Equinox - Spring 2022 by Equilibrium Financial Planning LLP

HALF-YEARLY INVESTMENT MAGAZINE

What’s the meaning behind your money? PAGE 04 - 07

PAGE 10 - 12

Monochrome about money PAGE 12 - 13

EQUINOX | SPRING 2022

Donating matters

EQUINOX | WELCOME

Welcome I am sure that, like me, you are looking forward to a time when stability in the world is such that the news flow is more balanced and positive in nature. It seems as though we have gone from Brexit to Covid, to the Russian invasion of Ukraine, without pausing for breath to fully comprehend the true impact of each of them. Whilst market volatility and rising inflation will no doubt be shattering the confidence of some investors, our aim is to double down on our efforts to ensure that all our clients’ financial plans are robust enough to withstand whatever the world might throw at us. We help our clients gain confidence and clarity around their money, enabling them to make better financial decisions so that they can live the life they want, look after those they love and leave a powerful legacy. The Spring edition of Equinox focuses on this concept and delves into how you can unlock the meaning behind your money. You will find our investment commentary from page 28, in which investment Manager, Mike Deverell, shares how our portfolios have fared, the actions we have taken and our outlook for the future. As always, if you have any feedback or suggestions, please feel free to email me at colin.lawson@equilibrium.co.uk. I would be delighted to hear from you.

Colin Lawson FOUNDER

Contributors: James Carr, Mike Deverell, Paul Farrugia, Neal Foundly, Rachel Griffiths, Andrew Hirst, Debbie Jukes, Colin Lawson, Tori Longdon, Linda and Nigel Robinson, Ben Rogers

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Editor Laura Stewart Design Paul Davis Print Paragon Print and Marketing Solutions

EQUINOX | CONTENTS

Contents Articles 04 What’s the meaning behind your money?

14 The Gift Aid brain teaser

08 Begin your legacy with a donor advised fund

15 Letters of love

24 Investing ideas, an eye on the future

18 What do you want your money for?

26 What is an NFT and should you buy one?

10 Monochrome about money 12 Donating matters

Investment review 28 The ever-changing land-scape

22 Portugal peddlers

20 Classical music goes digital

Portfolios 37 Sector performance & analysis

Statistics 39 Model portfolio returns 40 Sector portfolio returns 41 Market returns 42 Current holdings

BY BEN ROGERS

What’s the meaning behind your money? What plans do you have for your life and how is your wealth helping you to achieve them?

EQUINOX | WHAT’S THE MEANING BEHIND YOUR MONEY?

Like many 16-year-olds, I was once faced with (what certainly felt like at the time) a very big decision; what should I study at university? And I recall thinking about the subjects that most interested me back then; psychology and philosophy.

can be used to make their lives better. It is an endeavour that involves me approaching my (fundamentally economic) subject matter from a psychological, and sometimes downright philosophical, perspective.

I also remember sitting with my dad at the kitchen table where he asked me two great questions. First: “What do you want to get out of uni?” To which I responded rather flippantly: “A good time and a wellpaid job”.

Serendipity is a funny thing.

Brushing this off, he then asked me: “What jobs would you get from a degree in psychology?” (He knew very well I was unlikely to be suited to a life in academia or clinical research). He then left me to consider my options. In the end, I studied economics. Now a decade after graduating, and what has sometimes felt like a never-ending stream of professional exams, I find myself working as a Financial Planner. A role in which I try to better understand how people’s money

So, why am I telling you this? Well, consider it fair warning. This article appeals more to my inner Pavlov and Plato than Smith and Keynes. Nonetheless, I do believe that, contrary to classical economics, we are not rational decision makers, void of emotion, focused solely on the optimal level of utility. Working with clients over the years, the most economic decision doesn’t necessarily make it the right decision.

Start with ‘why’ The same year I started university, author and leadership guru Simon Sinek published a book called ‘Start With Why’ and his TED Talk on the topic later became the third most watched video ever (‘How Great Leaders Inspire Action’). Sinek argues that ‘why’ isn’t just a word but a powerful concept for organisations.

He states that every single company on the planet knows ‘what’ they do i.e. the products or services they sell. He then supposes that some companies know ‘how’ they do what they do. Whether it’s their unique selling point or ‘differentiating value proposition’, some companies identify what makes them better or different to their competitors. Sinek finally argues that very few companies can clearly articulate ‘why’ they do what they do. And it’s not about running a profitable company – that’s a result. ‘Why’ is all about purpose. ‘Why’ does a company exist and ‘why’ should anyone care? By first understanding their ‘why’, and by keeping it at the heart of everything they do, Sinek argues that companies will then strive to do more, be better and thrive.

What’s our ‘why’? At Equilibrium, ‘what’ we do is relatively straightforward. We provide financial planning, manage risk and investments and offer tax planning advice to ensure you keep the returns you make. But the honest truth is that our ‘what’ is nothing new or different. If you visit the website of any wealth manager or financial planner, you’ll find something very similar. Managing a client’s risk and investments in line with their objectives and minimising their exposure to tax is what you hire a financial adviser to do! They are hygiene factors. They are the tools of the trade.

I fundamentally believe that there is no such thing as a financial plan. There are life plans that need money to achieve them.” 05

EQUINOX | WHAT’S THE MEANING BEHIND YOUR MONEY?

Now of course, the quality of that financial planning, the technical ability to mitigate tax and manage risk is important but does that make Equilibrium different? What makes Equilibrium special? What allows our clients to trust us with their hard-earned money? What keeps them with us year after year? What makes us the No.1 financial services firm to work for in the UK? For me, it’s our ‘why’. We believe our ’why’ is simple; to ‘make people’s lives better’. This applies to our team, our clients, our community and anyone we interact with. It’s our shared purpose that we all work towards every day. It’s what gets us out of bed in the morning and what drives us to constantly ask ourselves: “How can we make our clients’ lives better?” And it’s our ‘why’ that forces us to look far beyond just maximising your returns or minimising your tax liabilities. Because, whilst they help, they don’t actually make people’s lives better. By providing clients with confidence and clarity around their wealth; which leads to them making better financial decisions or just doing something differently; this can truly make our clients’ and their family’s lives better. In order to do this though, we need to understand the ’why’ behind your money. What is it

that you really want it to achieve for you? I fundamentally believe that there is no such thing as a financial plan. There are life plans that need money to achieve them.

Only when we work together to discover the purpose behind your money, can we really begin to understand how it can make your life better.” Live. Love. Legacy. So ‘how’ do you go about finding the ‘why’ behind your wealth? Well, a good place to start is by asking ‘how’ your wealth can allow you: 1. To live the life you want 2. To look after those you love 3. To leave a powerful legacy By considering these three topics, you can find what is truly important to you and, in doing so, open up a vast array of

opportunities to make your life, the lives of your family and the lives of those around you, better.

Live the life you want When creating a financial plan, the first, second and third priority is you. We want to ensure that no matter what happens out in the wider world, the investment climate or even your own lives, that you have the confidence to live the life you want to live. And the life you want to live will no doubt be completely different to mine or anyone else’s. We all have our own dreams, goals and aspirations. You may have dreamed of travelling to the furthest corners of the world. Perhaps you’re perfectly comfortable curling up with a book in a cosy cottage in Cornwall. You may savour the gastronomic delights of Michelin starred restaurants, or maybe a roast dinner with family at your local gastropub is all you desire. Whatever it is, there is no right or wrong answer. One of the biggest challenges I see clients face is the prospect of retirement. Again, there is no right or wrong answer. There is no one correct retirement age. For every client I have spoken to who can’t wait to finish working, there is another who gets great fulfilment and purpose from their work. The key for me is choice. If we accept that there is no right or

The key for me is choice. If we accept that there is no right or wrong answer, then the purpose of your money should be to provide you with choices.”

EQUINOX | WHAT’S THE MEANING BEHIND YOUR MONEY?

wrong answer, then the purpose of your money should be to provide you with choices. The choices to allow you to live the life that you want to live – whatever that life looks like.

will you have your own attitudes towards wealth and aspirations for their future, but they will have their own. And when attitudes and beliefs differ, that’s where conflict can arise.

Look after those you love

But I do believe that all problems exist in the absence of a good conversation. Talking about money with family openly and honestly can reveal a variety of financial opportunities. I have personally seen conversations ease financial stress, provide confidence, enable career changes and even buy precious time with grandchildren.

We do not exist in a vacuum and once we have considered what we want from our own lives, we tend to turn to those who are significant to us. It could be your partner, your children, your parents, your friends – anyone you care about. And making plans or considering those we love can quite often be even more challenging than finding our own ‘why’. Not only

Leave a powerful legacy A common objective I hear from prospective clients is to minimise or save inheritance tax.

It’s understandably not the most popular tax but is that really their ‘why’ – to save tax? Or is there more to it? I would argue that inheritance tax planning is a perfect example of a ‘how’ masquerading as a ‘why’. For most people, the ‘why’ is actually a desire for their hard-earned money to pass to their beneficiaries – family, friends or charities. Minimising inheritance tax is just ‘how’ we do that. But stepping back and considering what happens once you’re gone is vitally important, even if it’s just to make sure the right people have all the information you would want them to have. Thinking about legacy can also lead to hard truths about what you want to happen to your wealth. Who do you want to benefit? When would it have the biggest impact? How much is enough? Are there others you want to support? It’s never easy to do but one of the challenges I make to clients is: “If you are uncomfortable giving modest amounts during your lifetime, when you can guide and support your loved ones, why would you give them all of it on death when you have no influence whatsoever?”

Finding your ‘why’ I hope this has stimulated some thought for you. Taking time to pause isn’t always easy. But the best things never are and at Equilibrium we’re here to work with you and spend some more time thinking about the meaning behind your money. Why? Because we are committed to making your life better.

BY BEN ROGERS

Begin your legacy with a donor advised fund As the UK’s fastest growing philanthropic vehicle, donor advised funds offer an attractive alternative to giving directly or to setting up a personal or family charitable foundation.

EQUINOX | BEGIN YOUR LEGACY WITH A DONOR ADVISED FUND

In short, a donor advised fund provides a cost effective and flexible way of donating to selected charities either in the short term or over many years to come.” Despite what you may see in the news, it turns out that we Brits are a generous bunch. The level of charitable giving by UK households has increased from £9.6bn in 2016 to a whopping £11.3bn in 2020 and this trend is expected to continue. An increasing number of individuals are becoming interested in how their wealth can make lives better beyond their lineal descendants. To this end, they may consider establishing their own charitable foundation to which they can donate – either during their lifetime or as a legacy in their will. However, the prospect of establishing your own charity can be a daunting one. This involves significant administrative and reporting requirements for the donors and trustees. Generally, this comes with associated costs and this cost and time burden can act as a major barrier to an individual’s philanthropic goals. This is where donor advised funds (DAF) come in. A DAF allows donors to give in a way that is flexible and tax efficient, provide the freedom to give to multiple causes and offer a chance to involve the family in gifting beyond their lifetime. It replicates most of the benefits of setting up a charitable grant making trust but with significantly fewer administrative, fiduciary and reporting requirements for the donor, as these are dealt with by the DAF.

Gift A DAF is a registered charity eligible for Gift Aid and other appropriate tax reliefs. The tax relief arises as soon as the donor makes their gift into the DAF, even if that gift is not immediately passed on to a charity. A key point to note is that once gifts are made to the DAF, they are

irrevocable and the donor cannot then get their gift back.

Grow The money gifted by the donor can remain in the DAF until they advise that they wish to distribute it to the chosen charity. The donor can opt for an investment strategy for the funds they have gifted to the DAF which ties into their wishes for the fund – be that to provide annual grants in perpetuity or to deplete the fund over a certain period, or many years to come.

