Diy investor magazine issue one by DIY Investor

1 DIY Investor Magazine / March 2014

USE IT OR LOSE IT! THE END OF THE TAX YEAR ON APRIL 5TH IS FAST APPROACHING

ARE HAPPY DAYS

ISA INVESTING –

A LONG TERM PLAN

HERE AGAIN?

JOIN ‘THE CLUB’

FOR YOUR ISA

08_

010_

012_

020_

012_

IN ISAS WE TRUST

A LONG TERM PLAN FOR YOUR ISA

Henderson Global Investors strongly approve of tax efficient ISAs and considers the merits of closed ended investment companies

Passive investment enthusiast David (DAN) Norman looks at risk diversification and the ‘cost monsters’

022_ AIM COMES OF AGE WITH ISA ADMISSION

08_

016_

ARE HAPPY DAYS HERE AGAIN?

READY FOR TAKE OFF? INVESTMENT COMPANIES POST THE RETAIL DISTRIBUTION REVIEW

Dr Stephen Barber celebrates the economic recovery in the UK whist questioning its quality - and urges caution in light of global political instability

Increasingly popular with DIY investors, James Carthew makes the case for investment companies

010_

018_

ISA INVESTING – JOIN ‘THE CLUB’

BONDS VS EQUITIES IN 2014

Steve Haysom looks at the basics of ISA investing and points to the growing ‘club’ of ISA millionaires

With assets looking expensive, James Baxter considers the relative merits of investing in bonds or equities

Having been admitted to ISA wrappers in August 2013 it has been a tumultuous year for AIM stocks; Steve Haysom considers whether the ‘diggers and the drillers’ have been usurped by companies at the cutting edge of technological development

028_

032_

034_

EIGHT THINGS TO KNOW ABOUT SHORT & LEVERAGE ETFS/ETPS

JUNIOR ISA OFFERS TAX EFFICIENCY TO THE BANK OF MUM AND DAD

Boost ETP delivers a technical overview of the world of short and leverage ETPs

Facing wage stagnation, large student debt and rocketing house prices, Steve Haysom considers how the Junior ISA can be used to give your children a financial head start in life

LIFE IS SWEET.... DIY INVESTOR IN CONVERSATION WITH SMALL BUSINESS OWNER TONY MOXON

036_ THE FINAL WORD

Tony Moxon explains how he became a DIY investor and shares some of his best, as well as his worst investment decisions

In the first of a series of articles, Daniel Hawkins seeks to answer some of the key questions facing those new to DIY investing

DIY Investor Magazine delivers education and information, it does not offer advice.

DIY Investor Magazine / March 2014

INSIDE

5 DIY Investor Magazine / March 2014

4 DIY Investor Magazine / March 2014

PUBLISHING MEET THE TEAM STEVE HAYSOM Publisher 07973 483 687 steve.haysom@muckle.com

GRAEME FOSTER Head of Sales & Marketing 07881 502 705 graeme.foster@muckle.com

TERRY KELLEHER Head of Advertising 07432 150 183 terry@kellehermedia.co.uk

DESIGN - D2 INTERACTIVE DAN DROGMAN Managing Director – D2i 07712 824 370 d.drogman@d2interactive.co.uk

MICHELLE LAWRENCE Creative Director – DIY Investor Magazine 07891 134 853 m.lawrence@d2interactive.co.uk DIY Investor Magazine delivers education and information, it does not offer advice.

WELCOME TO THE FIRST EDITION OF DIY INVESTOR MAGAZINE – THE ELECTRONIC PUBLICATION DEDICATED TO SELFDIRECTED SAVINGS AND INVESTMENT.

Welcome to the first edition of DIY Investor Magazine – the electronic publication dedicated to selfdirected savings and investment. DIY Investor Magazine is designed to educate those new to savings and investment as well as inform experienced investors – it unites a community of DIY investors and encourages crowd sourced decision making. We save because we have to – lifestage events such as tuition fees, weddings, property purchase and retirement are all far less traumatic if they are seen as key milestones on a structured financial journey. Our core ethos is found in the archaic Northern or Scottish saying ‘mony a mickle maks a muckle’ – i.e. many small things combined over a long period of time create a larger thing – does what it says on the tin.

WHAT A TIME TO LAUNCH! The Government’s Retail Distribution Review (RDR) has brought pricing transparency and certainty to a previously murky world of hidden commissions and bungs. Those advisers that have chosen to take the new QCF Level 4 qualifications are now obliged to declare the fees they charge and far from achieving one of its core objectives of delivering universal access to good quality financial advice, up to 5.5 million adults in the UK have fallen into an ‘advice gap’ by dint of either refusing to pay for what was previously a ‘free’ service or being cast aside as unprofitable by their adviser. A recent survey by Deloitte indicated that up to 2.2 million of these ‘orphaned’ clients will take partial or total control of their financial affairs. Education and engagement is the absolute key to ensuring that this growing band of DIY investors are empowered to make the informed investment decisions that will shape their financial future.

Long term saving into a tax-efficient ISA wrapper is one of the key components in a DIY investment strategy and this edition is intended to deliver a clarion call to action as the tax year draws to a close – it’s ‘ISA season’ and if you miss the deadline the 2013/14 tax-free allowance will be lost to you forever.

WHAT A TIME TO LAUNCH! George Osborne’s 2014 Budget speech delivered the biggest shot in the arm to savers and investors in living memory and drove a coach and horses through the pensions industry. As well as removing the 10% rate of tax on savings, Osborne announced that from 1st July savers would be able to invest in a “NISA” – a new ISA wrapper that allows more flexibility in terms of its combination of cash and stocks and shares – with annual contributions of up to £15,000. Junior ISAs received a boost with an increase in the annual allowance to £4000 and in the biggest shake up of all, subject to parliamentary decree, theoretically it will be possible for savers to take their entire pension pot at age 55 and seek investments that will deliver a better return than the meagre yields that have been delivered by annuities in recent years. It really is an exciting time to become a DIY investor and by delivering education and content from industry experts we will be with you every step of the way. Over time we will look at setting financial objectives, explain various investment types, look at some techniques to help you to construct and monitor your portfolio and explore issues such as tax and retirement planning. If you have any topics you would like us to consider in future issues, would like to contribute or join the debate, we would welcome your thoughts to feedback@diyinvestormag.com. Alternatively to Steve Haysom at steve.haysom@muckle.com

7 DIY Investor Magazine / March 2014

6 DIY Investor Magazine / March 2014

‘MONY A MICKLE MAKS A MUCKLE’

It still seems something of a novelty writing a commentary such as this with such a seemingly positive economic backdrop. Long in the anticipation, the light at the end of the tunnel is finally with us. The UK economy, so anaemic in recovery, is now projected to challenge the mighty United States as the fastest growing in the G7. But questions remain around the consequences for ending quantitative easing, the quality of recovery and the risk of global political instability.

ECONOMIC STRENGTH The British economy will grow at a rate of 2.8% in 2014 according to the British Chamber of Commerce and 2.5% in 2015. That is a big turnaround when compared to the patchy recovery of recent years. Among other things,

underpinning British economic output is strengthening manufacturing (according to the recent CIPS survey) and increased mortgage lending (according to the Bank of England). Joblessness has also fallen unexpectedly fast; such that the new Bank Governor, Mark Carney, has had to backtrack on his forward guidance which had suggested interest rates could rise once unemployment fell to 7%. And while such jobs levels are the envy of the ‘club med’ troubled Eurozone members, the single currency is in a much healthier (if not happier) place than it was a year ago. Meanwhile, the United States has long since recovered the overall GDP lost during the credit crunch.

Renowned political economist Dr Stephen Barber, says that the economy is stronger at last but investors need to be strategic in structuring their portfolios to take full advantage of recovery.

Last year, it is believed, US expansion contributed as much as 4.1% to the growth of the rest of the world. This relative stability in some of Britain’s principal trading partners represents some sort of a return to normality - particularly for those engaged in longer-term portfolio planning.

CAUTION Conditions have brightened to the extent that the FTSE 100 posted a 14 year closing high at the end of February. That is a real vote of confidence. But while equity markets have responded positively to the strengthening economy and the pick-up in corporate activity, investors still need to exercise caution. The UK housing market looks in danger of overheating and exports appear well below the strength conducive to supporting ongoing growth. Furthermore, the monetary experiment known as quantitative easing,

which saw the Central Banks of Europe, America and Japan, support the faltering global economy by pumping billions into asset purchases, is coming to an end. It is true that markets have been nervous at the prospect of scaling back intervention but more than this, the inflationary fear has been replaced with a deflationary risk. Price rises in the UK have fallen to just 2% and the story is the same in Europe and across the Atlantic. Economists are divided on the likelihood of falling prices akin to the experience in Japan over almost 20 years now. For my own mind the odds are stacked against a deflationary

spiral not least because of the prospect of more monetary stimulus. Nonetheless, investors would be wise to consider the potential damage such an environment could have on portfolio planning.

market appears to offer investors an increasing range of prospects. And if the Chamber of Commerce is right then the overall size of the economy will return to pre-credit crunch levels by the summer.

