerns over the mono line insurers being re rated in the US, forcing an inevitable sell off, leave the investor thinking they are better leaving that bar until the brawl finishes.
Banks will need to write off more capital and in turn more capital will have to be raised. This will take some time to make its way out of the crisis we are in. In the meantime lenders will continue to be as tight on their lending processes which will force even more pressure on demand in the housing market.
All of that aside, its clear that most of this has already been priced into the market for 2008 and also into 2009. In many individual stocks we have looked at, there is also a considerable mark down on the share price based on the overall bad news that exists in the market. Is it fair to mark all banking stocks down for example when not all have the same exposure to arrears, bad debt and US based collaterised debt obligations? This has left the equity market relatively fairly priced but also cheap in certain sectors leaving an opportunity for growth but expect further volatility.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment.
Sources
1 Guardian
2 Standard Life
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
What is your view on the market given the last bout of instability and the banking reporting season?
At the time of writing the final numbers for the banks are not through but there is clearly plenty of unexpected news out there to come. I will separate the question above as they are related but different.
Firstly the concerns on the market relate mainly to the US and recessionary fears. The US going into recession is the main concern, and will the UK follow is another. The truth is the US is probably already in recession and that should come as no shock. Weak retail numbers at supermarkets, an increase in unemployment and a struggling housing market will probably show in a few months time that the US is indeed already there. On a positive note, the Fed reacted strongly and that should make its way slowly to the market to stabilise before the year end so as to ensure we don’t have a continued recession in 2009. The housing market is still an issue and it’s well known that rate drops take up to eighteen months to have their true impact on the economy, so we should keep a keen eye on that. The only risk is that the Feds keenness to avoid recession may see its way through to inflationary pressures later.
Considerable risk still remains in the banking sector, particularly through opacity. Whilst banks have injected large amounts of liquidity into the system, and this has reassured the market, we worry about what we can’t see.
Take the situation at Bradford and Bingley. The bank has just announced it has impairment charges of £226m of which £94 million where in relation to complex derivatives backed by sub prime mortgages in the US.1 Many were surprised they had such an exposure. It is precisely this lack of clear information that concerns investors and the market. News that it had a 42% increase in arrears and a trebling in charge to cover sour loans of £22.5m is transparent and whilst bad news, is easy to understand. For many the fact they have had such an exposure to complex structured investment vehicles and collaterised debt obligations in the US is too much opacity to handle. Their pre tax profit was cut by £121m and its share price plummeted by 23% to an all-time low of 187p. The concerns about the debt and opacity have then pushed other banks share prices down further.
So is it all over? Unfortunately not. The G7 finance ministers recently announced they believed the total losses from credit problems could reach $400bn but as yet we have only had $150 – 175bn written off by the banks.2 There is further bad news to come. Concerns over the mono line insurers being re rated in the US, forcing an inevitable sell off, leave the investor thinking they are better leaving that bar until the brawl finishes.
Banks will need to write off more capital and in turn more capital will have to be raised. This will take some time to make its way out of the crisis we are in. In the meantime lenders will continue to be as tight on their lending processes which will force even more pressure on demand in the housing market.
All of that aside, its clear that most of this has already been priced into the market for 2008 and also into 2009. In many individual stocks we have looked at, there is also a considerable mark down on the share price based on the overall bad news that exists in the market. Is it fair to mark all banking stocks down for example when not all have the same exposure to arrears, bad debt and US based collaterised debt obligations? This has left the equity market relatively fairly priced but also cheap in certain sectors leaving an opportunity for growth but expect further volatility.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment.
Sources
1 Guardian
2 Standard Life
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Can I invest in the stock market and reduce my risk?
22 February 2008
Reader Writes:
I understand you can invest in the stock market but reduce your risk. A plan I saw advertised in the window said this was possible. Given the stock market volatility, is this a good idea?
I am not a lover of opacity and products that are ‘easy ...
22 February 2008
Reader Writes:
I understand you can invest in the stock market but reduce your risk. A plan I saw advertised in the window said this was possible. Given the stock market volatility, is this a good idea?
I am not a lover of opacity and products that are ‘easy money’ for the financial services industry, all of this leaves me with a cold sweat when I see ‘protected’ or ‘guaranteed’ next to a financial services product. Take it from me, what is displayed, as a simple poster in a bank or building society window is more complicated than most financial advisers would be able to understand let alone the public.
Here are some tips for you to avoid making mistakes with structured or ‘protected, guaranteed’ products. Firstly there are five new products per month launched. To date I have never felt any of them were value for money. That is a message in itself.
If you do use one, never use a structured product with less than a five-year term - the risk is propelled skyward and suits only the providers not you. Most companies have now abandoned this idea.
Secondly avoid any product with a dump out (kick out) option. This option is generally used to dump you out of the plan if the market performs very well in the short term. You’ll see it marketed as ‘receive 110% of the stock market return and benefit from 35% return if the stock market grows by more than 35% in the first three years’. Whilst marketed as a good thing, it is actually only there to protect the company providing the plan and is one of the worst features of an investment product.
Avoid like a 2 day old prawn sandwich.
You will also see a ‘benefit’ sold to you stating the plan will calculate the return of the stock market over the five years. They then say that the final stock market value is calculated by using the average value over the last year. Whilst a year or the last six months is about fair, some companies use an average over longer periods, which can be disastrous to the final value you will receive. Once again it’s sold as a benefit but is actually no more than a protection for the provider of the plan.
Without going into the deep mechanics of these plans, have a quick check who provides the backing. Typically, a large ‘credible’ institution may market the plan but the backing will be elsewhere. Avoid products backed by those counterparties with an S&P rating of less than A-. If there is a default by these counterparties your protection could be worthless.
Some contracts will also offer an enhanced (geared) upside if the market performs at a certain level. They can often however offer a geared downside. If there is any level of geared downside to a plan avoid it like an actuary at a party.
You’ll normally see a product linked to the FTSE 100 which is a fairly well understood market. Be very careful (if not avoid) any product linked to a basket of shares rather than an index. Once again the risk is propelled.
Lastly be careful of products that offer ‘worst of’ scenarios at all costs.
I have always believed that structured contracts are for customers who don’t truly understand the potential for return versus the potential for loss. Consider that a spread of investments in the FTSE could fall by nearly 25% and still provide the same capital return as a structured plan, as they would have benefited from the dividends. In any event there are few six year terms where the FTSE is down and the structured plan only provides the security if the contract is held to the end of the term. Another reason why we don’t use them.
If you have a query on an investment call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Reader Writes:
I understand you can invest in the stock market but reduce your risk. A plan I saw advertised in the window said this was possible. Given the stock market volatility, is this a good idea?
I am not a lover of opacity and products that are ‘easy money’ for the financial services industry, all of this leaves me with a cold sweat when I see ‘protected’ or ‘guaranteed’ next to a financial services product. Take it from me, what is displayed, as a simple poster in a bank or building society window is more complicated than most financial advisers would be able to understand let alone the public.
Here are some tips for you to avoid making mistakes with structured or ‘protected, guaranteed’ products. Firstly there are five new products per month launched. To date I have never felt any of them were value for money. That is a message in itself.
If you do use one, never use a structured product with less than a five-year term - the risk is propelled skyward and suits only the providers not you. Most companies have now abandoned this idea.