Grant When ready to make a gift, the donor advises the trustees of the DAF who they wish to make the gift to. This is advice and the trustees are not obliged to follow it. In practice, the trustees will happily pass gifts on to any UK registered charity unless there is a compliance issue (e.g. if the charity concerned was subject to criminal investigation, the trustees might need to wait before acting on the advice). The DAF is responsible for all due diligence and correspondence with the charity and the original donor may, if they wish, remain anonymous.

Putting it into practice Let me introduce you to Alan and Sue. They are in their late 60s and retired after having held successful careers in the pharmaceutical industry. Although they had high incomes, they have always been very frugal with their expenditure. As such, they have accumulated a large estate. Alan and Sue never had children of their own, however, they do have nieces and nephews, who they think a lot of.

Having worked with Equilibrium over many years, they have established a portfolio and income strategy that allows them to live the life they want – to the point that any further expenditure would actually make them feel uncomfortable. What’s more, as part of their inheritance tax planning, they have helped their nieces and nephews feel financially secure. In their annual meeting with Equilibrium, they asked their adviser: “What next?” They wanted their wealth to result in a long lasting and powerful legacy and their planner asked for their views on charity and philanthropy. Both Alan and Sue came from lower income backgrounds and felt it was the opportunities they had in their education that allowed them to get to the position they are in. They also know many people who didn’t get the opportunities they did. As such, they were keen to support charities in this sector but with a particular focus on smaller, regional charities. However, they didn’t know which charities to support or the best structure for doing so. Their Equilibrium planner introduced the prospect of a donor advised fund and arranged a meeting to introduce Alan and Sue to Andrew Evans – a philanthropy adviser with ‘Think Philanthropy’ – to explore potential good causes. In short, a donor advised fund provides a cost effective and flexible way of donating to selected charities either in the short term or over many years to come.

BY RACHEL GRIFFITHS

Monochrome about money

Our attitudes towards money are far from black or white. Understanding our own psychology and behaviours brings a new awareness that can increase our wellbeing, reduce stress and reveal a spectrum of colour to our lives. When we think about our money, it is perhaps easier to revert to stereotypes. We are either cavalier or conscientious. Are we a cavalier individual, who lives in the present and is carefree, often only seeing a green light when it comes to spending and being easily tempted into spending too much? For the cavalier, there is no pain in purchasing, just pleasure as they see buying to be fun. To them there is a relationship between being a spendthrift and boredom. Or are we conscientious? Proud to the point of being frugal with our spending. The pleasure is going to great lengths to build large savings pots, long-term investments and having empty credit cards. There is a pain to spending and besides, the status of being careful with money is a rational advantage, isn’t it? The immediate temptation when asked about our attitudes to our wealth is to slot ourselves, with ease, into either the category of ‘spender’ or ‘saver’.

We are only human after all and there is comfort, ease and certainty in attaching ourselves to a label. The truth is that either label is not only unhelpful, it can also be personally limiting. Between the black and white choice of either spender or saver, cavalier or conscientious, there is not just a whole range of grey but the opportunity to open up to a world of colour. When we begin to understand our thinking around spending and saving, we can reduce our stress, increase our buying power and improve our levels of financial security. What is more, it can help us make wiser decisions. So, perhaps it is time to move out of our monochrome thinking to rewire our thoughts towards our wealth.

Imagine what could change The ‘conscientious’ can be free from the pain they experience in spending and allow themselves to begin to enjoy their money. The ‘cavalier’ who gets a thrill from the here and now can realise the value of saving and investing, knowing that their spending can be sustained in the future.

Paint your psychological picture The link between psychology and financial behaviours is a powerful one and is evidenced by years of research. In 1930, Keynes predicted that as more people became wealthy and had more disposable income, they would save more to protect against unforeseen circumstances, or to sustain or enhance a standard of living. This didn’t happen. Savings did not increase so social and psychological attitudes towards money had to be brought into consideration. We begin to consider our culture, the care we receive when we are young, and our chemistry.

EQUINOX | MONOCHROME ABOUT MONEY

Culture At the broadest level, our culture has a huge impact on our psychology towards wealth. Consider countries like Vietnam, India and China. In these countries saving is the natural order of the day; saving and investing is what a ‘sensible person’ is supposed to do. Compare this with the culture of immediate consumption and the credit levels found in the United Kingdom, United States and Greece.

Caregiving Early life experiences inevitably shape our psychology and affect our behaviours. The attitudes of our caregivers or parents influence our own attitudes and beliefs. As children, we often internalise our parents’ emotional response to money, whether they saved for a rainy day or have always given to charity. How do you remember your parents being towards money?

Chemistry When it comes to chemistry there is a sound base of research that shows how one third of our financial behaviour can be explained by our genetics (1). Our chemical make-up certainly plays a role in how we experience things. Scientists have even identified a gene that makes self-control easier; roughly onequarter of people are born with a saver gene (2). This chemical aspect is hard to ignore. We are naturally built to experience pain vs pleasure and our chemical makeup determines our response. Take the dopamine rush, which some people experience when spending, but is so short-lived it must be repeated for the happiness boost to be maintained. Whilst those who feel physical pain and distress when they spend money or experience financial loss are natural savers and find it easier to set aside money. Both are very real experiences, all part of our natural make up and each one a chemical reaction.

Being aware of behaviours If our psychology defines our attitudes, then it, in turn, determines how we act as a result.

Scholars of behavioural finance outline five main concepts that are often displayed in making financial decisions. Consider which of the following behaviours you may demonstrate in managing your wealth and how your own psychology may be the trigger for you to exhibit them.

If spending money causes you stress

1. Mental accounting. A tendency to allocate money for specific purposes.

• Notice the difference between being frugal and knowing how to spend money.

2. Herd behaviour. Follow the mainstream and mimic the majority e.g. in a period when the stock market is rising, there is a tendency to jump in.

• Check that you aren’t foregoing some purchases and experiences that would make you happy or make your life easier.

3. Emotional gap. Decisionmaking based on extreme emotions such as fear, anxiety or excitement, limited ability to make rational decisions. Don’t pay a premium for an emotional reaction. 4. Anchoring. Attaching a reference to a level of spending to bring satisfaction e.g. a budget. 5. Self-attribution. Choices based on overconfidence in our own knowledge or skill.

Discover a world of colour So, how do we begin to become more conscious of our own psychology and start to get greater awareness of how we are wired towards our wealth? Here are some questions that may prompt you into making sure that your money is making your life better, not limiting it. • Which of the behaviours and attitudes may you have adopted from your parents or carers? • Which attitudes would you choose not to pass on to your children? • What is it that is important to you about your money? • How is your money helping you to live the life you want? • What is the message about your money that you want to give to those you love?

• Try not to overthink. Just for a moment, allow yourself to experience the joy in the present moment without worrying about your future.

If you overspend easily • Get curious about what owning items means to you. While spending is fun, are you beginning to associate purchases with status, a sense of pride or a way to be accepted by peers? • If you love to spend, explore how else you could get the same pleasure that doesn’t involve money. • Remember there is a good feeling to be had when you see your savings and investments grow. • Picture the goal; the peace of mind knowing that you can maintain your standard of living through retirement or the comfort to know that those you love are well looked after in the event of your passing. As with anything in life, a new level of awareness brings new learning. When it comes to your money, taking time to know your own psychology can have huge payback, whether that is understanding your resulting behaviour around finance, giving you the courage to live the life you really want, or simply looking after your own wellbeing. (1) Cronkvist & Siegel, “The Origins of Saving Behavior” 2015. (2) Shefrin, “Born to Spend? How Nature & Nurture Affect Spending Habits” 2013.

BY DEBBIE JUKES

Donating matters

With an insatiable appetite to make people’s lives better, Equilibrium is about to launch its second charitable trust. Debbie Jukes asks Colin Lawson the reasons behind the new venture and his hopes for its future. You have The Equilibium Foundation, why do you need a second one? Our new framework is designed exclusively for donor advised funds (DAF) and will be open to clients, allowing them to make a tax efficient gift and then make recommendations as to how the money is used (see pages 10-11). It is a framework that requires limited liability protection and for the majority of the trustees to be independent. It will, of course, also have different aims and objectives to our foundation. By contrast, our current foundation was established to accept contributions from the partners of Equilibrium, our team members and our clients. The majority of the trustees are currently internal to Equilibrium and the foundation structure is such that it does not have limited liability protection.

What is the structure of the new entity? The charity will be established as a Charitable Incorporated Organisation (CIO). This is a relatively new (introduced in 2013) type of legal format for a registered charity. The main benefits are that the charity has a ‘legal personality’ which allows it to enter contracts, sue and be sued, and hold property in its own name rather than in the name of the trustees. Its members have limited liability in the event the charity becomes insolvent. These benefits were previously only available to limited companies which require registration and filings with both Companies House and the Charities Commission. However, a CIO only needs to register and file returns with the Charities Commission, thereby reducing administration and bureaucracy.

Who will the trustees be? Two of our existing clients have offered to take on the role of trustees, as well as external philanthropy consultant, Andrew Evans, founder of ‘Think Philanthropy’. I will be the trustee representing Equilibrium and we will also be appointing an additional independent trustee (who has experience either with

EQUINOX | LEAVING A LEGACY

other charities or with the legal/ accountancy professions).

What will the new charity be called? We aim to keep things simple so the new charity will be known as ‘The Equilibrium Charitable Trust’. We will of course be retaining ‘The Equilibrium Foundation’ in its current format.

Who will pay the cost of establishing it? Our intention is for the financials to operate in exactly the same way as our current Foundation, in that all costs will be paid by Equilibrium Financial Planning. The cost of establishing The Equilibrium Charitable Trust will effectively be met by the current equity partners of the firm.

The majority of DAFs charge annually for their services. What will Equilibrium’s approach be? While DAFs can be significantly cheaper than establishing your own charitable foundation, they can still be somewhat expensive to run. For example, Charities Aid Foundation, which is one of the largest providers of DAFs, charges £4,200 p.a. for a fund with a value of £500,000. We want to encourage donations of all shapes and sizes and make charitable giving as friction free as possible. It’s our intention that the costs of running the trust will be met and initially funded by the partners of Equilibrium Financial Planning. It’s also important to work out what sector client’s and their family’s would like to support and to identify which charities within a chosen sector are able to make the greatest impact. One aspect of our service will be to help clients decide the areas they would like to help and to carry out the appropriate due diligence to ensure their legacy is being used wisely.

How much are you hoping to raise? Whilst we will be encouraging lifetime gifts, we anticipate a large proportion of the money and mandates will come via clients’ wills and so hopefully this is a long-term question. We will be monitoring the ongoing commitments of clients to donate money in the future so that we can monitor the success and demand, in order to structure the organisation accordingly. However, to put this into context we already have a number of interested clients. I would guess the total amount in question at the moment is circa £5million. I will be disappointed if, during my lifetime, we couldn’t raise £50million.

What role does Equilibrium Financial Planning play in the process? The unique ability of our financial planning arm is to maximise the money under management for our clients. For example, there’s an article in this edition (on p.14) which talks about the benefit of both Gift Aid and tax relief on a charitable donation. We can take this even further by looking at an example where a client has shares or unit trusts with significant gains. These could be assigned to charity and the capital gains tax avoided, as well as income tax relief given on the value of the shares gifted. I mentioned earlier that we expect a large bulk of the money to come via our client’s wills. However, lifetime giving that attracts Gift Aid can make a significant difference and when our clients can afford it, obviously we will be encouraging this approach. It’s also our role to highlight the advantages of giving on death. For example, anyone with an inheritance tax (IHT) liability who leaves 10% of their taxable estate to charity can receive significant reductions in their IHT liability. Recently, I had a case where a client’s father had passed away. I calculated that if the beneficiaries were prepared to

be £16,000 pounds worse off, this would result in a £64,000 donation to charity.

