TITLE February 2016
For today’s discerning financial and investment professional
WHAT DOES THE CHINESE NEW YEAR BRING? FEBRUARY 2016
Strategising Your Exit
Structured Products for I FAmagazine.comthe Risk Averse
ISSUE 45
The Three Tenors of the High Yield Bond World 3
CONTE NTS February 2016
3
CONTRI BUTORS
Editor’s Welcome
5 Brian Tora
News
an Associate with investment managers J M Finn & Co.
14 Monkey Business
Lee Werrell a senior compliance consultant and industry adviser.
16 Cash Review: NS&I To Kick-Off Major New Adviser Survey
Richard Harvey a distinguished independent PR and media consultant.
18 And Now for Something Completely Different
Neil Martin has been covering the global financial markets for over 20 years.
21 Structured Products for the Risk Averse
Michelle McGagh brings a wealth of experience on industry developments.
24 Strategising Your Exit
27
Michael Wilson Editor in Chief editor ifamagazine.com
The Three Tenors of the High Yield Bond World
30
Sue Whitbread
Senior Management & Certification Regimes
Commissioning Editor sue.whitbread ifamagazine.com
38
Alex Sullivan
Could Passives Overturn the Applecart?
Publishing Director alex.sullivan ifamagazine.com
42 Don’t try and fool My Generation
IFA Magazine is published by IFA Magazine Publications Ltd, Loft 3, The Tobacco Factory, Raleigh Road, Bristol, BS3 1TF C
2016. All rights reserved
‘IFA Magazine’ is a trademark of IFA Magazine Publications Limited. No part of this publication may be reproduced or stored in any printed or electronic retrieval system without prior permission. All material has been carefully checked for accuracy, but no responsibility can be accepted for inaccuracies. Wherever appropriate, independent research and where necessary legal advice should be sought before acting on any information contained in this publication. IFA Magazine is for professional advisers only. Full details and eligibility at: www.ifamagazine.com
4
I FAmagazine.com
WE LCOM E February 2016
A Cold and Draughty Welcome Come back 2015, all is forgiven. As the financial world struggled back to its desks at the start of January, you could have excused it for wondering where the season of goodwill had vanished to? It wasn’t just that Santa had forgotten to leave a rally in front of the fireplace, despite a steady stream of letters posted up the chimney. The search for Wise Men in the East also appeared to have run into the sand, with Saudi Arabia and Iran at loggerheads and with China’s Shanghai Composite opening the year with a treble-trigger 15% drop, (And to think, the suspension trigger mechanism hadn’t even existed before January…) Elsewhere the dull thudding hangover persisted – not least in New York, where Janet Yellen’s early Fed rate rise was now looking decidedly optimistic in the face of slowing economic growth and a clear tend toward shrinking corporate profits – not a good thought for Barack Obama as he
I FAmagazine.com
surveyed the Democrats’ chances in next November’s presidential elections. Still, at least Mark Carney didn’t have that problem at the Bank of England, where the Board has practically given up on trying to offer ‘forward guidance’ about the relationship between economic growth and fiscal policy. A prescient step, as it turned out when the markets eventually opened. And For Advisers? Not, you might think, a good omen for encouraging clients to save more and get more involved with the financial markets during the incoming year. And yet 2016 is going to be an enormously important year for financial advisers. Firstly, because April marks the end of the first full year of pensions freedom – a poor piece of timing if ever there was one, because such a lot of clients have opted for drawdowns against the expectation that the capital value of their portfolios would remain broadly on their current course – which, of course, they haven’t. Many
of us will find ourselves working hard to put the brakes on their spending expectations, which won’t always be easy considering that neither income investments nor annuities are exactly looking their best at the moment. Secondly, because April is also going to be the month when the last elements of legacy trail commission disappear – leaving many firms wondering how best to value their own operations? And then there’s all that retraining still to do – it’s going well in most places, by all accounts, but the final leg of the push into RDR is still proving challenging for some of the old school. But thirdly because of the powerful opportunity which this tricky environment is providing for those advisers who have successfully refocused on ‘holistic’ services to their clients. The ability to steer, serve and generally ask all the right questions is the factor that will decide which of us will create new trust and client loyalty during this challenging year, and which will still be scratching their heads by the time December comes.
5
NTITLE EWS February 2016
Aviva Investors Boosts Senior Management Team Aviva Investors has made two senior hires. In comes David Clayton as Chief Financial Officer and Mike Craston joins as Global Head of Business Development. Both become part of Aviva Investors’ Executive Team and both will report to Euan Munro, CEO of Aviva Investors. Clayton will also report to Tom Stoddard, Group Chief Financial Officer of Aviva.
I FAmagazine.com
Aviva Investors is the global asset management business of Aviva plc. Clayton has over 30 years’ experience in the financial sector and has held senior roles at Standard Life and PwC. Craston moves from Legal & General Investment Management. Munro said: “I am delighted with the additions of David and Mike to our Executive Team. While the business has made considerable progress
in the past couple of years, we are just getting started in terms of realising Aviva Investors’ long term potential. Our goal is to be the global leader in outcome-oriented solutions, and to that end we plan to build on the successful launch of our AIMS multistrategy funds with further products that aim to meet the objectives of today’s investor. I have every confidence that David and Mike will play a critical role in helping us achieve our ambitions.”