Secondly avoid any product with a dump out (kick out) option. This option is generally used to dump you out of the plan if the market performs very well in the short term. You’ll see it marketed as ‘receive 110% of the stock market return and benefit from 35% return if the stock market grows by more than 35% in the first three years’. Whilst marketed as a good thing, it is actually only there to protect the company providing the plan and is one of the worst features of an investment product.
Avoid like a 2 day old prawn sandwich.
You will also see a ‘benefit’ sold to you stating the plan will calculate the return of the stock market over the five years. They then say that the final stock market value is calculated by using the average value over the last year. Whilst a year or the last six months is about fair, some companies use an average over longer periods, which can be disastrous to the final value you will receive. Once again it’s sold as a benefit but is actually no more than a protection for the provider of the plan.
Without going into the deep mechanics of these plans, have a quick check who provides the backing. Typically, a large ‘credible’ institution may market the plan but the backing will be elsewhere. Avoid products backed by those counterparties with an S&P rating of less than A-. If there is a default by these counterparties your protection could be worthless.
Some contracts will also offer an enhanced (geared) upside if the market performs at a certain level. They can often however offer a geared downside. If there is any level of geared downside to a plan avoid it like an actuary at a party.
You’ll normally see a product linked to the FTSE 100 which is a fairly well understood market. Be very careful (if not avoid) any product linked to a basket of shares rather than an index. Once again the risk is propelled.
Lastly be careful of products that offer ‘worst of’ scenarios at all costs.
I have always believed that structured contracts are for customers who don’t truly understand the potential for return versus the potential for loss. Consider that a spread of investments in the FTSE could fall by nearly 25% and still provide the same capital return as a structured plan, as they would have benefited from the dividends. In any event there are few six year terms where the FTSE is down and the structured plan only provides the security if the contract is held to the end of the term. Another reason why we don’t use them.
If you have a query on an investment call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Mad Markets...What next?
7 February 2008
Reader Writes:
The last few weeks have been pretty mad in the markets and I wondered what your views are for the coming months ahead?
It has been ‘pretty mad’ as you put it. Few weeks in the last thirty years have been as incident packed. Last week for ...
7 February 2008
Reader Writes:
The last few weeks have been pretty mad in the markets and I wondered what your views are for the coming months ahead?
Reader Writes:
The last few weeks have been pretty mad in the markets and I wondered what your views are for the coming months ahead?
It has been ‘pretty mad’ as you put it. Few weeks in the last thirty years have been as incident packed. Last week for an investor must have been like a western barroom brawl with everything that could be grabbed, thrown around the room.
The savvy investor shouldn’t have been forced into a knee jerk reaction and awaits the moment in which he can lift his head again, in the meantime reducing risk by cuddling into a safe spot and enjoying the fun.
There are plenty of fundamentals that support the problems we have now and that of course has turned to sentiment with some values being forced below where they should be.
We know that the US has reduced its interest rates very aggressively and is focusing on a 2008 recession and no longer - good news. Their timing has been poor and this should have been completed some months ago. The reason for the timing comment is that the benefit of the rate drops will take up to eighteen months to have their true effect, but the aggressiveness of the rate drops should provide positive sentiment in the short term.
Over the next few months there will be a tooing and froing of the benefits of the rate drop versus potential worsening economic data. Expect fluctuations.
The greater issue is that European banks and the Bank of England do not have the luxury of simply dropping rates to provide that stimulus. They are caught between the rock of inflation and the hard stone of an economy in recession mode.
The monetary policy committee has stated that the short run inflation problem has worsened. The committee has concerns the consumer will acclimatise to inflation at this level, so has chosen to keep rates at their current level even though we are on the brink of recession.
Moreover the vote wasn’t even close. They voted 8:1 to keep rates at their same level which shows their commitment to focus on inflation rather than boosting the economy. Mervyn king has made it clear he may well have to write to the chancellor of the exchequer on more than one occasion this year to explain why he hasn’t hit his inflation target, and has said he believes the UK may need to 'tough it out'.1
We can therefore expect rates to remain close to current levels until inflationary pressures abate.
All of this does not bode well for retail and spending which took a hammering at Christmas. Therefore if not handled correctly we could easily find ourselves in a full blown recession.
If companies aren’t making money, they naturally have to revise their profits. Their profits are all forecasted into the distance and subsequently priced into the current share price, so volatility explodes.
In many ways it's like a ship setting out with correct coordinates which ensure the correct destination. Poor wind, currents or rough seas knock it off track one or two degrees, so instead of Brazil, we land in Greenland - not so great in a bikini.
So much of the volatility today is based on a lack of true information. Because there is opacity and confusion and we cant see behind it, there has been an offloading of some assets until this confusion clears.
It may be the truth is better or worse. When the information is more transparent the market will react quickly, thereby leaving those who were disinvested out on a limb.
It is very difficult to call now but its easy to see that its best to be clear of certain corporate bonds as well as a lowering of exposure to Asia and its banks.
Market prices today are reflecting a considerable downturn in 2008 and no upturn in 2009, if this doesn’t happen equity prices look very cheap so consider a drip feed of capital into the market.
If you have a concern or query about any funds call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment.
Source: 1 Bank of England website, MPC
Source: 1 Bank of England website, MPC
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
The value of shares and investments can go down as well as up.
Beware of false promises
31 January 2008
Managing Director, Worldwide Financial Planning, Writes:
‘10% income and 100% capital protection’ – what an attention grabber in a volatile market.
A quote was wonderfully put by Mark Twain: ‘History doesn’t repeat itself, but it does sometimes rhyme’.
You can’t help but think that the marketing companies of the ...
31 January 2008
Managing Director, Worldwide Financial Planning, Writes:
‘10% income and 100% capital protection’ – what an attention grabber in a volatile market.
A quote was wonderfully put by Mark Twain: ‘History doesn’t repeat itself, but it does sometimes rhyme’.
You can’t help but think that the marketing companies of the life insurance industry know this, and are keen to slowly make you submit, by hitting you with a small twig every hour for a long time. So I read a recent email offering a structured sales plan!
A ‘structured contract’ is the technical term, but you will see them marketed very much as above. The small print will then explain what the potential risk might be to both that income and the capital protection. I am not a lover of such arrangements and that is well quoted, but I must consider that every month I see numerous offerings, so I can only assume people are buying them.
The plan I looked at was a fair enough offering by blue sky asset management. It was their protected income plan, and I couldn’t help but notice a number of issues with it which may go unnoticed by the untrained eye. It offers 10% income plus capital protection as long as one of five banking sector stocks doesn’t fall by over 65% and return to its original capital value.(1)
I studied the salesmail which explained the ‘income’ and I then read the brochure and couldn’t tie them up. You see, income to the average person is building society returns or the coupon from fixed interest investments. Income is what you receive irrespective of capital movements. This is not obvious at all from the documentation.
The brochure simply explains the income is calculated by giving you back 10% of the original capital. The email however, goes at length to explain that they are ‘enhancing the average dividend yield of the portfolio (nearly doubling it to 10%)’.(1)
Apparently it is designed to take advantage of the ‘indiscriminate fall out in the banking sector in 2007’ Surely indiscriminate means haphazard, unsystematic or random.
What can possibly be random about devaluing overvalued worried stocks? The banking sector has taken a battering which is very justifiable. One could easily argue that the true impact is yet to come:
How many loans have banks agreed for customers on a self certificated basis where the customer doesn’t have that income? How many loans are coming out of a fixed rate now and into the standard variable rate? Who will be left with the bad debt?
