The Spectrum of Capital | IFA92 | October 2020 by Clifton Media Lab

For todayâ&#x20AC;&#x2122;s discerning financial and investment professional

The Spectrum of Capital King and Shaxson Asset Management celebrate 10 years of MPS October 2020

ANALYSIS

REVIEWS

Deja Vu. We talk to Scottish Investment Trust's Alasdair McKinnon

The rising tide of ESG investing

IFAM92

COMMENT

INSIGHT

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CONTE NTS

CONTRIBUTORS

October 2020

Welcome

News

Faith Liversedge

Beyond ESG: The Spectrum of Capital IFA Magazine speaks to Wayne Bishop CEO, KSAM, about different approaches to investing and the 10 year anniversary of their MPS.

Paul Wilson Chairman, Clifton Media Lab paul.wilson@cliftonmedialab.com

Invest in the sustainability leaders of tomorrow The launch of a new range of low-cost responsible investment portfolios

18 Peter Wilson Online Writer, IFA Magazine peter.wilson@ifamagazine.com

Targeting Profit with a Purpose Investors increasingly do not have to choose between financial returns and social impact

Sustainability themes too important to ignore Ben Constable-Maxwell, Head of Sustainable and Impact Investing at M&G Investments

22 Andrew Sullivan Editor GBI andrew.sullivan@cliftonmedialab.com

Déjà vu IFA Magazine talks to Alasdair McKinnon, Lead Fund Manager at the Scottish Investment Trust

Why VCTs remain popular with high-earning clients

Sue Whitbread Editor sue.whitbread@ ifamagazine.com

Alex Sullivan Publishing Director alex.sullivan @ ifamagazine.com

It's worth taking the time to do the research and become comfortable recommending VCTs

M&G Positive Impact Fund: IFA Magazine interviews Ben Constable-Maxwell

Environmental, Social and Governance (ESG) investment Another exclusive extract from Tony Catt’s MPS Report

What is a brand in a remote-first world?

Kim Wonnacott Technical Sales and Marketing kim.wonnacott@ifamagazine.com

Faith Liversedge offers sage advice on how professional design and transparent communications will give you and your clients added confidence

A Financial History of the COVID-19 Crisis In the first of a three part series Paul Wilson takes a long hard look at the financial history of the Covid-19 crisis and its implications.

Liability to inheritance tax following pension fund transfer IFA Magazine reviews the recent Supreme Court Judgement on liability to inheritance tax following pension fund transfer

Career Opportunities From Heat Recruitment

Designed by: Becky Oliver IFA Magazine is published by IFA Magazine Publications Ltd, Tel: +44 (0) 1173 258328 3 Worcester Terrace, Clifton, Bristol BS8 3JW © 2020. All rights reserved ‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com

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October 2020

WE LCOM E

A WORLD OF UNCERTAINTY

s more and more of the UK comes under local restrictions following the latest wave of COVID infections, the advice profession goes into autumn more dependent than ever on the use of technology in order to continue to deliver the service which clients want and need. It’s certainly been a steep learning curve for many but the remarkable ability of the advice profession to adapt in order to continue to support clients - albeit remotely - has been a transformation that few would have expected to see at the start of the year. It’s one aspect that looks like it’s here to stay and which will change our lives for the good in so many ways. BRACE, BRACE

THE INVESTMENT DEBATE Financial Planners are used to working with uncertainty however making investment and asset allocation decisions in this climate is particularly challenging. One important consideration which has not diminished one tiny bit in importance is the need for sustainability when it comes to investment matters. The ESG drive continues unabated, consequently many of the pages in this month’s edition are dedicated to this important topic. We talk to Ben Constable-Maxwell of M&G Investments, to Wayne Bishop of King and Shaxson Asset Management and to Damien Lardoux of EQ Investors about their investment approaches in this key area. Compliance consultant Tony Catt talks us through how the advice process needs to demonstrate sound due diligence when it comes to ESG in order to ensure client needs are met effectively.

But, and there’s always a but, as the world braces itself for the impact of rising COVID infections, you could be forgiven for thinking that this was more than enough to take centre stage for matters of investment as well as for our own health and wellbeing.

We are also grateful to Alasdair Mckinnon of Scottish Investment Trust about his contrarian approach and to Octopus Investments about how VCTs can provide a valuable alternative and tax efficient investment option for high earners.

Not quite. With the end to the transitional agreement just a few months away and concerns about the implications of a possible no-deal Brexit doing the rounds, the level of uncertainty around the UK’s future trading relationship with the EU have not exactly gone away. Far from it.

There are plenty of other articles on a range of topics in this combined edition of IFA Magazine and GBI Investments. With comment on tax-efficient investing, a new three-part series from our Chairman, Paul Wilson, on the financial history of the COVID 19 crisis, we hope you find them of interest.

And then there’s the US Presidential Election coming up at the start of November. As we go to press the Democrats have seemingly built up a lead in the polls but there’s everything to play for and the consequences of the outcome will reach right around the globe.

Sue Whitbread Editor IFA Magazine

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October 2020

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Industry body sets best practice guidelines for tax-based investments. EISA seeks fee transparency

he Enterprise Investment Scheme Association (EISA), the representative organisation for members involved in investing in businesses through the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), has published best practice guidelines to ensure that there is fee transparency within the industry. Investee companies and investors using intermediaries to source and manage investments under the schemes are frequently both charged fees and the EISA guidelines are designed to bring complete transparency to enable level playing field comparisons to be made between all parties.

CEO of the EISA, Mark Brownridge commented, “In the post-Covid world, there is a need to re-emphasise the benefits of EIS and SEIS as an attractive means of investment both for investors and early stage growth businesses We believe that transparency and clarity are important ingredients in this, which is why we have published the guidelines. Rightly firms are open to decide on their own fee structures, but as the industry association we are keen to see best practice being applied with both businesses and investors being fully aware of the fees they are being charged.”

An area that often causes confusion for financial planners is whether fees are being charged to the investor or the company, and how much of the investment is eligible for Income Tax relief. It is worth noting that the net effect of fees, whether charged to the company or the portfolio, is broadly similar in that the investee company is provided with a reduced level of available investment. The Research, Education and Marketing Committee of EISA, in conjunction with leading financial planners, has formulated the guideline principles for advisers, so that they are equipped to ask investment managers the right questions enabling them to provide clear advice to their clients with accurate fee comparisons. The guidelines focus on the level of fees charged at the outset and the anticipated fees that will fall due over the first five years of the investment, highlighting the impact on the amount of funds actually available for investing, the indicative level of tax relief available to investors, and clarity on what success fees may be payable by the business. Chairman of EISA’s Research, Education and Marketing Committee, Martin Fox who has been driving the work said, “‘The complexity and variety of EIS fees has been highlighted by financial planners, for some time, as a barrier to making EIS recommendations simpler. By producing these guiding

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principles and inviting planners and advisers to ask the right questions of EIS managers, we are giving planners and advisers the tools to make fair comparisons”. The EIS Fee Transparency Guidelines published by the EISA are as follows: 1. All fees should be clearly stated, when they are payable, and by whom. 2. Fees charged to companies matter as much as fees to investors. Both have an impact on the final outcome for investors, and it is misleading to say that fees charged to companies means that it is ‘fee free’ for investors. All fees charged to investee companies should be disclosed. For example, fees for services that are needed or mandatory on the investee company, such as consulting or monitoring services, should be disclosed. 3. There should be clarity on whether fees are fixed or variable. For example, where monitoring fees might depend on the size of the company. Where appropriate a range can be given, but it should be clear as to the basis being used to decide on the final amount.

October 2020

5. There needs to be clarity on which elements are subject to VAT and which are not. Just to say that VAT is charged as applicable is not sufficient and each fee should clearly have its VAT status given. The net amount of an investment that will be used to purchase shares should be clearly stated. 6. There should be clarity on success fees, and whether these are calculated on returns that include tax benefits, or not. It should be clear whether these are calculated on a per company or fund basis. Disclosure should include the amount of any options or warrants that the manager may receive, as well as any other investment the manager or team may make that is on different terms from those by their customers. The overall guiding principle is that investors should be able to readily compare fees openly and between different companies and know that all fees are declared.

4. It should be clear as to how long fees are payable for, and in what circumstances this can change.

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October 2020

FCA publishes end of transition rules

he FCA has published an updated version of the FCA Handbook to show the rules that will apply at the end of the transition period. It has also set out details on how it intends to use the Temporary Transitional Power (TTP). The TTP gives the FCA flexibility as to how and when changes to its rules apply following the end of the transition period, allowing firms to transition to the new regime. Where it applies, the TTP means that firms and other regulated persons can continue to comply with their existing requirements for a limited period. The FCA intends to apply the TTP on a broad basis from the end of the transition period until 31 March 2022. This means firms and other regulated persons do not generally need to prepare now to meet the changes to their UK regulatory obligations brought about by onshoring. There are areas where it would not be appropriate for the FCA to grant relief at the end of the transition period, including where doing so would not be consistent with its statutory objectives. By reviewing the new Handbook site, alongside the updated TTP information, firms will be able to see which changes will apply to them. In some key areas, the FCA expects firms and other regulated persons to be preparing to comply with changed obligations ready for 31 December 2020: · MIFID II transaction reporting · EMIR reporting obligations · SFTR reporting obligations · Certain requirements under MAR · Issuer rules

· Client Assets Sourcebook requirements (CASS) · Market-making exemption under the Short Selling Regulation · Use of credit ratings for regulatory purposes · Securitisation · Electronic commerce EEA firms · Mortgage lending after the transition period against land in the EEA · Payment Services – strong customer authentication and secure communication Nausicaa Delfas, Executive Director of International at the Financial Conduct Authority, said: ‘We are approaching the end of the transition period, so firms should be completing their final preparations. To help firms to prepare and provide clarity, we have published a version of our Handbook that will apply from the end of this year, which includes the changes made through the onshoring process. ‘We have also set out further details on the Temporary Transitional Power (TTP). The power will in most cases give firms more time to adapt to their new obligations. There are some areas where it would not be appropriate for us to apply the TTP, including where doing so could run counter to our objectives: in those key areas, we continue to expect firms and other regulated entities to prepare now to comply with the changes to their regulatory obligations by 31 December 2020.’ The FCA expects firms to use the duration of the TTP to prepare for full compliance with changes to UK regulatory obligations by 31 March 2022.