7
NTITLE EWS February 2016
Trade Body Publishes Response To H M Treasury The trade body for financial advisers has published its response to HM Treasury’s Public Financial Guidance Consultation. The Association of Professional Financial Advisers (APFA) says that the provision of public financial guidance should be rationalised by merging the three entities of Pension Wise, MAS and TPAS into one body. This, says APFA, would bring clarity and consistency for consumers, and also generate efficiencies and cost-effectiveness. It is also calling for a clearer referral system to regulated financial advice, so that consumers who need further help can be catered for. It also said that there
8
should be a reduction in the cost of advice, so that it becomes affordable for a greater number of people. What’s more, duplication of services should be reduced and the statutory provision should solely aim to fill the gaps in the market that cannot be catered for by the private sector. Chris Hannant, Director General of APFA, said: “There is a growing confusion around financial guidance that needs addressing. We believe that the organisations providing public financial guidance should be merged and the resulting entity needs to work better with other providers of information, guidance and advice in educating
consumers regarding the options available to them. “At the moment, the public financial guidance provision is fragmented and low public awareness could in part be caused by the existence of multiple entities and confusion around what they all do”. “Public financial guidance should have a triage approach, channelling consumers towards the level of guidance or advice that they need and can afford. It should also ensure that it delivers good value for money by not duplicating services.”
I FAmagazine.com
NTITLE EWS February 2016
Most Financial Advisers Apprehensive About Future Workplace Changes
New research reveals that some 88% of financial advisers are apprehensive about future changes in their workplace. Particularly, they are worried about business planning, performance management, technology and a diverse workforce. The findings come from a new report called ‘A Future That Works’ from BrightHR. It has put together a team of experts which have devised five top tips to help advisers cope with 2016 and beyond. The tips are: 1. Embrace technology (work with technology as opposed to against it). The report said: “Financial advisers must have the confidence to disrupt their business models through use of technology — this could be through automated HR systems or performance monitoring systems. Having employees within the business who understand these systems and are digitally skilled will be one of the key drivers for success within the industry”. 2. Keep compliant (an everyday concern for firms).
I FAmagazine.com
“For Financial advisers who work alongside their clients regularly, keeping up to date with changes in the workplace can be of mutual benefit whilst also improving business relationships”. 3. Processes and productivity (big problem is organisational complexity). “Financial advisers can take this on board, by looking at the processes they have in place and making time to simplify them. Intuitive technology that simplifies the context of work and reduces the amount of time wasted on administration is essential”. 4. Diversified workforce (working smoothly together is essential). “By 2020, 36 per cent of the UK working population will be aged over 50, and by 2028 a quarter of UK employees could be working until they are 70. The difference between the two generations will become increasingly apparent within the workplace unless businesses make a conscious effort to integrate the two. Businesses can harness the needs of both workers by sharing the skill set between
them, for example using the younger generation to share digital skills”. 5. Recruit and harness talent (some middle skills roles in decline). “A straightforward career path has become a thing of the past, leaving both companies and employees with a need to creatively think about how to address this”. Companies, including financial advisers can navigate this by considering adapting progression models based on promotion with ones based on learning and development which allows employees to enhance and renew their skills.”
9
NTITLE EWS February 2016
New online advice business aims to revolutionise investment advice A new online advice business has been launched. Called eVestor, the founders are Anthony Morrow, founding shareholder of IFA group Paradigm, and Duncan Cameron, Co-founder of Moneysupermarket.com. eVestor will be based in Wilmslow, Cheshire, and is scheduled to go live next year. It will target the next generation of savers, with a package that hopes to combine market-leading technology, an effortless user experience and seamlessly integrated regulated advice. The idea, says the company, is to make investing more accessible and affordable for everyone in the UK. For users who want additional support, eVestor has on hand a team of professional advisers who can answer questions.
CEO of eVestor Anthony Morrow said: “eVestor was born out of the belief that the cost of investing, and the buying of financial products, is too expensive and complicated for the vast majority of people in this country. As a result, large swathes of the UK population have been put off saving and investing because they are either unable or unwilling to pay the high costs that come with traditional advice. “Investing money can be an expensive, stressful and bewildering experience; we believe we have created a solution that removes these barriers. “With eVestor, we are creating a proposition that will not overcharge clients. Instead, it will engage with them to provide a service which suits their needs. Using
technology as the enabler, we believe we can make investment decisions simpler while also reducing the cost. “We want to empower consumers to become increasingly comfortable when it comes to understanding and managing their investments, so education will also feature heavily in our ongoing service.” co-founder of MoneySuperMarket. com Duncan Cameron: “While I have come across many attractive business opportunities over the last decade, nothing has grabbed my interest and attention quite like eVestor. The proposition we are putting in place has the potential to revolutionise investment advice for the benefit of consumers in the UK.”