And if ever one needed a reminder of global political risk, the situation in the Ukraine is it. After all, Russia is not only one of the key emerging markets in the world today but also an important trading partner for much of Europe. The knock on effect has been felt in neighbouring Turkey: a favourite market for many investors. Sticking our investment heads in the sand is not really an option. Even with a strengthening home economy, the UK represents no more than a tenth of the global economy and some of the most promising prospects and investment stories continue to be found right across the world. It is also a truth that the London market is heavily exposed to the four corners of the world. Balanced portfolios will continue to be globally diversified, but investors should take risk management seriously.

Pointedly, however, as investors shift their strategies to profit from the changing backdrop, some of the defensives which have been the mainstay of portfolios for some time are losing favour as investors seek opportunities in recovery. As conditions change, investors should be minded to adjust their strategies to take full advantage of future prospects.

RISK AND RETURN Good investment is always a matter of balancing risk and return. Compared to the roller coaster that was the credit crunch, the new environment investors now find themselves in is positively stable. Indeed, prospects for stable growth are better than at any time since the crisis. The UK has at last dragged itself out of the ‘doldrums’ and the

This article does not constitute advice. If you are in any doubt you should seek independent financial advice.

REFERENCES: On US economy: http://www.cnbc.com/id/101420721 Parts of UK economy doing well and weaknesses: http://uk.reuters.com/article/2014/03/03/uk-pollmanufacturing-idUKBREA220M120140303 BBC projections for UK economy: http://www.bbc.co.uk/news/business-26504691

DIY Investor Magazine / March 2014

8 DIY Investor Magazine / March 2014

ARE HAPPY DAYS HERE AGAIN?

As ‘ISA season’ is upon us once again, Steve Haysom explains the basics and benefits of the tax efficient wrapper. The mercury is rising and our parks and gardens have burst into life so the DIY investor knows precisely what season it is; its ISA season again and this year seems to have generated even more frenzied activity than before. However tempting it may be to dismiss this late flurry in the run up to the end of the tax year as a marketing exercise by platforms and product issuers, the ISA has a vital role to play in any long-term investment strategy and once the calendar shows 6th April, that 2013-14 allowance will be gone forever. Once the preserve of an elite group of stock pickers, the ‘ISA Millionaires Club’ has been expanding of late – due in

WHAT IS AN ISA? An Individual Savings Account (ISA) is an investment wrapper whose key attraction is that returns generated within it are free of tax. DIY investors can choose either a cash or a stocks and shares ISA and benefit from higher rates of return and tax benefits than savings accounts. With interest rates set to remain at record low levels there is precious little to be earned on savings accounts and any return less than the prevailing rate of inflation means that your capital is being eroded. In the current tax year investors can subscribe up to £11,520 in an ISA, up to half (£5760) of which can be in cash.

A little number crunching points to the opportunity – wealth managers Brewin Dolphin calculates that an investor making the maximum subscription each year and achieving a 5% return after fees could achieve a pot of £1 million within 29 years. The benefits of compounding and tax efficient saving can deliver life-changing wealth to those who seize the opportunity; the first step is to use this year’s allowance now, because otherwise you’ll lose it.

The 2014 budget allows peer-to-peer loans to be held in an ISA as well as bonds with less than five years to maturity. TAX SAVINGS 1. No capital gains tax is paid on profits from share price increases, saving you between 18% and 28% according to your tax liability 2. Tax on interest earned from bonds can be reclaimed from HM Revenue & Customs each year 3. Income earned, or dividends received from shares or funds are taxed at 10%, saving a basic rate taxpayer 12%

WEALTH MANAGERS BREWIN DOLPHIN CALCULATES THAT AN INVESTOR MAKING THE MAXIMUM SUBSCRIPTION EACH YEAR AND ACHIEVING A 5% RETURN AFTER FEES COULD ACHIEVE A POT OF £1 MILLION WITHIN 29 YEARS.

part to above-inflation increases in subscription levels – in his recent budget the Chancellor announced that from July 1st 2014 savers will be able to shelter £15,000 p.a. in an ISA with greater flexibility around the combination of cash and stocks and shares. But it is not only subscription levels that account; having existed for 15 years, ISA asset growth points to the benefits of long-term investing.

Stocks and shares ISAs currently allow investors to subscribe up to the full £11,520 annual allowance and invest in a wide range of stocks, bonds, funds, investment trusts and ETFs. Profits are not liable for capital gains tax and no additional income tax is due on dividends or distributions.

CASH ISA A cash ISA is simply a savings product that pays returns with no deduction of tax – a saving of 20% to standard rate taxpayers and 40% to those that pay at the higher level. £226 billion is currently invested in cash ISAs and despite the fact that rates have been declining, with the best instant access account currently available paying just 1.75%, this represents a year on year growth of 6%. The budget delivered a massive boost for savers, raising the annual maximum Cash ISA subscription to £15.000 from July 1st and allowing investors to convert from stocks and shares to cash products for the first time.

IS AN ISA FOR YOU? Notwithstanding the pressure from all sides to participate in what always seems to be described as a ‘bumper’ ISA season, many DIY investors will recognise the value of a tax efficient investment vehicle. Understand your attitude to risk, set your financial objectives and construct your long term investment strategy. Whilst some may need a nudge, ISA season should not really sneak up on you; the end of the tax year should just be another milestone on the way to the achievement of your investment goals. Some may consider that easy access to their investments makes an ISA a more portable and attractive alternative to a pension in their retirement planning; others may decide that the creation of sub-pots within a tax-efficient account may be the best way to give their children a financial head start in life. It is worth shopping around to ensure that the ISA provider you choose delivers the right technical capability and range of investment options that allow you to implement your strategy and at a cost that you find acceptable.

If you are not confident about picking individual investments you may to choose to effectively cede asset allocation decisions to the experts by purchasing a managed or multi-manager fund, by adopting a model portfolio, purchasing a low-cost index tracker or by selecting one of the pre-selected portfolios of funds that are on offer. What you should try to avoid is missing this year’s deadline and then thinking ‘I wish…… ISA INVESTING – SOME THINGS TO CONSIDER Bonds with less than 5 years to maturity can now be held within an ISA. Bond funds are more efficient within an ISA as they are sheltered from income tax whereas equity funds incur capital gains tax for which you already have an annual allowance of £10,900. However, collectives do not replicate the performance of bonds, so be sure that they meet your requirements. Take it to the max – combining your allowance with that of your spouse will allow you to jointly shelter £23.040 in the current tax year and £30,000 p.a. from July 1st. If you don’t have time to monitor the performance of individual stocks, consider tapping into the expertise of the professionals by buying funds or investment trusts. Allowed within ISA wrappers since August 2013 AIM stocks can add a little zest to your portfolio but it may not be the place for the faint hearted – consider an AIM tracker or small-cap fund with exposure to AIM stocks.

However, if you do make the wrong choice, ISAs are reasonably simple to transfer with no loss of tax benefit – you have instant access to your funds should you require it.

DIY Investor Magazine / March 2014

10 DIY Investor Magazine / March 2014

ISA INVESTING JOIN ‘THE CLUB’

STOCKS AND SHARES ISA

EGGS, BASKETS & OMELETTES

DIY Investor Magazine / March 2014

12 DIY Investor Magazine / March 2014

A LONG TERM PLAN FOR YOUR ISA With over 30 years experience in Financial Services David (DAN) Norman has worked for 10 different firms, most recently the CEO of Credit Suisse Asset Management (UK) he founded the specialist multi-asset passive boutique, TCF Investment, in 2009. Here he gives his thoughts on the best long term strategy for your ISA.

START WITH THE END IN MIND THE RISKS Investing is like any other long term activity – it needs a clear destination or purpose (to make sure you can monitor your progress), you need to understand the risks that might be faced along the way (and what you might need to do to reduce or to respond to those risks) and it needs some determination to stay the distance. A clear plan of what resources you will needed for later life is critical – as the famous conversation in Lewis Carroll’s ‘Alice’s Adventures In Wonderland’ highlights:

There are some obvious and less obvious risks that all investors face. Chief among them are inflation, volatility (the ups and downs) and cost – though I would argue that costs are more of a certainty than a risk. Every investment has a different risk profile. Cash isn’t volatile but it is poor at beating inflation. Equities beat inflation in the long run but are more volatile in the short run. Understanding your own risk profile is critical as it is the only way to build a portfolio that will meet your long term goals – you need to know:

“WOULD YOU TELL ME, PLEASE, WHICH WAY I OUGHT TO GO FROM HERE?” “THAT DEPENDS A GOOD DEAL ON WHERE YOU WANT TO GET TO”, SAID THE CAT.