The email points to the fact that the downturn appears to be overplayed in banking stocks. If that was the case the customer should buy the basket of five banking shares, enjoy the 7.38% average yield they currently offer, as well as the capital growth in the stocks - or am I missing something.
My main issues are that the risk may well be played down in the document. On the face of it, the potential for return and reward do seem fair, but whilst I am not a financials sector stock analyst, few would be betting on banks and what demons may be in their treasure chest.
The brochure states that to understand the risk you must understand the probability of the plan or any individual stock dropping 65%. Who would bet this would happen. What’s the probability? Who is qualified to know?
The danger here is that the customer could get carried away with the definite income and the capital ‘protection’, and mix up the risk of a volatility range of an index, rather than an individual share. No-one expected Northern Rock to drop by 10% did they? It had a 52 week high of 1157 and a 52 week low of 52.50 – a fall of 95.5%.(1)
In some ways the risk is increased, as modern portfolio theory is inverted, where the performance of the ‘capital protection’ is based on one ‘worst performing share’ as opposed to a spread.
In relation to products and to quote Mark Twain again, 'the trouble ain't that there too many fools, it’s just that the lightening isn’t distributed right'
For advice on investing risk efficiently or if you have any other financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment to see how we can help you today.
Source1 Blue Sky Fund
Source2 Yahoo Finance
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Managing Director, Worldwide Financial Planning, Writes:
‘10% income and 100% capital protection’ – what an attention grabber in a volatile market.
A quote was wonderfully put by Mark Twain: ‘History doesn’t repeat itself, but it does sometimes rhyme’.
You can’t help but think that the marketing companies of the life insurance industry know this, and are keen to slowly make you submit, by hitting you with a small twig every hour for a long time. So I read a recent email offering a structured sales plan!
A ‘structured contract’ is the technical term, but you will see them marketed very much as above. The small print will then explain what the potential risk might be to both that income and the capital protection. I am not a lover of such arrangements and that is well quoted, but I must consider that every month I see numerous offerings, so I can only assume people are buying them.
The plan I looked at was a fair enough offering by blue sky asset management. It was their protected income plan, and I couldn’t help but notice a number of issues with it which may go unnoticed by the untrained eye. It offers 10% income plus capital protection as long as one of five banking sector stocks doesn’t fall by over 65% and return to its original capital value.(1)
I studied the salesmail which explained the ‘income’ and I then read the brochure and couldn’t tie them up. You see, income to the average person is building society returns or the coupon from fixed interest investments. Income is what you receive irrespective of capital movements. This is not obvious at all from the documentation.
The brochure simply explains the income is calculated by giving you back 10% of the original capital. The email however, goes at length to explain that they are ‘enhancing the average dividend yield of the portfolio (nearly doubling it to 10%)’.(1)
Apparently it is designed to take advantage of the ‘indiscriminate fall out in the banking sector in 2007’ Surely indiscriminate means haphazard, unsystematic or random.
What can possibly be random about devaluing overvalued worried stocks? The banking sector has taken a battering which is very justifiable. One could easily argue that the true impact is yet to come:
How many loans have banks agreed for customers on a self certificated basis where the customer doesn’t have that income? How many loans are coming out of a fixed rate now and into the standard variable rate? Who will be left with the bad debt?
The email points to the fact that the downturn appears to be overplayed in banking stocks. If that was the case the customer should buy the basket of five banking shares, enjoy the 7.38% average yield they currently offer, as well as the capital growth in the stocks - or am I missing something.
My main issues are that the risk may well be played down in the document. On the face of it, the potential for return and reward do seem fair, but whilst I am not a financials sector stock analyst, few would be betting on banks and what demons may be in their treasure chest.
The brochure states that to understand the risk you must understand the probability of the plan or any individual stock dropping 65%. Who would bet this would happen. What’s the probability? Who is qualified to know?
The danger here is that the customer could get carried away with the definite income and the capital ‘protection’, and mix up the risk of a volatility range of an index, rather than an individual share. No-one expected Northern Rock to drop by 10% did they? It had a 52 week high of 1157 and a 52 week low of 52.50 – a fall of 95.5%.(1)
In some ways the risk is increased, as modern portfolio theory is inverted, where the performance of the ‘capital protection’ is based on one ‘worst performing share’ as opposed to a spread.
In relation to products and to quote Mark Twain again, 'the trouble ain't that there too many fools, it’s just that the lightening isn’t distributed right'
For advice on investing risk efficiently or if you have any other financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on Investment to see how we can help you today.
Source1 Blue Sky Fund
Source2 Yahoo Finance
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Should I stay invested?
28th November 2007
Managing Director, Worldwide Financial Planning, writes:
The last few weeks have been anything but boring in the investment world. For the first time in a long time, investors are questioning whether or not they should stay invested.
What is the concern? By and large the measure being used is ...
28th November 2007
Managing Director, Worldwide Financial Planning, writes:
The last few weeks have been anything but boring in the investment world. For the first time in a long time, investors are questioning whether or not they should stay invested.
What is the concern? By and large the measure being used is the FTSE. Is the FTSE a true measure? Hardly. We must remember that the FTSE 100 is a measure of the top 100 UK companies. Remember, however that many of these companies are basically global companies with considerable exposure to the US. In the late 90’s there was overexposure to technology. Other bubbles have lately included banks and oil companies. So if technology shares plummet, or as has happened of late, banking stocks fall out of favour, does it therefore follow that the market as a whole is struggling? Hardly. Bubbles are created everywhere and these bubbles will clearly represent themselves within the FTSE.
At the moment we are seeing the fallout of the credit crunch and clearly it is difficult to see, with the lack of transparency, exactly what the problem is. The property bubble (commercial and residential) is long due a little deflation and its stretch marks will be around for a long time. What is most surprising is the shock from most investors that property is having a tough time. Readers of this column will no doubt remember we have been pointing the problems out for over a year, but this sector has been pumped more and more by those with a vested interest. We note that Invesco perpetual property income investment trust has had a fall of 17% to its net asset value over the last quarter. 1
Clearly certain assets have fallen out of favour. The yield (income you might expect) on property is pitiful, making the asset unattractive and hence most are bailing out. (Remember, of course that property funds can also put a six month block on you taking your money out, as well as adjusting the unit prices downwards, as has happened of late by almost 6% in some situations. This has also been followed by the property funds struggling with overall values – not good reading. But, just as we commented over a year ago that this asset was a troubled one, fixed interests are also struggling to add value over cash, and its difficult to see where they can.
Which now leaves very little that looks valuable over equities, so lets see what we think of them. There is no doubt there will be further lowering of equity prices coming along in relation to the financial sector. LIBOR (the rate at which banks lend unsecured funds to other banks) is still considerably more than the normal base rate. This represents two issues: banks are clearly preserving their capital whilst also fearful of other banks exposure to the credit crunch and bad debt.
Banks could, in fairness all declare the extent of their bad debt to each other. By coming clean, this would reduce their fears and they could then begin lending more freely to each other, but also at more preferable rates. For some reason (and it cant be good) they are choosing not to. This may lead you to believe there is more bad news to come out of the banking sector. Some commentators believe it may take twelve months for the issues to flush through the system, but whilst these sectors have a tough time it must be remembered there are plenty of other areas to consider.