· Contractual recognition of bail-in

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October 2020

Investec unveils 100th launch its pioneering ESG-linked deposit product

nvestec has launched the UK’s first retail ESGlinked Deposit Plan. The product is part of Investec’s 100th launch, marking 12 years in which Investec has offered consistently available Deposit Plans and Investment Plans, with 1,175 matured products and no capital loss. The FTSE4Good 6 Year Deposit Plan 1, the first of its kind, is a 6-year fixed term Deposit Plan tied to the FTSE4Good UK 50, an index made up of the largest 50 companies in the FTSE which meet defined ESG criteria. The product returns 18% (equivalent to 3% per annum) if the FTSE4Good UK 50 is higher at maturity than at its starting level. If the FTSE4Good UK 50 is lower than or equal to the starting value at maturity, the investor only gets back his or her initial deposit. The Plan offers a sustainable alternative to Investec’s long-standing FTSE 100 6 Year Deposit Plan. Harris Gorre, Investec’s Head of Financial Products, commented: “Over the course of 100 launches, we have constantly focused on improving every aspect of our products to set new standards for the industry. Today’s announcement is one of a number of innovations that we have made, but is one that is particularly meaningful for us and of course our clients, who can achieve interest rates 2-3 times greater than in cash while investing in products that improve the world around them.” Responding to an independent survey of retail investors carried out on behalf of Investec in April 2020, 51% of respondents felt that sustainable investing was important to them. Tanya Dos Santos, Global Head of Sustainability at Investec, continued: “Partnering with our clients and incentivising them to be more responsible and impactful is a critical element of our sustainability strategy. We see this pioneering product as another significant step in using our financial

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expertise to address socio-economic issues and create a more sustainable world.” Investec CEO Fani Titi is one of 30 global leaders that make up the CEO Alliance of the United Nations Global Investors for Sustainable Development who aim to accelerate action to scale up sustainable investment globally. WHAT IS THE FTSE4GOOD UK 50? The FTSE4Good UK 50 Index tracks the performance of the shares of the 50 largest companies listed on the London Stock Exchange which also demonstrate strong Environmental, Social and Governance (ESG) practises. The stocks that make up the FTSE4Good UK 50 Index generally also feature in the FTSE 100 Index, since both indices track the shares of the largest companies listed on the London Stock Exchange. FTSE Russell, which oversees the indexes that carry its name, gives an ESG rating to companies based on how well they manage Environmental, Social and Governance issues. Environmental issues include how well the company manages its water usage, how much it pollutes, and how effectively the company combats climate change. Social issues include how responsible the company is to its customers, how well it complies with labour standards, and the company’s policies towards human rights and its communities. Governance issues include how effectively the company prevents corruption, the quality of its management and how transparent the company is with its taxes.

October 2020

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Technology EIS fund launch portfolio of existing companies and newcomers

RIE Capital has made 15 technologybased investments since it launched in 2016, offering a diverse portfolio that spans companies across various countries and in a spectrum of sectors such as Connectivity, Life Sciences, Fintech, Edtech and Sports/ Media Tech. They have two exits under their belt and the portfolio continues to increase in value. With a long track record in this space, coupled with a continuing desire to support cutting-edge innovation, ARIE Capital is launching its 2020 EIS fund to help grow some of their existing companies as well as some new companies that fit neatly within the portfolio. These companies all have: • A proof of concept and/or barrier to entry • Market traction with revenues already • An initial B2B approach • Capable and dedicated management

• The ability to scale and grow with significant upside potential They have selected an initial 4 investee companies for the current raise:

feeds, payments, chat, gamification, forms, automation and vouchers •

Hip Impact Protection provides sensor devices embedded in hip protectors to efficiently detect all falls, creating alarms and capturing data for subsequent analysis; ideal for care homes and elderly people living alone

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Net4 is an IoT (Internet of Things) Systems Integrator. It has a proprietary zero code application development environment together with a patented telephony technology (for use in the conference call market)

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Vitabeam® science products utilise proprietary and specific LED lighting technologies to achieve higher standards of food safety and improved health security by encouraging growth in plants while destroying pathogens and bacteria.

Investment can be made via the fund or directly into the specific Investee Companies. All the investee companies are trading and have received HMRC advanced assurance. Capital can be deployed before 5th April 2021 for anyone requiring carry back into 2019/20.

• Engage offers a white label communication platform to create apps with broad functionality including news

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RESPONSIBLE. SUSTAINABLE. INVESTING.

#positiveimpact

#futureleaders

For clients aiming to maximise impact and returns

For clients who want to invest sustainably at low cost

Why use our DFM service? We aim to maximise portfolio returns and sustainability for your clients: 9 We have brought sustainable investing into the mainstream since 2012 9 Our diversified, multi-asset portfolios offer a complete investment solution 9 Our award-winning impact reporting helps your clients to connect their investments with their values 9 Portfolios are available in a full range of wrappers on UK and offshore platforms Learn more at:

eqinvestors.co.uk/advisers Past performance is not a guide to the future. The value of investments and the income derived from them can go down as well as up. Clients could get back less than they originally invested.

EQ Investors, Centennium House, 100 Lower Thames Street, London EC3R 6DL eqinvestors.co.uk

020 7488 7110

enquiries@eqinvestors.co.uk

@eqinvestors

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EQ Investors is a trading name of EQ Investors Limited ('EQ') which is authorised and regulated by the Financial Conduct Authority, No. 539422. Company No. 07223330. Registered in England & Wales at: 6thÂ Floor, 60Â Gracechurch Street, London EC3V 0HR. EQ/0920/389

October 2020

KI NG AN D SHAXSON

BEYOND ESG:

THE SPECTRUM

OF CAPITAL

The Spectrum of Capital is used in investing circles to explain the different approaches to investing when other issues such as ethics and sustainability are considered on top of the financial analysis. IFA Magazine spoke to Wayne Bishop CEO of KSAM marking the 10 year anniversary of its MPS.

ing and Shaxson (KSAM) have been managing ethical portfolios since 2002, and with the flagship Model Portfolio Service (MPS) celebrating its tenth anniversary in 2020, now seemed the opportune moment to talk about topicality and transparency in the ESG sector. A key point raised is the outset by Wayne Bishop, KSAM’s Chief Executive Officer, is that ethical investing isn't a new concept. He reminds us that the first ethical screen arose back in 1758, although exclusions at that time by the Quakers, were driven in terms of their faith. The market has certainly come a long way since then and over the past decade the universe of available assets has grown dramatically. When MPS first launched, the availability of ethical investible assets was limited; for every fund that passed KSAM's screen many, many more did not. Now the market has changed. Over the last 5 years we have seen ESG outperform and in the opening eight months of 2020 saw environmental, social & governance (ESG) funds outpace their conventional rivals by as much as 20 percentage points, according to research by Trustnet.

Performance of indices over 2020

10% 5% 0% -5% -10% -15% -20% -25%

Jan '20

Feb

Mar

A - MSCI ACWI ESG Universal TR in GB (5.31%) B - MSCI ACWI TR in GB (3.64%)

Apr

May

Jun

Jul

Aug

31/12/2019 - 31/08/2020 Data from FE fundinfo2020

According to Bishop, over the last decade ‘the myth that ESG investment meant sacrificing returns has been debunked.’ The phrase 'Ethical Investing’ can sometimes make people think of avoidance, but there is a strong focus on the positive as well. KSAM does maintain a rigorous negative screen to avoid various 'sin' stocks, however the eco-system of available ethical opportunities has flourished since MPS started in 2002. ESG investing has not only outperformed, but has done so with lower volatility. A key factor behind this, according to Bishop, are the oil and gas, mining and financial sectors, which are dominant in many indices but either lower or fully

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KI NG AN D SHAXSON

absent in ESG investments. Exposure to commodity prices has made mainstream indices more volatile sectors, and at the same time these three sectors have lagged the markets for a number of years. This accounts for a large part of the outperformance of ESG. Over time we will see the weighting and influence of these traditional sectors decline and we expect the gap in performance to narrow. Whilst demand for ESG has often grabbed the headlines, as well as the rapid increase in the number and range of funds, one other key fact has been overlooked; the maturing of many of the favoured ESG sectors. At the turn of the century, wind energy was marginal and uneconomic without subsidies and investing in wind turbine companies such as Vestas Wind Systems was considered risky and optimistic while the concept of investing in solar farms in the UK would have been considered lunacy. Today, wind is a mature sector and Vestas is considered a more mature investment. In addition to the turbine developers and manufacturers, yield based investments in wind and solar farm operators (including those based in the UK) are available, and have proved to be resilient investments over the COVID crisis. As Bishop explains further, â&#x20AC;&#x153;for years we were frustrated as investors, that one of the leading offshore wind farm

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October 2020

Conventional investing is just that; the client aims to invest for returns only, and all stocks are investible. Socially Responsible and Sustainable Investing differs. A screen is added before investors allocate their capital. A companyâ&#x20AC;&#x2122;s business practices must not to be considered detrimental to society, or the environment, and exhibit good governance. The research undertaken is known as Ethical, Social, and Governance (ESG) analysis, and the universe of stocks available for selection are reduced. Thematic Investing looks at companies whose products or services are of direct social or environmental benefit concerning a particular theme. Themes emerge over time as pressing issues gain greater weight. Most recently we have seen this with climate change. Impact Investing focuses on investing in companies that finance solutions to the social and environmental issues we face, where the outcome is identifiable and measurable. An obvious investment is renewable energy companies, where the impact can be measured in terms of CO2 emissions saved.

October 2020

KI NG AN D SHAXSON

developers and owners, Danish Oil and Natural Gas (DONG) was off limits from an ethical perspective. They changed focus and rapidly began disposing of their fossil fuel interests, renaming themselves Orsted. Not only has been good from an ESG perspective, it has been very good for shareholders.” An increasing number of sectors nowadays have more viable investment options. To name but a few; social housing, better food ingredients (as well as vegan meat alternatives) and electric mobility. KSAM's Model Portfolios marry together funds across the spectrum of capital, from responsible and sustainable investing right through to Impact. Socially Responsible Investing (SRI), ESG and Impact focused investing are all included in MPS. KSAM therefore aims to meet the vast majority of investors' concerns by selecting a broad range of funds that are specific in their goal. Bishop commented on

this process, saying, 'ethics are personal, so it is important to educate our non-specialist clients on what KSAM has to offer.’ By selecting a wide variety of funds, KSAM further diversifies the risk of each portfolio, ensuring that exposure to individual companies, specific sectors or fund houses are complimentary but not repeated.

“ESG risk adjusted return versus various conventional benchmarks is highly commendable” Wayne Bishop, CEO, King and Shaxson

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As part of their in-house due diligence process, KSAM conducts an ‘Under the Bonnet’ screen every month. This helps to counteract ‘greenwashing,’ where funds that proclaim to be sustainable are avoided if they still hold stocks that are ethically questionable. Bishop said, ‘a thorough screening approach, adding qualitative analysis to external data is paramount to the integrity and longevity of our service.’ ESG investing has brought an alphabet soup of terms with it, and attempts are being made to develop a common taxonomy. Whilst this is positive move, there is a temptation to provide tick box solutions that might lead to greenwashing. It is worth remembering that there are a number of investments with good ESG scores that are still neither positive for the world nor without issues and controversies. For KSAM, their experience is that investors want more; they want companies that actually behave well and are affecting truly positive changes. ESG data can provide a quantitative basis for ESG investing, but this only works if there is an equal qualitative analysis to ensure that investments meet investors’ expectations.