Spending some time to develop this plan is probably the most important stage in investing.

• •

Without a plan how will you know whether you are on track? This is an area where a good financial adviser can really help. And any plan will of course need to understand the risks.

•

Your attitude to risk (your appetite for risk if you like) Your need for risk (how much return do you need to meet your goals?) Your risk tolerance (can you afford short term losses in pursuit of longer term goals?)

Many investors underestimate the impact of inflation or as Neil Rossiter (Certified Financial Planner) describes it ‘the hidden tax’. Many people aged 60 today will live into their 80s and beyond. To keep pace with inflation at just 2.5% pa your investments need to grow by 85% over a 25 year period. Your investment plan needs to take account of this.

Diversification, the idea that spreading your investment between different asset classes and between different stocks within each asset class, can boost your returns has been around for many years, but is as valid today as it ever was. Often described as a ‘free lunch’, you can boost your returns and reduce your risk by diversifying and re balancing regularly (bringing your portfolio back into line with its long term asset allocation). As a rule of thumb, more often than annually and less often than quarterly is a good guide – the costs of re balancing being a key factor. Spreading your investment between assets classes (equities, bonds, property, cash, commodities) leads to a lower risk profile. The same goes for spreading investments within asset classes between different geographies (e.g. UK and Overseas) and sectors (e.g. energy, financial and retail company shares). Index funds are an excellent way to achieve this diversification at very low cost – they hold a very broad mix of bonds or shares. And rebalance very efficiently. The latest generation of low cost multi - asset funds also offer diversification across asset classes and can be very cost effective.

AS A RULE OF THUMB MORE OFTEN THAN ANNUALLY AND LESS OFTEN THAN QUARTERLY IS A GOOD GUIDE – THE COSTS OF REBALANCING BEING A KEY FACTOR.

15 DIY Investor Magazine / March 2014

14 DIY Investor Magazine / March 2014

COST – BEWARE THE COST MONSTERS One of the biggest risks that long term investors face is cost – and yet too few see cost as a risk at all.

“In every time period and every data point tested, low cost funds beat high costs” “Expense ratios are strong predictors of performance. In every asset class over every time period, the cheapest quintile (cheapest fifth) produced higher total returns than the most expensive quintile (most expensive fifth)”

EVERY POUND THAT IS TAKEN FROM YOUR INVESTMENT IN COSTS OR CHARGES IS LOST FOREVER. AND SO IS THE RETURN ON THAT POUND …EACH AND EVERY YEAR IN FUTURE

Unfortunately the investment industry isn’t always as good at showing the full costs as it might be. Always look for the Total Expense Ratio (TER) or Ongoing Charges Figure (OCF) of a fund, rather than just the Annual Management Charge (AMC). Also check out the Portfolio Turnover Rate (PTR) to see how often the manager is trading the stocks and shares inside a fund - and thus how much extra cost drag the manager is generating from the trading. Another good reason for choosing index funds is that they trade far less often – so have lower running costs as well as lower expenses. Morningstar in the US conducted some analysis in 2010 to identify the best historic predictors of performance. The results are remarkably clear:

Choosing low cost index funds gives you a head start when building your portfolio. And the same goes for the cost of any wrappers (ISA or pension) that you select. Make sure you know the initial costs, the running costs, the switch or trading cost and any other charges. If you are choosing active funds make sure the manager has the right benchmark for your needs (comparing their performance to an index rather than the sector for example). And if you can try to assess the risk adjusted return – any manager can take more risk but do you get extra return for the risk taken?

IN THE LONG RUN RETURNS Real assets (e.g. equities / property) have historically outperformed cash and bonds over the long run. A key point is that asset allocation, how much you invest in bonds vs. equities for example, has been shown to be by far the biggest driver of long term returns and is far more important than which equity you are invested in. Using index funds to get access to a range of asset classes is a sound strategy. Perhaps adding some specialist active satellites to spice up returns in smaller areas (small companies, commodities.) Academic research into the performance track records of active funds bolsters the case for passive investing. An analysis of past performance figures concludes that, although some active investors possess skill (or luck), the average fund typically under performs the market. Even the most skilful investors struggle to produce consistent out performance. And the time, effort and therefore cost that would be required to select these managers (in advance if any hoped for out performance) is probably greater than the extra return anyway!

INVESTING IS NOT AN ART IT IS A SCIENCE Investing needs a clear long term objective based on understanding the risk and returns you are seeking. Then you need to use the key rules of investing to help you achieve your goals:

• • • • •

Get the right mix of assets to meet your needs Diversify Rebalance (keep your asset mix on track by checking it as the environment changes) Keep costs low Save tax where you can – using your ISA allowance will build up a tax exempt pot for the future

Index or passive funds are an excellent low cost way to achieve very broad diversification within an asset class at low cost. Combining index funds into a portfolio tailored to meet your needs – by using perhaps 10 or so index funds or simple ETFs – is a great way to invest for the long term. And stands more chance of making you, rather than the fund manager rich! My investments? All invested in a diverse portfolio of index funds and ETFs… my money is where my mouth is! David Norman CEO TCF Investment

JAMES CARTHEW HEAD OF RESEARCH & DIRECTOR MARTEN & CO. With so many potential homes for your ISA why should you be thinking about putting money into an investment company? Investment companies have been around for a long time – the oldest, Foreign & Colonial, was launched in 1868. They had a reputation with some investors as being old fashioned but, over the past decade, the investment company sector has been transformed. It is growing quite fast – new issues of investment companies account for a substantial chunk of all new listings on the London Stock Exchange. Investment companies are, as the name suggests, real companies that are set up for the purpose of making investments. They have a board of directors whose job it is to safeguard shareholders’ money. They can borrow money and issue different classes of shares and this can make them more complicated to understand (though there are plenty of straightforward ones). They invest in just about everything you can

So, faced with a choice of one type of investment that was going to effectively bribe you to recommend it and one that couldn’t, which one do you think got all the attention? The FCA have changed all that though. Advisers now charge fees regardless of what type of investment they recommend and it is going to be harder for them to ignore the attractions of investment companies, the chief of which seems to be superior investment performance. While there is always the exception to the rule, the average investment company in most investment areas tends to outperform the average open-ended fund. Take European funds for example. Over the ten years to the end of December 2013 the average open-ended fund returned 138% (according to the Investment Managers Association). The average investment company made 210% however – that’s quite a big difference. Why should this happen though? Well one important difference between open-ended funds and investment companies is that shareholders get to vote on how their company is run. Poorly performing managers get sacked and funds with the wrong investment strategy get wound up. This keeps directors and managers on their toes (it is also part of the fun of investing in these things – you even get the chance once a year to go along to the annual general meeting and ask the people in charge of your fund questions). Investment companies can also take advantage of their structure to enhance returns, borrowing money cheaply and buying assets that go up can do wonders for performance. It works both ways though and so definitely do not invest in an investment company with a lot of borrowings without considering how risky that makes it (but remember most investment companies do not have high borrowings and many have none at all).

Growth. We see the potential others miss.

DIY Investor Magazine / March 2014

16 DIY Investor Magazine / March 2014

READY FOR TAKE OFF? INVESTMENT COMPANIES POST THE RETAIL DISTRIBUTION REVIEW

Available in an

ISA

Fidelity Special Situations Fund. Fidelity has an established heritage of Special Situations

the UK and beyond. This allows us to identify those

investing – born of a belief that the best opportunities

investment opportunities the market has overlooked.

can be found where others least expect to find them.

So if you want to find the potential others miss – make

And after 30 years the fund remains steadily aligned

Fidelity Special Situations Fund your choice for this year’s

to its founding principles. Manager, Alex Wright,

ISA allowance. It could mean transformation for your

scrutinises the market for undervalued stocks that show the

investment. Go to fidelity.co.uk/situations.

potential for significant, positive change. While many fund

think of and range from highly diversified global funds (ideal core holdings in an equity portfolio) to specialist funds investing in biotech or renewable energy. In 2012 investment companies accounted for just 3.5% of all stocks and shares ISAs. In 2013 that figure had crept up to 3.8%. But we think this number ought to be about to take off – why? The way that financial advisers get paid has changed recently. Open-ended funds (unit trusts, OEICs, UCITs) used to charge you big up-front fees and then give most of that back to your adviser. That option was not available to investment companies.

Until this year all investment companies that only had a quote on the AIM market were off limits for ISA savers. The government have changed the rules however and now you can choose from many more funds. The choice is not as bewildering as for open-ended funds however.

managers simply scratch the surface, we’re able to dig

The value of investments can fall as well as rise, so you

deeper. We meet the management, suppliers, even

may get back less than you invest. Overseas investments

competitors of the companies we invest in – to gain a

are subject to currency fluctuations. Eligibility to invest in an

true understanding of their business models.