I will be disappointed if, during my lifetime, we couldn’t raise £50million.” In this particular case, there were five children, so each child had to agree to receive £3,200 less, in order to donate £64,000 to charity. With larger estates, the amounts can be significantly more. Equilibrium’s purpose is to make people’s lives better and we do that through helping our clients live the life they want, look after those they love, and leave a powerful legacy. Often for my clients, I help them mentally address this by earmarking notional pots. Once this money has been set aside, I ask: “How much would you like to put to one side to look after those you love?” Then: “If yours and your family’s needs are well taken care of and if there’s any money left, how much do you want to set aside to look after further causes such as charity and philanthropy?” The ultimate objective is to demonstarte that the money is not needed in their lifetime. This can then help the correct structuring of wills but also encourage lifetime giving in the process.

When will it be established? We will shortly be in a position to submit all of the paperwork to the Charities Commission for approval, which can take anywhere between six weeks to six months. During this time, we will be creating all of the supporting documentation and guides that clients and their advisers will need in order to make the process as smooth as possible.

BY BEN ROGERS

The Gift Aid brain teaser When you’re thinking of making a gift to charity, you may end up in a loop of tax relief and rebates. Financial Planner, Ben Rogers, explains the most efficient way to gift as you intend. Most people are familiar with the concept of Gift Aid. Gift Aid allows charities to claim an extra 25p from the Government for every £1 you give. Higher rate and additional rate taxpayers are also able to claim back 20% or 25% respectively of the gross donation, i.e. including gift aid, via a tax return. Consider an additional rate taxpayer who makes a gift of £100 to a charity. If the charity claims Gift Aid, it ends up receiving £125 in total. The donor can also claim back 25% of the gross donation (£125 x 25% = £31.25) meaning the actual cost to them is just £68.75. Sounds relatively simple, doesn’t it? So, where’s the brain teaser?

Meet Joe To illustrate the challenge, I’ll introduce you to Joe; a successful IT consultant earning over £200,000 a year, making him an additional rate taxpayer. Joe sadly lost his mother to cancer in 2021. He is the sole beneficiary and executor of her estate and will be receiving an inheritance of £410,000. In recognition of the care his mother received, Joe decides to donate £10,000 from the estate to the hospice which looked after his mum. He mentions this in his annual meeting with Equilibrium and we explain to Joe that by making the donation personally once he receives the inheritance, rather than from the estate, the charity can claim Gift Aid and receive £12,500, rather than £10,000. What’s more, he can reclaim a further 25% (£3,125) as an additional rate taxpayer so it would only cost him £6,875.

Joe fully understands the benefits of making the donation personally but is adamant that he wants to give away £10,000 (and not the lower amount after tax relief) to the cause that took such great care of his mum.

What can Joe do? He could gift the reclaimed tax of £3,125 to charity, however the cycle would just begin again – Joe donates £3,125, the charity receives £3,906 and he then reclaims £977 via his tax return. As you can see from the table below, Joe is caught in a loop of tax relief and tax rebates: Net Donation

Charity receives (including gift aid)

Tax reclaimed through Self-Assessment

£10,000

£12,500

£3,125

£3,906

£977

£1,221

£305

£381

£95

£119

£30

£37

£9

£12

£3

£4

£1

£0

£14,545

£18,181

£4,545

This loop is a waste of both time and energy. Who would have thought it’s so hard to give money away? A more efficient solution would be for Joe to make a larger one-off charitable donation of £14,545, funded by his inheritance. Joe then reclaims additional rate tax relief via his tax return of £4,545. This results in the desired net donation of £10,000 in the most efficient way possible. The charity claims Gift Aid totalling £3,636 and receives a total gross donation of £18,181. So next time you’re thinking of donating, take a few moments to consider the actual amount you want to give to charity after accounting for tax relief. The impact on your chosen cause could be as high as a whopping 81%! Note: You can claim tax relief on donations you make in the current tax year. For more information, visit https://www.gov.uk/donating-to-charity/gift-aid.

BY COLIN LAWSON

Letters of love Consider this, do you want your will to be the last communication you have with your kids? Here, Colin Lawson, explains the importance of having a ‘letter of love’ in place.

Death, impairment and incapacity are always difficult things to face up to, yet here at Equilibrium we never duck the difficult decisions. We bring them front and centre to ensure that whatever happens to you, during your life and on your death, your affairs are not just in

ant w uld hat o w I re t ave u s h n to e unds I d and f e the mulat u, will u acc d to yo our e gift within be r stay dline o ty.” i o blo o char t left

order (avoiding leaving a mess), but everyone knows exactly what you want to happen and why. Of course, there are multiple legal documents needed such as powers of attorney, wills, pension nomination forms, trust deeds etc. The problem is they are full of legal speak and are therefore by definition dull, boring, and full of incomprehensible jargon. So, let’s start off by looking at these documents and how we can help bring them to life.

EQUINOX | LETTERS OF LOVE

r 18, e v o e r a As you nically h c e t d l u you co oney m s i h t w withdra blow d n a y l e t immedia uickly.” q y r e v l l it a

Lasting Power of Attorney (LPA) The first legal document that your family (or representatives) might need to deal with is your LPA, which, if you have prepared thoroughly, will be in two separate documents - health and welfare; and property and financial affairs.

Health and welfare The most important and often overlooked one is your health and welfare LPA, which sets out how you want to be treated by health professionals and what powers your attorneys have. Our website article, ‘Hope for the best, prepare for the worst’, highlights the importance of having this LPA and a poignant example of a client without one. What a health and welfare LPA doesn’t spell out, is your feelings about what you truly want. Imagine if your representatives had a letter from you, expressing your hopes, your fears and how you would like them to act - wouldn’t this give greater clarity and meaning?

pension I enjoy from Dad should cover 24-hour care and nursing in my own home. Please do not feel you can save money by doing this yourselves as this is unrealistic and will lead to unhappiness for both the family, carer and me. “If eventually and in extremis you all decide I cannot live at home, then I expect the care home to be of an extremely high standard with excellent food and wine. “I hope for entertainment that does NOT include sing-a-longs of ‘The Lambeth Walk’ (1937) or ‘It’s a Long, Long Way to Tipperary’ (1912). Why carers assume you know the words to songs that were current, years before one was born, I do not understand.

Take this real-life example from one of our clients:

“I would also like fresh flowers, fresh coffee (in bone china cups) and good wine in a large glass.”

“I do not wish to go into a ‘home’ and unless I tell you otherwise, this is to remain my intention. Obviously, if I become a danger to myself and others through dementia you will have little choice; the considerable

You can literally picture this scene in your mind, helping the representatives no end in terms of expectations and budget. Who could possibly go against these wishes?

Property and financial affairs When it comes to the financial LPA, you could express some guidance as to how you want the money to be invested. Many of our clients, without any nudging from us, have gone as far as saying please take guidance from Equilibrium.

Wills Your will is the last communication you will ever have with your loved ones and if you have ever tried to read one you will appreciate that an interpreter is often required. We recommend writing an accompanying letter which provides an opportunity to simplify things, share your thoughts or even explain some of the things you’ve found hard to say in life. The best bit is that it will all be in your own words. Many people like to explain the background as to how their money arose and how they managed it: “As a child I grew up in poor circumstances but through hard work and good fortune, I have

EQUINOX | LETTERS OF LOVE

managed to accumulate a degree of wealth, the disposal of which is dealt with by my will and the terms of the various family trusts.” They go on to explain the detail of how they hope the money will be used and the benefits it will bring: “I hope the inheritance I have left you will enable you to have financial freedom to enjoy life, travel to far-away places and spend quality time with your family and friends.” These letters can explain as little or as much as you like. For instance, why you didn’t spend more, changes you made regarding inheritance tax, your wishes for how they spend their inheritance, or even how to protect it: “I wish for you to have a prenuptial agreement in place before you marry simply because, in the unhappy event that the marriage breaks down, I would want to ensure that the funds I have accumulated and gifted to you, will stay within our bloodline or be left to charity.”

Pensions Pensions do not form part of our wills and therefore need a separate nomination form which

we can guide you through. For tax reasons, we often recommend nominating multiple generations including grandchildren and great grandchildren (highlighted in our website feature, ‘Future fortunes’). The issue this brings with grandchildren, is early access to the money, as captured by the stick and the carrot approach here: “As you are over 18, you could technically withdraw this money immediately and blow it all very quickly. “The purpose of this letter is to encourage you to do the opposite. This was my pension, which I built up over many years, and I hope you will use as your own pension pot. I hope that you will keep it invested and let it grow tax-free so that you can enjoy a great retirement like I did. “There is also a significant sum of money held by the family both personally and in trusts, and I have made it clear that your access to further funds from these sources will depend entirely on how responsibly you manage this pension.”

Trusts Most trusts are discretionary, which means the range of

beneficiaries can be virtually anyone on the planet. Providing guidance to the trustees through a further document known as a ‘letter of wishes’ is fairly standard but again it’s usually in legal speak rather than from the heart. Once again, a letter can really help in sharing your hopes and intentions: “I have set up a discretionary trust, naming you both as the beneficiaries. This is for you to use wisely, whether you need a sustainable income from it or to go towards a new house or extension. The trust is for yours and your family’s benefit but also gives me the peace of mind that the money I’ve worked hard to accumulate, stays within our family.” Your letter of love and your will should be kept together and reviewed regularly, ideally every two to three years, to ensure changes in your personal circumstances, or legislation are considered. You can amend or replace your letter of love as often as you like as it’s free to do. Remember this is your legacy, let’s make it a powerful one! If you would like to view the referenced website articles, visit www.equilibrium.co.uk.

Death rehearsal Once we have guided a client through making sure they have all the right documents and letters in place, we will then host a death rehearsal. If it’s a couple, we will choose whose death to rehearse and whilst both will be in the meeting, logically the dead cannot speak. This process can be invaluable in highlighting any issues or problems early and ensures that when the inevitable does happen, everything is as stress-free as possible for those left behind. We will amongst other things: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Check whether you wish to write a letter of love. Check all the legal documents and insurances are up to date. Check and note where important documents are stored. Calculate any inheritance tax. Make sure we have all the documents needed for probate. Demonstrate who will receive what in monetary terms. Highlight how income will increase or decrease for the survivor. Discuss who needs to be notified. Ask how we turn off social media such as Facebook or LinkedIn. Enquire as to which funeral directors/ songs/ poems/ readings you wish to use.

BY PAUL FARRUGIA

What do you want your money for? When financial planner Paul Farrugia asked this question to clients Linda and Nigel Robinson, they found themselves unable to answer. It was the start of them thinking differently about the purpose of their money. And it is a story that they wanted to share. Linda and Nigel Robinson became clients ten years ago and they had one main priority; to gain the confidence that their finances could support them into later life. Finding themselves in the situation of having a final salary income with additional savings, they came to Equilibrium wanting certainty that the long term was looked after. “Like many in our generation, we grew up when mortgage rates were very high, so being cautious and prudent with money was the only way to survive and to make

We fondly recall Jason Lowe, our first adviser, acknowledging that we were one of the most cautious clients he had ever had.”

EQUINOX | WHAT DO YOU WANT YOUR MONEY FOR?

sure that we could be financially secure and stable in the future,” explains Nigel. “We fondly recall Jason Lowe, our first financial planner, acknowledging that we were one of the most cautious clients he had ever had. He patiently took us through the clear charging structure and we got our first taste of Equilibrium’s family and personal style; something we were unable to find in any other organisation.” He continues: “We considered our money to be our savings and something that was purely there for our old age. We wanted to make sure that we had enough to look after ourselves as we got old and in case we both needed care. I suppose being cautious with our money is in our culture, it is how we have grown up. Once you have that outlook, it stays with you and it is very hard to get out of that mindset.” “In recent years, Paul Farrugia has been our financial planner and with his help, we continue to have confidence in our plan. What we hadn’t appreciated was exactly what else that could now mean for us,” says Linda.

“We were so used to thinking about the long term that when Paul asked us the question as to what we wanted our money for, we quite simply didn’t have an answer.

that I did for the first five years of his life. As a result, we both enjoy a wonderful relationship with him. That is something that I consider to be very precious indeed.”