There are always opportunities created in scenarios like this, and many companies have very strong earnings today which have been down valued. Jupiter fund managers commented that many companies are capable of growing dividends at near double digits, and that dividend cover is at its highest level for over twenty years, which is reassuring.1
There is no doubt we may see an easing of interest rates, and this, coupled with Asia taking up the US slack, mean equities are offering a more attractive value than other asset classes.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Jupiter Monthly Fund Updates October 2007
Managing Director, Worldwide Financial Planning, writes:
The last few weeks have been anything but boring in the investment world. For the first time in a long time, investors are questioning whether or not they should stay invested.
What is the concern? By and large the measure being used is the FTSE. Is the FTSE a true measure? Hardly. We must remember that the FTSE 100 is a measure of the top 100 UK companies. Remember, however that many of these companies are basically global companies with considerable exposure to the US. In the late 90’s there was overexposure to technology. Other bubbles have lately included banks and oil companies. So if technology shares plummet, or as has happened of late, banking stocks fall out of favour, does it therefore follow that the market as a whole is struggling? Hardly. Bubbles are created everywhere and these bubbles will clearly represent themselves within the FTSE.
At the moment we are seeing the fallout of the credit crunch and clearly it is difficult to see, with the lack of transparency, exactly what the problem is. The property bubble (commercial and residential) is long due a little deflation and its stretch marks will be around for a long time. What is most surprising is the shock from most investors that property is having a tough time. Readers of this column will no doubt remember we have been pointing the problems out for over a year, but this sector has been pumped more and more by those with a vested interest. We note that Invesco perpetual property income investment trust has had a fall of 17% to its net asset value over the last quarter. 1
Clearly certain assets have fallen out of favour. The yield (income you might expect) on property is pitiful, making the asset unattractive and hence most are bailing out. (Remember, of course that property funds can also put a six month block on you taking your money out, as well as adjusting the unit prices downwards, as has happened of late by almost 6% in some situations. This has also been followed by the property funds struggling with overall values – not good reading. But, just as we commented over a year ago that this asset was a troubled one, fixed interests are also struggling to add value over cash, and its difficult to see where they can.
Which now leaves very little that looks valuable over equities, so lets see what we think of them. There is no doubt there will be further lowering of equity prices coming along in relation to the financial sector. LIBOR (the rate at which banks lend unsecured funds to other banks) is still considerably more than the normal base rate. This represents two issues: banks are clearly preserving their capital whilst also fearful of other banks exposure to the credit crunch and bad debt.
Banks could, in fairness all declare the extent of their bad debt to each other. By coming clean, this would reduce their fears and they could then begin lending more freely to each other, but also at more preferable rates. For some reason (and it cant be good) they are choosing not to. This may lead you to believe there is more bad news to come out of the banking sector. Some commentators believe it may take twelve months for the issues to flush through the system, but whilst these sectors have a tough time it must be remembered there are plenty of other areas to consider.
There are always opportunities created in scenarios like this, and many companies have very strong earnings today which have been down valued. Jupiter fund managers commented that many companies are capable of growing dividends at near double digits, and that dividend cover is at its highest level for over twenty years, which is reassuring.1
There is no doubt we may see an easing of interest rates, and this, coupled with Asia taking up the US slack, mean equities are offering a more attractive value than other asset classes.
If you have a financial query call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our section on investment
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Jupiter Monthly Fund Updates October 2007
What is a Mirror Fund?
16th November 2007
Managing Director, Worldwide Financial Planning, Writes:
Some of you my well remember my column six months back regarding ‘mirror’ investment funds. Whilst it caused a massive stir at the time it is continuing to create further debate in the financial services industry as it would appear that many had ...
16th November 2007
Managing Director, Worldwide Financial Planning, Writes:
Some of you my well remember my column six months back regarding ‘mirror’ investment funds. Whilst it caused a massive stir at the time it is continuing to create further debate in the financial services industry as it would appear that many had not fully grasped its impact on the investor.
It is well worth you analysing your own investments to see if you are impacted as the annual cost to you could be, from my calculations, up to 11% per year.
The main issue lies with investments into an investment bond and certain pensions. They are typically marketed as having low or no entry charges, but that is totally contrived, and the charges are taken anyway, as you will see in my most recent study below.
So what is a mirror fund?
A normal investment would be directly into a fund such as Fidelity special situations, or Jupiter income trust for example. Some life and pension companies offer you access to some of these funds within their products. You might believe you are investing directly into Fidelity but in fact you are investing into the life company’s version of it.
Whilst a real mirror gives an exact reflection of what is in front of it, a mirror fund does not. So how will you recognise if you have one or not? Well simply you will see an initial in front of the fund, so an investment into an Axa investment bond may say Axa SL Fidelity special situations. Or more simply put if you haven’t invested directly with Fidelity you are probably buying a mirror (mutated version).
Mirrored funds are often seen to be sold as having cheap access to a top fund. Fidelity special sits for example is available as a mirror fund in many investment bonds. In some instances it is being made available at 1% per year and sold as such. Consider that Fidelity don’t do discounts, so alarm bells should really be ringing at this point.
I suspect if you asked the average person if they thought there was any difference between the actual fund and the mirror fund they had just purchased, they would have an expectation they were exactly the same thing. Unfortunately they would have been badly misled.
Lets look a little closer at the actual performances.
I had a look at the performance of fidelity special sits within Canada life, Friends Provident, Scottish Mutual and AIG over three years. AIG had returned a healthy 50.2% over the period. (1) Naturally we would expect Fidelity special sits to return exactly the same. Well you would wouldn’t you. Prepare yourself. A customer who invested directly with Fidelity would be over 33% better off than had they invested with AIG. That’s 33% better over just three years. (1)
Over five years, the numbers are really quite startling. Scottish Mutual returned a lovely 127.45%, AIG a pretty 111.6%, but once again the customer who used the financial adviser to end up with one of these middlemen would have been disadvantaged. (1)
An investment with Fidelity special sits directly would have returned 164.67%! That’s a staggering 10% per year charge for having dealt with a financial adviser. (1) Some customers may well think that’s expensive for what they are getting. Perhaps.
I would recommend you study any pension or investments you have and ascertain if you are indeed invested in a mirror fund or not. It’s well worth remembering that an investment bond is also tax disadvantageous for most people given the fact that tax is taken at source as it grows, and is not reclaimable by non tax payers. This is on top of the inefficiencies above.
Whilst many will try and distract you with charges and fee savings of 0.5% per year, the issue with mirror funds above, as you can see, can be twenty two times worse. Remember their profits rely on a certain amount of apathy so speak to your Independent Financial Adviser immediately.
If you want to check if you hold a mirror fund call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our investment section on our website.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
(1) Source lipper hindsight
Managing Director, Worldwide Financial Planning, Writes:
Some of you my well remember my column six months back regarding ‘mirror’ investment funds. Whilst it caused a massive stir at the time it is continuing to create further debate in the financial services industry as it would appear that many had not fully grasped its impact on the investor.
It is well worth you analysing your own investments to see if you are impacted as the annual cost to you could be, from my calculations, up to 11% per year.
The main issue lies with investments into an investment bond and certain pensions. They are typically marketed as having low or no entry charges, but that is totally contrived, and the charges are taken anyway, as you will see in my most recent study below.
So what is a mirror fund?
A normal investment would be directly into a fund such as Fidelity special situations, or Jupiter income trust for example. Some life and pension companies offer you access to some of these funds within their products. You might believe you are investing directly into Fidelity but in fact you are investing into the life company’s version of it.