October 2020

an ethical difference and we favoured ASOS as an investment.’ The COVID crisis has accelerated the growth of ESG and investments in this sector have been increasingly sought after, as investors seek areas of genuine trend-based economic growth rather than just the beneficiaries of stimulus. Additionally, in Europe KSAM noted a push to funnel stimulus towards greener projects, adding to the wave of interest although they share some of the concerns that there might be some short-term overheating, especially around the environmental sector. By way of summary Bishop noted that ‘as we move on with the crisis we expect to see the social and governance areas of ESG receive more interest. How companies have behaved during the crisis has become an area of focus, and issues such as executive pay and the treatment of hard-pressed customers are now all under the microscope. At times like this, greenwashing may fool some, but experienced eyes and minds will know that clients who sign up for ESG investments now more than ever, expect more.’

A recent case in point is that of the company Boohoo and he comments that ‘whilst it had the same ESG score as ASOS, as we dug deeper and looked to other sources outside of typical ESG screening we concluded there was

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EQ I NVESTORS

October 2020

INVEST IN THE SUSTAINABILITY

LEADERS OF TOMORROW

The launch of a new range of low-cost responsible investment portfolios

OUR CARBON EMISSIONS PROBLEM Human induced carbon emissions are the leading cause of global climate change. These include the burning of fossil fuels (such as coal) for heat and electricity, agriculture (livestock, rice patties and unhealthy soils), land use changes and some chemical and industrial processes (like cement production). On top of this, there are natural feedback loops that intensify this (releases from oceans, ice caps and forests). It is up to all of us to stop the current trajectory. A concerted effort to tackle the climate crisis was finally embraced by 195 governments in the form of the Paris agreement in 2016. Yet, that isn’t enough. The private sector also needs to realise its responsibility in this global issue and the threat to business as normal.

•

Low cost: These portfolios are built using efficient passive funds with low fund charges. All our portfolios are globally diversified, and regularly rebalanced to reflect our views on the potential returns from different markets.

• Sustainable: The EQ Future Leaders portfolios select the most sustainable companies based on published Environmental, Social and Governance (‘ESG’) data. •

Low carbon: All this means that Future Leaders portfolios have a lower carbon footprint than market benchmarks. Based on our scenario analysis, they are compatible with limiting global warming to 1.5 degrees.

• Tailored to you: available for ISAs, SIPPs and GIAs. SUSTAINABILITY CREDENTIALS

INTRODUCING THE EQ FUTURE LEADERS PORTFOLIOS As a B Corp (committed to both shareholder and stakeholder success) wealth manager, we’ve highlighted our commitment to sustainability with the launch of a new range of low-cost responsible investment portfolios. Our aim is to provide a sustainable investment solution for everyone who wants to invest:

Passive investing lends itself well to a best-in-class approach and can also incorporate negative screening. With this in mind, we have designed the EQ Future Leaders Portfolios around the Impact Management Project’s ABC framework: • Avoiding harm: We use passive funds that screen out the most harmful sectors:

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EQ I NVESTORS

o No tobacco o No armaments o No alcohol o No gambling •

Benefiting stakeholders: We use tracker funds based on the MSCI Socially Responsible Investing (SRI) Indexes. These target the most responsible companies based on their disclosed ESG data. This biases portfolio exposure towards companies that are managing their social and environmental impacts well and demonstrating good corporate governance.

•

Contributing to solutions: Future Leaders uses thematic ETFs to increase portfolio exposure to sectors that are helping to solve global problems, including healthcare, clean energy and green bonds.

We’ve been a pioneer in the impact investing space over the last eight years. The launch of the EQ Future Leaders Portfolios sees us building on that reputation whilst responding to the changing market we work in to deliver a competitively priced multi-asset passive solution. Going forward, our ambition is to evolve the portfolios as the universe of passive strategies increases.

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FIND OUT MORE If you have a question about the EQ Future Leaders Portfolios or our DFM service, please get in touch. Damien Lardoux, Head of Impact Investing EQ Investors damien.lardoux@eqinvestors.co.uk

About Damien Lardoux, Head of Impact Investing Damien is the portfolio Manager for the EQ Future Leaders and EQ Positive Impact Portfolios. He is committed advocate of responsible investing and spreading the word about its benefits. Before joining EQ Investors, Damien worked for Bank of America Merrill Lynch. Damien has an MSc in Management from Reims Management School and an MSc in Wealth and Asset Management from ESCP-EAP Paris Business School. He is also a CFA charter holder, being a regular member of the CFA Institute and CFA UK society.

October 2020

PRAETU RA VE NTU RES ADVE RTORIAL

TARGETING PROFIT WITH A

PURPOSE Investors increasingly do not have to choose between financial returns and social impact

ince the outbreak of the pandemic, the case for sustainable investing has grown stronger, demonstrated by the significant performance of global sustainable indices and ESG funds as well as the swell of support from ordinary investors and clients who increasingly see profit and purpose as a central goal.

challenges have the greatest market demand in the long term. As governments commit capital to support businesses and families at this time and institutions around the world are changing their behaviour, it is those navigating solutions to the pressing challenges we face that stand to benefit. It will be the companies that understand and address the growing market opportunity that will prosper.

Impact investing, which seeks market rates of return by investing in companies that have a positive social and environmental impact on society, is at the forefront of the sustainable investment movement. Many organisations, large and small have entered the space, encouraged by a surge of support from governments and business leaders.

At Triple Point the opportunities we unlock each have a challenge at their core. We increasingly see investors not having to choose between financial returns and social impact.

There is now a growing pool of investors who stand to benefit from a broad range of profitable asset groups, focused on addressing problems across societal inequality, healthcare and the environment. According to a June 2020 survey, conducted by the Global Impact Investing Network â&#x20AC;&#x2DC;GIINâ&#x20AC;&#x2122;, 88% of impact investors reported meeting or exceeding their financial expectations, and a whopping 99% said they met or exceeded their impact expectations. What is becoming increasingly clear is that investment solutions which address broader societal and environmental

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PRAETU RA VE NTU RES ADVE RTORIAL

October 2020

TRIPLE POINT IMPACT EIS SERVICE The Triple Point Impact EIS Service is part of the expanding market opportunity, known as impact investing. The service targets significant capital growth by investing in fast-growing, innovative companies that have a positive social impact and which qualify for EIS tax reliefs. The Service invests in companies that make a positive contribution to one of four themes: health, environment, children & young people and inequality — with each investor holding a portfolio of 8 to 12 companies, ensuring diversification within the investment too. Financial returns are targeted by investing in unlisted growth companies that are already generating revenue and have the potential to provide a significant capital return over a four-to-seven-year period. Depending on their circumstances, investors can also benefit from tax reliefs associated with EIS, including income tax relief of 30%, inheritance tax relief and tax-free growth. CURRENT IMPACT INVESTMENTS As part of the current portfolio, the Impact EIS Service has invested into two companies that have been identified as fast growing and having a positive impact in one of our four themes. A digital health company that is reducing the cost and increasing the effectiveness of identifying melanoma skin cancer by providing dermatological quality digital images and diagnosis using artificial intelligence (‘AI’). An award-winning food tech company on a mission to improve health globally by connecting people with the food they need. The company launched in 2016 with a cloudbased B2B SaaS platform to help Hospitality clients digitise their recipes and menus to comply with new EU food allergen information legislation. Additional functionality was released enabling clients to analyse the nutritional make-up of their food, and communicate digitally with end customers. These are two fantastic examples of the types of investments the Impact EIS Service targets. By focusing on opportunities that have a challenge at their core, the objective of the service is to do well by doing good. If you have any further questions about our Impact EIS Service or any of our other investment solutions, which

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include our Income Service, Estate Planning Service and Venture Fund VCT, please get in touch on 020 7201 8990. Risk Warning: The Triple Point Impact EIS Service places investor’s capital at risk. There is no guarantee that target returns will be achieved, and investors may get back less than they invested. Past performance and forecasts are not a reliable indicator of future performance. Tax treatment depends on the individual circumstances of each client and is subject to change. Tax reliefs depend on the EIS maintaining its qualifying status. This financial promotion has been issued by Triple Point Administration LLP which is authorised and regulated by the Financial Conduct Authority no. 618187.

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SUSTAINABILITY THEMES TOO

IMPORTANT TO IGNORE

Ben Constable-Maxwell, Head of Sustainable and Impact Investing at M&G Investments

2019 was a pivotal year in the journey towards a more sustainable future. The recent wave of public attention generated by the nature documentary series ‘Blue Planet II’ has helped to create a backlash against single-use plastics. Sustainability issues have made front-page news courtesy of environmental movement Extinction Rebellion and Swedish teenage climate activist Greta Thunberg, among others. Yet 2019 saw the highest carbon emissions on record, and there remains global discord on the action needed to combat climate change. I am far from alone in believing that solving sustainability challenges will be era-defining for the world’s companies. Most, if not all, sectors need to adapt in order to continue to thrive. As we look ahead to 2021, here are three sustainability themes that investors ignore at their potential cost. 1. MOVING TOWARDS A CIRCULAR ECONOMY Not only are many important resources finite, but their extraction and single use can have costly implications for the environment. An alternative to the “take, make and dispose” economic model is moving to a more circular economy, where waste from production and consumption becomes a resource to be recycled, repaired and reused.

This transformation will take more than a change in mindset. Durable goods must be designed so they can be repaired, not replaced, and global supply chains will have to be reimagined to enable the reuse and recycling of materials. Some companies and sectors, as in the packaging industry, have already made great progress towards closed-loop processes. Ultimately, transforming waste into a resource should not only address major sustainability concerns, but could also unlock greater value for businesses and their investors. 2. SOLVING ENVIRONMENTAL CHALLENGES There is a persistent tension between fostering global economic development and reducing costs to the environment. After all, a rising population that consumes more as it grows richer heaps greater strain on the planet. For growth to be more sustainable, it is imperative to lower our carbon footprint. There are therefore powerful opportunities where companies can successfully develop solutions to environmental challenges while enabling the modern economy. These solutions do not need to be revolutionary – it is often the incremental innovations that can have the greatest impact. Technologies that make common processes more energyefficient, for instance, can have a significant effect.