“Through the planning and the forecasting that Paul worked with us on, we saw that the long term was taken care of, and we found ourselves asking, so now what?

Both Linda and Nigel have been enjoying some new opportunities that have been afforded to them. The confidence that Equilibrium’s planning has given them over the years has allowed them to begin to enjoy life even more.

“We discovered that we were able to help our children with wedding gifts and house deposits and were delighted to find that we could support our grandchildren too. “We also realised the ‘old age’ that we were planning for was actually here! That made us contemplate what was next for us. Equilibrium had given us security for our future, which meant that it was time to begin to live in the present and that takes some getting used to,” explains Linda. “One of the things that I am most grateful for was the ability to take early retirement when my grandson was born. They say that money can’t buy time, but I would disagree. I was able to look after my grandson for three days a week, something

After some careful research (of course), Linda was also able to treat herself to the car she had always wanted; a mini cooper convertible. In addition, both Linda and Nigel have been enjoying some unforgettable holidays across China, Bali, Singapore, Borneo and Cambodia. After much consideration and with their new outlook they even took the plunge and travelled business class on their recent trip to Abu Dhabi, something they had always aspired to do. Linda went on to say: “We have been promising ourselves to travel business class for so long, if we don’t do it now, when are we going to do it?”

BY TORI LONGDON

Classical music goes digital The pandemic has been a catalyst for the world of classical music to reach a brand new audience. Conductor Tori Longdon tells us how. Classical music and digital technology are rarely featured in the same sentence. Often the preserve of the ‘technophobic’ generations, classical music has developed a reputation for being dusty, traditional and slow to adapt. However, the events of the last two years have given the industry no choice but to innovate, and for many classical musicians and creators this has involved embracing the online world and developing new skills which could help to bring the industry into the 21st century.

EQUINOX | CLASSICAL MUSIC GOES DIGITAL

The pandemic created a unique challenge, which classical artists responded to with their characteristic verve and ingenuity. From staging online concerts via YouTube Live, to stitching together virtual ‘choirs’ from thousands of mobile phone recordings, artists across the world reached new audiences, developed new skills and discovered that the digital space could become a new canvas upon which they could create. This baptism of fire led to a range of new skills being developed within the industry; video editing, streaming, social media, all previously neglected, which connected the world’s greatest music to new audiences.

The events of the last two years have given the industry no choice but to innovate.” There are now two, huge opportunities facing classical music. Firstly, how does it convert the newly engaged audiences into long-term classical music lovers?

Classical music relies on the devotion and imagination of its artists to survive.” Secondly, how does it achieve this whilst also trying to resurrect live music after the imposed restrictions of the last two years?

Home Choir’ are connecting some of the world’s greatest artists to their fans in live workshops which all take place online.

This is the real challenge, and it is exacerbated by the systemic lack of funding within arts organisations as a whole. This has led to a lifesupport approach to spending, where core areas of operation must be prioritised over less critical new ventures, experimentation and innovation. Without innovation, new uses for digital technology cannot be tested and implemented, cutting off potential new revenue streams for the arts. And the problem is cyclical, since lack of revenue makes these organisations ever more dependent on public funding and likely to fall behind other sectors.

Digital content is a doorway to attracting new music lovers, which will become the lifeblood of the industry in future generations. How the industry learns from the lessons of the pandemic and uses the new tools it has developed will be crucial to carving out a space for classical music in the digital world of the 21st century.

As ever, classical music relies on the devotion and imagination of its artists to survive. Online platforms such as OnJam and the Digital Concert Hall of the Berlin Philharmonic, are widening access to streamed content for millions of viewers worldwide, whilst organisations such as the ‘Stay at

Want to enjoy classical music online? Here’s how... Berlin Philharmonic Digital Concert Hall: www.digitalconcerthall.com Stay at Home Choir: www.stayathomechoir.com OnJam: www.onjam.tv

Tori Longdon Tori has been described as a ’musical force of nature’. She is an associate of the Royal Academy of Music, a conductor for the National Youth Choirs of Great Britain and is the co-founder of the 28,000 strong Stay at Home Choir, together with Swingles baritone Jamie Wright. Tori is currently an on-screen conductor for Songs of Praise on BBC1, as well as an adjudicator for their competitions including ‘Young Choir of The Year’ and ‘Young Chorister of The Year’. She appeared on BBC2 as a judge on two series of ‘The Choir’ with Gareth Malone. She is a regular contributor to Classic FM magazine. Twitter: @Tori_Longdon www.torilongdon.com

BY ANDREW HIRST

Portugal Peddlers

Hear how Andrew Hirst and two of his fellow planners fared as they faced a charity cycle challenge. Our mission: Cycle Portugal Mileage: 465 miles Duration: 6 days Fitness level: Reasonable

last and aim to raise more money than ever before. We decided on Cycle Portugal which required us to cycle the entire length of the country.

Saddle up

The peloton for this Portuguese challenge comprised of myself, Jason Lowe (early 50s) and David McKendrick (late 40s). We are colleagues, financial planners and friends but this challenge would put our usual easy-going natures to the test. Our approach to training differed as we were all at varying levels of speed and ability. David hadn’t even been on a bike since he was a kid, so he upped his game and arrived with full confidence in his cycling ability, whilst Jason and I knew what really lay ahead!

As I’m now in my early 50s, I am at the stage where if I don’t stay fit, I end up fat and whilst there is only one letter difference, the difference to my happiness, confidence levels and even concentration is immense. I have never been a gym lover; I really don’t like running, so cycling was the obvious choice for me. I’d already done a series of cycle challenges, the UK coast to coast ride and even Venice to Rome with my colleague Jason Lowe (in 2020). I’d learned two things from those. Firstly, that like anything in life, having a goal motivates me to train and secondly, that raising money for charity makes all the hard work worthwhile. We knew the pandemic had taken a huge toll on charities up and down the country, especially those who rely on public fundraising and we wanted to help in some way. Plus, our efforts would be doubled by the Equilibrium Foundation. So, we sat down at work one morning and decided we would find another cycling challenge, tougher and longer than the

Peloton preparation

The uphills Whilst we had all trained for the trip, it’s fair to say, we could have done more, although I’m not sure anything could have prepared us for the unseasonable heat – a whopping 32�C! We even acquired another couple of fellow riders, forming our very own mini group. We knew from the start we weren’t going to break any records; this was all about staying strong mentally and physically. We each hit ‘the wall’ at different points in the journey at which point, we would slow down and

EQUINOX | PORTUGAL PEDDLERS

encourage each other to keep going, finishing each day as we’d started…together.

The downhills We saw some breath-taking views and passed through wine regions, charming villages, olive groves and wild scenery. We cycled for 10-12 hours each day and rewarded ourselves with the most mouthwatering suppers and obviously a glass of ‘vinho’ to wash it down. The best part was catching up with all the other riders in the evening to dissect the day with tales of

breakdowns, wipe-outs, muscle cramping and all the other ailments that go with endurance cycling.

The unforgettable result We raised a whopping £21,000, which was split between each of our chosen charities. We’re truly proud of our cycling achievement, but knowing how we’ve made a difference to the charities is exceptionally humbling. For instance, the donation to Claire House paid for seven families to receive counselling and support following the loss of a child.

Thank you so much to everyone who supported us. Unfortunately, our Virgin Giving page is now closed, however, if you would like to know more about the charities we sponsored or would like to donate directly to them, please use the links below: Reuben’s Retreat: www.reubensretreat.org Claire House: www.clairehouse.org.uk My Name’5 Doddie: www.myname5doddie.co.uk

Anyone up for a challenge? We booked our trip with ‘Discover Adventure’ as we have always found their organisation and support to be superb. If cycling is not your thing, they also offer trekking challenges both worldwide and in the UK. All the adventures are graded in terms of how challenging they are and if I have learnt anything, it’s a fantastic way to step outside of your comfort zone and achieve something to be proud of. If our trip has piqued your interest, visit www.discoveradventure.com.

BY JAMES CARR

Investing ideas, an eye on the future Without a crystal ball, how do you spot the next best thing? Well, that all depends on your style of investing. James Carr, our Investment Analyst, explains more and looks at three companies that fund managers currently have their eyes on. Hindsight can often be a wonderful thing! It’s great to have the benefit of experience and perspective, however, with investing, hindsight can often be tarnished by regret and a feeling of ‘what could have been.’ Have you ever felt like you have invested in something you wish you hadn’t? Or taken profits too soon in a stock like Amazon or the next generation growth company? While the future can often seem uncertain, with hindsight the life-changing returns from organisations which have since become household names can seem so obvious. Surely Amazon was always going to be a success? How could I have missed that one? However, we forget that during the early 2000s Amazon’s value fell nearly 94% from peak to trough, leaving investors underwater for nearly a decade. This was because the company was spending aggressively to build out the infrastructure that powers it today. Holding or adding to Amazon during this uncertainty would have been a challenge for even the most long-term of investors. Despite this it would only have taken a £600 investment in them at the Initial Public Offering (IPO) in 1997 to be a millionaire today! Bringing all this back to today and as we look forward to the future, there are tens of thousands of companies listed globally across different geographies, regions and industries. So, how can you decide what to invest in if you are picking individual stocks? Broadly speaking, most of the fund managers that we invest with have a distinct ‘style’ of investing with the main ones being growth, value and quality.

EQUINOX | INVESTING IDEAS, AN EYE ON THE FUTURE

Growth: Managers invest in companies that they think can grow sales and earnings faster than the market.

you are listening to or even explore virtual artwork. Therefore, we think Snap is positioning itself to build the next big platform.

Value: Managers believe that companies which are cheaper than average can outperform.

“And what makes this all particularly exciting is that Snap has a big, engaged base of users who are precisely the right age to pioneer a new platform. A super platform that blends the physical and digital worlds.”

Quality: Managers believe companies that are operationally superior to the market can do best. While the companies that the managers invest in may look completely different, they all share the belief that the expectations the market has for the company is incorrect and they can perform better than is currently ‘priced in.’ We asked three of our fund managers across the investing styles for an idea each that they are particularly excited about within their portfolio.

Growth The Baillie Gifford American Fund is the one with the most growthoriented approach in our portfolios. They were one of the earliest institutional investors in Tesla and have generated exceptional returns over the last decade. They believe social media company ‘Snap’ is one of the most interesting propositions at the time of writing. “For most of us, Snap is better known for its instant messaging app ‘Snapchat’, one of the most popular social networks for the Gen Z, with 90% penetration of the 13-24 demographic in the U.S. and over 80% in Europe. “But despite the popularity of this social media platform and its huge potential in the advertising market, Snap does not see itself as an advertising company looking to sneak a few more dollars from its rivals. Instead, they are at the forefront of the Augmented Reality (AR) revolution and that is an exciting potential future. “AR has evolved to a point where it is no longer only in the realm of fun and entertainment. It has utility. It can help people virtually try on shoes, clothes or make up, scan labels to find ratings, reviews and prices, tell you the name of the song

Value Within our UK portfolio we hold the Miton UK Multicap Income Fund and, while not the deep value style that was made popular by Warren Buffett at the start of his career, the fund looks to buy cash-generative companies that can grow dividends and that are trading for less than they are intrinsically worth. The fund is managed by Gervais Williams, whom some readers may recognise from our investment dinners or investment panels. Gervais has built up a stellar track record investing in smaller companies and is currently excited about the prospects for ‘iEnergizer’: “iEnergizer is an integrated software and service pioneer, that helps global business with customer service and technical support, such as chatbots. It has a culture of delivering very high levels of customer satisfaction, that has led it to progressively take market share from others. It also offers a very competitively priced service, due in part to its Indian and Mexican cost base. “The combination comes together in a company that generates abundant cash surpluses with a generous dividend policy. Despite its ongoing sustained growth, it still offers a yield of 4.5% and stands on what we consider to be an overlooked price/earnings ratio of only 14.5x for the year to March 2022 and 12.1x for the current year. When markets stagnate, often the best returns come from compounding of a stream of good and growing dividend income, from stocks such as iEnergizer.”