Whilst a real mirror gives an exact reflection of what is in front of it, a mirror fund does not. So how will you recognise if you have one or not? Well simply you will see an initial in front of the fund, so an investment into an Axa investment bond may say Axa SL Fidelity special situations. Or more simply put if you haven’t invested directly with Fidelity you are probably buying a mirror (mutated version).
Mirrored funds are often seen to be sold as having cheap access to a top fund. Fidelity special sits for example is available as a mirror fund in many investment bonds. In some instances it is being made available at 1% per year and sold as such. Consider that Fidelity don’t do discounts, so alarm bells should really be ringing at this point.
I suspect if you asked the average person if they thought there was any difference between the actual fund and the mirror fund they had just purchased, they would have an expectation they were exactly the same thing. Unfortunately they would have been badly misled.
Lets look a little closer at the actual performances.
I had a look at the performance of fidelity special sits within Canada life, Friends Provident, Scottish Mutual and AIG over three years. AIG had returned a healthy 50.2% over the period. (1) Naturally we would expect Fidelity special sits to return exactly the same. Well you would wouldn’t you. Prepare yourself. A customer who invested directly with Fidelity would be over 33% better off than had they invested with AIG. That’s 33% better over just three years. (1)
Over five years, the numbers are really quite startling. Scottish Mutual returned a lovely 127.45%, AIG a pretty 111.6%, but once again the customer who used the financial adviser to end up with one of these middlemen would have been disadvantaged. (1)
An investment with Fidelity special sits directly would have returned 164.67%! That’s a staggering 10% per year charge for having dealt with a financial adviser. (1) Some customers may well think that’s expensive for what they are getting. Perhaps.
I would recommend you study any pension or investments you have and ascertain if you are indeed invested in a mirror fund or not. It’s well worth remembering that an investment bond is also tax disadvantageous for most people given the fact that tax is taken at source as it grows, and is not reclaimable by non tax payers. This is on top of the inefficiencies above.
Whilst many will try and distract you with charges and fee savings of 0.5% per year, the issue with mirror funds above, as you can see, can be twenty two times worse. Remember their profits rely on a certain amount of apathy so speak to your Independent Financial Adviser immediately.
If you want to check if you hold a mirror fund call Peter on 0845 230 9876 or e-mail info@wwfp.net and take a look at our investment section on our website.
Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
(1) Source lipper hindsight
Will a greener government mean greener investments?
14th September 2007
Reader Writes:
Do you really believe that the market in green investment will only take off when governments take it seriously?
The answer is categorically yes although evidence shows that canny investment now in appropriate investment in green energy is already paying dividends. Take Vestas the wind turbine manufacturer. ...
14th September 2007
Reader Writes:
Do you really believe that the market in green investment will only take off when governments take it seriously?
The answer is categorically yes although evidence shows that canny investment now in appropriate investment in green energy is already paying dividends. Take Vestas the wind turbine manufacturer. Their share price virtually stayed the same for three years and from January 2006 until now the price shot up near 271%. 1
Let’s look at some key points: the world has identified that we are using the wrong fuels and also that we have an energy crisis. The problem is that governments have not formalised a policy on the issue and this creates concern.
In the US, the Republicans are noted as believing that only 20% of global warming relates to human agency! 46% believe the world is getting warmer yet an amazing 51% of republicans believe the government should take action to protect climate change! 2 Confused? With that sort of confusion its no wonder the markets will be volatile in relation to energy.
Indeed it gets more confusing when we read that the cow is responsible for more global warming gases than all the transport on earth – planes, trains, cars, the lot. The culprit – its backside. 3
Whilst our government is keen to slap taxes on 4x4’s its also worth noting that the jeep wrangler 4x4 is the most friendly vehicle to the environment.4 Indeed we are lead to believe (so we can be taxed more) that cars which burn fuel at a high rate are bad for the environment. Whilst there is an amount of truth in that the key issue is to look at the whole picture.
The results of study show that the manufacturing and disposal of cars is actually the biggest pollutant and so we should be making less cars and instead keeping them longer (but that would stuff the car industry, so that’s not going to happen). One of the most alarming issues with the ‘dust to dust report’ pointed that the so called number one green cars (the hybrid models) which top all green charts everywhere I look, weren’t even in the top 50.
The total energy cost per mile of a luxury hybrid model came in at a staggering 20 times more than a Jeep Wrangler.
Notwithstanding any of this there is no doubt that energy is an issue. ‘Dirty’ fuels such as oil and coal have an upward sloping futures price (basically the stock market confirms the only way for their price is up). Interesting oil products future curves are also sloping upwards too. The cleaner electric and natural gas curves are flat and downward (the market believes their price will not increase). 2
From this we can deduce the market believes the current government policy changes will not reduce the demand for the dirtier fuels. The international energy agency (IEA) also believes that without a policy regime, oil and coal will still retain their dominance for 25 years.
This is worrying given that energy demand is expected to rise by just over 50% in the next 25 years. What’s more worrying is that the world is not investing sufficiently to sustain the current supply let alone meet future demand. 2
Since coal and oil are the biggest co2 emitters we have a big problem. Increased co2 emissions is not an option. The Stern report points to 2-5 degree warming over the next 45 years. The middle band here takes us to a temperature we haven’t experienced for over three million years. If we don’t stabilise, but carry on as we are, the expected target is 6.5 degrees before accounting for feedback risks with an upper boundary of ten degrees. 2 This is not an option.
Over $20 trillion dollars of investment is needed however, of which 50% is to replace existing infrastructure.
In the absence of a policy regime this will be slow to come forward. When it does, the non green investor may well be green with envy.
For advice on the best green funds or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Read more about Ethical & Green Investments
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Yahoo finance
2 Barclays equity gilt study
3 BBC.co.uk
4 Motorque.com
Reader Writes:
Do you really believe that the market in green investment will only take off when governments take it seriously?
The answer is categorically yes although evidence shows that canny investment now in appropriate investment in green energy is already paying dividends. Take Vestas the wind turbine manufacturer. Their share price virtually stayed the same for three years and from January 2006 until now the price shot up near 271%. 1
Let’s look at some key points: the world has identified that we are using the wrong fuels and also that we have an energy crisis. The problem is that governments have not formalised a policy on the issue and this creates concern.
In the US, the Republicans are noted as believing that only 20% of global warming relates to human agency! 46% believe the world is getting warmer yet an amazing 51% of republicans believe the government should take action to protect climate change! 2 Confused? With that sort of confusion its no wonder the markets will be volatile in relation to energy.
Indeed it gets more confusing when we read that the cow is responsible for more global warming gases than all the transport on earth – planes, trains, cars, the lot. The culprit – its backside. 3
Whilst our government is keen to slap taxes on 4x4’s its also worth noting that the jeep wrangler 4x4 is the most friendly vehicle to the environment.4 Indeed we are lead to believe (so we can be taxed more) that cars which burn fuel at a high rate are bad for the environment. Whilst there is an amount of truth in that the key issue is to look at the whole picture.
The results of study show that the manufacturing and disposal of cars is actually the biggest pollutant and so we should be making less cars and instead keeping them longer (but that would stuff the car industry, so that’s not going to happen). One of the most alarming issues with the ‘dust to dust report’ pointed that the so called number one green cars (the hybrid models) which top all green charts everywhere I look, weren’t even in the top 50.