ISA depends on personal circumstances and all tax rules

Supported by our dedicated research network of over

may change in future. Fidelity does not give advice. If you

If you want to learn more, there are websites dedicated to helping you. Ours, www.quoteddata.com, gives free information on every investment company quoted in London plus news articles and in-depth research on selected funds – drop by.

140 analysts, we rigorously examine companies across

require a recommendation, please contact an adviser.

web: fidelity.co.uk/situations call: 0800 22 25 20 or speak to your adviser The Key Investor Information Document can be obtained from our website at ﬁdelity.co.uk/importantinformation or by calling 0800 41 41 61.The full prospectus may also be obtained from Fidelity. Issued by FIL Investments International authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity Worldwide Investment, the Fidelity Worldwide Investment logo and F symbol are trademarks of FIL Limited. CSO5803/0714

The impact of easy monetary policy in the post crisis recovery is now obvious to see. With base interests rates in the developed world economies at below 1% for 7 years and the time horizon for rate rises perpetually 18 months off, everything looks expensive. •

•

Income generating assets have been pushed to very high valuations, the higher the certainty of the income the higher the price: gilts, corporate bonds, London property, high yield equities all at or fast approaching generationally high relative valuations. The price volatility of non-income producing assets is also high as highly liquid investors with negative cost of financing (after accounting for inflation) pursue inflation beating returns.

WHERE DOES THIS LEAVE THE BOND VERSUS EQUITY DEBATE? The case against bonds is well versed. With interest rates forecast to rise bonds will fall and should therefore be avoided. Similarly the case for equities

appetite and whether this 5 year bull market in equities can continue without a major market correction at some point soon. So before going ‘all in’ with equities we must admit we know very little as to what equity returns will be and that the only route to a certain return is in bonds. How important is certainty to you? How will you feel if you are nursing big losses?

GETTING THE BEST FROM BONDS Here are my top 5 tips: •

• •

• as a protection against inflation is the general view. If inflation is coming buy equities not bonds. The principles in both these statements are correct but the resultant strategy looks dangerous. With the S&P 500 index, the main barometer for global equities, up 150% in five years, put all your money in equities? History would suggest this might be a pretty dumb move.

THE PRICE OF CERTAINTY It remains extremely difficult to forecast if and when inflation will start to rise, when interest rates might rise, what will happen to corporate profits, investor risk

Consider buying individual bonds not just funds. Only when you hold a bond directly do you get the certainty of the return to maturity. Keep costs low. This means using a good broker with low fixed fees and good execution in the bond market. Optimise returns buy selling ahead of maturity. With persisting low rates bonds will generate nonlinear returns. Paying investors disproportionately high returns ahead of the yield to maturity in the early years and less in the last few years. If this is news to you, probably have not thought about bond investing and might be better referring you client to a fund or bond expert. Avoid gilt funds, vanilla corporate bond funds and short dated bond funds. After fees the likely return on all of these, from here until interest rates have normalised, is likely to be low and less than inflation. Use funds that can access the higher yield market, the new issue market where rates will track up if interest rates rise and that can hedge against rate rises.

James Baxter is a Managing Partner at Tideway Investment Partners who as well as being specialist ‘at retirement’ pensions advisers run the award winning Tideway UCITS - Global Navigator absolute return bond fund.

Take a global view of investment trusts, expertly managed by Henderson

DIY Investor Magazine / March 2014

JAMES BAXTER MANAGING PARTNER TIDEWAY INVESTMENT PARTNERS

It’s a global marketplace

ARE YOU A GLOBAL INVESTOR?

DIY Investor Magazine / March 2014

BONDS VS EQUITIES IN 2014

Investment Trusts, managed by Henderson

For over 75 years, Henderson Global Investors has been at the forefront of investment trust innovation and development. Now, with a diverse and established range of managed investment trusts and investment companies, Henderson has a global view of the market.

Whether you are retirement planning, investing for your children, looking to take advantage of dynamic global markets or want a cautious investment approach, our managed companies offer a wide range of investment objectives and strategies professionally managed by regional experts. If your priority is high income, long term capital growth or a mixture of both, Henderson Global Investors has a range of solutions which aims to meet your investment needs. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise as a result of market and currency ﬂuctuations, and you may not get back the amount originally invested.

Call to receive your Investment Trust brochure or visit www.hendersoninvestmenttrusts.com

0800 856 5656 @HGiTrusts

Issued in the UK by Henderson Global Investors. Henderson Global Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Fund Management Limited (reg. no. 2607112), Henderson Investment Funds Limited (reg. no. 2678531), Henderson Investment Management Limited (reg. no. 1795354), Henderson Alternative Investment Advisor Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), Gartmore Investment Limited (reg. no. 1508030), (each incorporated and registered in England and Wales with registered ofﬁce at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. Telephone calls may be recorded and monitored. H004652/1113ad

WE TRUST BY HENDERSON GLOBAL INVESTORS

ISA season is upon us and many a fund management house will be paying testament to the tax wrapper’s advantages. We agree. At Henderson Global Investors we view it as one of the most efficient ways to invest for your future and if managed well the £11,520 the government allows you for a Stocks & Shares ISA in a single tax year could well mean the making of significant future financial returns.

the number of shares in issue stays put, allowing them a longer-term investment view where more opportunities may exist as well as the option to buy more esoteric or illiquid assets. Because ISAs are about investing for the long-term we think this makes investment trusts a sensible choice in your ISA.

Deciding what to put in it is difficult though and we do not deny the sea of choice out there. Because of this, Henderson brings you one (largely unknown) corner of the investment market that we think may be perfect for your ISA: investment trusts. Investment trusts are closed-ended investment companies; they have a fixed amount of money to invest for their particular mandate i.e. growth, income, or a mix of both; from a wide range of geographical or sector specialisations. Investors

Usually, the decision surrounding where to invest your money is based on two broad outcomes: do you want to grow your capital or do you wish to preserve it and gain an income. Investments in ISAs in general do not attract any income tax on dividends paid-out by the investment vehicle. Investment trusts offer a further advantage: the manager is able to save up to 15% of the pot of income received from the underlying assets, whereas managers in open-ended funds do not have this

There are further advantages.

£11,5201 THE GOVERNMENT ALLOWS YOU FOR A STOCKS & SHARES ISA IN A SINGLE TAX YEAR COULD WELL MEAN THE MAKING OF SIGNIFICANT FUTURE FINANCIAL RETURNS

This feature – known as gearing - enables the manager to purchase a greater number of stocks during bullish market periods, such as the one we are now, utilising a potentially greater number of opportunities and adding to any capital gains made. It’s a double edged sword though: it may also serve to enhance loss’s if a manager does not see an economic down-turn coming. For those with the cash, £11.5k is certainly a significant sum to consider investing. Monthly payment options, however, mean you need not necessarily invest it all at once, removing the dilemma many face: “When is the best time to deal?” Some providers allow as little as £20 per month. And the efficiency of the wrapper means its exclusion from tax returns, so it requires little thought at the end of the tax year. If you have an investment strategy, adding investment trusts to your Stocks & Shares ISA should be a part of it. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. For capital growth seekers, investments in ISAs also avoid Capital Gains

ANNUAL PERFORMANCE (CUM INCOME) (%) DISCRETE YEAR PERFORMANCE % CHANGE (UPDATED QUARTERLY)

wishing to buy into them buy shares in the investment trust company, as you would BP or Barclays. This differs from open-ended funds; if they experience sudden and significant redemptions the fund managers may find themselves selling positions on the basis of liquidity rather than preference, which may less profitable. The effect is to constrain, both in terms of liquidity and the time horizon for the investments. Investment trust managers do not need to concern themselves with maintaining a level of liquidity to fund redemptions;

Stocks and Shares ISA allowance 2013/2014

privilege. Because investment trust managers can retain earnings, usually during buoyant economic periods, when less favourable market conditions arise they are able to dip into their reserve account and keep-up payments. It makes for a smoother income flow and, as such, can make investment trust payments less volatile. The City of London Investment Trust, for example, has achieved 47 years of consistently rising dividends, although investors should note past performance is not a guide to future performance.

PRICE

NAV

31/12/2012 to 31/12/2013

24.1

26.1

30/12/2011 to 31/12/2012

16.6

16.2

31/12/2010 to 31/12/2011

2.1

3.2

31/12/2009 to 31/12/2010

24.7

16.5

31/12/2008 to 31/12/2009

24.1

23.4

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

THE VALUE OF AN INVESTMENT AND THE INCOME FROM IT CAN FALL AS WELL AS RISE AND YOU MAY NOT GET BACK THE AMOUNT ORIGINALLY INVESTED.

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

DIY Investor Magazine / March 2014

20 DIY Investor Magazine / March 2014

IN ISAs

For capital growth seekers, investments in ISAs also avoid Capital Gains Tax (CGT). Investment trusts again offer a further advantage to aid capital growth: they have the option to borrow money with the aim of enhancing returns over and above its costs.