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Not only can products and services that enable us to conserve energy or water, for example, help solve the world’s environmental challenges, but they have the potential to generate sustainable profits. 3. COMBATTING CLIMATE CHANGE Arguably, there is no more critical challenge facing global society than climate change. The environmental risks of climate inaction may be evident, but the financial risks should not be overlooked. Where companies fail to act, they not only expose their investors to financial loss, but they will miss opportunities that lie in action to combat climate change. Where companies can tap into trends like rising demand for green electricity, they can pursue more sustainable financial returns for their shareholders while contributing to positive change. I believe the transition to a lower-carbon economy will be more effective if incumbent companies are coaxed into playing an active part. Despite the scale of the challenge, I am buoyed by the contribution that active asset managers like M&G can make by exerting their influence. We have long held companies to account on strategy and governance and, in the same way, we can hold their feet to the fire on climate change. TARGETING SUSTAINABLE RETURNS There are clearly multi-billion-dollar opportunities for innovative companies that can successfully deliver

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October 2020

products and services that help solve the world’s range of sustainability challenges. Where active investors can successfully identify these companies, your clients have the potential to not only target sustainable long-term returns, but also have a demonstrably positive impact on the environment. The value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested. For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776. About Ben Constable-Maxwell Ben is Head of Sustainable and Impact Investing, M&G. He joined M&G in 2003 as an Investment Specialist supporting the Global Equities team. He then moved to the Corporate Finance and Stewardship team in 2013, where he began focusing on corporate governance and ESG at international companies. Ben has been responsible for developing the incorporation of ESG in M&G’s investment processes and sits on M&G’s Responsible Investment Advisory Committee, which oversees Responsible Investment activities at M&G including the firm’s membership of the UNPRI. Ben graduated from the University of Newcastle-upon-Tyne with an Honours Degree in Classics before spending four years in the Equities team at Invesco Perpetual.

October 2020

SCOTTISH I NVESTM E NT TRUST

DÉJÀ VU Alasdair McKinnon is the Lead Fund Manager of the Scottish Investment Trust and speaks to IFA Magazine about how he came to a contrarian position in the market, and why the monumental rally of US tech stocks reminds him of the Dot Com bubble.

he Scottish Investment Trust is an independently managed investment trust company which was formed in 1887 to provide investors with an efficient way to invest in companies around the world. The Scottish takes a contrarian approach to global stock markets, which they view as irrational and ultimately inefficient. As high-conviction investors, they focus on stocks that are out of favour with mainstream investors, as they believe that these offer the greatest potential for long-term gains. The Scottish has an unbroken run of 36 years of regular dividend growth, and won the Shares Awards 2019 ‘Best Investment Trust’. Alasdair McKinnon is the Lead Fund Manager of the Scottish and speaks to IFA Magazine about how he came to his own contrarian position. I started by asking McKinnon about his background and early influences. McKinnon took an initial interest in the stock market as a teenager, spending time as a Scot living in England and then Brazil. During the flotations of the 1980s he commented that ‘it was just generally an interesting time. I also listened to my mum who inspired me to get involved

as she was very interested in the stock market, and alleged she kept making money - in retrospect though I think you could call it gamblers fallacy.’ McKinnon’s first role in the investment industry was as an Investment Analyst for Tilney Investment Management. This is when McKinnon came across what he describes as the ‘small company’ effect, ‘small companies had previously been overlooked, which encouraged a rush of small company funds to promptly flood the market and destroy returns’. Pressed on where his own contrarian approach came from, McKinnon explained that although based on various strands, its formative stage came during the Dot Com bubble. Exploring this further he explained that one of the biggest factors in the Dot Com bubble was the availability of relatively easy money following a demise in long term capital management. Although starting off as sceptical as most, McKinnon cites the purchase of Arm Holdings and Orange as a key decision. ‘I thought, everyone is soon going to have a mobile phone, and if everyone owns a mobile phone, then I’ll invest in the integral component, the chip itself’. This was in 1998, and as the Dot Com boom happened, McKinnon’s confidence grew. ‘Suddenly in the company my successful intuition had led to me being seen as an internet guru.’ In an interesting analogy, McKinnon likened it to being a young sports star adding ‘If you keep being successful you inevitably get more and more out of

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touch with reality.’ Speaking of his own experience and what he has seen in the investment industry, he added that ‘people start off level-headed, they have a great idea and then any scepticism disappears, followed by a flood of money which can then lead to a bust’. McKinnon explains the next phase of his career happened when he got interested in gold in 2004, after tracking the rise and not quite understanding why that rise was happening. Realisation followed detailed research ‘I looked at gold and I suddenly realised everything I thought I knew about money was wrong, and everything I’d learned about economics was wrong, and everything I’d been taught about investing was wrong.’ Quite the realisation, McKinnon explained how this then shaped his attitude to investing, ‘Ultimately money is a piece of paper, it’s an act of faith, you have to believe it’s worth something - and that’s the same for share prices. The reason the gold price was acting the way it was, was because the investors that understood gold were looking at the massive amount of credit the banks were creating, ultimately generating that huge property boom in the period between 2001-2007.’ McKinnon looked back to his childhood experiences in Brazil, ‘I remembered something my Dad told me that workers spent the first hour of every working day exchanging their daily wage into dollars.’ Brazil had three currencies whilst McKinnon lived there, and though they

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October 2020

weren’t supposed to exchange it for dollars, everyone did. ‘There’s an awful lot of belief in the share price but opinion can matter much more than fundamentals - they're only part of the story for many people.’ Consequently, in 2007 when McKinnon saw queues for Northern Rock while on holiday in Switzerland he thought, ‘This is it, this is the trigger.’ Our discussion on gold moved naturally to Coronavirus, and the present and likely future impact on our economy. McKinnon said, ‘The system as we understood it broke with COVID-19 and the whole service economy has been challenged.’ Talking of his personal experience from before the lockdown McKinnon said, ‘We sold most of our cyclical stocks before the pandemic hit. But the markets were slow to react to the growing crisis and we thought, perhaps we were wrong to act, but then it all changed.’ Talking of the government response McKinnon said, ‘Authorities have kept the show on the road with printed money - not just in the UK but everywhere.’ McKinnon asked if I was familiar with the children's show ‘Come outside,’ wherein a lady and her dog tour UK industry to see how things are made. It struck McKinnon that all the factory footage was at least thirty years old, with most of those industries now gone and yet they were still showing this to his children on television adding that ‘arguably that’s the problem today, in that our economy has been totally

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restructured to the service economy’. When I asked how this might resolve itself McKinnon remarked that he wasn’t sure but that most of the developed world has realigned itself in this way. This brought us to the area of the stock market that has been thriving during the pandemic, Tech. McKinnon noted that ‘a lot of tech stocks have clearly been beneficiaries of the COVID crisis. We’ve needed to buy hardware, and software on top of that and we’ve needed to pay for subscription for ways of communicating. It might be argued that the government and society as a whole picked its winners, with local smaller scale shops having to close and yet Amazon continuing to deliver, in both practice and in its share price.’ In terms of successes, alongside the Amazons McKinnon suggests what’s done well are what he refers to as “working from home stocks”. Before our interview McKinnon was talking about his invigorated passion for golf, and in his view a lot of people just like him have changed their habits throughout lockdown with a longer-term change to our work ethics a very likely outcome. He added ‘the stock market has been led by tech stocks and gold and we are now in a world where the cost of money won’t go up for a very long time, so we find ourselves in a bit of a mess’. Considering his experience during the Dot Com bubble, I asked McKinnon what he thought of the tremendous

tech stock rally in a historical context and if there were any parallels between now and then. We talked about recent research that highlighted 6% of S&P 500 stocks are trading on a ratio of ten times the value of sales. ‘To get a pay back on a company on ten times sales, it’s not just a ten year payback – it’s a 50-year payback.’ McKinnon continued, ‘When you look at the ‘darling stocks’ of twenty years ago, and where they are today - though I know some people disagree with this - they have usually started off well and then declined over time. When you buy a generic group on a huge multiple of sales, yes there will be some individual winners, but as a group you’re not in a good pool.’ Quick to add, ‘Does that mean they’re going to fall - not necessarily.’ McKinnon ended with an anecdote from his early career in the Dot Com bubble, ‘I remember going into the office and parroting what I’d just heard on CNBC. I said “I like this stock, because even though it’s on 100 times earnings I know we can depend on the profits”… and the guy looked at me. I knew I was talking rubbish, and he knew I was talking rubbish but he didn’t want to say.’ McKinnon ended our conversation with one final take away, a parallel to what happened in the 1980s, and something he sees emerging once again and that’s the situation where ‘Clever people are telling each-other things they don’t really believe in because that’s what they think people want to hear, that’s the climate we find ourselves in once more.’

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How can investors do well from doing good ? New challenges are reshaping our markets. The impact on the environment, communities, health and education is a key factor in decisions made by consumers, governments and corporates. Triple Point’s Impact EIS is uniquely positioned to benefit from this expanding market opportunity by investing in businesses that are actively addressing these challenges. By investing in fast growing, socially responsible companies, our EIS targets significant capital growth for investors, whilst having a positive impact on broader society.

Investments with purpose for profit by people from Triple Point

The Triple Point Impact EIS Service carries all the risks of investment in smaller companies. Companies can experience significant and sudden increases or decreases in value. As with any investment, there is no guarantee that the target return will be achieved and investors may get back less than the amount they invested. Past performance is not a guide to future performance. Tax treatment depends on the individual circumstances of each client and is subject to change.

020 7201 8990 contact@triplepoint.co.uk

IMPACT EIS ®

www.triplepoint.co.uk

This financial promotion has been issued by Triple Point Administration LLP (“TPAL”), which is authorised and regulated by the Financial Conduct Authority (FCA) in the United Kingdom (with firm reference number 618187). Triple Point is the trading name for the Triple Point Group which includes the following companies and associated entities: Triple Point Investment Management LLP registered in England & Wales no. OC321250, authorised and regulated by the Financial Conduct Authority no. 456597, Triple Point Administration LLP registered in England & Wales no. OC391352 and authorised and regulated by the Financial Conduct Authority no. 618187, and TP Nominees Limited registered in England & Wales no.07839571, all of 1 King William Street, London, EC4N 7AF, UK

October 2020

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WHY VCTS REMAIN POPULAR WITH

HIGH-EARNING CLIENTS It's worth taking the time to do the research and become comfortable recommending VCTs

estrictions on pension contributions have left many clients looking for additional tax-efficient ways to invest towards their retirement. As such, they have been a big driver of VCT demand over the last few years. While it’s true that fewer clients will be affected by the annual allowance after the threshold and adjusted income limits were raised this year, those that are face a lower tapered annual allowance. Of relevance to more clients is the lifetime allowance. This rose to £1,073,100 this year, the lowest level to which the government could have increased it under current rules. The lifetime allowance remains a material constraint on tax-efficient pension saving for a lot of people. And of course, high earners who take advantage of any increase in their annual allowance can expect to find themselves butting up against the lifetime allowance sooner than they otherwise would have. In this article, you’ll see how VCTs can provide a valuable alternative and tax-efficient investment for high earning clients.