The total energy cost per mile of a luxury hybrid model came in at a staggering 20 times more than a Jeep Wrangler.
Notwithstanding any of this there is no doubt that energy is an issue. ‘Dirty’ fuels such as oil and coal have an upward sloping futures price (basically the stock market confirms the only way for their price is up). Interesting oil products future curves are also sloping upwards too. The cleaner electric and natural gas curves are flat and downward (the market believes their price will not increase). 2
From this we can deduce the market believes the current government policy changes will not reduce the demand for the dirtier fuels. The international energy agency (IEA) also believes that without a policy regime, oil and coal will still retain their dominance for 25 years.
This is worrying given that energy demand is expected to rise by just over 50% in the next 25 years. What’s more worrying is that the world is not investing sufficiently to sustain the current supply let alone meet future demand. 2
Since coal and oil are the biggest co2 emitters we have a big problem. Increased co2 emissions is not an option. The Stern report points to 2-5 degree warming over the next 45 years. The middle band here takes us to a temperature we haven’t experienced for over three million years. If we don’t stabilise, but carry on as we are, the expected target is 6.5 degrees before accounting for feedback risks with an upper boundary of ten degrees. 2 This is not an option.
Over $20 trillion dollars of investment is needed however, of which 50% is to replace existing infrastructure.
In the absence of a policy regime this will be slow to come forward. When it does, the non green investor may well be green with envy.
For advice on the best green funds or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Read more about Ethical & Green Investments
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Yahoo finance
2 Barclays equity gilt study
3 BBC.co.uk
4 Motorque.com
What is ethical and green investing?
23 August 2007
Managing Director, Worldwide Financial Planning Writes:
Following last week’s column let’s take a closer look at ethical and green investing.
Trying to pick the best individual ethical stocks can be very tricky so ethical funds have become more and more popular. Ethical investment funds select what stocks to invest into, ...
23 August 2007
Managing Director, Worldwide Financial Planning Writes:
Following last week’s column let’s take a closer look at ethical and green investing.
Trying to pick the best individual ethical stocks can be very tricky so ethical funds have become more and more popular. Ethical investment funds select what stocks to invest into, and assist you by spreading your capital across a wide range of holdings they feel are appropriate and meet the relevant criteria. When choosing an investment provider for your ethical investment, consider their selection process very carefully.
Ethical investment basically highlights an investment process that screens for, or against certain criteria. Since its development nearly 23 years ago, ethical investment has evolved from a sales idea to a sophisticated process.
There is no doubt however that you are giving up considerable choice by way of investing in such funds, and the potential for underperformance has lead to many ignoring the sector.
Unlike other sectors of the market, ethical investment is not easily comparable. You are never really comparing an apple to an apple. Analysing on performance alone is a journey to no-where and could cost you dearly in terms of ethics and potential future underperformance.
Ethical/green funds for example are restricted to around 30% of the FTSE 100 and as a consequence have a bias towards small to medium size stocks to invest into. 1
In certain market conditions these stocks can outperform but vice versa.
Be mindful also that by their nature, smaller companies are also more volatile than their larger counterparts meaning that fluctuations can be more severe.
When selecting an appropriate ethical fund to invest into, you should carefully consider what your ethics are and match that with the relevant funds.
Consider whether or not you are a green or ethical investor as the two can easily be mixed up.
Ethical’ funds for example, avoid investment in companies with significant exposure towards activities such as armaments, tobacco & alcohol, gambling, animal testing etc.
Environmental or ‘Green’ funds avoid investing in companies whose activities are thought to contribute towards global warming, ozone depletion, pollution etc.
Given the extremely restrictive nature of this type of fund, it's fair to say it’s not for the faint hearted, or the ethical token gesture approach with your capital.
Let's look at some of the issues with ethical and green investing.
Ethical funds generally screen against or for certain criteria. Some however, agree to a slightly more relaxed or grey approach. It may surprise you to know that some screening takes this grey approach. For example some allow investment in firms where the sale of alcohol accounts for less than 10% of their turnover. How confusing. Surely if alcohol is ethically bad it should be a black and white approach to it with a 100% negative screen. 1
The investment funds will be your block to this, so you should be fully aware of their approach to screening. Some investment houses purchase their research from an external organisation such as Eiris, and other larger organisations, such as the highly successful Morley and Jupiter team have their own research screening team. 1
Aegon is one of the funds that uses a wholly negative screening process i.e. they avoid, but don’t look for positives. Aegon is one of the more successful funds in the market place and customers can be comfortable with their negative screening. They typically avoid companies involved in animal testing, intensive farming, meat & poultry producers or retailers, armaments and military, nuclear power, ozone depleting chemicals, pesticides, political contributions, genetic engineering, gambling, alcohol, tobacco, pornography, banks with exposure to Third World debt, oppressive regimes. 1
The longest running fund, F&C Stewardship has a wider net and looks at both positive and negative screening. Examples of positive screening are investing in companies that are supplying the basic necessities of life, providing high quality products and services which are of long term benefit to the community, conservation of energy or natural resources, environmental improvements and pollution control, good relations with customers and suppliers, good employment practices, good health and safety policies and practices, training and education, strong community involvement, a good equal opportunities record, openness about company activities, good corporate governance. 1
Consider all of this carefully as some companies may not be negatively screening against a factor that is very important to you.
For a fact sheet on the best performing funds or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Sesame Ethical Fund Review R04-039, April 2004
Managing Director, Worldwide Financial Planning Writes:
Following last week’s column let’s take a closer look at ethical and green investing.
Trying to pick the best individual ethical stocks can be very tricky so ethical funds have become more and more popular. Ethical investment funds select what stocks to invest into, and assist you by spreading your capital across a wide range of holdings they feel are appropriate and meet the relevant criteria. When choosing an investment provider for your ethical investment, consider their selection process very carefully.
Ethical investment basically highlights an investment process that screens for, or against certain criteria. Since its development nearly 23 years ago, ethical investment has evolved from a sales idea to a sophisticated process.
There is no doubt however that you are giving up considerable choice by way of investing in such funds, and the potential for underperformance has lead to many ignoring the sector.
Unlike other sectors of the market, ethical investment is not easily comparable. You are never really comparing an apple to an apple. Analysing on performance alone is a journey to no-where and could cost you dearly in terms of ethics and potential future underperformance.
Ethical/green funds for example are restricted to around 30% of the FTSE 100 and as a consequence have a bias towards small to medium size stocks to invest into. 1
In certain market conditions these stocks can outperform but vice versa.
Be mindful also that by their nature, smaller companies are also more volatile than their larger counterparts meaning that fluctuations can be more severe.
When selecting an appropriate ethical fund to invest into, you should carefully consider what your ethics are and match that with the relevant funds.
Consider whether or not you are a green or ethical investor as the two can easily be mixed up.
Ethical’ funds for example, avoid investment in companies with significant exposure towards activities such as armaments, tobacco & alcohol, gambling, animal testing etc.
Environmental or ‘Green’ funds avoid investing in companies whose activities are thought to contribute towards global warming, ozone depletion, pollution etc.
Given the extremely restrictive nature of this type of fund, it's fair to say it’s not for the faint hearted, or the ethical token gesture approach with your capital.
Let's look at some of the issues with ethical and green investing.