NAME SIRIUS MINERALS

AIM COMES OF AGE WITH ISA ADMISSION BUT HOW WAS IT FOR YOU? Steve Haysom looks at the effect that ISA admission has had on the AIM market (first published on www.diyaiminvestor.com) Figures released by broker Hargreaves Lansdown show that investors have embraced the government’s decision to allow AIM stocks to be held in ISAs, but with seemingly mixed fortunes. 7% of its 577,000 clients lodged AIM shares in the tax-efficient wrapper in the six months after the rules changed on 5th August 2013; perhaps a wise minority given that during the period the LSE’s junior market soared 18.9% compared with a rise of just 2.1% on the FTSE All-Share. Once considered not for the faint hearted, the ‘diggers and drillers’ of old are being eclipsed on AIM by companies at the cutting edge of technological development and the index is expected

to benefit further when stamp duty is abolished on purchases in April 2014. However, investors need to fully embrace caveat emptor as a philosophy because AIM small company shares can display extreme volatility and be harder to sell on due to lower levels of secondary market liquidity. Those seeking the higher potential returns available from AIM companies necessarily expose themselves to higher levels of risk and potential capital losses than if they stuck with the blue chips – the classic risk/reward conundrum. Hargreaves revealed the most popular AIM shares on its Vantage platform during the year to 30th January 2014, and also offered a rundown of the top-performing AIM shares overall during the same period.

23 1 YEAR CHANGE -53%

GULF KEYSTONE PETROLEUM

-22.7%

FASTJET

-93.8%

QUINDELL

105.3%

MONITISE

92.3%

XCITE

-2.5%

RARE EARTH MINERALS

400%

IGAS ENERGY

24.6%

IOFINA

-34.3%

RANGE RESOURCES

-66.6%

FIGURES RELEASED BY BROKER HARGREAVES LANSDOWN SHOW THAT INVESTORS HAVE EMBRACED THE GOVERNMENT’S DECISION TO ALLOW AIM STOCKS TO BE HELD IN ISAs, BUT WITH SEEMINGLY MIXED FORTUNES.

DIY Investor Magazine / March 2014

MOST POPULAR AIM SHARES TRADED ON VANTAGE YEAR TO 30TH JAN 2014 WERE:

A glance at the performance of the most popular picks shows the tremendous discrepancies that can exist between the winners and the losers, and the fact that only Rare Earth Minerals appears on both the top traded and best performer lists show the difficulty of stock picking in this market, even for relatively sophisticated investors.

are huge differences between the haves and the havenots when compared with the main market.

No-one who backed Rare Earth Minerals will feel shortchanged with a 400% return, but those who conspired to put Sirius Minerals, Gulf Keystone Petroleum and Fastjet at the top of the popularity charts will be feeling a little bruised, sitting on average losses of almost 57% unless they got their timing spot on.

The prospect of identifying the next Coms, which saw its shares rise by 950% in the year to Jan 2014, or the stellar performance of fashion retailer ASOS which would have returned £211,000 for a £1,000 investment made in 2001, is what makes it attractive to some investors.

Over the past five years the FTSE AIM market has returned 122.1% compared with the FTSE All Share’s performance of 100.9%, but within those figures there

COMMITTED TO ETF EFFICIENCY

Investors should look beyond the index and short-term performance when considering AIM shares as it doesn’t paint the full picture and the market is volatile at the extremes.

25 DIY Investor Magazine / March 2014

24 DIY Investor Magazine / March 2014

PICKING A WINNER

LYxoR ETF ALL ETFS ARE noT ALIKE

However, at the other end of the spectrum, pawnbroker Albemarle and Bond saw the value of its stock fall from over to 200p to 17.5p after over-extending itself during the year.

OTHER BENEFITS Admission of AIM stocks in ISA wrappers allows canny investors to take advantage of tax relief in life as well as death, as returns on some AIM investments remain exempt from inheritance tax.

Investors can now choose to purchase individual AIM shares and hold them inside an ISA or a Self-Invested Personal Pension (SIPP) or alternatively can access the AIM market through funds and Venture Capital Trusts.

Once certain AIM shares have been held for a two-year period they qualify for Business Property Relief and potentially up to a 100% exemption from inheritance tax even if they were originally held outside of an ISA then transferred in.

Whilst investors choosing to invest in collectives benefit from the specialist expertise of the fund manager and a more diversified approach, there is no inheritance tax exemption when AIM shares are held this way.

ETFs have attracted a growing number of providers to the market, leaving investors with a difficult question: which is the most efficient? In theory, all ETFs tracking the same index should provide very similar returns as they are simply designed to replicate the performance of that index. In practice however, the return provided by an ETF can vary significantly. When it comes to ETFs, true efficiency is built on three things:

» LoW ToTAL ExPEnSE RATIoS » ACCURATE InDEx TRACKInG » SmALL SPREAD BETWEEn BID AnD ASK PRICES At Lyxor we’re committed to improving efficiency at every level.

Discover more at sglistedproducts.co.uk/lyxor or email listedproducts@sgcib.com

RISKS - Investors’ capital is at risk. Investors should not deal in these products unless they understand their nature and the extent of their exposure to risk. The index tracked by a Lyxor ETF may be volatile. Investors may be exposed to counterparty risk resulting from the use of an over-the-counter performance swap contract with an investment bank. Physical ETFs may have counterparty risk resulting from the use of a securities lending programme.

THE POWER TO PERFORM IN ANY MARKET

THIS COMMUNICATION IS FOR FINANCIAL ADVISERS AND SOPHISTICATED RETAIL CLIENTS IN THE UK.

Lyxor ETFs are open-ended mutual investment funds established under French Law or Luxembourg Law. This advert is issued in the U.K. by the London Branch of Societe Generale. Societe Generale is a French credit institution (bank) authorised by the Autorité de Contrôle Prudentiel et de Résolution (the French Prudential Control Authority) and the Prudential Regulation Authority and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority. Details about the extent of our authorisation and regulation by the Prudential Regulation Authority, and regulation by the Financial Conduct Authority are available from us on request.

NAME

1 YEAR CHANGE

COMS

910.6%

SIGMA CAPITAL GROUP

826.5%

CRAWSHAW GROUP

712.0%

THALASSA HOLDINGS

434.8%

RARE EARTH MINERAL

400%

CLOUDBUY

388.4%

AEOREMA COMMUNICATIONS

373.1%

BEST OF THE BEST

364.3%

GW PHARMACEUTICALS

354.7%

KARELIAN DIAMOND RESOURCES

328.6%

“THE 69 COMPANIES THAT CAME TO MARKET ON AIM OVER THE LAST YEAR RAISED A TOTAL OF £1.17 BILLION AND THERE IS EVERY INDICATION THAT 2014 WILL BE JUST AS PROLIFIC IN TERMS OF INITIAL PUBLIC OFFERINGS.”

Launched in November 2012 Retail Bond Expert is the UK’s leading portal dedicated to retail bonds with the remit to inform experienced investors, educate those new to investing and to help those that pay for professional financial advice to understand the nature of the products in which they are invested. In addition to creating a community around retail bonds, Retail Bond Expert produces and hosts a series of micro sites that sit above existing communities designed to educate the investor – self-directed or wealth manager – and inform them of product launches in a comprehensive and timely fashion.

The number of stocks in the most traded table that have posted an annual performance beginning with a ‘-‘ shows that however popular the inclusion of AIM stocks in ISA wrappers may have proven and however welcome the stimulus may have been to those companies that have attracted investment, there will be an awful lot of investors currently looking at losses that they may well have avoided had they not sought the river monsters in the junior market.

when picking individual stocks and for those less comfortable with doing so it is still possible to add AIM exposure to your ISA via one of the pooled investment products or perhaps a fund such as River and Mercantile’s UK Equity Smaller Companies fund.

The 69 companies that came to market on AIM over the last year raised a total of £1.17billion and there is every indication that 2014 will be just as prolific in terms of initial public offerings.

Clearly this is not a market for the faint hearted and whilst providing a flavour of this exciting environment, DIY AIM Investor urges any potential investor to ensure that they have done as much research as they possibly can before parting with their hard-earned and to seek professional advice appropriate to their experience and financial literacy if they are in any doubt.