Fairstone Expands Teesside Office Fairstone Financial Management has expanded its Teesside office. The business, which was formerly known as Belasis IFA, has now moved into new premises in the heart of Darlington, from their previous base in Billingham. The Teesside office consists of six advisers and two administrative staff. The team is led by business principal Craig Dyball and IFA
10
Stewart Hodgson. The firm joined Fairstone Financial Management in 2012 under Fairstone’s Downstream Buyout Model. In 2013 it acquired Retirement Options Wearside and Retirement Options Durham. These specialised in bespoke financial advice for teachers. A year later, it also acquired Fergus MacKenzie & Co. The Teesside office now looks after around 1,500 clients across the Teesside,
County Durham and North Yorkshire areas. It advises on all areas of personal and corporate financial planning including investments, pensions, IHT planning, group pensions, auto enrolment, mortgages, group risk, succession planning and business protection. Business Principal at Fairstone Financial Management’s Darlington office Craig Dyball said:
I FAmagazine.com
NTITLE EWS February 2016
“Having outgrown our offices through the growth of the team and expanding client work, we took the strategic decision to move to Darlington. We have been impressed by the dynamic nature of Darlington and recent inward investment which has created jobs and a skilled workforce.” IFA Stewart Hodgson said: “With an eye on developing more business in the North Yorkshire area, a move to Darlington represented a sensible decision for the firm. With the continued support we receive from our parent, Fairstone, this promises to be a very exciting time for the company, especially as we look to further acquisition opportunities.” Chief Executive of Fairstone Group Lee Hartley said: “We are very pleased with the continued growth of the team in Teesside under the Fairstone umbrella. It is particularly gratifying to see the results that can be achieved when our partners take advantage of our Downstream Buyout
I FAmagazine.com
Model and of the financial and administrative support they can count on when they become part of the Fairstone family. “We are always keen to provide the help needed for our partner businesses to flourish, whether it be financial or administrative, and the success that the team in Darlington has achieved is something we would like to congratulate them on, and emulate throughout the Fairstone Group.” At Fairstone Financial Management’s Darlington office Craig Dyball said: “Having outgrown our offices through the growth of the team and expanding client work, we took the strategic decision to move to Darlington. We have been impressed by the dynamic nature of Darlington and recent inward investment which has created jobs and a skilled workforce.” IFA Stewart Hodgson said: “With an eye on developing more business in the North Yorkshire area, a move to Darlington represented a
sensible decision for the firm. With the continued support we receive from our parent, Fairstone, this promises to be a very exciting time for the company, especially as we look to further acquisition opportunities.” Chief Executive of Fairstone Group Lee Hartley said: “We are very pleased with the continued growth of the team in Teesside under the Fairstone umbrella. It is particularly gratifying to see the results that can be achieved when our partners take advantage of our Downstream Buyout Model and of the financial and administrative support they can count on when they become part of the Fairstone family. “We are always keen to provide the help needed for our partner businesses to flourish, whether it be financial or administrative, and the success that the team in Darlington has achieved is something we would like to congratulate them on, and emulate throughout the Fairstone Group”.
11
N EWS February 2016
Berkshire I FAs Formulate FAM R Response a great deal of effort to understand and explain. Far too much time is spent generating suitability reports, that the majority of clients do not read, often fear and certainly only file. Furthermore, that product information and documentation is far too lengthy, drowning the clients in order to ‘protect’ them; having confused them first. Simpler rules and regulation are needed along with simpler products.
A group of Berkshire IFAs who meet on a monthly basis to discuss issues effecting the industry, have formulated their Financial Advice Market Review (FAMR) response. The group looked at the five questions provided by the FCA on FAMR and provided each with a response. The group’s spokesperson is IFA Geoff Mason of Geoff Mason Associates. 1. The extent and causes of the advice gap for those people who do not have significant wealth or income The group noted that RDR has increased all associated
12
costs of advice, which has resulted in closure of advice channels and fewer advisers. However, interpretation of regulation was unclear creating known unknowns. Also, wealthier clients had until RDR subsidised advice to the less well off. The group also said that advice had until RDR been considered by those seeking it as ‘free’. And, mass affluent are now discouraged by the idea of having to pay fees and find it hard to value advice when the benefit of the advice may be years ahead. 2. The regulatory or other barriers firms may face in giving advice and how to overcome them. The group said that regulatory rules require
Other Points – Claims management firms who market alarming headlines, fail to assist the claimant with valid claims and instead creates an open ended liability. – The costs of an advice business are not known at the outset of the year. The FSCS can and do significantly increase costs and levies over which advisers have no control or influence. – Exiting firms reduce the pool from which these and levies may be requested and the cost therefore increases further, until there are no adviser businesses remaining. The funding of the FSCS needs a fundamental rethink. – Consumers often don’t know where to go to get financial advice, the regulator should have a clear register of advisers for consumers and what they do possibly linking to money advice register. – Clients don’t know the value of advice or what sort of
I FAmagazine.com
NTITLE EWS February 2016
advice they are looking for. 3. How to give firms the regulatory clarity and create the right environment for them to innovate and grow. As regards the media, the group said that they currently link financial advice firms with pension companies and the banks, and the bad news sticks to the wrong sector. The industry must try to educate the media. • Lower risk products and specify who/which type of client the products may be sold to, as overseen by independent due diligence provider. •Better guidance on insistent client versus best interest rules. Currently the rules put the adviser on an uneven playing field.
One adviser confirms inappropriate advice, another may have a different motivation and end up with a claim on the FSCS. • And, introduce a long stop on liabilities. 4. The opportunities and challenges presented by new and emerging technologies to provide cost effective, efficient and user friendly advice services. On the subject of robo advice, it has the potential to help fill the advice gap but consumers MUST not sign away their consumer protection rights. If its advice then the consumer must be protected, otherwise it isn’t advice, it is guidance. The Older generation may struggle with technology.