Advising on venture capital trusts (VCTs) is a good way to provide high-earning clients with a full service. It may also help you win new clients. Accountants, for example, may be more inclined to refer high-earning clients to an adviser who can offer advice on a broad range of investments, including tax-efficient investments like VCTs. It comes down to the type of clients you have, and the type of clients you want to have. By offering advice on VCTs, you can make yourself attractive to clients who have several decades of investing ahead of them. VCTs give clients access to a portfolio of early-stage companies with high growth potential, while also enabling them to claim upfront income tax relief (worth 30% of the amount invested, up to an investment of £200,000) and earn tax-free dividends and capital gains. Not so long ago, it was common for an adviser to recommend a VCT to just one or two of their clients. The typical case size would be around £25,000 to £30,000. That’s not a huge amount of business in and of itself, but it’s part of providing a full service for high-earning clients, who like the fact that they can claim upfront income tax relief. For some advisers, though, the time spent researching what was then a very niche part of the investment universe was not justified by the amount of business they could expect to recommend. But times have changed. Today, we work with advisers who will have ten, fifteen or even twenty clients invested

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in VCTs. These clients are high earners, and tend to make frequent VCT investments. Over the years, this can add up to a sizeable amount of business. A VCT investment can be a powerful tax planning tool for investors in many different situations. Tax-free dividends represent the potential to provide a useful income stream, while exposure to the type of growth company VCTs invest in can complement other areas of a client’s portfolio. So as VCTs have become a more common piece of planning, they have also become a standard piece of research for more advice firms, because it’s now worth the time to do that initial piece of research work to become comfortable recommending VCTs. Clients will typically be in their accumulation phase for twenty to thirty years. High-earning clients could spend around half of this period making enough in income to use up their pension and ISA allowances, or worried about exceeding the lifetime allowance. That’s ten to fifteen years during which such clients could benefit from making regular VCT investments, which represent another tax-efficient way to invest for retirement. VCTs have a very different risk profile to the type of investments that typically go into an ISA, which makes VCTs a way of diversifying a client’s portfolio into an area of equity investing unlikely to be covered by their other investments. Multiply that by the growing number of clients affected by the lifetime allowance, and you can see why an adviser who previously didn’t consider VCTs worth their time might now decide to research them.

October 2020

DON’T MISS THE OCTOPUS ONLINE SHOW ON 1ST OCTOBER The next Octopus Online Show, which focuses on planning opportunities for clients who own a business, will include a look at how a VCT can help business owners extract profits from their business tax efficiently. To watch, register your details at octopusinvestments. com/estate-planning-show-episode-4/. The episode will broadcast at 10 am on Thursday 1 October. You’ll get 45 minutes’ CPD for attending. To watch, register your details at here. The episode will broadcast at 10 am on Thursday 1 October. You’ll get 45 minutes’ CPD for attending.

VCTs are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. We do not offer investment or tax advice. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880. Issued: September 2020. CAM010186.

UNDERSTANDING THE RISKS The first step with any client is to make sure they understand the risks before making any investment. VCTs are high risk investments. The value of a VCT investment, and income from it, can fall as well as rise. Investors may not get back the full amount they invest. Tax treatment depends on individual circumstances and may change in the future. Tax reliefs also depend on the VCT maintaining its VCT-qualifying status. Clients will also need to be comfortable with the idea of holding the shares for five years in order to keep any income tax relief they claim. And they should keep in mind that VCT share prices can be volatile, and the shares may be hard to sell.

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October 2020

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M&G POSITIVE IMPACT FUND:

Q&A with Ben Constable-Maxwell

WHO ARE YOU? I am Ben Constable-Maxwell, the Head of Sustainable and Impact Investing at M&G, and the Impact Lead on the M&G Positive Impact Fund. WHY ARE YOU PERSONALLY INTERESTED IN THIS FUND? Having worked for some time on the original concept for this fund, it was something I was incredibly excited to see brought to life. I believe our industry has a huge role to play in addressing the world’s major social and environmental challenges – and impact investing can act as a catalyst for transformational change in this regard. I also believe that we can work towards these goals while providing attractive financial returns to our customers. WHY ARE YOU PERSONALLY INTERESTED IN WHY DID YOU LAUNCH THIS FUND? M&G was at the forefront of the ‘democratisation’ of investment, with a long history of ‘firsts’. This started in 1931 when we launched the first mutual fund for the UK general public. This fund is furthering that trend, opening impact to a much wider audience than previously had access, when impact was the reserve of private equity and debt.

There is also the realisation that the UN Sustainable Development Goals do not stand a chance of being achieved by 2030 without the contribution of private capital. This provides a natural tailwind for those companies that help to achieve these goals and represents a huge opportunity for impact investors. THERE ARE MORE AND MORE FUNDS IN THIS SPACE. WHAT MAKES YOUR FUND DISTINCTIVE? There aren’t that many funds in the listed equity space that are strictly ‘impact’. We are trying to stay within the pure spirit of impact, ensuring the companies we invest in have the intention of delivering impact (and that this is not just talk, but translates into results), that that impact is meaningful and measurable, and that those companies actually add something to the playing field. We have a rigorous approach to identifying impactful investments, which we call our ‘triple I’ methodology. This analyses the Investment quality, Intentionality and Impact of a company to assess its suitability for the fund. As part of this analysis, the Positive Impact team internally scores companies on these ‘III’ credentials and requires above-average results for inclusion in the fund’s watchlist, as well as consensus agreement of a company’s merits from the entire Positive Impact team. The fund manager can then invest in these businesses when he thinks the timing and price are right.

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THE FUND IS QUITE CONCENTRATED. WHY DID YOU TAKE THIS APPROACH GIVEN THAT IT COULD BE ARGUED THAT THIS INCREASES THE RISK? We think that holding fewer stocks for longer decreases the complexity of managing risk. With 30 stocks you can create a nicely diversified portfolio across different business models and end markets. We invest across six impact areas, mapped against the SDGs, three of which are focused on environmental solutions and three on social – there are a diverse range of companies addressing the various challenges within each impact area. Then from a portfolio construction perspective, the fund invests in three categories of positive impact companies: Pioneers (whose products or services have a transformational effect on society or the environment); Enablers (which provide the tools for others to deliver positive social or environmental impact); and Leaders (which spearhead the development of sustainability in their industries). Investing in this way provides diversification across industries, end markets, and maturity of business models. We also believe that, in a concentrated portfolio, every stock pick is meaningful, allowing us to maximise the portfolio’s impact and avoid the dilution of returns. Holding fewer stocks also means that we can effectively engage with those companies, properly fulfilling our role as an active, impactful investor.

October 2020

2. Rigour (starting with our III methodology) 3. Transparency as a driver of change WHAT WOULD SUCCESS LOOK LIKE FOR YOUR FUND? To achieve positive societal outcomes through our investments, with the ability to measure tangibly how they are making a difference to society. To deliver returns ahead of the MSCI ACWI Index over rolling five-year periods. We would also measure success through engagement with our direct customers, as a demonstration that they truly are on the journey with us. The value and income from the fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that the fund will achieve its objective and you may get back less than you originally invested. The fund invests mainly in company shares and is therefore likely to experience larger price fluctuations than funds that invest in bonds and/ or cash. For financial advisers only. Not for onward distribution. No other persons should rely on any information contained within. This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is 10 Fenchurch Avenue, London EC3M 5AG. Registered in England and Wales. Registered Number 90776.

The fund holds a small number of investments, and therefore a fall in the value of a single investment may have a greater impact than if it held a larger number of investments. THIS IS AN INTERNATIONAL FUND. HOW DO YOU MANAGE THE CURRENCY RISK? We have a ten-year investment horizon – you have to be long-term if you want to compound returns and deliver meaningful impact. Because of this we don’t hedge currency, as short-term fluctuations tend to wash out over time. The fund can be exposed to different currencies. Movements in currency exchange rates may adversely affect the value of your investment. WHAT THREE THINGS WOULD YOU LIKE YOUR FUND TO BE IDENTIFIED WITH? 1. Empowering our customers to make a difference through their investments

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About Ben Constable-Maxwell Ben is Head of Sustainable and Impact Investing, M&G. He joined M&G in 2003 as an Investment Specialist supporting the Global Equities team. He then moved to the Corporate Finance and Stewardship team in 2013, where he began focusing on corporate governance and ESG at international companies. Ben has been responsible for developing the incorporation of ESG in M&G’s investment processes and sits on M&G’s Responsible Investment Advisory Committee, which oversees Responsible Investment activities at M&G including the firm’s membership of the UNPRI. Ben graduated from the University of Newcastle-upon-Tyne with an Honours Degree in Classics before spending four years in the Equities team at Invesco Perpetual.

October 2020

ADVE RT

WATTABUY -

WHAT TO BUY? WHAT A BUY! The unique advice app for investing in global investment instruments in USD

ot long ago, deposit rates made it possible to live off interest payments. But 2020 finally convinced everyone that the days of high deposit rates are gone forever. Even looking farther afield at deposits in foreign currency, an even more sad rate of return of 0.5% per annum have made people look for other investment instruments to preserve and increase their capital. Relying on management companies and private banking, who, in their turn, are trying to neutralize the fall in their own incomes, leads to the imposition of structured products and synthetic instruments with non-transparent internal commissions on clients. This also results in frustration with the level of expertise and a feeling that the support on offer is mere lip service. For the last two years there is a tendency of global flow of clients and capital to private brokerage accounts. People are no longer willing to entrust their money to campaign managers, and have instead started using self-managed investment solutions, trying to manage investment portfolios at their own risk. Unfortunately, this practice often leads to losses, since such decisions make users engage in frequent, hasty and high-risk

transactions; in essence, brokerage companies exploit human imperfections such as impulsiveness and a gambling nature. The need for truly independent financial expertise in the preparation of high-quality and balanced portfolios, not tied to a single specific broker, has become apparent. Currently there is only one such service - the Wattabuy platform. It is an application that offers unbiased advice for building a high-quality bond portfolio with minimum trading lots of $2,000 USD. This is not a brokerage service or an asset management service. Our clients continue to work with the bank or brokerage accounts they are used to. With Wattabuy they simply receive an independent examination of their portfolio. The Wattabuy team, in tandem with a smart machine learning algorithm analyse daily dollar bonds of more than 5,000 global companies, as well as globally diversified index funds for real estate and stocks with reliability ratings from AAA to BB +. These include a large number of exchange-traded funds with internal commissions not exceeding 0.4% per annum and starting at 0.03 (vanguard) and the volume of funds exceeding 1 billion dollars, offering their own vision of an individual portfolio.