Quality While most of us will be aware of a growth company or a value company, a ‘quality’ company may

be considered a less common term. Quality is more subjective; however, some of the common metrics many quality managers will use are strong balance sheets, high margins or recurring revenues. One of the purest plays on this discipline is the Morgan Stanley Global Brands Fund we own in our portfolios. This focuses on companies generating high returns on capital employed. They are particularly excited about their top holding, ‘Microsoft’: “Under Satya Nadella (CEO), Microsoft has transformed into a vibrant company leading key technological changes. Cloud revenue across Office 365 and Azure is over $60bn. Microsoft is largely free from the privacy, data and antitrust controversies affecting other leading tech players. “In our view the company is expected to grow revenues at above 10% for the next few years, benefiting from the acceleration to the digital economy accelerated by the COVID crisis. We believe Cloud (Azure and Office 365) growth is a strength and a source of higher revenue.” While all these companies will be driven ultimately by the fundamental performance of the business, at times markets can behave irrationally. A great company can be a poor investment if bought at the wrong price. Meanwhile, a poor company can be a great investment if bought (and sold) at the right price. Few of us around the world would have heard of Zoom two years ago as we approached the pandemic, whereas now it has become a verb in a similar way that Google has. At the start of March 2020, Zoom traded at around $150 a share and since then they have grown revenues from $622m in 2020 to profits (not revenues!) for 2022 estimated to be $1.38bn. The current share price? It now trades for around $107 a share, substantially below its prepandemic price. This article is intended as an informative piece and does not construe advice. Please contact your financial planner before taking any action.

BY NEAL FOUNDLY

What is an NFT and should you buy one? There’s much curiosity as to whether to invest in an NFT, but is it worth the money? Let’s start with the basics. NFT stands for ‘non-fungible token’ which simply means a one-of-a-kind digital item that cannot be duplicated. In the real world, if you own an original Picasso painting, you have a non-fungible asset because each is unique compared to, say, pound coins which are homogeneous and easily tradable for another pound coin. So, instead of real-world Picasso paintings, these NFTs are digital assets which can involve pretty much anything such as a tweet; a mega-sword for your warrior in Fortnite; a TikTok video or song or, more commonly at the moment, digital art. When someone buys an NFT, they obtain ownership in the sense that it becomes their property - and is a digital certificate of ownership. These certificates can be bought and sold via platforms and then transacted on blockchains that use cryptocurrencies for payments. You can read more in our online article, ‘In a nutshell: digital and cryptocurrencies.’ In reality, an NFT is just a string of digital code that you keep in your cryptocurrency wallet and so you never actually take possession of a ‘thing’ in real life. Generally, the owner of the NFT will have a limited ability to share or reproduce the item itself.

Welcome to the ‘Bored Ape Yacht Club’ (BAYC) So, ownership of digital assets is up for grabs but how do you value them? In these early Wild West days of NFTs, the answer has been to create a buzz. Create a cool digital image; sell an iconic artefact like Twitter founder’s first tweet; get Paris Hilton or Eminem to endorse your art, and so on. This lures buyers in on the basis that there is some cachet or scarcity that would infer some value. Better still, create an exclusive online club where members create their own buzz. For example, at the time of writing this article Twitter user ‘Byson’ tweeted: “Today marks my first day in the NFT world, I deposited 40 Ethereum and was unsure what to buy, and today I purchased an NFT for $30,000. I’m now part of the BAYC family.”

EQUINOX | WHAT IS AN NFT AND SHOULD YOU BUY ONE?

He has bought a cartoon image of a monkey from the Bored Ape Yacht Club (and nothing to do with maritime activities), which, like others such as CryptoPunks, is trying to create exclusivity to drive up prices. Byson has no idea what the ‘value’ of his certificate of ownership is (of the cartoon image of an ape) but he is hoping that there is a ‘greater fool’ out there who will buy it from him at a much higher price (I’m not being insulting, this approach of buying a fully-priced asset in the hope that you can sell it to another at a higher price is called the ‘greater fool theory’). The greater fool might well come in and pay a higher price, but it is unlikely. You may have read about NFTs selling for tens of millions of dollars, the record highest going for $90m. Be wary of such claims, many of which are bogus due to an unsecured loan facility (‘flashloan’) on blockchains that effectively allows the seller to loan the money to the buyer who buys at an inflated price and instantly pays it back. Indeed, analysis by the Financial Times shows that: “So far, most NFT collectors on the secondary market have yet to recoup the costs of their purchases.” (FT - 31 December 2021)

real-world identities of buyers and sellers is difficult, if not impossible, to discover.

bonuses such as front row tickets to their concerts for those who own their NFTs.

It is worth remembering that the NFT only shows who the current owner is. However, the copyright – and thus the royalties from use – remain with the creator. If, for example, a Hollywood film is made using your image or song, as the owner of the NFT, you will receive nothing.

Utility NFTs can provide the bridge between the virtual and physical world and are likely to be the important medium that companies will use to promote goods and services.

Just as a reminder too, collectables are subject to capital gains tax and so the tax authorities may also be interested in the value of your NFT collection.

Beyond art One area that is growing rapidly is the ‘utility NFT’ which, as the name suggests, are NFTs that carry some underlying utility, benefit, or application. Art is pretty subjective but what if you bought an NFT that, say, conferred a right to access special online – or physical – events? What if it allowed you early access to content or a limited edition product or allowed you to meet your sporting hero?

Should I buy one? The advice is, only spend what you can afford to lose. This is an extremely high-risk investment as it does not physically exist, and there is a real possibility of 100% capital loss. If you have always wanted to own a certain digital item, go ahead, but keep some money back for utility NFTs that may offer you some real-life benefits that a ‘greater fool’ might also want to buy in the future. If you would like to view the referenced website article, visit www.equilibrium.co.uk. This article is intended as an informative piece and does not construe advice.

For example, the band ‘The Kings of Leon’ has included fan

As an unregulated market, it is plagued by fraud, scams and market manipulation, especially because the

BY MIKE DEVERELL

INVESTMENT REVIEW

The ever-changing landscape Welcome to the investment review section of this edition of Equinox. Mike Deverell

PARTNER & INVESTMENT MANAGER

12%

Omicron variant causes new UK restrictions equities fall and gilts rally

10% 8% 6% 4% 2% 0% Bank of England puts up rates bond yields increase

-2% -2% -6% Oct

FTSE 100

30 28

Nov

S&P 500

Summary We discuss what has happened over the last 12 months and the actions Equilibrium has taken.

Dec

FTSE Actuaries UK Gilts

Investment outlook Here, we provide our investment philosophy and the ‘tilts’ we are making to our portfolios.

EQUINOX | INVESTMENT COMMENTARY

The news headlines in recent weeks have been dominated by the tragic events in Ukraine. Our hearts go out to the people affected by the conflict.

Given the inflation outlook, central banks appear determined to push on with interest rate hikes, despite concerns about how this might hit growth.

From an investment point of view, the uncertainty has caused a great deal of volatility in markets. However, the Ukraine situation has arguably been only a secondary driver, adding to existing concerns about higher inflation and how this might hit the economy. As the price of essentials goes up, people tend to cut back on non-essential spending.

All this has led to significant falls in most bond markets, as well as impacting equities.

Rising rates begin to hit US shares, but FTSE outperforms due to energy stocks

In the coming pages, we will explore these changing dynamics, how they have affected portfolios and what might happen from here.

Russia invades Ukraine - equities fall and bonds rally, briefly

China announces new stimulus

Federal Reserve increases rates

Feb

Mar

Apr

Source: FE Analytic, total return in local currency. Data from 5 October 2021 to 5 April 2022

Sector performance & analysis After a turbulent start to the year, here we look at the performance of our selected funds compared to their relative sectors.

Portfolio performance You can find a thorough breakdown of how each portfolio has performed in both the long and short term here.

EQUINOX | INVESTMENT COMMENTARY

It has been a very difficult start to the year for investors. Table one shows the returns of various equity and bond markets so far in 2022. Remarkably, only the FTSE 100 has gone up this year, with its high exposure to energy and mining stocks, helped by the spike in commodity prices. For example, Shell has gone up by 31.95% so far in 2022. However, every other asset class in the table is down significantly. Given this backdrop, portfolios have fallen this year, with the balanced portfolio down 3.43% over the same period (31 December 2021 to 5 April 2022). It is always frustrating when portfolios go down, but unfortunately short-term losses are an inevitable part of investing. However, for the core IFSL Equilibrium funds, it is important that their behaviour is predictable no matter which direction markets are going. We can’t control whether markets are going up or down, but we think you should be able to count on our funds to behave in a particular way depending on the line of travel. Table two shows the performance of the core IFSL Equilibrium funds since launch in 2017.

The benchmark for each fund is to beat inflation (CPI - Consumer Prices Index) over rolling 5-year periods rather than to target any industry average or sector. Over 10 years or more, the funds aim to beat CPI by a significant margin (cautious by 4% p.a., balanced by 5% p.a. and adventurous by 5.5% p.a.). These are deliberately challenging targets and have become even more challenging recently. Whilst beating inflation is the number one priority, Financial Express (the data provider we use) groups our fund with other multi asset funds in the FE Mixed Investment 20-60% Shares sector and so we also use this as an informal performance comparator. As well as showing the total return since launch, the table also shows the return for each individual calendar year. Green numbers show when our funds have outperformed the FE sector. Since its launch, all our funds have outperformed the average mixed investment fund and are ahead of inflation. We also think looking at discrete annual periods is helpful when assessing the behaviour of each fund. Whilst all have outperformed over the entire period since launch, Table one: Global equity & bond returns

Asset class

Return 31 Dec 2021 to 5 April 2022 (%)

Large UK shares (FTSE 100)

4.22

Large US shares (S&P 500)

-4.80

Emerging market equites (MSCI Emerging Markets)

-4.97

Corporate bonds (UT Sterling Corp Bond)

-5.53

Gilts (FTSE All Stocks Gilt Index)

-7.30

Medium sized UK shares (FTSE 250)

-8.62

US tech stocks (Nasdaq 100)

-9.00

Smaller UK shares (FTSE AIM Allshare)

different funds have done better or worse over shorter periods. In general, adventurous has outperformed significantly in periods when the sector has gone up. Meanwhile, cautious has outperformed in periods when the sector has gone down. For example, in 2018 it lost significantly less than the sector. It has also outperformed so far this year, again losing less than the average fund. On the flip side, cautious tends to lag when the sector goes up. Meanwhile, adventurous tends to lose more than the sector when it goes down. This is by design. We deliberately take more risk in adventurous and expect longerterm performance to be stronger as a result. However, we must accept the flip side to this is that losses will be greater when markets go down. Cautious takes the opposite approach and over the long term, it should return less than adventurous, but experience less volatility. Meanwhile, balanced sits in the middle and it has outperformed in each of the four full calendar years since the funds were launched. It has gone down slightly more than the sector so far this year but there are still three quarters of the year to go!

Different investments for different environments Our investment philosophy is all about diversification. We don’t have a crystal ball which will allow us to see which stock, fund or asset class will perform the best over any given period.