5. How to encourage a healthy demand for financial advice, including addressing barriers which put consumers off seeking advice. Here the group outlined five key thoughts: – increase financial education in schools. –boost publicity for the benefit of advice and the good news associated with planning. – bring back consumer choice as to how advice is paid for, either through product or a fee from the client. – simplify the products and the regulation. – promote transparency of the product for e.g. apply a guide like Total Expense Ratio (T.E.R.), similar to APR in the credit market.
Hartmoor Financial and Aldermore Bank combine to offer new structured products Hartmoor Financial, the trading name of Target Servicing, has launched its first structured products for UK retail investors. The products are available via financial intermediaries. Partnering Hartmoor in this new initiative is Aldermore Bank which will act as deposit taker. The first products, two deposit-based plans, are open for subscription from today. These are detailed in a Hartmoor announcement: FTSE 100 Kick Out Deposit Plan 1 – January 2016: A six-year plan, that offers the potential for maturity at the end of years three, four, five or six with a fixed return
14
of 4.25% per year, provided the FTSE100 closes at or above its Start Level on one of the Kick Out Dates. If the FTSE100 does not close at or above its start level on all of these dates, then the investor will receive back their initial deposit only. FTSE 100 Deposit Growth Plan 1 – January 2016: This is a six-year plan, that will pay a return of 31%, provided the FTSE100 closes at or above 90% of its start level at maturity. If the FTSE100 closes below 90% of its start level, then the investor will receive back their initial deposit only. Leading the initiative is Mike Newman: “We strongly feel that there is a need for an independent provider
which is focused on simple, well-researched product ideas and giving great customer service. Our goal is to design products that meet genuine customer needs and put the customer at the heart of everything we do. We look forward to offering the market something new, and are excited to have Aldermore as a strategic partner.” Target Servicing has over five years’ experience in the administration and servicing of structured products for a number of leading banks and product providers.
I FAmagazine.com
ACQUISITION AND SALES
O F I FA BUSINESSES Retirement? Time for a change? There are countless reasons to dispose of an IFA business, just as there are countless reasons to get hold of one.
WE A RE A SPECIA L I ST F I NANC IAL S A L E S , CO N S U LTA N CY A N D BR O KE R AGE B US I N ES S . Gunner & Co.’s mission is to work directly with you, whether you are looking to realise the capital in your business, or you are looking for growth through a merger or acquisition. We consider every business to be unique, and therefore finding the right solution for you starts with a thorough understanding of your business operations and your wish list. Only from here can we make valuable introductions which align to both party’s needs. If you would like to discuss options to sell, exit or retire, or acquire IFA businesses, please get in touch for a confidential discussion.
louise.jeffreys@gunnerandco.com
gunnerandco.com
BRIAN TORA February 2016
Monkey Business With the Year of the Red Fire Monkey starting on 8th February, Brian Tora takes a look at an unpredictable market The first trading week of 2016 brought a crashing end to any lingering hopes we might have had that the Chinese stock market could leave a relatively modest 2015 result behind them. In the space of just five days, the Shanghai exchange managed to trigger its newlyinstalled circuit-breaker three times – two total closures and one suspension. By the 12th January, when a halting stabilization seemed to have started, the Shanghai Composite was fully 15% down on its end-2015 position. What had brought the market to such a low point? A combination of global angst that focused not just on China but on other major economies, and a crashingly awful set of responses from the Shanghai authorities. What lies ahead now? To be honest, nobody seems very keen to chance his arm with a prediction. But Brian Tora is willing to give it a try.
peaking at over 5000 in the early spring of 2015. But that was as far as the good times went. Last summer’s June/July panic sent the index hurtling back down to below 3000, and the subsequent recovery was modest - and alas, too shortlived. That was when the 2016 crisis started. Last Year’s Rout Before we looking at what might happen in 2016, it’s still worth reflecting on the driving forces behind last year’s rise and subsequent fall in Chinese equities. After all, the writing had been already on the wall for economic growth before Shanghai peaked - momentum was fading, and it had eventually resulted in a comprehensive retrenchment of commodity
Michael Wilson. Editor in Chief In retrospect, it had all started rather well as we reached the summer and autumn of 2014. Having trundled along a little above the 2000 level for some months, the Shanghai Composite suddenly breached 2500 and then 3000 by the end of 2014 - eventually
16
prices that has shaken the world. It is hard not to take the cynics’ view and believe that the Beijing authorities had played more than a little part in driving shares higher during
early 2015. Plenty of state sell-offs were planned, and a burgeoning domestic investor base looked like a ready source of buyers for enterprises that were already familiar to them, but which were likely to be regarded with a greater deal of suspicion by foreign investors. Indeed, it is believed that the real victims of the reversal of fortunes for China’s stock market were those sucked in at the end of 2014 and early in 2015, who lost proper money. Red Monkeys Are: • Inquisitive and intelligent • Urban dwellers by inclination • Fond of practical jokes • Creative • Sometimes clumsy and insensitive • Not always trusted The trigger for last summer’s proper collapse was an unexpected devaluation of the Chinese currency. China watchers became concerned that things were even worse than had been previously painted (China had already scaled back officially its expectations for growth), and the panic quickly gathered pace. In an effort to stem the tide, the Chinese authorities restricted selling and cancelled a number of new issues.