Ethical funds generally screen against or for certain criteria. Some however, agree to a slightly more relaxed or grey approach. It may surprise you to know that some screening takes this grey approach. For example some allow investment in firms where the sale of alcohol accounts for less than 10% of their turnover. How confusing. Surely if alcohol is ethically bad it should be a black and white approach to it with a 100% negative screen. 1
The investment funds will be your block to this, so you should be fully aware of their approach to screening. Some investment houses purchase their research from an external organisation such as Eiris, and other larger organisations, such as the highly successful Morley and Jupiter team have their own research screening team. 1
Aegon is one of the funds that uses a wholly negative screening process i.e. they avoid, but don’t look for positives. Aegon is one of the more successful funds in the market place and customers can be comfortable with their negative screening. They typically avoid companies involved in animal testing, intensive farming, meat & poultry producers or retailers, armaments and military, nuclear power, ozone depleting chemicals, pesticides, political contributions, genetic engineering, gambling, alcohol, tobacco, pornography, banks with exposure to Third World debt, oppressive regimes. 1
The longest running fund, F&C Stewardship has a wider net and looks at both positive and negative screening. Examples of positive screening are investing in companies that are supplying the basic necessities of life, providing high quality products and services which are of long term benefit to the community, conservation of energy or natural resources, environmental improvements and pollution control, good relations with customers and suppliers, good employment practices, good health and safety policies and practices, training and education, strong community involvement, a good equal opportunities record, openness about company activities, good corporate governance. 1
Consider all of this carefully as some companies may not be negatively screening against a factor that is very important to you.
For a fact sheet on the best performing funds or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
1 Sesame Ethical Fund Review R04-039, April 2004
What ethical or green investments are available to me?
14th August 2007
Reader Writes:
I was talking to my bank who advised me that I might consider either ethical or green investments and wondered if you had any ideas about which investments were appropriate?
An Ethical/green investment is either something you really are focused on or not. Many customers have interestingly been ...
14th August 2007
Reader Writes:
I was talking to my bank who advised me that I might consider either ethical or green investments and wondered if you had any ideas about which investments were appropriate?
An Ethical/green investment is either something you really are focused on or not. Many customers have interestingly been put off ethical and green investment because of the underperformance over time. Investors should also seek careful advice before indulging in what some have commented on as being the ‘nice’ thing to do and others have taken liberties in terms of forcing marketing twaddle at us and indeed bashing us with excessive taxes.
I considered a conversation with a fellow traveller in Arizona today. I’m here with my family and couldn’t help but notice that everything is miles (no miles!) from anywhere. A trip from the Grand Canyon to flagstaff meant I didn’t see a petrol station in 2 hours! I noticed how vast the country was and asked about the impact of four litre cars having to travel an hour just to get groceries.
I also asked how far people have to travel to go to school. I parked up in an RV (motor home) park in Las Vegas and noticed that everyone had their generators on to feed air conditioning and many left their doors open.
I noticed the water levels at Hoover Dam were at levels of pre 1965 and have fallen from near 1215 feet to today’s levels of 1110 feet. As you gaze around the rim of Lake Mead you can't help but notice the difference in rock colour where the 105 foot gap is apparent.1
I pulled up at a marina that had been reasonably recently built at Overton in Nevada. It was deserted and a sign said it had been closed, as water levels are now so low that boats can’t launch. On the next site I noticed that many of the water fittings to the RV’s (motor homes) were poorly fitting and water happily poured away. Most of my conversations with people were interesting in that they all felt a caring for the planet yet the evidence of clear action wasn’t there. So why?
Many believed that the environment was important but was just being used as an excuse to bolster taxes. When I look at it, I might be inclined to have sympathy for that. I suppose when I look at petrol prices it becomes a little clearer.
If the price of petrol was 90p (nice dream), 47.1p would disappear in duty, and 13.4p would go to VAT. Value added? Where’s the value? So from a product cost of 23.2p and a retailer delivery cost of 6.3p I end up with 29.5p. That means the added tax costs are a massive increase of 205%. Now if we say that the increases are to help the environment, can I please ask someone to tell me how this has helped, and what has been done with the money? Has the increase stopped people using their car more? Is there any evidence of it? 2
Naturally no-one wants to make these sorts of statements as it isn’t the ‘nice’ thing to do but when I pay for something I expect to see its benefit.
Furthermore what impact are we really likely to have anyway? I am in Sedona, Arizona today and I along with all the other large vehicles here am paying short of three dollars per gallon for fuel. That’s £1.42 per gallon or 37.51p per litre!
American planes take off over 8.5 million times per year and in fact one third of the world’s airports are in the USA. The biggest fuel burner is the take off and over half of those are in the USA.3
Lines of traffic await me on my way up the west coast of America. In the time I have left, I, like others, have time to consider whether or not those that can have their hand in our pocket once again.
For me, the only time it will make a difference is when governments truly take it seriously and responsibly and use encouragement rather than penalties to motivate people to help the environment. Perhaps they can have a smoke over that thought in parliament, as it isn’t banned there.
Next week I will review ethical and green funds and how they select and screen.
For a fact sheet on ethical and green investments or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Sources:
1 Lake Mead water levels
2 petrol prices
3 planes and transportation stats
Reader Writes:
I was talking to my bank who advised me that I might consider either ethical or green investments and wondered if you had any ideas about which investments were appropriate?
An Ethical/green investment is either something you really are focused on or not. Many customers have interestingly been put off ethical and green investment because of the underperformance over time. Investors should also seek careful advice before indulging in what some have commented on as being the ‘nice’ thing to do and others have taken liberties in terms of forcing marketing twaddle at us and indeed bashing us with excessive taxes.
I considered a conversation with a fellow traveller in Arizona today. I’m here with my family and couldn’t help but notice that everything is miles (no miles!) from anywhere. A trip from the Grand Canyon to flagstaff meant I didn’t see a petrol station in 2 hours! I noticed how vast the country was and asked about the impact of four litre cars having to travel an hour just to get groceries.
I also asked how far people have to travel to go to school. I parked up in an RV (motor home) park in Las Vegas and noticed that everyone had their generators on to feed air conditioning and many left their doors open.
I noticed the water levels at Hoover Dam were at levels of pre 1965 and have fallen from near 1215 feet to today’s levels of 1110 feet. As you gaze around the rim of Lake Mead you can't help but notice the difference in rock colour where the 105 foot gap is apparent.1
I pulled up at a marina that had been reasonably recently built at Overton in Nevada. It was deserted and a sign said it had been closed, as water levels are now so low that boats can’t launch. On the next site I noticed that many of the water fittings to the RV’s (motor homes) were poorly fitting and water happily poured away. Most of my conversations with people were interesting in that they all felt a caring for the planet yet the evidence of clear action wasn’t there. So why?
Many believed that the environment was important but was just being used as an excuse to bolster taxes. When I look at it, I might be inclined to have sympathy for that. I suppose when I look at petrol prices it becomes a little clearer.
If the price of petrol was 90p (nice dream), 47.1p would disappear in duty, and 13.4p would go to VAT. Value added? Where’s the value? So from a product cost of 23.2p and a retailer delivery cost of 6.3p I end up with 29.5p. That means the added tax costs are a massive increase of 205%. Now if we say that the increases are to help the environment, can I please ask someone to tell me how this has helped, and what has been done with the money? Has the increase stopped people using their car more? Is there any evidence of it? 2
Naturally no-one wants to make these sorts of statements as it isn’t the ‘nice’ thing to do but when I pay for something I expect to see its benefit.