Basic principles of creating a balanced portfolio to mitigate risk across a range of industry sectors apply

RETAILBONDEXPERT.COM

Managed by Dan Hanbury the fund was one of the best performing funds in the UK in 2013 and has around 30% exposure to AIM stocks across a range of sectors,

27 DIY Investor Magazine / March 2014

26 DIY Investor Magazine / March 2014

BECOME AN EXPERT THROUGH EDUCATION

AIM STOCKS THAT DELIVERED THE BEST RETURNS IN THE 12 MONTHS TO 30TH JAN 2014

ADVERTISING FEATURE BY BOOST ETP Exchange Traded Product (ETP) is an umbrella term which encompasses Exchange Traded Funds (ETFs), Exchange Traded Notes (ETNs) and Exchange Traded Commodities (ETCs). ETPs can provide exposure to all asset classes including equities, commodities, fixed income, currencies and alternatives. ETPs have existed since 2005 and leverage for many centuries; today there are almost $61bn of assets in leveraged and short ETPs which are traded on most of the major global stock exchanges. Due to the combined features of leverage and daily compounded returns, these types of ETPs are trading instruments which need to be clearly understood before an investor should invest. However, once understood they can be highly efficient tools, providing magnified long and short exposure in an efficient product wrapper. Boost ETP (www.boostetp.com), is one of only a few specialist providers of short and leveraged (SL) ETPs to the European market with a focus on delivering added value by issuing highly innovative products. The company has education, transparency and thought leadership at its core and herein considers eight key things that it believes investors need to know about short and leveraged ETPs, using its own products as examples. 1. LEVERAGED RETURNS Leveraged returns magnify the daily returns of an unleveraged investment. For example, the charts below show that if the FTSE 100 rises by 1% in a day, the Boost FTSE 100 3x Leverage Daily ETP (3UKL) will rise by 3% (excluding fees and adjustments). Conversely, if the FTSE 100 falls by 1%, the Boost FTSE 100 3x Short Daily ETP (3UKS) will rise by 3%. Leverage returns allow an investor to either use less of their capital to achieve a similar investment (2/3 less in the case of 3x leverage) or to magnify returns using the same amount of capital.

BOOST 3X LEVERAGED DAILY ETP Index

BOOST 3X SHORT DAILY ETP

Boost 3x Leveraged Daily ETP

UP DAY FOR THE INDEX

Index

DOWN DAY FOR THE INDEX

1% -1%

-1%

-3%

Boost Short and leverage Daily ETPs rebalance their leverage at the end of every index trading day, providing investors with a 3x or -3x daily returns. This is slightly different to using margin or buying or selling a futures contract to obtain leverage.

up and down by 2% per day. After 11 days, the Index is up by 1.8%, the Boost 3x Leverage Daily ETP would be up only 4.1% (2.3x the Index) and the Boost 3x Short Daily ETP is down 7.7% (-4.3x the Index). The ‘Trending Market’ chart shows the outcome over 11 days, where the index increased by 2% each day.

Boost 3x Short Daily ETP

UP DAY FOR THE INDEX

4. DAILY RE-BALANCING

DIY Investor Magazine / March 2014

28 DIY Investor Magazine / March 2014

MASTERCLASS - EIGHT THINGS TO KNOW ABOUT SHORT & LEVERAGE ETFS/ETPS

-3%

(Source: Boost ETP LLP)

2. WHAT INDICES DO SL ETPS TRACK? Boost SL ETPs track a range of liquid, blue-chip indices; they either track a specially designed 3x daily leveraged or 3x daily short index (such as the ShortDAX X3 TR EUR Index) that calculates the leveraged return inside the index, or they track an unleveraged index (such as the NASDAQ Commodity Crude Oil ER Index) and for which the 3x or -3x daily leverage is applied in the same way that the short or leverage index is constructed.

Daily ‘constant leverage’ is used because an open-ended ETP allows for investors to buy and sell the ETP on any day and still receive the stated leverage multiple. Leverage based on a ‘constant dollar’ amount is not possible as the amount of leverage experienced by each investor depends on the amount and day the investment was made. Monthly leverage (or some other frequency of rebalancing) could be used but then the actual leverage an investor was exposed to would depend on what day of the month they bought the investment. Daily leverage simplifies this issue. 5. COMPOUNDING - ITS EFFECTS

After 11 days, the Index is up by 24.3%, the Boost 3x Leverage Daily ETP would be up only 89.8% (3.7x the Index) and the Boost 3x Short Daily ETP is down 49.4% (-2.0x the Index). However, on a day to day basis, the Boost 3x Leverage Daily ETP and Boost 3x Short Daily ETP has done exactly as it is supposed to do.

VOLATILE MARKET CUMULATIVE RETURN Index

3x Leverage Daily

DAILY RETURN OF INDEX

3x Short Daily 3%

6% 4%

4.1%

1.8%

-2%

0% -1%

-2%

1% 5

-2%

-3%

-2%

DAY

-4%

-6%

As with any investment, returns over periods longer than one day are affected by compounding due to market movements (like a bank account may compound interest over many months).

-7.7%

-8%

-10%

DAY

TRENDING MARKET CUMULATIVE RETURN Index

3. HOW IS THE SHORT AND LEVERAGE POSITION ACHIEVED? An investor buying £100 of a 3x Leverage Daily ETP receives £300 of exposure consisting of £100 cash and £200 of borrowed funds (charged at the interbank lending rate) to achieve an investment of £300. The borrowing cost is deducted from the daily return and is either incorporated into the index or the calculation of the ETP price. An investor buying £100 of a 3x Short Daily ETP effectively borrows £300 of the index which is sold short; £400 (£100 from the investor and £300 from the short sale of the index) is then invested at inter-bank cash rates. The cost of the stock-borrow and interest income on the cash is incorporated into the calculation of the ETP price each day.

Daily leveraged exposure means the compounding effect will be amplified and occur daily, which can have a positive or negative effect on returns over longer periods.

3x Leverage Daily

DAILY RETURN OF INDEX

3x Short Daily

100% 89.8%

80%

60%

40% 24.3%

20%

1% 0%

DAY

0% 0

-20% -40% 49.4%

If the FTSE 100 price is £100 and rises by 1%, the Boost FTSE 100 3x Leverage Daily ETP (3UKL) will rise by 3% to £103 (excluding fees & adjustments). If the FTSE 100 then falls by 1% the next day, then 3UKL will fall to £99.91. Thus over the two days the average return is 0%, however the 2-day compounded ETP return is -0.09%. The Index would also have an average return of 0% but its price would be £99.99 and its 2-day compounded return would be -0.01%. The daily compounding effect may increase with the length of a holding period, index volatility and leverage. These charts show the effects of compounding on returns. In the ‘Volatile Market’ chart the index moves

-60%

DAY

(Source: Boost ETP LLP)

6. INTRA-DAY CRASH PROTECTION Boost ETPs are designed to prevent the ETP from falling to $0 in one day. If a market move is extreme, e.g the FTSE 100 falls by 20% (60% including leverage) then 3UKL rebalances intra-day to ensure that the ETP does not go to $0. The intra-day rebalancing reduces the sensitivity of further falls below 20% while maintaining some exposure to a rebound. Similarly, if the FTSE 100 rises by 20%, then 3UKS would rebalance intra-day.

SL ETPs can be used by a wide range of investors for many different trading strategies:

Leverage ETPs have been fiercely debated in investor circles as to whether they are risky and/or complex investments. Leverage has been around for many centuries and a multitude of financial products exist to enable investors to gain leverage and/or short exposure. An investor should understand the benefits and risks of each leverage product and see which one suits their goals and circumstances for the specific trade being considered. SL ETPs increase the tools available to investors, and used in the right way, can enhance returns.

• • • • • • •

Treble daily returns, positive or negative (excluding fees and adjustments). Hedge existing positions in one simple trade Use in a long-short strategy using both a leverage ETP and a short ETP Use in a pair trade to take advantage of undervalued assets Short the market/asset class quickly, efficiently and cost-effectively Short ETPs allows the investor to profit in a falling market Use tactically within a broad portfolio where an investor holds strong short term convictions

8. LEVERAGE ETPS AND POSSIBLE RISKS

FREE THINKING ETPS DIY Investor Magazine / March 2014

30 DIY Investor Magazine / March 2014

7. USES AND TRADING STRATEGIES

Boost considers its products provide a robust, transparent, exchange-traded, collateralised, secure and relatively cost efficient tool for a wide range of investors to gain leverage or short exposure, through their normal brokerage or investing channels.

BOOST ETP

STRUCTURED PRODUCTS

ETFS

CFDS/ SPREADBET

FUTURES/ OPTIONS

Underlying / asset classes

Equities, Commodities

Many

Single commodities not possible

Many

Leverage

Yes

Yes (only up to 2x)

Yes

Lose more than your No invested capital

Yes

Exchange Traded

Yes

Multiple Market Makers

Yes

Arbitrageable

Yes

Unsecured credit risk

Yes

Yes (MF Global & World Spreads)

Over Collateralised

Yes

Usually

High fees

Yes

BOOST ETP

STRUCTURED PRODUCTS

ETFS

CFDS/ SPREADBET

FUTURES/ OPTIONS

Transparent

Yes

Mostly

Yes

Highly liquid and trade in large size

Yes

Margin calls & close out

Yes

Short term dated

Yes

Yes (rolls & exercise dates)

N.B The information contained in this article is not intended to represent all the risks associated with Leverage and Short ETPs, nor does it list all the important factors one should consider when reviewing whether a Boost ETP is appropriate. Investors should review and understand the Prospectus including the ‘Risk Factors’ section before any investment into Boost ETPs. This communication has been provided by Boost ETP LLP which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority. Please read our full disclaimer at www.boostetp.com/Content/Disclaimer before considering an investment in Boost ETPs.