Disclaimer: The views and opinions expressed in this advert are those of the authors and do not necessarily reflect the official policy, thoughts or position of the publisher.

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In this way, the client benefits from expertise based not only on a smart algorithm for selecting high-quality bond portfolios, but also on the many years professional experience of Wattabuyâ&#x20AC;&#x2122;s in-house specialists. This is a new, unique model for the investment market. A smart algorithm analyses a clientâ&#x20AC;&#x2122;s risk profile and based on the results it can offer nine model and about a hundred personalized US dollar global bond portfolios. Two more currencies will be added in the near future: the euro and the yuan. Each portfolio will contain at least ten issuers with trading lots starting at $2,000 USD. Clients will be offered portfolios consisting primarily of high-quality bonds, with a range of portfolios that could also include equity and real estate funds. It should be noted that the service makes it possible to change up to four issuers in the base portfolio. The application also builds a calendar of cash flows according to the dates stated in the coupon payments, including stock funds (ETF), where the distribution of dividends and redemption of individual bond issues takes place. Wattabuy monitors the accumulated portfolio and offers replacement bonds in case there is a deterioration of credit quality or if more profitable high-quality bonds are available.

October 2020

in terms of circulation: up to 10 years, from 10 to 20 years, over 20 years and offering a yield of 1 to 2.5% per annum. The second row of portfolios starts to include bonds of more risky companies, but the group's ratings remain very high (A): McDonalds, AT & T, FedEx, General Electric and Starbucks, with yields from 2 to 3% per annum. And the third row includes sovereign bonds of developing countries and small corporate issuers with credit ratings BBB +, BBB-, BB +: Dell, Motorola, Broadcom with yields from 2.5 to 4% per annum. In total, there are three lines of three bond portfolios with different maturities - nine basic model bond portfolios in US dollars. The minimum trading lot for one security is $ 2,000 USD. It should be noted that the credit quality of all issuers is high, and they all have investment ratings. The service regularly monitors issuers, and in the event of a drop in ratings below BB- or a decrease in ratings below those set for the relevant group, the Wattabuy application will send a recommendation for an immediate exclusion. After three days, the paper will disappear from the portfolios and the service will stop monitoring it. BUT WHAT ABOUT STOCKS?

WHAT KIND OF PORTFOLIOS DOES THE WATTABUY APP RECOMMEND? In the first top row are bonds of the highest credit quality with the highest AAA reliability rating: Amazon, Cisco, Pepsi, and others. There are three such portfolios, differing

The thing is that the key task of the Wattabuy service is capital planning, not playing on the stock exchange. For the coupon value of the portfolio we add equity funds in a number of portfolios, such as Nasdaq stocks,

Disclaimer: The views and opinions expressed in this advert are those of the authors and do not necessarily reflect the official policy, thoughts or position of the publisher.

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October 2020

ADVE RT

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It is important to note that the service does not prompt subscribers to trade securities frequently; the key principle of the algorithm is to monitor the quality of the portfolio, so subscribers will be spared from annoying push notifications. Meanwhile the application will always be on hand in times of uncertainty, downgrading of companies' ratings, the risk of bankruptcies, and early redemption of bonds. Wattabuy’s sole aim is to provide objective information in a convenient way.

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It does not offer securities trading or ideas; only constant support in times of instability.

Disclaimer: The views and opinions expressed in this advert are those of the authors and do not necessarily reflect the official policy, thoughts or position of the publisher.

I FAmagazine.com

October 2020

TONY CATT

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG)

INVESTMENT Another extract from Tony Catt’s MPS Report

hile researching this report, there seemed to be a lot of providers who were majoring on their ESG credentials. I found that this is in preparation for the implementation of MiFID II regulation relating to the adoption of ESG investment principles. The EU Regulation on sustainability-related disclosures in the financial services sector came into force at the end of December 2019 and will apply 15 months later. It is yet another indicator that ESG matters are growing in importance as a compliance issue for financial institutions.

ESG investing takes into account ethical factors alongside financial markers in the decision-making process and has become more commonplace in the global investment space in recent years.

There are some providers who are closely following this and revolving their whole investment strategy around ESG. At the other end of the scale, I suspect some providers are labelling funds as ESG, but being little more than a tick-box exercise or greenwashing a portfolio to fulfil their obligations.

IFAs who have resisted ESG investing will now have to start taking ESG into consideration. And if IFAs fail to take heed of the proposed sustainable regulations when they go through next year, they could have to answer to the FCA.

But greenwashing — a phenomenon of growing concern in the financial sector, which sees firms market products and investments as more sustainable and ethical than they really are — has been a thorn in the side of the responsible investment movement. MiFID II’s sustainable finance measures mean firms must explain what happens if clients say yes to interest in ethical investing.

Last year the European Commission, in conjunction with the European Securities and Markets Authority, proposed

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TONY CATT

changes to MiFID II to bring financial advice firms into line with the EU’s climate action plan through the integration of sustainability and ESG considerations. Assuming that Britain's financial regulation remains aligned with the EU's in the aftermath of Brexit, these changes could have a big impact on UK IFAs. Dated 27 November 2019, EU parliamentary regulations stated advisers should “take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors”. That means joining the dots between suitability and sustainability, regardless of whether the client has expressed any preference towards ESG investing.

October 2020

decisions and an assessment of the likely impacts of sustainability risk on client returns. “Where advisers deem sustainability risks not to be relevant, the descriptions referred to in the first subparagraph shall include a clear and concise explanation of the reasons,” it said. When a client shows interest in ESG, an IFA must have the knowledge and policies to ensure their clients receive suitable advice. A firm’s advice process will need to show how ESG funds are identified and how the IFA assesses one against another to ensure they can put together the appropriate products and funds to meet each client’s needs.

Additional transparency clauses in the EU’s report explained what advisers must include in their due diligence. These included the extent to which sustainability risks are integrated into investment

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October 2020

FAITH LIVE RSE DGE

WHAT IS A

BRAND IN A REMOTE-FIRST WORLD?

In her regular column for IFA Magazine, Faith Liversedge offers sage advice on how professional design and transparent communications will give you and your clients added confidence

his is a question I've been chatting to a lot of my clients about recently. For many people the physicality of their business plays a big part of their brand.

The pandemic has forced us all to move a lot of our business online. Whether it's using video calls, sending more regular email communications, or using a client portal, we're now all part of a 'remote-first' world, and most of us would agree there's no going back. SO WHERE DOES THAT LEAVE YOUR BRAND? Without bricks and mortar, coffee cups, the letterhead, carpark signage, the blinds, the brand of coffee, the tangible bits and bobs that come together to define your 'brand' uniquely, what do you have that shows you're professional and trustworthy? And if you hadn't thought of your brand like that before, then let me introduce you to the idea that there's no such thing as a brand-free interaction. Your brand codifies your promise and anything that promotes and upholds that promise is branding. That could start with your website and include the

way you answer the phone, your tone of voice in emails etc. It is, of course, digital as well as physical in a perfect world. In a way, it's a hard concept to describe, because it is by its very nature intangible; nevertheless, it's very real. Why do people choose to work with you? Why is it that prospective clients trust you? That's your brand. FOR ONE PARTICULAR ADVISER, HIS BRAND WAS ABOUT TO INCLUDE NEW PRINTED MATERIAL. Earlier this year, I finished working on a design job with an adviser: business cards, brochures, printed case studies, a client agreement, and investment philosophy and process brochures: the works. Around March 17th it was ready to go to print. We know what happened next. The original plan was that the adviser would take these to client meetings, but that wasn't going to happen now that we were all in indefinite lockdown, so would he still want to go ahead? I checked to ask whether he still wanted us to hit the big red print button.

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FAITH LIVE RSE DGE

(Always a nerve-wracking task at the best of times.) He said that yes, he did. He wanted to use the time to get this work done so that he was ready for when the tide turns. He was right when he said: "I'm convinced people will need us more, not less. My kinda people anyway (is that Michael Barrymore?)." I remember really appreciating his sense of humour at this point. It's easy to forget how the uncertainty felt during those first few weeks of the crisis until you read emails sent back in March. Anyway, I digress. Four months later, we talked about the print work again, and how glad he was he'd done it, particularly because it had been crucial for him to have a physical representation of who he was for new clients, now that there were no meetings taking place in his office.

October 2020

This is the part I often see overlooked, and it can be a bump in the road. Documents printed in Word, with stretched logos and inconsistent fonts. If you've said you're professional and given the impression you're high-end, this suddenly says otherwise. Designing these things enables you to prove you're dedicated to clear, transparent communications, that you want your client to feel confident and empowered by working with you, that you're professional and can be trusted. Without an office presence, the next best thing for new clients might be your professionally designed collateral that shows them literally what you're all about and gives them something tangible at a crucial point of the 'sale'. Whether you post these to them or upload them to your portal, they're the next best thing to bricks and mortar. And they take away the pressure of creating that perfect Zoom background. Overlook the details at your peril.

I think this is significant. Business development in the remote-first world has been the biggest concern for advisers I've spoken to. Yes, existing clients might have adapted, but many advisers were apprehensive about how easy it would be to meet new clients without the face-to-face. The body language, the small talk, the energy from a first meeting would all be much more difficult to gauge - for both parties - from across a screen. And even if your website had been reassuringly expensive (or not, as the case may be) and your Zoom call had gone swimmingly (sound turned on straight away, an impeachable bookcase in the background, not a stickyfingered child in sight) what about the follow up?

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About Faith Liversedge Faith Liversedge is an experienced communicator with a wealth of knowledge and understanding of the adviser profession. She was Marketing Manager at Nucleus for 5 years, creating innovative and award-winning campaigns. Before that she worked for Standard Life, Prudential and Royal London. In 2017 she set up her own consultancy to help forwardthinking financial advisers and planners to become more profitable through websites, communications and other laser-focused marketing techniques.