Furthermore what impact are we really likely to have anyway? I am in Sedona, Arizona today and I along with all the other large vehicles here am paying short of three dollars per gallon for fuel. That’s £1.42 per gallon or 37.51p per litre!
American planes take off over 8.5 million times per year and in fact one third of the world’s airports are in the USA. The biggest fuel burner is the take off and over half of those are in the USA.3
Lines of traffic await me on my way up the west coast of America. In the time I have left, I, like others, have time to consider whether or not those that can have their hand in our pocket once again.
For me, the only time it will make a difference is when governments truly take it seriously and responsibly and use encouragement rather than penalties to motivate people to help the environment. Perhaps they can have a smoke over that thought in parliament, as it isn’t banned there.
Next week I will review ethical and green funds and how they select and screen.
For a fact sheet on ethical and green investments or if you have a financial query, call 0845 230 9876 to speak to an Independent Financial Adviser or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority. 'The FSA does not regulate Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax Planning.'
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made.
The above represents the personal opinions of Peter McGahan.
All information is based on our understanding of current tax practices, which are subject to change.
The value of shares and investments can go down as well as up.
Sources:
1 Lake Mead water levels
2 petrol prices
3 planes and transportation stats
With Profits Bond - a monster that won't go away...
25th July 2007
Reader Writes:
Do you have any views on the inflation-proofing with profit bond being offered by Norwich Union as I have been advised to come out of my property fund and go into this plan?
‘Frying pan …fire..’ With profits reminds me of one of those horrible movies when the ...
25th July 2007
Reader Writes:
Do you have any views on the inflation-proofing with profit bond being offered by Norwich Union as I have been advised to come out of my property fund and go into this plan?
‘Frying pan …fire..’ With profits reminds me of one of those horrible movies when the monster, despite having been blasted by every laser and explosive available, keeps crawling back. Eventually the audience turn the TV off.
The ill-fated concept of with profits was thought initially to be a good idea. Everyone was sold on an umbrella that would provide a smoothing of returns in the event of a difficult market. So in each year the investment house would invest your money, produce returns, and then decide how much of your money they would give you and in turn decide how much they would keep behind – pretty much how you treat your children on holiday with their spending money.
On the first occasion we needed to open the umbrella, we found holes all over it. And so all the smoothing they promised disappeared. With the holes came an MVR (market value reduction). This was basically a lock that stopped people exiting the investment as they would be thumped with a large penalty. This was also coupled with the fact that the with profit bond was producing bonuses that were less than cash.
One thing investors should have learned from that is to ensure they have an exit strategy and not to tie themselves up in a plan that had as many exits as a round room.
Moreover the key is also to avoid packaged products. In assessing hundreds of products, I have yet to approve one, as they are generally opaque in their nature and appeal to a one stop approach for the investor. Advice for every investor should be unique and as the word says, advice.
This offering by Norwich Union provides investors with a guarantee of a full return of their investment with inflation proofing after five years.(1) I’ll analyse that guarantee in a moment, but firstly consider if you might need access to the cash within the first five years. Whatever you take from the bond, either by way of income withdrawals or just an encashment will reduce the guarantee proportionally at the end of five years.
Consider also that if the adviser who is selling you this plan is taking commissions this will also be taken back from you on encashment, so seek the surrender details for the first five years. A common ploy is to offer an increased allocation on entry but few people fall for this now, as most are wise to the fact that it is simply an enticement which is taken away if charges are not recouped earlier by encashment… what’s the point?
If death occurs during the first five years, the bond will pay out 100.1% of the value of the plan at the time, not the guaranteed value, so there are no guarantees in the first five years.1
After five years you will, have access to the cash of either the bond value, or the value of the guarantee, whichever is the greater. In truth, what is the value of the guarantee, and here is the crux of the matter.
Inflation appears to be under control at 2.7% and the recent hikes in interest rates will drag inflation down further. So what of the prospect for inflation below 2.5% on average over the next five years? What of the prospect of deflation? The Bank Of England have a target inflation of between 1 – 3%. On that basis your guarantee from this bond is 1-3% per year. Whoopee, that’s less than the building society!
Investor’s focus should be solely on the potential for extra returns from the actual fund and we all know what they have been for the last few years when the stock market has soared only for you to be left behind with the shackles of an MVR.
This new plan also has the opportunity to apply an MVR, mmmm!
For a fact sheet on lower risk funds or if you have a financial query, call 0845 230 9876 or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority.
Reader Writes:
Do you have any views on the inflation-proofing with profit bond being offered by Norwich Union as I have been advised to come out of my property fund and go into this plan?
‘Frying pan …fire..’ With profits reminds me of one of those horrible movies when the monster, despite having been blasted by every laser and explosive available, keeps crawling back. Eventually the audience turn the TV off.
The ill-fated concept of with profits was thought initially to be a good idea. Everyone was sold on an umbrella that would provide a smoothing of returns in the event of a difficult market. So in each year the investment house would invest your money, produce returns, and then decide how much of your money they would give you and in turn decide how much they would keep behind – pretty much how you treat your children on holiday with their spending money.
On the first occasion we needed to open the umbrella, we found holes all over it. And so all the smoothing they promised disappeared. With the holes came an MVR (market value reduction). This was basically a lock that stopped people exiting the investment as they would be thumped with a large penalty. This was also coupled with the fact that the with profit bond was producing bonuses that were less than cash.
One thing investors should have learned from that is to ensure they have an exit strategy and not to tie themselves up in a plan that had as many exits as a round room.
Moreover the key is also to avoid packaged products. In assessing hundreds of products, I have yet to approve one, as they are generally opaque in their nature and appeal to a one stop approach for the investor. Advice for every investor should be unique and as the word says, advice.
This offering by Norwich Union provides investors with a guarantee of a full return of their investment with inflation proofing after five years.(1) I’ll analyse that guarantee in a moment, but firstly consider if you might need access to the cash within the first five years. Whatever you take from the bond, either by way of income withdrawals or just an encashment will reduce the guarantee proportionally at the end of five years.
Consider also that if the adviser who is selling you this plan is taking commissions this will also be taken back from you on encashment, so seek the surrender details for the first five years. A common ploy is to offer an increased allocation on entry but few people fall for this now, as most are wise to the fact that it is simply an enticement which is taken away if charges are not recouped earlier by encashment… what’s the point?
If death occurs during the first five years, the bond will pay out 100.1% of the value of the plan at the time, not the guaranteed value, so there are no guarantees in the first five years.1
After five years you will, have access to the cash of either the bond value, or the value of the guarantee, whichever is the greater. In truth, what is the value of the guarantee, and here is the crux of the matter.
Inflation appears to be under control at 2.7% and the recent hikes in interest rates will drag inflation down further. So what of the prospect for inflation below 2.5% on average over the next five years? What of the prospect of deflation? The Bank Of England have a target inflation of between 1 – 3%. On that basis your guarantee from this bond is 1-3% per year. Whoopee, that’s less than the building society!
Investor’s focus should be solely on the potential for extra returns from the actual fund and we all know what they have been for the last few years when the stock market has soared only for you to be left behind with the shackles of an MVR.
This new plan also has the opportunity to apply an MVR, mmmm!
For a fact sheet on lower risk funds or if you have a financial query, call 0845 230 9876 or e-mail info@wwfp.net
Worldwide Financial Planning Ltd are authorised and regulated by the Financial Services Authority.