I FAmagazine.com
BRIAN TORA February 2016
January 2016: A Catalogue of Clumsiness Unfortunately, Shanghai’s latest response to the stock market crisis hasn’t been the only sign of regulatory chaos we’ve seen. When last summer’s plunge happened, Beijing’s first action was to order the partially state-run banks to pump in a quarter of a trillion dollars’ worth of liquidity, apparently in an attempt to outrun the combined weight of the foreign markets. Unsurprisingly it didn’t work. If the authorities had been a little quicker to introduce a circuit-breaker in June 2015, they might have limited the damage. However, the circuitbreaker came in only on 4th January 2016, in two levels: • A 15 minute trading suspension if a one-day fall reached 5% • A full closure for the day if the drop reached 7%. It says everything that the circuit breaker was invoked three times in eight days. Meanwhile, in January 2016, Beijing hurriedly abandoned its attempts to impose a daily fix on the renminbi, after the currency dropped by an embarrassing 1% in ten minutes. Since the central bank had spent December shedding $108bn of China’s precious foreign currency reserves in an attempt to prop up the renminbi, it was now left looking ineffective and rather undignified. That wasn’t all. Shanghai also gave a startling series of mixed messages on whether or not it would end last June’s ban on sell-offs by large shareholders, which was supposed to have expired on 1st January. First it said it would, then it wouldn’t, then it would, and finally it wouldn’t. No wonder it lost the market’s trust.
I FAmagazine.com
Consumption Rises, Construction Flattens But, while conditions calmed, confidence had been undermined considerably and global markets started to factor in a worldwide economic slowdown that involved more than just China. As we reached the end of 2015, investors seemed more concerned with how the United States might handle its first effort of monetary tightening than about a less robust Chinese economy. Accounting for 15% of global GDP, China is hardly likely ever to be ignored; but right to the end of the year they were sticking to their forecasts of 7.5% growth - hardly peanuts for the developed world. While this target might indeed be achievable, it does demand a swift transition from an export, infrastructurespending economy to one that’s more consumer driven. Will it get one? The signs are mixed so far. Consumption is rising, but probably not swiftly enough to counter balance the slowdown in manufacturing and exports. More encouragingly, the service sector is growing strongly – something that China badly needs. But the
plain fact is that much of the major infrastructure expenditure, which kept China ahead of the economic game during the post financial crash period and led to high indebtedness, is now over. Future generations might reap the benefits, but the problems are closer to hand. Hopes for Tomorrow But China’s emergence as a consumer society with a wealthy and growing middle class is something that could tip the balance of prosperity for many countries. Will they achieve it? My hope is that they will – eventually. The problem is likely to be that the development of consumption is unlikely to take place sufficiently fast to replace a declining manufacturing base. They understand this, of course, which is why the devaluation of the renmimbi took place. Anyway, we may never know what really happens, as the figures they release are not necessarily reliable. Muddling through looks the most likely scenario, which may not be too bad for markets in the longer term. Brian Tora is an associate with investment managers, JM Finn & Co
17
ADVISETITLE R SU RVEYS February 2016
Cash Review: NS&I To Kick-Off Major New Adviser Survey National Savings and Investments (NS&I) is reaching out to IFAs via a major survey. It’s going to be called the Financial Advice Barometer. The idea is to gauge advisers’ opinions on the cash deposit market, building up a picture over time of advisers’ sentiment towards cash, how it is used within client portfolios, and views on the wider cash market. The initiative
YOUR CLIENTS WANT TO SPEND IT NOW AND SAVE IT FOR LATER.
is being driven by Andrew Pike, Head of Intermediary Relationships at NS&I. At the end of January, NS&I will approach a few thousand advisers via an online survey, asking for feedback on cash deposit market activity and latest topical issues. Chief amongst the latter will be the increasing use of roboadvisers, but future topics may include areas such as later life planning and pensions freedoms.
Gross Yield
4.9%
LET’S TALK HOW.
This advert is for investment professionals only, and should not be relied upon by private investors. The value of investments and the income from them can go down as well as up and clients may get back less than they invest. Source of performance: Morningstar as at 31.12.2015. Basis: bid-bid with net income reinvested. Launch date is 01.11.2007. Past performance is based on the A income (bundled) share class and is not a guide to the future. Peer group is the IA Mixed Investment 0-35% Shares sector. The fund’s target yield is between 4% and 6% p.a. on the capital invested. The yield is based on the Y income (clean) share class, is not guaranteed and will fluctuate in line with the yield available from the market over time. *Source: Morningstar Direct. Basis: bid-bid, net income reinvested at UK basic rate of tax to 31.12.2015. IA Primary share class shown. Universes defined as 10 best-selling funds to 30.11.2015 in the IA Mixed Investment 0-35% shares, Mixed Investment 20-60% shares, Mixed Investment 40-85% shares
ADVISE R SU RVEYS February 2016
The online survey will be carried out every quarter throughout 2016. The first data and analysis will be made available by NS&I sometime in the Spring. The organisation already successfully surveys the retail customer market for its Quarterly Savings Survey. NS&I is an Executive Agency of the Chancellor of the Exchequer and one of the UK’s largest savings organisations. It has some 25 million customers who have over £123 billion invested. The organisation’s aim is to help reduce the cost to the taxpayer of government borrowing. What’s more, because it is backed by HM Treasury, it is able to offer 100% security on every penny invested. Individuals can invest just over £4 million with NS&I. Official figures on the large amounts invested show that 4,000 of its customers have
at least £1 million invested; 400,000 at least £50,000 invested; and, 1.5 million have at least £25,000 invested. Pike admitted that one of the challenges at NS&I has been the level of service offered to financial advisers. Since its inception, NS&I has evolved as a direct-toconsumer organisation, and its processes and systems have been designed to primarily focus on the end customer. However, NS&I is rolling-out a significant modernisation programme, and many enhancements to NS&I’s adviser proposition are scheduled as part of this. When launched, NS&I hopes these enhancements will significantly improve the experience for advisers when they deal with NS&I. In the meantime, this new trade survey is part of a plan to reach out to the adviser community.