BOOST FTSE 100 3X LEVERAGE DAILY ETP (3UKL)

boostetp.com

BOOST FTSE 100 3X SHORT DAILY ETP (3UKS)

+44 (0)20 3515 0050

info@boostetp.com

This communication has been provided by Boost ETP LLP which is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority. If you wish to read our full disclaimer please visit: www.boostetp.com/Content/Disclaimer

According to the Institute for Fiscal Studies, those born in the 60s and 70s are the first generation since the Second World War to be poorer than their parents. Writes Steve Haysom Those leaving further education in 2014 face the prospect of student debt in excess of £50,000, fierce competition for employment, wage stagnation and ‘gazumping’ has returned to London’s super-heated housing market. According to the Office for National Statistics there were over 800,000 births in the UK last year, an increase in the birth rate of 18% in a decade and it seems that the ‘Bank of Mum and Dad’ is going to have to work harder than ever in order to be able to help out in the future. It is generally accepted that starting early and continuing for a long time is the best way to achieve a successful outcome to an investment strategy and it is now more important than ever that parents give their children a financial head start in life. A whole range of savings and investment plans exist and since November 2011 when the Junior ISA replaced Child Trust Funds, they have been able to support their loved ones in a tax-efficient way. Parents can save tax-free for their children up to the age of 18 through a Junior ISA up to an allowance of £3720 this year, rising to £4,000 in 2014/15

JUNIOR ISA Stocks and shares Junior ISAs work like a normal stocks and shares ISA which can be more risky than the cash alternative and will usually attract annual management and platform charges. Junior ISAs are a long term investment vehicle and it is very important that you select a provider that offers you the pricing structure and investment choice appropriate to your requirements. Make sure too that you have the ability to access the account in a way that suits you in order to make investments or monitor performance. Making the wrong choice at the outset can incur punitive transfer charges if you decide to switch horses later on. A Junior ISA can invest in a very large

range of equities, funds and investment trusts and it is important that you do your homework in order to achieve a balanced portfolio of investments that will perform according to the chosen time-horizon which may differ from your own investment portfolio. Then do an ‘apples and apples’ comparison of a couple of providers on administration fees, fund and share dealing costs, regular investing charges and any other fees. As we adapt to the post - RDR investment world, some providers have no admin fees but still take a cut of commission from fund annual management charges, others offer ‘clean’ funds that are free of this commission but charge for buying and selling investments; most brokers have now announced their new pricing models. If you plan to regularly invest for your child make sure the cost of doing this is as low as possible, by either finding a platform that offers discounted regular monthly investment – some as low as £1.50 - or use one that offers free fund dealing. The predecessor to the Junior ISA, the Child Trust Fund (CTF), gifted £250 at birth to all babies born on or after 1st September 2002 with a similar lump sum at the age of seven. Parents could top this up by up to £3,720 tax-free each year, and could continue to do so when the Junior ISA replaced it in 2011. No withdrawals can be made from the account until the child reaches 18 and when the Junior ISA came along the government withdrew its support for CTFs and no transfers were allowed into Junior ISAs. However, CTF holders were faced with a dwindling choice of investment options as fund providers lost interest in the defunct product and in a volte face the government will allow transfers into Junior ISA from a currently provisional date of April 2015 stimulus.

Money put in cannot be taken out until the child is 18 and when they reach that age, the pot is theirs alone to do what they will with it. Alternatives to a Junior ISA could be to save into a standard child’s savings account, invest using a standard DIY investing platform account or select a children’s specific investment plan and an attraction may be that the account can be accessed before the child reaches 18. Investment companies, banks and building societies offer children’s savings plans which use a child’s personal tax allowance, currently £9,440, as an amount they can earn a year before being taxed. If you are not using all of your own annual ISA allowance you could set aside some of this to invest for your children, with a pot earmarked for them within your own DIY investing account. Although it may not work for those that max out on their allowance or have a large number of children, a couple with two children could efficiently accommodate two additional savings plans for their children within their existing stocks and shares ISA.

TRANSFERRING FROM A CTF TO A JUNIOR ISA The Treasury says transfers will operate in the same way as moving from one ISA provider to another. Once you have chosen a provider to move to it will typically take up to 15 working days to transfer to a cash account and 30 days for stocks and shares; you have to transfer the full amount from your CTF before then closing it and the existing provider cannot refuse.

WHAT INVESTMENTS SHOULD YOU CONSIDER IN A JUNIOR ISA? Investing for children is a long-term game, so you can afford to take more risks than you might do with your own money but you should still make sure that you create a balanced portfolio to ensure that your risk is spread across sectors and asset classes. Unless you are a dedicated DIY investor then picking individual shares may not be the best move; a fund or investment trust will allow you to spread your risk and require less work.

THINGS TO CONSIDER

DIY Investor Magazine / March 2014

32 DIY Investor Magazine / March 2014

JUNIOR ISA OFFERS TAX EFFICIENCY TO THE BANK OF MUM & DAD

Try to select a complementary range of investments, balancing growth investments – those in companies where you expect to see a rise in their share price over time and mainly deliver returns – with income investments – companies that pay dividends which can be reinvested to deliver solid returns from compounding over time. Charges are a key consideration - high management fees eat into returns and over 18 years this can deliver a sizeable drag on how much an investment makes for your child. Passive tracker funds carry low management charges – the HSBC FTSE 250 Tracker, for example, which tracks the mid-share index charges 0.25% and the Vanguard FTSE UK Equity Index just 0.15% - whereas some contend that the improved returns from a good active fund manager more than justify the additional cost; choose wisely though because many active funds may charge handsomely yet still under perform passive index trackers. Increasingly popular are investment trusts which offer a managed portfolio but with low fees. With so many things to consider, it may just be too tempting to let the ISA deadline slip and ‘start next year’ – but then spare a thought for those facing student loans of £50,000 and the fact that the average age of a first time buyer in London has now topped 40 – and think what an even modest regular savings and investment plan could do to help your children in the future.

LIFE IS SWEET....DIY INVESTOR IN CONVERSATION WITH SMALL BUSINESS OWNER TONY MOXON Tony 68, was a disc jockey and radio presenter for most of his working life starting on commercial radio and finishing at the BBC. Semi-retired in the late nineties, he now divides his time between running the famous Britcher & Rivers sweetshop in Rye, East Sussex and looking after his property and stock market investments.

HOW LONG HAVE YOU BEEN A DIY INVESTOR? I’ve invested in the markets for 14 years, I first got interested listening to a good friend telling me about all the money he was making in shares that doubled in value in a week (the dot com bubble). I almost lost interest shortly after when most of his halved in value week after week until they were worth nothing.

your money down the mine shaft at least that way you get a holiday out of doing the money. Doubling down, if it was good value at £1 now it’s halved in a week to 50p it must be twice as good value. As it then goes to 25p in short order you think ‘er no’. The list of mistakes I made is endless and when I read Robbie Burns’ superb Naked Trader book about investing that, among much else, lists the common mistakes............................... I’d made them all and some. I’m now a very calm, calculating investor with neither pride nor shame. However I still make plenty of mistakes.

WHAT ARE YOUR KEY CONSIDERATIONS WHEN YOU CONSIDER AN INVESTMENT? I only invest in things that I understand, so no indices or FX. I like small cap shares that make real profits that don’t have large debt and trade on sensible earnings multiples. I use level 2 to try and work out where the price is going in the very short term to get a good entry point and I use charts to see what has happened in the past and to take a view on what might happen. I am happy to be either long or short and depending on my ‘current’ view of the market adjust the ratio of long to short.

WHAT TYPE OF INVESTOR ARE YOU? To begin with I was an ‘uneducated’ investor, there are long lists of mistakes that most new investors make, and I made them all. Things like buying penny shares, you think that if a 5p share goes to £5 you’ll be rich, trouble is the ones you buy never do. In my opinion buying the ‘next great idea’ is not a good idea, buying small mining companies, you might as well go to Africa and throw

DIY Investor Magazine / March 2014

34 DIY Investor Magazine / March 2014

DIY.....Q&A

ISA OR PENSION? Both, in the past more ISA than pension, however the recent budget now makes Sipps a much better proposition for someone like me.

THE PRICE COLLAPSED AND I DOUBLED UP NOT ONCE, NOT TWICE, NOT THRICE BUT YES, FOUR TIMES. COST ME £8000.