-12.99 Source: FE Analytics FE Analytics, total return in local currency

Table two: Fund performance since launch

Fund

2022 %

2021 %

2020 %

2019 %

2018 %

Since launch %

Cautious

-2.68

6.51

3.60

12.37

-3.60

16.30

Balanced

-3.43

7.73

4.31

13.79

-4.12

18.40

Adventurous

-4.25

9.58

6.98

16.61

-5.60

23.80

UT Mixed Investment 20-60% Shares

-2.97

7.65

3.48

11.88

-5.08

15.76

CPI (UK Consumer Prices Index)

0.61

5.40

0.65

1.31

2.10

11.13

Source: FE Analytics, total return. Calendar year returns are 1 Jan to 31 December, except 2022 1 Jan to 5 April. Since launch is from 1 Nov 2017 to 5 April 2022

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However, we do have lots of information about how asset classes have historically behaved in different environments and what the relationships between the different assets have been in the past. For example, we know that government bonds tend to do poorly in times when interest rates are rising. We also know which types of stocks have historically done better and which performed worse in times when bond yields rise. Similarly, we can look at past instances when inflation has been elevated and what types of assets did well during these times. We also know which types of assets tend to do better in a growing economy and which to hold during a recession. We can use this data, plus analysis of valuations, sentiment and all the other factors, to make adjustments to the portfolio. But again, we must acknowledge the limits to our forecasting ability. For example, one crucial factor affecting growth and inflation - and by extension interest rates – will be the war in Ukraine. Even if we could forecast all the other variables, unless we can predict what will happen with the conflict, we cannot possibly say with certainty what inflation or rates will be at the end of this year. How do you then position a portfolio when the outcome is so uncertain?

The answer is to diversify, with a mixture of positions which should outperform in different environments. Whilst we will never ‘bet’ on any single outcome, we will make ‘tilts’ to the portfolio based on what we think is the most likely outcome. For example, we can look at the path of interest rates the market expects and say whether we think it more likely the Federal Reserve will raise its interest rate more, less, or about the same as the market has already priced in. We will then use that to adapt the amount we hold in different areas. This is very much an art, not a science.

Our expectations for 2022 Our expectation for the economy going into this year was that it would continue to grow although this would likely slow after the postCovid bounce. We expected that interest rates would go up, but the pace of this would be uncertain. We thought inflation would probably moderate towards the end of the year. Our view is that the level of inflation poses a significant risk and rising prices could hurt economic growth. Given this expectation, we made a few adjustments to the portfolios. We reduced bond exposure and within our bond portfolio favoured

Chart one: Correlation of regions and styles to US 10-year Treasury yield

so-called ‘floating rate bonds’ where the coupons are linked to interest rates. We have less than usual in fixed rate bonds as the price of these tends to fall when rates rise. We instead sought other ways to hedge equity risk (see ‘Hedging the risk’, p.32) and increased exposure to ‘real assets’ like property and infrastructure, where incomes tend to be linked to inflation. Within equities, we looked at historic data about which types of equities tend to do better or worse. Chart one is from JP Morgan and shows which types of equities tend to outperform and which underperform when bond yields are rising (and rates are going up). As a result of this and similar analysis, we increased our exposure to value equities last year and kept a relatively large weighting in smaller companies, both areas which tend to do well when we see rising rates. We have remained relatively underweight in US growth and large-cap equities, which have historically underperformed when bond yields rise.

Long-term positioning As well as short-term ’tilts’ based on our analysis of current market conditions, we also take some positions that we think will benefit from long-term trends. For example, research has shown that over the long term, smaller companies tend to outperform larger ones. Whilst in the short term they can be riskier, by holding a bit more in small companies than your typical investment, it should increase chances of long-term outperformance. We will also try and be on the right side of long-term trends. For example, one long-term trend has been the rise of the middle class in Asia who have greater spending power than ever before, a trend which looks set to continue. We want to benefit from funds which can sell to Asian consumers.

Country/region

Large/small

Value/growth Source: JP Morgan ‘Guide to Markets’ (January 2022)

Another trend is climate change, where huge amounts of capital are going into areas to help decarbonise our economy. Infrastructure investments are a potential

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beneficiary of this, particularly in renewables and energy infrastructure.

slowdown here in the UK as ‘plan B’ restrictions were imposed in December.

are down over the past 12 months, a remarkable difference between companies in the same industry.

Furthermore, we believe a lot of economic growth will be driven by technology and will have a higher weighting in the next generation of tech stocks.

We also have a significant risk that the rising price of ‘essentials,’ such as food and energy, will cause a slowdown in consumer spending on other goods and services. This has been exacerbated by the war in Ukraine.

In essence, some of our long-term portfolio tilts, which have driven returns over the past few years, have all underperformed at the same time. In fact, unless most of your money was in large-cap US stocks, you will have experienced a period of poor performance.

Again, individually such positions are all risky, but they are all different, driven by different factors. Therefore, we’d normally expect that if one isn’t working so well in the short term, another one may be outperforming.

No such thing as average… The difficulty with data such as in chart one is that it is historic. It is also based on averages but things are rarely just ‘average’ and historic situations rarely repeat exactly. Generally, when interest rates and bond yields are rising, it means the economy is doing well. This is why small caps, which can be more sensitive to economic growth, tend to do well when rates rise. Value stocks also tend to be quite ‘cyclical’. What is different in the current environment is that the economic situation has worsened, at the same time as rates are going up. This is rare. Firstly, the momentum of the post-Covid bounce as economies re-open, is starting to wane. We have had the Omicron variant of Covid, which caused a temporary

All of this leads to fears of the dreaded ‘stagflation’ – where we have stagnant growth and high inflation. As a result of this, smaller companies have significantly underperformed larger ones of late, unusual for periods when rates rise. Similarly, the underperformance of emerging market and Chinese stocks has been exacerbated by concerns over the geopolitical climate. In addition, our preference for ‘next generation’ technology stocks rather than large cap stocks in the US has not paid off in recent months, with large caps holding up much better. Chart two shows the return of large cap US technology in blue (the S&P 1500 information technology sector). This includes the likes of Microsoft and Alphabet (Google) and is up more than 14% over the last 12 months. Meanwhile, the red line shows smaller US technology shares (the Russell 2000 Technology sector) whilst the green line shows non-US tech stocks (FTSE World excluding US Technology). Both those indices

Chart two: Large US tech outperformance

This means that our more adventurous funds have struggled so far this year, after a strong period of returns previously. The more adventurous portfolios have greater exposure to these growth trends, as we have a long enough time horizon to allow us to ignore short-term volatility. On the other hand, value stocks have done extremely well, particularly energy and commodityrelated stocks. This is why the FTSE 100 has done much better than most markets so far in 2022, after several years of underperformance. We did top up value exposure last year which has helped returns. In addition, the FTSE 100 outperformance has helped our defined returns plans, two of which have kicked out this year already.

Hedging the risk Away from equities, some of our other positions have worked out very well. In particular, we have generally reduced bond exposure in the face of rising rates and inflation and instead increased our exposure to ‘real assets.’ Chart three shows the returns of our property (blue) and infrastructure (red) portfolios over the last 12 months, compared to UK gilts (green). Traditionally, government bonds have been seen as the best way to hedge equity exposure in a multiasset portfolio. Often, they go up when equities go down.

A - S&P Composite 1500 Information Technology (14.38%) B - FTSE World Ex US Technology (-6.90%) Source: FE Analytics, total return in local currency C - Russell 2000 Technology Industry (-11.93%) 05/04/2021 - 05/04/2022

However, these bonds tend to do poorly when interest rates rise. Each bond pays a fixed level of interest, which looks less attractive as the rates available on cash go up. The

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yield on the bond needs to go up and the only way that happens is the price must go down. Gilts have therefore lost 5.69% over the last 12 months. Meanwhile, both infrastructure and property can actually benefit from higher inflation and have therefore gone up by over 9% and 13% respectively. We have deliberately targeted areas where incomes are directly or indirectly linked to inflation. For example, properties where rents are CPI or RPI (Retail Prices Index) linked, or solar/wind farms, where rising electricity prices can help boost returns. These assets are more correlated to equities than fixed interest and so allocating to such funds does somewhat increase volatility. You can see from chart three that both fell in the early months of 2022, at the same time as equities fell. However, interestingly, you can see that gilts also fell but did not bounce in the same way that real assets did. Gilts offered little protection from equity losses. We have for some time been seeking alternative ways to hedge our equity risk. One alternative strategy which historically has been negatively correlated to equity returns, is volatility. The best-known volatility index is known as the VIX (CBOE Volatility Index) which is calculated using the pricing of equity market derivatives known as options.

When the market is more volatile the VIX will rise. Volatility tends to increase during sharp falls in the market, which means that the VIX tends to go up when the market goes down. However, you can also lose a lot of money tracking the VIX when equities are rising, as volatility tends to go down in that scenario. Buying a VIX index tracker, for example, is a very risky thing to do.

We have deliberately targeted areas where incomes are directly or indirectly linked to inflation.” We instead invest in volatility via the THEAM Dynamic Volatility Carry fund, which aims to profit when volatility increases but doesn’t lose too much money when volatility decreases. So far in 2022 the THEAM fund has made 2.56%, whilst the S&P 500, which is designed to hedge, has fallen, as have the usual asset investment used to hedge equity risk, the government bonds. Holding this fund not only gave us some positive returns when equities were falling, but we were then able to take some of these gains out and recycle the capital back into equities at recent lows.

Chart three: Property, Infrastructure & Fixed Interest performance

Defined returns One other asset class we like to use to provide equity-like returns with some protection, is what we call defined returns products. These are also known as ‘autocall’ structured products. The products promise to pay a pre-defined return provided the market does not go down over the life of the product. For example, on 1 February 2022 we invested into a new defined return product from Credit Agricole, which is based on both the FTSE 100 and the S&P 500 index. On that date, the FTSE 100 was at 7,536 and the S&P 500 was at 4,547. If both these indices are at or above these levels on the first anniversary of the product’s inception, it will kick out and give us a 10.95% return. However, should one or both indices be below these levels it won’t kick out, but instead will roll on to the next anniversary. If the markets are then above the starting levels, we will get a return of 10.95% x 2 = 21.9%. If not, the product rolls onto the third year when we get 10.95% x 3 and so on, up to a maximum of six years. If we get to the end of the term and the product has never been above the start levels, then we just get our money back. The only time we lose money is if either index is down by more than 40% over six years, in which case we lose money in direct proportion to the fall in that index. We think this is very attractive for a number of reasons. Whilst we believe equities will still provide some decent long-term returns, our best guess is that they will be lower than 10.95% p.a. We also don’t require a strong market to get this return – it only needs to go sideways. We think a partly capital-protected product with such an attractive return makes perfect sense in this environment.

A - Equilibrium Infrastructure Portfolio (13.77%) B - Equilibrium Property Portfolio (9.31%) C - FTSE Actuaries UK Conventional Gilts (-5.69%)

Source: FE Analytics, total return in local currency 01/04/2021 - 05/04/2022

The Credit Agricole investment was funded by the kick out of a previous defined return (from BNP

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Paribas, which kicked out on its second anniversary on 31 January 2022), providing a return of 22.1% over the life of the holding. The BNP Paribas defined return was based on the FTSE 100, which returned only 9.62% over the same period, including dividends. The investment therefore returned more than double the index. However, these products are not without risk. In particular, they can be volatile when close to a potential kickout date, especially if the market is close to the ‘strike level.’ As well as having some very positive results, we have had a couple of instances recently where the product has just missed kick out, with the index dropping below the strike level on the anniversary date, only to be above it in the following days. Whilst this is frustrating and also leads to short-term losses, in some ways we can view this as a positive. It simply means that the product rolls on for another year and the potential return therefore increases.

Managing portfolios through volatility Throughout the volatile markets so far this year, we have made a succession of changes to portfolios. We can divide these actions into ‘attacking’ trades, where we are using volatility to buy assets that have fallen and ‘defensive’ trades, where we aim to mitigate short-term losses.

As mentioned earlier, we must accept the limits of our forecasting ability when times are so uncertain. However, where there is an asset that we already thought looked attractive and we get an opportunity to buy at a cheaper price, we think this is a sensible thing to do. Table three shows the ‘attacking’ changes we have made to portfolios since the beginning of February. These have all made gains since we carried them out, to varying degrees. Whilst individually the changes were all small, by making lots of small improvements consistently over time, we think this could add up to some big differences over the long term. As well as these changes aiming to boost returns, we made a succession of changes to reduce downside risk in the non-equity part of the portfolio. Firstly, we reduced fixed interest (bond) exposure and increased cash weightings. We did this by reducing exposure to the highest risk companies, known as high-yield corporate bonds, which can be sensitive to an economic downturn. In addition, we made further improvements to the credit risk of our fixed interest portfolio, by switching from corporate bonds and into government bonds.