October 2020

PAU L WI LSON

A FINANCIAL HISTORY OF THE

COVID-19 CRISIS In a three part series Paul Wilson takes a long hard look at how and when decisions have been made since 11th March, and weighs up just how effective these have been and at what cost to the economy.

aking financial policy on the hoof is fraught with difficulty, as Rishi Sunak has found having had to tear up his plans for the future just weeks after presenting his spring budget. A little like a car starting a speed wobble, real care needs to be taken in the corrections so as not to amplify the problem. Here we review the measures taken so far in the COVID crisis, and examine the road ahead and the adjustments that may well be needed to steady the economy. Sunak stood up to the dispatch box at 12.34 pm on the 11th of March to deliver his first budget. Already under pressure to work quickly having been appointed Chancellor just 28 days earlier on the shock resignation of his predecessor Sajid Javid, it was a budget framed to deliver the party manifesto that had helped win the 2019 election with a majority of 80 seats. In that budget, held against the backdrop of an 8% FTSE 100 drop two days earlier, Sunak announced COVID measures, describing them as ‘Temporary, timely and

targeted’ and broadly grouped into three categories costing approximately £12 billion in total. He awarded just £5bn for the NHS, however noting that ‘whatever extra resources our NHS needs to cope with coronavirus – it will get.’ With hindsight one wonders what they thought the pandemic would look like that afternoon. £6bn for Tax reliefs, a budget he hoped would stretch to cover rates relief for businesses with rateable values under £50,000, Government funded SSP for 14 days, a £3000 grant for 700,000 small businesses and a COVID Business Interruption Loan Scheme (CBILS) with loans of up to £1.2m, 80% guaranteed by the Government. And another billion for extended benefits. In retrospect, the Government seems to have had no idea just how serious the economic damage caused by COVID would be. CBILS proved to be a damp squib, the banks didn’t like the idea as they were exposed to 20% of the losses directly and were overwhelmed by the level of applications. The net result

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was CBILS did not deliver as British business scrambled to shore up rapidly depleting cash reserves, retreating turnover and collapsing balance sheets. Not even a week after his budget, the following Tuesday the 17th Sunak extended his rates relief to £20bn, sending £3.5bn to the devolved administrations. The Government’s advice to avoid pubs, clubs and theatres necessitated not just this intervention, but was ‘sufficient for businesses to claim on their insurance where they have appropriate business interruption cover for pandemics in place.’ The cash grant for the smallest 700,000 businesses was extended to £10,000. Sometimes a Chancellor’s pronouncements are ignored by commercial interests, as with the Banks and their lack of enthusiasm for CBILS. The insurance industry dug its heels in and refused to pay out on business interruption policies ,and it would take the FCA to win a High Court action against Hiscox on the 15th of September before some businesses would see the funds that insurer owed them under their policy.

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October 2020

Sunak also announced that Mortgage lenders were to offer a three month payment holiday to borrowers. However, controversially Business Secretary Alok Sharma told Sky News ‘The Financial Conduct Authority has talked to banks and lenders about this issue . . . and it shouldn’t affect your credit score.’ A point the FCA confirmed on the 20th. Lenders appeared to ignore this using bank statements to weed out those who had taken mortgage holidays and declining their applications later. The FCA was forced to issue a clarification effectively conceding that Mortgage Holidays can impact future applications. Those regulated by the FCA might raise an eyebrow at how easily it batted away the poor advice it gave to consumers in March: ‘Our guidance published in June 2020 (and our previous guidance published in March 2020) makes clear to firms that they should make sure that if you take a payment holiday then it won’t have a negative impact on your credit file. However, you should remember that credit files aren’t the only source of information that lenders can use in lending decisions. Factors other than payment history may also be relevant. For example, lenders may take into account your bank account information,

October 2020

PAU L WI LSON

your use of credit products, or how much you are in debt, when making a lending decision.’ On the 20th of March, nine days after his first budget, Sunak returned to the House of Commons to announce an updated plan to deal with the unfolding situation. “Let me speak directly to people’s concerns. I know that people are worried about losing their jobs. About not being able to pay the rent or the mortgage. About not having enough set by for food and bills. I know that some people in the last few days have already lost their jobs. To all those at home right now, anxious about the days ahead, I say this: you will not face this alone. But getting through this will require a collective national effort, with a role for everyone to play – people, businesses and government. It’s on all of us.” “To meet our commitment to that effort, I am today announcing a combination of measures unprecedented for a Government of this nation.” It is no exaggeration to say the measures were unprecedented, The Furlough scheme to cover 80% of

people’s wages up to £2,500 pm for up to three months where there was no work for them to do would be supporting the incomes of 9.4 million at its peak. When Sunak said ‘I am placing no limit on the amount of funding available for the scheme. We will pay grants to support as many jobs as necessary’ did he realise he would rack up a bill of over 35.4 billion pounds by the 16th of August, with the clock then extended to the end of October? He extended CBILS interest support from the first six months being compliments of HMG to the first twelve months and deferred £30bn worth of business taxes to the end of the year, an extraordinary move for a Treasury increasingly focused on timely tax payment. He introduced cash grants worth £25,000 for small business properties and beefed up Universal Credit and benefits for the selfemployed, The welfare bill was £7bn with a further billion on rent support. In nine days, the Chancellors COVID bill rose from £12bn to over £50bn. And there were many more cheques to write. BoE Base rates had fallen to just 0.1%.

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PAU L WI LSON

It is impossible to model a modern economy accurately in such a dynamic and compressed timeline, so the question as to how these decisions were made will occupy financial historians for decades. As the COVID crisis ramped up rapidly, Boris Johnson announced the total lockdown of the UK in a television announcement on the 23rd of March. It was watched by 27.1 million people; a national event exceeded only by the World Cup of 1966, and the Funeral of Princess Diana. The game had changed dramatically. On the 26th of March Sunak announced a support package for the self-employed, capped at £7500 for the first tranche

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October 2020

in July. This was a long wait for the self-employed and large numbers of self-employed were excluded, either as a result of paying via dividends or simply not having traded during the qualifying period that set the income level. As the lockdown bit hard into the economy Sunak extended the furlough scheme by a month on the 11th of April, just a month on from his first budget. By the 12th of May he extended the scheme further to the end of October, although taking the opportunity to taper the benefit to employers to reduces costs, now heavily escalating. This was cold comfort to many self-employed people who were left in the cracks of policy, and reflected in the increase by 856,500 job seeker claimants in April alone. Problems with Banks processing CBILS forced Sunak to devise a new scheme, the Coronavirus “Bounce Back Loan” BBLs on the 27th of April. This scheme offers a loan 100% guaranteed by the Government of 25% of turnover capped at £50,000 for small companies, with no capital repayment for a year, an interest rate set at 2.5% and the Government picking up the tab for the

October 2020

PAU L WI LSON

first year. There were just seven questions to answer on the application and funds in your account in just 24 hours. The UK’s SMEs breathed a sigh of relief, the banks systems were overwhelmed and delays in delivering cash ran to weeks. By the beginning of the 21st of June a billion pounds had been lent under BBLs, highlighting the banks reluctance to lend under CBILS, with just over 10 billion approved by them under that scheme On the 14th of May the OBR forecast that the cost to Government of combatting the coronavirus pandemic has risen to £123.2bn, with annual borrowing estimated to be 15.2% of the UK economy. This figure is the highest annual borrowing since the end of World War II when it stood at 22.1% By the end of April the Chancellor had drawn most of his financial ammunition to the front line, providing levels of financial support seemingly undreamed of on the 11th of March. One of the biggest gambles in British Financial History was underway, would a Y shaped recovery ride to the rescue in time to allow the economy to recover from what would be the biggest drop in GDP for 300 years? Today as we enter Autumn, that remains to be seen. There have been minor tweaks since May, the allowance

of flexible furlough for part time working until the end of October, a £1000 jobs retention bonus for employers at the end of January 2021, time to pay Vat and Taxes, and a second grant for the self-employed in October trimmed to £6,570. The successor to the Furlough scheme, the Jobs Support Scheme will run from the 1st of November for six months, however it is significantly less generous with the Government’s contribution limited to just £697.92 per month. The Chancellor’s financial ammunition boxes are starting to look a little bare. Indeed the Autumn Budget is cancelled, and the virus is making a comeback. Hopefully it will be that ‘difficult second album’ for Covid-19 and it will peter out quietly. What Sunak sought to achieve in the first six months of the Covid crisis was preserving the economic engines of the economy, not just the production capacity but the spending capacity too. In a consumption led economy consumers are king, the 9.4 million people who were furloughed and the 1.17 million small businesses which relied on bounce back loans have been the key element of Sunak’s strategy. At lockdown Boris Johnson spoke about the refiring up of the ‘great engines of the British Economy’ after the

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lockdown, and early data shows that happening, however it was also hinted that a vaccine might be ready by September, as lockdown eased from the 28th of May it was clear that the financial strategy at least was based on a single wave of the Pandemic. Today, at the notional half time break in the Covid game, assuming a vaccine turns up in the spring we face a second wave, millions around the UK are caught in rolling lockdowns, restrictions similar to early March affect us all and infections are on the rise, what now for the Chancellor? It will soon become clear how employers will decide to manage their workforce capacity. Will they subsidise short time working for six months to retain surplus staff, or cut ties with a redundancy package and recruit back when more certain trading conditions return? When the BBLS and CBILS capital borrowed has been exhausted will owners double down? Will they be able to? One issue emerging for smaller businesses is that the rule that a business cannot hold a BBLs and CBILS loan at the same time means that their bounce back loan must be replaced by much more expensive and partial recourse lending before further working capital can be accessed. This is one of the cliff edges Sunak needs to address quickly, although the Banks are probably happy with

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October 2020

that cliff edge as it creates a significant margin increase opportunity for them. The difficult facts at this point in the crisis are that Sunak has fired all his guns in a ‘shock and awe’ gamble on a single wave and a ‘V’ shaped recovery. His options for the coming cycle are considerably reduced, as are his counterparts in all the world’s major economies. Instead of spending our way out of problem as for the first phase, it has to be a concern that the options now available mainly involve the fair distribution of economic pain. The challenge is predicting what will happen, and almost everyone has been wrongfooted so far, for example with the surge in the property market from June. It is not just unprecedented, but entirely unpredictable. Over the coming period IFA Magazine will focus on the strategies IFAs and wealth managers are recommending to clients to preserve and enhance their wealth. Join us for that discussion. Next Month: We examine the unintended consequences of the financial response to date and review further developments.

October 2020

LIABI LITY TO I N H E RITANCE TAX

LIABILITY TO

INHERITANCE

TAX

FOLLOWING PENSION FUND TRANSFER

The transfer of emphasis from strict compliance with the tax rules as drafted, to include intention was reinforced with this latest judgement in the Supreme Court. Thus adding a layer of moral philosophy to advice.

ublished in The Times on September 18, 2020, the Supreme Court judgement finds that a transfer of a terminally ill person’s pension fund from one scheme to another which, though potentially conferring inheritance tax advantages on her sons, was done with the sole intention of avoiding any possibility of benefit accruing to her ex-husband, was not a “transfer of value” subject to tax. When, however, the transferor then deliberately omitted to take any benefit under the new scheme, so that the entire benefit fell outside her estate on her death (and in the event went to her sons in accordance with her expressed wishes), that omission was “a transfer of value” on which inheritance tax was payable. There was no material break in the chain of causation between the omission and the increase in value in her sons’ estates by virtue of the fact that the payment to the sons resulted from the exercise of a discretion by the pension scheme administrator.