GEORGE OSBORNE’S BUDGET DELIVERED A REAL SHOT IN THE ARM FOR SAVERS AND INVESTORS, WHAT ELSE WOULD YOU LIKE TO SEE THE GOVERNMENT DO? The pension reform was a good start as was the increase in the ISA allowance. Since 2008 it’s been all about staving off an almighty financial collapse. This has been done by in effect taking money from prudent savers and giving it to feckless borrowers........................... This has got to change, the population is aging in front of our eyes, people have to be given a reasonable chance to make provision for their own old age. The tax raid that Gordon Brown inflicted on pensions (the abolition of basic rate tax relief on dividends) should be reversed, the ‘life time’ cap should be revised upwards, the ISA allowance should be increased at a rate above inflation each year from now on. Oh, and don’t even think about taxing large ISA pots if you ever want to be re-elected again. If people have been clever enough to turn the relatively small amounts they have been allowed in invest in ISAs into million pound pots............................... Good for them.

WHAT HAVE BEEN YOUR BEST AND WORST INVESTMENTS? Jarvis was my worst ever. The price collapsed and I doubled up not once, not twice, not thrice but yes, four times. Cost me £8000. The best has been sticking at it through thick and thin, spending thousands of hours trading, investing, learning and slowly getting better at it.

WHAT ADVICE WOULD YOU GIVE TO ANYONE CONSIDERING SELF-DIRECTED INVESTING FOR THE FIRST TIME? Not sure I’m qualified to give advice to be honest. I think the most important lesson I’ve learnt is to make money slowly. Take small positions that you can afford to lose if all goes wrong, that takes all the stress and emotion away, only enter trades with a good risk reward ratio, cut losses very quickly and move on when you call it wrong, and don’t snatch profits too soon when you call it right. Finally, markets are a mind game. Never forget, you’re not a punter, you’re in business running your own investment fund.

37 DIY Investor Magazine / March 2014

36 DIY Investor Magazine / March 2014

THE FINAL WORD AN ISA OR A PENSION THAT IS THE QUESTION... In the first of his articles designed to deliver simple answers to the questions facing those new to investing Daniel Hawkins weighs up the relative merits of ISA and Pension saving

Many investors have strong views on the merits of either or both of these methods of saving, normally combined with a view on investment in property. The TV commentators give some guidance, but are mainly just encouraged to see people are actually looking to save. If the question were ‘an ISA or a payday loan’ then I think the answer is somewhat easier to articulate. So what is our view on this barely asked but frequently answered question? Simple, have both.

us all that “I’m in” to the new pension arrangements to which many will be automatically enrolled. The normal deal is the boss puts in 3% of your salary, provided you put 5% in; not quite free money, but generally not to be sniffed at. Most importantly the tax man will increase your contribution by adding basic rate tax relief whilst high rate tax payers can claim the higher rate back as part of self-assessment. Why not just put 5% of your salary in to an ISA? Well you probably should, there are limits on how much you can put in to an ISA but few of us are lucky enough to earn such huge salaries that 5% would get close to this limit (£11,520 in 2013/14 rising to £15,000 in July 2014). Why the ISA? Accessibility is the key driver here, ISA rules state that even a fixed rate cash ISA has to allow the customer to be able to withdraw their money within 30 days of requesting it; the likelihood is you’ll be penalised for this but you will be able to get hold of your investment should a rainy day occur (definitely a better option than a 3000% APR loan).

If your boss offers you a workplace pension in which they are going to put some of their money it is rare that this isn’t the best thing to do. It is, of course, not as simple a decision as to whether you just accept free money, there is normally a catch most pension arrangements offered by your employer also insist you contribute as well. You may have seen the slightly condescending TV ads the government paid for including the super-rich Theo Paphitis telling

Your pension arrangement isn’t so forgiving if you need to get hold of cash - pensions were designed in a more paternalistic era when the nation couldn’t trust people not to squander their savings (and importantly the extra bit of tax the government gives the pension saver). Instead your pension money is normally locked away at least until you’re 55, but if you decide to cash in at this point, take a lump sum and pay off the last of the mortgage or buy the Harley, you will probably seriously reduce the amount of regular income your pension will give you when you decide to give up work. So an ISA is more flexible but easier to fritter away as a result, your pension gives you a bit more security when you retire

as it’s harder to blow on a Caribbean cruise or Tarquin’s university fees but raises the problem of annuity versus income drawdown versus any other method of drawing an income from your pension pot. What I seem to be saying here is what my father always said to me “put

However, George Osborne’s 2014 Budget speech drives a coach and horses through the annuity business as from April 2015 it is proposed that pensioners should be able to take their entire pot to do as they wish with, thereby avoiding the pitifully low annuity rates

AS A GUIDE, AT AGE 20 IF YOU TARGET A RETIREMENT FUND OF £300K AND GROWTH IS 5% YOU WILL NEED TO SAVE £165 PER MONTH UNTIL YOUR 68TH BIRTHDAY, START 10 YEARS LATER IT WILL COST YOU £275 PER MONTH.

10% of your salary away for a rainy day”. Realistically saving any less than this will mean you are unlikely to retire on an income close to the one you were enjoying during employment.

that have resulted from five years of rock-bottom base rates. How do you buy your pension income? What do you do with your ISA cash when you decide to stop working?

As a guide, at age 20 if you target a retirement fund of £300K and growth is 5% you will need to save £165 per month until your 68th birthday, start 10 years later it will cost you £275 per month. However, this seemingly large pot of money will currently buy you little more than an income of £18K per annum.

All subjects we will cover in the future. In the next edition I will look at how you might set about constructing a portfolio within your ISA or Pension wrapper and help you navigate through the jargon that once made investing impenetrable to a large part of the population.

PENSION

ISA

What is the tax position of my

Contributions direct from salary before

Generally more efficient than savings

contributions?

tax. Individual pensions claim tax back

accounts but you are saving income

on your contributions. Basic rate tax

that has already been taxed unlike a

payers get a £125 benefit from every

pension.

Midpoint is a peer to peer Foreign Exchange and International Payments Platform

Saving You Money on Every FX Currency Transaction

£100 contribution. Higher rate tax payers can reclaim a further 20%. Can my employer contribute?

Yes

What if I’m made redundant

Assuming no contributions are made,

A high amount of savings in an ISA

your pension pot will remain static. A

will affect your entitlement to certain

large pension pot will not affect your

means-tested state benefits.

THE FX SPREAD IS DEAD! DIY Investor Magazine / March 2014

DIY Investor Magazine / March 2014

ISA VS PENSION AT A GLANCE

entitlement to state benefits. What is the investment risk?

There is a risk that the value of your

Cash ISAs have no investment risk

pot could fall, but generally you have

although many pay less than inflation

the option to select funds that reflect

so your capital is thereby eroded.

your appetite for risk.

Stocks and shares ISA carry investment

It matches buyers and sellers of currency pairs, eliminating the cost of intermediaries such as banks and brokers

risk and can fall as well as rise in value. When can I access my money?

Not until age 55

Anytime although sometimes with a penalty.

Options at retirement?

25% lump sum tax free. Purchase

Entirely flexible - take an income from

annuity or remain invested and draw

the interest or investment returns Draw

down income. From 2015 – potentially

down an income from the ISA pot.

MID-MARKET RATE

LOW COST TRANSPARENT FEES

take entire pot and reinvest In the event of death?

If you have purchased an annuity the

ISA savings form part of your estate. If

provider keeps the remainder. Any

your total estate exceeds £325,000 you

proceeds left in income drawdown

will be subject to Inheritance Tax.

FAST & SECURE

No Pre-Funding Required. Ideal for One-Off or Regular FX Currency Transactions

passes to your beneficiaries after the deduction of tax at 55%. Will my income run out before I die?

An annuity guarantees you an income

If you only use interest or returns

for the rest of your life.

from your ISA pot, then (depending on

It is possible that you could run

investment performance) your income

out of money under a drawdown

should not run out in your lifetime. If

arrangement.

you decide to take a regular portion of your ISA pot as income, you could use this up.

How is my income taxed?

When you take your pension income, it

Your income will be tax-free.

will be subject to Income Tax.

Dan is a widely published and quoted marketing professional with many years’ experience of working in the workplace savings sector

Free Registration on www.midpoint.com 0800 211 8620

info@midpoint.com

5th Floor, Aldermans House, Aldermans Walk, London, EC2M 3UJ

Midpoint is registered and regulated by the Financial Conduct Authority (FCA).

FEEDBACK What would you like in the next issue of DIY Investor magazine Please leave your feedback at: feedback@diyinvestormag.com

WWW.DIYINVESTORMAG.COM Copyright © DIY Investor Limited 2014 Registered in England and Wales. No. 08594239 Registered office: 1 St. Andrew’s Hill, London, United Kingdom, EC4V 4BY DIY Investor Magazine delivers education and information, it does not offer advice.