As these bonds have fallen in price, their yields have gone up. When the UK gilt reached a 1.5% yield and the US bond reached a 2% yield, we decided this was a good time to start to increase exposure. That is not to say that these yields mean we expect a stunningly good return. However, these bonds are beginning to look less expensive and reflect what we think is realistic in terms of future interest rate increases. The bond market is currently pricing in that the US Federal Reserve will increase rates from the current 0.25% to potentially 2.25% this time next year. Here in the UK, the market thinks rates will get to perhaps as high as 2%. Whilst this is certainly possible, in our view, there is a greater likelihood of fewer hikes, rather than more. If the economy does take a turn for the worse, then it would be a brave central bank to continue putting up rates! Of course, hopefully the economy remains resilient but even then, we don’t believe the banks can hike rates ‘more’ than is currently in the price. Whilst government bonds do usually perform poorly when rates go up, should they go up less than the market has already priced in, they would actually be more likely to rally in our view. We also know that these bonds have very defensive characteristics, and should there be a further escalation in hostilities in Ukraine for example, then they would likely go up in value.

A lack of interest… A year ago, the yield on a 10-year gilt was around 0.75%, whilst the yield on a 10-year US government bond was around 1.75%.

Table three: Taking advantage of volatility Date

Fund or asset class

Approx. % of the Balanced fund

Approx. return to 5 April 2022

1 Feb 2022

New Credit Agricole Defined Return

1.00%

0.00%

23 Feb 2022

Purchase US tech & private equity

0.50% 0.50%

15.63% 6.01%

25 Feb 2022

Purchase US tracker

0.50%

3.06%

4 Mar 2022

Purchase REITs UK Dynamic Emerging Markets FTSE 100 (1%)

0.50% 0.25% 0.25% 1.00%

11.42% 5.25% 6.03% 5.20% (switched to infra 21/3)

7 Mar 2022

Top up infrastructure

0.50%

5.02%

10 Mar 2022

Top up REITs & infrastructure

0.50% 0.50%

5.31% 5.45%

TOTAL

6.0% Source: FE Analytics / Equilibrium Investment Management. Based on end of day prices - some figures are approximate where they were purchased intra-day

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by making lots of small improvements consistently over time, we think this could add up to some big differences over the long term.” We have only added a few percent in each bond, but if yields continue to increase, we expect to add further exposure, as they begin to look better value.

Valuation and outlook In order to determine how much we should invest in each region or sector, we like to look at long-term expected returns and valuation. In most asset classes we invest in, there are indicators which historically have been a decent guide to future returns. For

example, in the bond market, the yield gives you some idea of the potential return of that bond. In equities, we look at indicators such as the price/earnings ratio and various other metrics comparing the market’s price with underlying profits or other indicators. We combine all these metrics together and use this to calculate a valuation score for each region. This helps tell us how much we should allocate to each region over the longer term.

Chart four: UK composite vs 10 year returns over cash Current valuation

Over long time periods such as 10 years, these valuations have historically been a very good guide to future returns. For example, chart four shows our UK equity valuation score, compared to the returns over the subsequent 10 years (relative to returns on cash). Each dot on the chart represents a different 10-year period, and the higher the dot is on the chart the higher the returns. The horizontal axis shows how cheap or expensive the market was at the beginning of that 10-year period. There is a strong relationship from top left to bottom right, where periods when the market was cheaper led to strong returns.

Higher return

The correlation is very strong. For those who are familiar with statistics, it has an r2 of 0.81 (where 1 would be perfect correlation) – another way of saying this is that there is an 81% correlation between our indicator and 10-year returns.

More expensive

Source: Equilibrium Investment Management / Refinitiv Datastream

Chart five: US composite vs 10 year returns over cash Current valuation

Chart five shows the same but for the US market. Here the correlation is even stronger, with an r2 of 0.89 (89% correlation). The red line on each chart shows the latest valuation. When we’ve been in similar periods in the past, UK stocks have returned between 4% and 8% more than cash over the next decade.

Higher return

However, in past instances when the US has been as expensive as this, returns have been roughly in line with cash returns over the next 10 years.

More expensive

Source: Equilibrium Investment Management / Refinitiv Datastream

If we are to believe central banks, then perhaps cash returns might average around 2%, giving expected returns of low single

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digit for US stocks, and perhaps as high as 10% p.a. for UK stocks.

one or two years, there is almost no correlation.

Many people might look at the past outperformance of US stocks and extrapolate this into the future – they believe because it has outperformed in the past, it will in the future.

As the great investor Benjamin Graham once said: “In the short run, the market is a voting machine but in the long run it is a weighing machine.” In the short term, markets can be irrational and overshoot both on the way up and on the way down. However, over the long term, the fundamentals such as valuation and growth, are what drives returns.

higher shortterm inflation can actually make lower future inflation more likely” However, we try to look forward rather than backwards. Because US stocks have done so well, they are now relatively expensive and therefore their future expected return is lower. As a result of this, we continue to hold less in the US market than most other funds and more in the UK. Many funds will hold more than half of their assets in the US market, as it is where the world’s largest companies are based. We believe this is a dangerous thing to do and prefer to diversify across other regions where they are not so expensive. However, it is important to note that whilst the 10-year correlations between valuation and return are very strong, over short periods like

If petrol prices were to ease somewhat from current levels, then this could be deflationary over the next 12 months.

We will always take a long-term view based on fundamentals, rather than manage based on short-term sentiment.

We still believe high inflation looks likely to be a short-term phenomenon rather than the start of a long-term trend, but clearly the longer it persists the more damage it can have.

Real return is really difficult!

So, are our long-term inflation + 4% to 5.5% p.a. targets still achievable?

We started this section by saying that our real return targets, ranging from 4% for the cautious fund to 5.5% above inflation for the adventurous fund, are deliberately challenging.

We think they are, but it will certainly be very difficult. However, they are 10-year targets rather than targets for each year individually.

Chart six shows the latest inflation forecast from the Bank of England. At the time this forecast was produced, they believed inflation could get to 7% later this year. Since then, it has indeed increased to 7% and some people believe it could rise further. However, it is also important to point out that the Bank believes inflation will then drop back and will actually be below their target level of 2% in 2023. In fact, higher short-term inflation can actually make lower future

Chart six: Bank of England inflation forecast

Source: Bank of England Monetary Policy Report, February 2022

inflation more likely. Inflation is always calculated using prices from one year to the next. If we have temporarily higher petrol prices for example, this pushes up inflation today, but it also means that inflation in a year’s time will be calculated using this new higher ‘base level.’

It is also worth remembering that they are a target rather than a promise. We think setting challenging but realistic targets make sense and even if we undershoot slightly, we will still hopefully have achieved a very positive real return. It is important to state that we only take the amount of risk that is appropriate for each of the portfolios. We will not risk greater losses in order to chase higher long-term returns. We will continue to review our target returns, considering what we think are realistic future returns, and inflation. We will be open and honest if we think they are no longer achievable within an appropriate level of risk.

Past performance is not a guide to future performance. Investments will fall as well as rise.

EQUINOX | SECTOR PERFORMANCE & ANALYSIS

Sector performance & analysis UK equities As mentioned earlier, within our portfolios we like to have a relatively high weighting to smaller companies. This is particularly the case with our UK equities, with the UK market having a very mature and deep pool of smaller firms. Most of our UK equity funds therefore have a small or mid-cap bias, which also partly reflects the fact that we have lots of FTSE 100 exposure via the defined returns plans (our balanced portfolio currently holds around 11% in defined returns). We therefore don’t feel we need our equity funds to hold too much in the top 100 shares.

Global established equities

This means our UK equity funds have had a tough time recently, with smaller companies underperforming the large cap, commodity-related stocks in the FTSE. Table four shows the returns of the funds we hold, with all of them underperforming the relevant benchmarks over six months and one year.

In global equities, we have very much seen a period where the US has stood out. For example, as can be seen in table five, over twelve months the average North American fund was up by over 15%, whilst the average European equity fund gained less than 4% and Japanese equities lost money.

However, we can also see from the table that despite this weak recent run of returns, all of the funds have significantly outperformed over three years.

However, as mentioned earlier, within the US market it was very much a small sub-set which outperformed. Whilst large caps did well, smaller companies, especially in the technology space, performed poorly.

We believe the long-term growth potential of these funds remains attractive and we do not plan to change our approach in the short term.

Table four: UK equity fund performance 6 months %

1 year %

3 year %

Premier Miton UK Multi Cap Income

-3.80

1.37

29.95

Equilibrium UK Conservative Equity

-3.80

1.37

16.51

4.19

10.65

13.30

FP Octopus UK Micro Cap Growth

-14.08

-10.65

55.46

Liontrust Special Situations

-3.65

5.14

20.18

Premier Miton UK Value Opportunities

-12.16

-5.61

30.91

Equilibrium UK Dynamic Portfolio

-9.58

-1.42

21.99

-0.95

5.86

14.81

UT UK Equity Income

UT UK All Companies

Source: FE Analytics, total return in sterling, to 5 April 2022. Numbers are in green where they are ahead of the benchmark shown

Table five: Global equity fund performance

Baillie Gifford American L&G US Equity (Responsible Exclusions) UCITS ETF

6 months %

1 year %

3 year %

-23.25

-21.07

82.74

7.49

18.88

Not held

Sector: UT North America

6.68

15.71

56.58

Baillie Gifford Japanese

-6.61

-7.58

19.93

Sector: UT Japan

-6.32

-4.73

17.33

Premier Miton European Opportunities

-8.78

-0.19

61.62

Sector: UT Europe Excluding UK

-3.13

3.68

28.40

Morgan Stanley Global Brands

6.36

16.03

Not held

Schroder Global Recovery

2.10

8.41

Not held

Equilibrium Global Established Portfolio

-3.13

1.04

40.46

Sector: Global sector

1.10

7.39

37.79

Source: FE Analytics, total return in sterling, to 5 April 2022. Numbers are in green where they are ahead of the benchmark shown

EQUINOX | SECTOR PERFORMANCE & ANALYSIS

This means that, whilst our L&G US tracker fund outperformed, our Baillie Gifford American fund was by far the worst performing of our established market funds over six and twelve months, although it remains well ahead of sector over three years. Our European and Japanese fund selections also struggled against their benchmarks in the short term but remain impressive performers over the long term. More positively, our two global funds from Morgan Stanley and Schroders, both outperformed the average global fund over six and twelve months.

Emerging market equities Global emerging markets was a particularly difficult place to be invested in recent times, with our Global Speculative portfolio falling by 10.81% over 12 months. The exception was India, where our fund increased by 27.51%, even greater than the returns from the US market. Chinese stocks fared particularly badly, especially the large technology stocks like Tencent and Alibaba. The Invesco China fund held a high proportion in such stocks and was hit particularly hard - falling 30.67% - as the Chinese authorities cracked down on these big monopolies.

We have recently re-positioned our global speculative portfolio to reduce exposure to China, after a partial rally in such stocks and we have now sold the Invesco fund.

Non-equity asset classes We’ve covered the issues affecting bond markets comprehensively elsewhere. Chart seven shows our fixed interest (green), alternative equity (orange), and property (light blue) portfolios over the past 12 months, compared to gilts (dark blue). Whilst our fixed interest portfolio lost money over this period, it was significantly less volatile than gilts. As mentioned, we hold less in fixed interest than usual, and more in alternative equity (which includes infrastructure as well as absolute return funds) and property. Chart seven shows how these assets have done far better than fixed interest over the period. The question we have to ask ourselves is: “After such a sharp sell-off in bonds, are they starting to look more attractive again?” We think so, but are wary about moving back into the asset class in too big a way, too soon.