Pike, who’s been with NS&I for twelve years, said that their ambition was to: “..become ‘the’ market authority on the cash market.” He’s been Head of Intermediary Relationships for just over three years, roughly about the same time as the RDR and its outcome. During this period he says he has seen IFA firms become more professional and more holistic in their approach to their clients, something which he said should be welcomed by all those within the industry. NS&I is on a push to win the hearts and minds of the adviser community, with Pike at the vanguard, hopefully heralding more responsive services for advisers. Only time will tell if those hearts and minds are won over, but at least they won’t be slow in coming forward throughout 2016.
FIDELITY MULTI ASSET INCOME FUND While we can’t perform miracles, we can introduce you to our Multi Asset Income Fund. It aims to offer the Holy Grail of investing for your clients: sustainable income, as well as capital preservation. • Yielding 4.0% net or 4.9% gross in a SIPP or ISA • Distributes income monthly • Less volatile than the best-selling multi asset income funds* • Preserves capital through low levels of drawdown • Outperformed its sector over 3 and 5 years, and since launch. Let our co-managers Eugene Philalithis and Nick Peters, together with their award-winning team, show how your clients could achieve more with their money.
Go to fidelity.co.uk/mai
and Flexible Investment sectors where ‘income’ or ‘distribution’ was in the fund name. Funds in the IA Unclassified sector with a multi asset income remit were also included. The fund should only be considered as a long-term investment. As a result of the annual management charge for the income share class being taken from capital, the distributable income may be higher but the fund’s capital value may be eroded which will affect future performance. The investment policies of Fidelity multi asset funds mean they invest mainly in units in collective investments schemes. Investments should be made on the basis of the current prospectus, which is available along with the Key Investor Information Document, current and semi-annual reports free of charge on request by calling 0800 368 1732. Issued by FIL Investments International, authorised and regulated by the Financial Conduct Authority. Fidelity, Fidelity International, the Fidelity International logo and F symbol are trademarks of FIL Limited. UKM0116/8389/CSO7658/0416
I NVESTM E NT TITLE COM PAN I ES February 2016
And Now for Something Completely Different Investment Trust sales have been exploding since RDR. Alex Denny, Investment Trust Director at Fidelity International, explains Over the last few months there has been growing evidence that demand for Investment Trusts (or, more correctly, “investment companies”) amongst advisers has been growing. Figures recently published by the Association of Investment Companies (AIC) from Matrix Financial Clarity show that, prior to The Retail Distribution Review (RDR), purchases of investment companies from advisers using platforms were holding pretty steady at around £200 million per year. Since then, however, sales have tripled, with purchases approximately trebling to £600 million per year today. (Source: AIC, 30 September 2015.) It is easy to write-off this growth in demand as small fry when compared to the multibillion pound flows across the industry in open-ended funds. Yet there are a number of factors which have limited the growth in sales of investment trusts – with the supply side of the equation often failing to satisfy the growing demand. Getting to the Core This month, FundsNetwork became the first of the “big three” fund supermarkets to offer investment trusts as a core part of its fund range – on a level pegging with openended funds. While it is still early days, it seems likely that this increase in supply will lead to a direct impact on the volume of sales of investment trusts in the future. Indeed, it was thanks to the
20
support from FundsNetwork - and from several executiononly platforms, too - that the launch of Neil Woodford’s Patient Capital Trust (the first investment trust offered by the FundsNetwork platform) raised a magnificent £800 million – making it not just the largest new issue last year but also the largest UK-domiciled investment company launch ever. The company has since issued a further £30 million on the secondary market. Investment Company fundraising, overall, hit a record high of £5.24bn in 2015 (56% higher than the previous record of £3.36bn in 2007). (Source: AIC, 11 December 2015) How Do Investment Trusts Work? So, fundamentally – what is driving this demand? Why are investment trusts proving so popular with a new generation of investors? Several years ago, I attended a seminar on investment trusts where a broker (I forget which one) began his presentation by asking: “An Investment Trust:
Is it a bird, is it a plane, or is it superman?” It’s a catchy title, but what he was asking whether was investment trusts are best regarded as a fund, or as a direct equity, or as something else? As a starting point, it’s very helpful to understand that investment trusts are collective investments – i.e. funds. Just like open-ended funds, they allow investors access to a wide range of assets, spreading their risk, while also benefiting from economies of scale. However, investment trusts are also companies in their own right – oversight is provided by an appointed, independent board, accountable to shareholders. Perhaps more importantly on a day-to-day basis, they have a fixed number of shares – with shares traded on the open market. This means that every buyer needs a seller and vice versa, and flows do
I FAmagazine.com
I NVESTM ETITLE NT COM PAN I ES February 2016 not affect the underlying portfolio. The share price is set by demand in the market, so like other shares you can calculate a price-to-book value of the company. For investment trusts, this is much more commonly described as a “discount” (the share price is less than the NAV of the portfolio) or “premium” (the share price is greater than the NAV), expressed as a percentage. The fixed number of shares and the absence of daily flows of capital into and out of the portfolio mean that investment trusts are able to invest in far less liquid assets than is possible in open ended funds; also, although highly regulated, they are not restricted by the same constraints as most UCITS. Investment trusts can invest
I FAmagazine.com
Neil Woodford’s Patient Capital Trust raised a magnificent £800 million – making it not just the largest new issue last year but also the largest U K-domiciled investment company launch ever.