The Supreme Court so held (Lord Hodge and Lord Sales dissenting in part) when allowing in part an appeal by the executors of the late Mrs Rachel Staveley against a decision of the Court of Appeal upholding notices of determination by HM Revenue and Customs in respect of both the transfer and the omission. Mrs Staveley’s executors, Mr Richard Parry, a solicitor, and her two sons, had challenged the determinations before the First-tier Tribunal (Tax Chamber) which found tax payable on the omission but not the transfer. On appeal and cross-appeal, the Upper Tribunal (Tax and Chancery Chamber) found no tax payable at all. Legislation had since been enacted to exclude omissions to take pension benefits from the scope of inheritance tax in circumstances such as the present case: see section 12(2ZA) of the Inheritance Tax Act 1984, as inserted by paragraph 47(2) of Schedule 16 to the Finance Act 2011. Lady Black, with whom Lord Reed and Lord Kitchin agreed, said that shortly before her death in 2006, Mrs

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LIABI LITY TO I N H E RITANCE TAX

Staveley had transferred funds from her existing “section 32 buyout policy” pension scheme (to which section 32 of the Finance Act 1981 applied) into a personal pension plan. She did not take any pension benefits at all during her life and, in those circumstances, a death benefit was payable under the personal pension plan. Mrs Staveley had nominated her two sons as beneficiaries of the death benefit, subject to the discretion of the pension scheme administrator and, after her death, the death benefit was paid to them. The revenue determined that inheritance tax was due, on the basis that both the transfer of funds into the personal pension plan, and Mrs Staveley’s omission to draw any benefits from the plan before her death, were lifetime transfers of value within section 3(1) of the Inheritance Tax Act 1984. Section 3(3) extended the reach of section 3(1) to include an “omission to exercise a right” in certain circumstances. Section 10(1), however, provided that a disposition was

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October 2020

not a transfer of value if it “was not intended, and was not made in a transaction intended, to confer any gratuitous benefit on any person”. The first question (Transfer Issue 1) was whether the transfer, as a disposition viewed on its own, amounted to a transfer of value or whether section 10(1) applied. Mrs Staveley had divorced in 2000. The divorce was acrimonious, leaving her feeling bitter towards her ex-husband. While together, they had set up a company and she had a large pension fund with its occupational pension scheme. On divorce, her involvement with the company ceased and her share of the company pension scheme was put into a section 32 buyout policy. However, the pension was over-funded and, as things stood then, any surplus in the fund on her death would be returned to the company, potentially benefitting her exhusband, which was not acceptable to her. At the time of the transfer, Mrs Staveley was in the late stages of a terminal illness, from which she died six

October 2020

LIABI LITY TO I N H E RITANCE TAX

weeks later. The First-tier Tribunal found that her sole motive in making the transfer was to sever all ties with the company. The revenue argued that, whilst what someone intended was a question of fact, the treatment of that factual intention for the purposes of section 10 was a question of law. And on a legal analysis of the transaction new rights had been substituted which conferred a benefit on the sons within the statutory words. However, any assertion that the relevant intention was merely an intention on the part of the disponor to engage in a transaction which, as a matter of legal analysis, created new rights which conferred a benefit on a person could not be correct. It was the disponor's actual intention in making the disposition that was in point. The search was for what the disponor intended, and in particular for whether the disponor intended to confer any gratuitous benefit on any person. The finding of the Fist-tier Tribunal was that Mrs Staveley had not intended to improve the sons’ position by transferring the funds. It followed that section 10 applied

and so the transfer of the funds on its own was not a transfer of value. A second question then arose (Transfer Issue 2). Even if the transfer into the personal pension plan, viewed alone, would escape inheritance tax, it had to be looked at in a wider context. The revenue argued that the transfer had to be taken together with Mrs Staveley's omission to take lifetime benefits under the personal pension plan. The omission was intended to benefit the sons so, on the revenue’s argument, when the two were viewed together the transfer was also clothed with an intent to confer gratuitous benefit. They pointed to the definition of “transaction” in section 10(3) as including “a series of transactions and any associated operations”, arguing that the transfer and the omission amounted to “associated operations”, linked by common intent. On that argument, the intention to confer benefit on the sons by not taking lifetime benefits coloured the “transaction”, so that it was not possible to bring the disposition within section 10(1).

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LIABI LITY TO I N H E RITANCE TAX

However, the transfer and the omission could not properly be taken together for the purposes of section 10. They did not constitute a “series of transactions and any associated operations” because there was no common intention linking them together as a scheme to confer gratuitous benefit. The final question was whether the omission was to be treated as a disposition by virtue of section 3(3). It was common ground that Mrs Staveley's estate was diminished by her omission to exercise her right to lifetime benefits under her pension and that her sons received the resulting death benefits some months after her death. The dispute was as to whether it could be said that “the value . . . of another person’s estate” was “increased by” her omission, within the meaning of section 3(3).

October 2020

discretion of the scheme administrator did not break the chain connecting the two events. To say that it did would be to adopt a narrow and legalistic approach to section 3(3) which did not seem appropriate. Putting it another way, the omission was the operative cause of the increase. Lord Hodge, with whom Lord Sales agreed, gave a judgment agreeing with Lady Black on Transfer Issue 1 and the omission issue, but reaching a different conclusion on Transfer Issue 2. The judgement further increases the pressure on advisers to be conservative in their advice to clients, moderating advice given where the greyer areas of intent and effect override the latitude the rules themselves allow.

The executors argued that for matters to come within section 3(3) the omission had to be the immediate cause of the increase in the value of another’s estate, with there being immediacy both in terms of timing and in terms of cause and effect. In the present case, the omission yielded the death benefits that, in fact, increased the sons’ estates. The limited

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Job Ref: AR60806

Salary: £25,000 - £35,000 DOE

This role involves researching the marketplace and recommending the most appropriate strategies and services available, ensuring clients are aware of and understand the solutions that best meet their needs. Meeting with clients on a face-to-face basis to provide initial fact-find meetings, obtaining signed paperwork and completing any presentation/ completion meetings. ‘Meetings’ also encompasses telephone/web-based calls. Maintaining client relationships with our existing client book and managing the process of answering client queries. Monitoring existing clients and identifying opportunities, including providing protection advice where relevant. Writing any mortgage recommendation plans and providing compliant documentation. This comes with a client bank to service and uncapped commission. Commission is based on fees earnt and the ownership of the client. You will be CeMap qualified with a proven track record

Position: Paraplanner

Job Ref: CM60831

Location: HERTFORDSHIRE

Salary: £30,000 - £45,000 DOE

The opportunity for an experienced Paraplanner to join a fantastic Financial Services firm who focus on providing a high-quality financial planning and investment management service. During a period of key expansion, our client is looking for an experienced Paraplanner to support the successful Financial Planners of the business. The firm has the flexibility to mould the perfect opportunity around each person’s specific skillset, so the role can be tailored to exactly what you want. You will have the opportunity to prepare suitability letters, reports and recommendations and provide technical support to complex client queries. You will be working in a strong team-focused environment where you can develop your career within a prestigious firm.

What’s needed for me to be considered? • Level 4 Diploma qualified or working towards this • Previous experience within a fast-paced IFA Practice

Position: Paraplanner Location: ABERDEEN

Job Ref: AR60724 Salary: £30,000 - £40,000 DOE

This is an exciting opportunity for an experienced Paraplanner to join a successful Financial Planning firm, based in Aberdeen. Focusing on providing a high-quality financial planning and investment management service to its valued clients, this firm has built a sound reputation within the industry and is ever growing in stature. This unique opportunity is a paraplanning role in which the chosen candidate will report directly to a Financial Planner with an expansive client bank assisting them throughout the entire client process, from the early client correspondence stage, through the suitability report writing and supervising the administrative staff to ensure a smooth client process. Other duties will include performing research, obtaining illustrations, using analytical software and client liaison.

What’s needed for me to be considered? Previous experience in a Paraplanning role You will ideally have attained the Level 4 Diploma in Financial Planning Excellent IT and communication skills and the ability to deal with individuals at all levels within and outside the business

Position: Financial Adviser/Trainer Hybrid Job Ref: DG60876 Location: BEDFORDSHIRE A fantastic Financial Planning firm in Bedfordshire, who focus on providing a high-quality financial planning and investment management service to a high net-worth client base. They are a highly respected and fast-growing company with an excellent reputation in the industry. This is a great opportunity for an experienced financial planner/trainer to take a significant leap forward in terms of your career and personal development, due to a business structure that rewards hard work and progression. You will be provided with leads and clients to service (an already established client base, based in north London and surrounding home counties), as well as sales and marketing support to maximise effective selling time and allow you to grow this initial bank. They are looking for someone who is keen to balance both an advice role, with roughly 30-50% of their time in a training/coaching role, assisting 3-5 other financial planners.

What’s needed for me to be considered? •

Qualified to level 4 diploma as a minimum and working towards chartered status.

•

Previous experience within the IFA practices and giving financial advice

•

A proven sales track record

•

FCA understanding of regulations and products, and their practical application

•

Effective communication, both written and verbal

September 2020 This month has been a challenging month for many, however in the world of Financial Planning recruitment, we have seen our busiest and best month of the year so far. Q1 started like a rocket, with a record-breaking number of candidates being placed, things then slowed down to say the least, but now, we are looking forward to the months to come as momentum really starts to build. Candidates are very much active, and companies are finding their feet in the new recruitment process. Most placements have happened over phone calls, Zoom meetings, Skype or Teams call. Companies are finding their new ‘normal’ and continue to hit the growth plans they originally set out. We are looking forward to the end of year and plan help as many individuals and businesses as we can. If you are looking to hire or are considering a change yourself then please get in touch.

Alex Russon Managing Consultant – Financial Planning Division, Heat Recruitment Alex.russon@heatrecruitment.co.uk 0117 284 1248

What’s next? If you are interested in any of the above opportunities, please contact us directly. If suitable, one of our specialist consultants will be in contact with you to discuss the opportunity in detail prior to submitting your Curriculum Vitae to the client. During this discussion, we will aim to identify your specific skills and motivations and, where appropriate, can also recommend other relevant opportunities to you that match your requirements.

And finally… If these specific vacancies are not exactly what you are looking for, please contact us to discuss other opportunities we may be recruiting for that aren’t necessarily advertised.

TELEPHONE

0330 335 8347 Visit the Heat Recruitment website for more details of these and hundreds of other jobs too www.heatrecruitment.co.uk

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The Spectrum of Capital | IFA92 | October 2020

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