AIM portfolio The AIM market has been one of the hardest hit equity sectors and

Chart seven: Property, Alternatives & Fixed Interest performance

the FTSE AIM Allshare index has fallen by 12.87% over six months. Partly, this came as analysts have pared back profit forecasts that had originally factored in a strong recovery as the economy emerged from the pandemic lockdowns. Within the AIM Index, by far the best performing companies have been those involved in energy and commodities, which combined, comprise around a fifth of the market. Many of these companies don’t qualify for Business Relief and so are not held by us. As such, the returns from the portfolio have been slightly lower than the index over six months at -15.46%. Nevertheless, the recent spate of company updates and results give us heart. In such difficult circumstances, many companies are able to pass on higher costs in higher prices or make savings to preserve profitability. Some companies, such as Smart Metering Systems, have contracted revenues directly linked to rates of inflation whilst others, such as digital games services company Keywords Studios and confectionary producer Hotel Chocolat, have sought-after products and services that confer pricing ability. Having successfully survived the pandemic hiatus, we believe the portfolio companies can continue their path to recovery despite the many macro-economic and geopolitical headwinds. The tables below shows the five top and bottom performing stocks in the portfolio over the past six months: Top stocks by total returns 30.0%

Next Fifteen Comm.

18.8%

Alliance Pharma

8.6%

Hotel Chocolat Group

8.6%

Thorpe (FW)

6.9%

Yougov

Bottom stocks by total returns

A - Property (9.31%) B - Alternative Equity (8.82%) C - Fixed Interest (-4.35%) D - FTSE Actuaries UK Conventional Gilts (-5.69%)

Source: FE Analytics, total return in sterling 05/04/2021 - 05/04/2022

-83.2%

IG Design Group

-64.8%

Dotdigital Group

-43.5%

AB Dynamics

-40.2%

RWS Holdings

-35.9%

Strix Group

EQUINOX | STATISTICS

Model portfolio returns Below is the performance of our Cautious Portfolio, Balanced Portfolio, Adventurous Portfolio Global Equity Portfolio and Defensive Portfolio. Cautious Portfolio

6 months %

1 year %

3 years %

5 years %

10 years %

Since launch* %

Cautious Portfolio

-1.02

2.25

12.77

21.32

78.51

114.72

Mixed Asset 20-60% Shares Sector

-0.30

3.30

14.14

19.44

63.59

77.38

6 months %

1 year %

3 years %

5 years %

10 years %

Since launch* %

Balanced Portfolio

-1.74

2.30

14.70

24.39

89.67

126.05

Mixed Asset 20-60% Shares Sector

-0.30

3.30

14.14

19.44

63.59

77.38

6 months %

1 year %

3 years %

5 years %

10 years %

Since launch* %

Adventurous Portfolio

-2.52

2.52

19.93

32.07

109.05

145.90

Mixed Asset 20-60% Shares Sector

-0.30

3.30

14.14

19.44

63.59

77.38

6 months %

1 year %

3 years %

5 years %

10 years %

Since launch* %

-4.88

1.33

1.10

7.39

6 months %

1 year %

Defensive Portfolio

-1.59

-0.01

IA Global Bonds Sector

-3.64

-2.22

Balanced Portfolio

Adventurous Portfolio

Global Equity Portfolio Global Equity Portfolio IA Global Sector Defensive Portfolio

Data not available

3 years %

5 years %

10 years %

Since launch* %

Data not available

We also show returns compared to the Asset Risk Consultants indices made up of other discretionary managers’ portfolio returns. These are shown in the table below and are given to 31 March 2022 as ARC indices are published on a monthly basis: 6 months %

1 year %

3 years %

5 years %

10 years %

Since launch* %

Cautious Portfolio

-1.69

2.25

13.67

21.47

77.65

114.32

ARC Sterling Cautious PCI

-0.99

1.82

10.76

13.39

38.5

56.14

Balanced Portfolio

-2.40

2.21

15.84

24.56

88.45

125.48

Adventurous Portfolio

-3.44

2.52

21.70

32.45

107.92

145.30

ARC Sterling Balanced PCI

-1.00

3.63

15.50

19.88

60.45

76.26

Global Equity Portfolio

-5.75

1.66

ARC Sterling Steady Growth

-0.97

5.13

Model Portfolio

Data not available

Note: performance shown is after a 0.5% investment management fee with no adjustment for financial planning or platform charges * Launch date 1 January 2008. All data to 5 April 2022. Figures are highlighted in green where they are in excess of the relevant sector.

EQUINOX | STATISTICS

Sector portfolio returns 6 months %

1 year %

3 years %

5 years %

10 years %

-3.80

1.37

16.51

22.99

112.87

UT UK Equity Income Sector

4.19

10.65

13.30

19.89

98.64

UK Dynamic

-9.58

-1.42

21.99

37.51

164.94

UT UK Equity All Companies Sector

-0.95

5.86

14.81

24.33

103.01

Global Established

-3.13

1.04

40.46

60.38

234.99

1.10

7.39

37.79

56.33

168.35

Global Speculative

-8.22

-10.81

16.95

43.64

112.46

UT Global Emerging Mkts Sector

-4.27

-7.54

14.62

26.42

70.76

Equilibrium AIM **

-15.46

-4.88

18.68

33.00

292.69

FTSE AIM All Share

-12.87

-11.81

18.18

20.25

51.79

Alternative Equity

3.90

8.82

12.15

20.41

72.11

UT Mixed Asset 20-60% Shares

-0.30

3.30

14.14

19.44

63.59

7.07

9.31

8.38

16.22

60.02

7.04

11.96

6.82

15.53

44.30

Fixed Interest Portfolio

-5.49

-4.35

13.68

20.80

60.53

UT Sterling Corp Bond Sector

-5.13

-4.29

5.62

10.00

47.35

Equity Portfolios UK Conservative Equity

Global Established Benchmark

Property Portfolio Composite Property Benchmark

* ** ***

***

Global Established Benchmark is 40% UT North America, 40% UT Europe Ex UK, 20% Japan. Performance data prior to 17 March 2015 (launch date) is calculated using the backtested model portfolio. Composite Property Benchmark is an equal weighting of all eligible funds in the UT Property Sector. Property portfolio switched to cash 15 June 2012 to 11 April 2013 as we did not hold property funds in this period.

Figures are highlighted in green where they are in excess of the relevant ‘Mixed Asset’ sector.

EQUINOX | STATISTICS

Market returns 6 Months %

1 Year %

3 Years %

5 Years %

10 Years %

FTSE 100 Index (UK)

9.31

17.15

14.19

26.11

94.67

FTSE 250 Index (UK Mid Cap)

-5.20

0.35

16.98

26.71

143.06

FTSE AIM All-Share

-12.87

-11.81

18.18

20.25

51.79

S&P 500 Index (USA)

8.57

18.58

60.62

94.70

347.98

MSCI Europe Ex UK Index

-1.17

5.71

26.58

37.44

149.33

Topix (Japan)

-5.01

-5.25

14.26

22.33

127.33

MSCI Emerging Markets Index

-1.68

-6.07

13.70

27.89

71.51

Equity Markets

Fixed Interest FTSE Actuaries UK Conventional Gilts All Stocks

-4.34

-5.69

-0.48

2.34

31.52

UT Sterling Corporate Bond Sector

-5.13

-4.29

5.62

10.00

47.35

UT Sterling High Yield Sector

-3.64

-1.34

10.85

18.05

57.12

Bank of England Base Rate

0.15

0.20

1.01

2.05

4.45

UK Consumer Price

3.02

5.85

8.22

12.98

21.38

Other Measures

* Property benchmark is a composite of all eligible funds in the UT Property sector.

Risk warnings and notes Past performance is never a guide to future performance. Investments will fall as well as rise. Any performance targets shown are what we believe are realistic long-term returns. They are never guaranteed.

• Your own performance may vary from the model due to dividend pay dates, transaction dates, contributions and withdrawals.

Unless stated otherwise:

• Actual performance may also differ slightly due to constraints over how we can reflect fees and discounts from fund managers. These are assumed not to change over the whole investment period. In reality, discount levels change as we change the funds in which we invest.

• All performance statistics are from Financial Express Analytics on a bid-bid basis with income reinvested.

• Individual sector portfolios are shown with no charges taken off or fund manager discounts applied.

• All performance data is to 5 April 2022.

For details of your own portfolio performance, please refer to your half-yearly statement from the wrap platform in which you are invested. We will also provide personalised performance information at your regular reviews.

None of the information in this document constitutes a recommendation. Please contact your adviser before taking any action.

• Model portfolio performance is stated after a 0.5% investment management fee with no adjustment for financial planning or platform charge.

EQUINOX | STATISTICS

Current holdings of the Balanced Fund Asset class

Fund name

Cash & Money Market Short Dated Fixed Interest

Fixed Interest

Property

Alternative Equity

Defined Returns

6.99 Royal London Short Duration High Yield

0.96

Allianz Strategic Bond

3.07

Nomura Global Dynamic Bond

2.51

Royal London Extra Yield Bond

1.00

TwentyFour Dynamic Bond

4.51

Muzinich Asia Credit Opportunities

1.74

Waverton Sterling Bond

1.74

iShares $ Treasury Bond 7-10 Yrs ETF

1.99

iShares UK Gilts ETF

1.97

Time Commercial Long Income

1.01

Supermarket REIT

1.02

Primary Healthcare Properties

0.58

Segro

0.76

Civitas

0.54

Target Healthcare

0.55

Tritax Big Box

0.70

Carmignac Long Short European Equity

2.51

Foresight UK Infrastructure Income

4.61

Lazard Rathmore Alternative

4.00

Blackrock European Absolute Alpha

2.53

ClearBridge Global Infrastructure Income

4.61

Man GLG Absolute Value

1.38

Foresight Sustainable Forestry Co

0.98

BNP Dynamic Volatility Carry

4.00

Societe Generale FTSE Autocall Dec 2017

2.84

JPM FTSE Autocall September 2018

2.73

Atlantic House Defined Returns

0.52

Credit Suisse FTSE/S&P Autocall Jan 2018

2.31

Morgan Stanley FTSE/S&P Autocall Mar 2019

1.07

Credit Agricole FTSE/S&P Autocall Feb 2022 Equity - UK Conservative Equity Equity - UK Dynamic

Equity - Global Established

Equity - Global Speculative

Equity - Private Equity

% held

1.17

Miton UK Multi Cap Income

3.30

Miton UK Value Opportunities

3.96

Octopus UK Micro Cap Growth

2.04

Liontrust Special Situations

3.29

Baillie Gifford Japanese Co.

1.97

Miton European Opportunities

1.93

L&G US Equity Responsible Exclusions ETF

1.43

Baillie Gifford American

0.93

Morgan Stanley Global Brands

2.34

Schroder Global Recovery

2.46

Royal London Global Equity Select

2.49

Goldman Sachs India

1.13

Hermes GEM SMID

1.22

Baillie Gifford EM Leading Companies

1.69

Allianz China A-Shares

1.44

Merian Chrysalis Inv Co.

0.40

HG Capital Trust

1.07

These are the holdings in the IFSL Equilibrium Balanced Portfolio as of 5 April 2022. These will change periodically and have not all been held throughout the period covered by this document.

Welcome to the end... ...and the beginning This is the end of our Spring Equinox, although we hope it’s just the beginning of your lifetime financial plan. For those new to us, we’re pleased to share our ‘Hello’ brochure where you can get to know us a little better. If you’re already a client with us, you’ll know our aim is to make people’s lives better, so why not pass this edition to your friends and say “hello” on our behalf?

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EQUINOX | SPRING 2022

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Equinox - Spring 2022

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Market returns

Sector portfolio returns

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Investing ideas, an eye on the future

Begin your legacy with a donor advised fund

Letters of love

Portugal peddlers

Donating matters

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Monochrome about money

What do you want your money for?