directly into real property, infrastructure projects, unlisted companies (venture capital), micro-cap stocks or any number of other asset classes from the weird to the wonderful. Don’t Discounts and Premiums Lead to Increased Risk? It is certainly true that volatility in discounts and premiums, like any volatility in price, will change the overall risk profile of an investment trust – and it’s important to ensure that an investment matches the risk appetite of the investor. They can, however, present real opportunities as well as risks. As a starting point – it is often helpful to think of discounts and premiums as market amplifiers. If a market or sector is out of favour (and is therefore potentially appealing to a contrarian investor), the companies in that sector are likely to be undervalued and “cheap”. The same is true for the investment trusts investing in that sector – they are likely to trade at a discount, until the market begins to appreciate the hidden value. When that happens, the portfolio’s
underlying stocks are likely to recover at the same time as the investment company’s share price – narrowing the discount and enhancing returns. Of course, the same could also be true on the downside. Many investment trusts, though, trade at discounts for sustained periods of time – and a persistent discount of, say, 5 to 10% may be beneficial for a different reason – especially for a long term investor looking at total returns. If the same portfolio is held in an open-ended fund and a closed-ended investment trust at a discount, then the effective yield achieved by the investment trust is enhanced by the same factor as the discount (i.e. the investor pays less for the same level of income). If this is reinvested into more shares, at a discount over several years, then the overall performance of the investment trust will be enhanced. Then Why Do So Many Income Trusts Trade at a Premium? Generally, investors seeking an income are not looking to reinvest it (and if they are intending to do so – reinvesting into a trust trading at a premium may need careful consideration). Normally, the key thing is the level of overall yield, and the overall risk of the portfolio.
21
I NVESTM E NT TITLE COM PAN I ES February 2016
What about Gearing? Many investment trusts use gearing or derivative strategies to increase exposure to the market or enhance yields, and their power to do so is much less restricted than in UCITS vehicles. Over the longer term, it can be shown that gearing enhances returns across multiple market-cycles, but it also increases volatility
NAV
Discount
Share Price
Negative Sentiment
22
over the shorter term and may not be suitable for risk averse investors. With increasing availability of investment trusts on platforms, greater transparency in their charges and reporting, and the opening up of markets in a post-RDR environment, it may be a good time to look again at what investment trusts have
NAV
Discount
Share Price
Improving Sentiment
to offer. In most cases, they will not be a replacement for existing open-ended funds, but they can often be an excellent complement to them.
NAV
Premium
Share Price
Positive Sentiment
I FAmagazine.com
STRUCTU RE TITLE D PRODUCTS February 2016
Structured Products for the Risk Averse Nick Sketch, Senior Investment Director at Investec Wealth & Investment, looks at ways of using structured products to constrain risk for investors
Let’s be frank about this. There are many reasons why some advisers are wary of structured products (SPs), and at first sight those reasons look understandable. For one thing, there are far too many of them for a quick glance to tell us anything. And for another, they often have unhelpful or incomprehensible names. Then there’s the fact that they are not typically ‘funds’. And that many - but not all! - offer bad value, bad transparency, bad (or nonexistent) daily liquidity during their lives. Or all of those things. And compliance officers and regulators may be much more interested in SP recommendations than in recommendations to buy, say, another corporate bond fund. More generally, some advisers will say, “I don’t buy anything that I don’t understand fully.” Which also sounds reasonable. Except that it isn’t. After all, how many UK funds, including index trackers, have shares in HSBC as a top holding - and how many of us claim that we ‘understand fully’ all of the moving parts within that
I FAmagazine.com IFAmagazine.com
firm? Are SPs really more complex than those funds? The Details Matter So some of the worries about structured products miss the mark completely. On the other hand, the SP sector is still a sector where ‘amateurs’ who skip the required work can get it badly wrong – or at least get a good
Then there’s the fact that they are not typically ‘funds’. And that many - but not all! - offer bad value, bad transparency, bad (or non-existent) daily liquidity during their lives deal less return than they could have had. And the demand is surely there. Many investors – and not just those approaching or in retirement – need a defensive core to their portfolio, a good income without excessive risk, or a way of extracting decent investment returns even if stock markets continue to
be generally dull in their performance over the next few years. In any of those situations, an SP or two may be just what a properly diversified portfolio with equity and bond investments needs. The key point is, of course, that the correct advice is sought - and that everyone remembers that the detail really matters when looking at SPs. In reality, it does take some effort to understand enough about SPs to make good investment decisions, but it is far from being a superhuman task only possible for technicians, and the rewards can be high. Gross Income – Balancing the Risk and reward Let’s take an example. There’s a note currently available from a major retail bank that’s based on the FTSE100 index, and currently priced at about 102p. It pays gross income of 3.5p twice a year if the index has stayed between 3500 and 7500 throughout each six month period, but it pays nothing if the index has moved outside that range.
23
STRUCTU RETITLE D PRODUCTS February 2016
The initial capital of 100p will be returned in October 2018 if the index is above 3500, but if the index closes below 3500 in October 2018, then investors lose capital - so that the capital return matches the fall in the index. Investors are also exposed to credit risk, ranking in line with deposit account holders (but without the compensation scheme), so they could lose everything if the bank becomes irretrievably bust (and is not rescued) over the next three years. Of course, investors might miss an income payment or two if the FTSE100 rises by c.20% in the next three years, which is possible. However, most of them will have other holdings that will do very nicely if that is what happens, and they will be more concerned with the downside risk. Then again, a 45% fall over the next three years is also not impossible, and the bank could in theory become bankrupt - but most of us regard both of those risks as small. Moreover, those small risks need to be set against the return – c.7% a year or thereabouts looks favourable compared to a 3-year Gilt (offering less than 1%) or a 3-year fixed-rate depositwith the same bank (offering about 1.4%). Investors can make up their own minds as to whether that balance between risk and return looks attractive or suitable for their portfolio – but it doesn’t look that difficult to understand, does it? A note like this pays its return as gross income (not as a dividend or a capital gain), so for many investors it might be best suited to Self Invested Personal Pensions (SIPPs) and Individual Savings Accounts
24
(ISAs). Other types, however, might deliver their returns as capital gains taxed under CGT. With the right skills it is perfectly possible to build a portfolio of these SPs with different expected pay out dates, and that will offer the investor a way to get taxefficient cashflows from a portfolio without accepting the ultra-low returns from, say, index-linked Gilts or the full equity risk that comes with most equity income funds.
A Good Alternative to Equity Investments?
Of course, high-yield bond funds will also offer the investor a good income level, but they too are far from risk-free. So it’s reasonable to regard that HSBC note we mentioned as an alternative (or complement) to high-yield bonds. But structured products can also offer a good alternative to equity investments. For example, there is currently a note from a French bank that looks appealing to those with more appetite for risk. This ‘Autocall’ note is currently priced at about 116p and is daily traded. It will be repaid on the first anniversary (each January) on which the UK (FTSE 100) and European (Eurostoxx) stock market indices are high enough to trigger payment. In January 2016, that would require index levels of 6834 and 3135 respectively – the Eurostoxx index is currently well above this level (over 3400) but the FTSE100 is at about 6300, at the time of writing, so repayment in January seems rather unlikely. Assuming that the 2016 test is failed, the investment survives until January 2017. Then the test levels will be the
same (i.e. the FTSE100 would need to be 9% higher than today), but the payment on offer (if triggered) would be 148.92p. That suggests a gain of 28% if the FTSE rises over 14 months by 9% (or more) from today’s level – assuming, of course, that the European markets are not sharply lower by then and that the bank has not become bankrupt. The same annual test is applied each year thereafter until 2020, unless the note is repaid early. If all previous tests are failed, the 2020 tests will be at 5909 and 2665, so both indices are already high enough to trigger payment - but this time the repayment would be 188.34p. That would suggest a gain of 62% over 50 months even if the indices should fall a little more from today’s levels, assuming that the bank has not become bankrupt. If that test is also failed in 2020, then the initial capital of 109.5p will be returned to investors in 2020, provided that the indices are above 4442 and 2050. That would imply a loss of about 6% if (for example) the FTSE100 index is down by between 8% and 30% from today’s level. If even that test were to fail, capital returns will match the capital performance of whichever index has done worse. In this scenario, which looks most unlikely but is clearly not impossible, this would mean a sharp capital loss. Investors can also make a loss if the issuing bank becomes irretrievably bust (and is not rescued) during the period, and (like all liquid SPs) market prices during the product’s life will fluctuate daily and can fall sharply from time to time to reflect, in the main, index movements.
I FAmagazine.com
STRUCTU RE TITLE D PRODUCTS February 2016
No SP Should Be Regarded as Risk-Free
No SP should be regarded as risk-free - and this French bank note is significantly more risky than the other note above. However, in a broad range of future environments, it can still be expected to deliver strong gains from today’s price over the rest of its life, and the total returns seem likely to beat those from the stock market indices themselves unless those index returns are much stronger or much weaker than history
suggests is at all probable (or than most of us regard as at all likely). Under most scenarios from very good to very bad, stock picking would have to be
Investors can make up their own minds as to whether that balance between risk and return looks attractive or suitable for their portfolio
positively inspired if it were to be likely to deliver similar levels of outperformance of stock market indices. Isn’t that profile attractive enough that it encourages anyone for whom the risk level may be acceptable to do a bit of homework? Finally, there’s an argument that a picture is worth a thousand words. Re-creating Autocall prices and returns is fairly easy now because we know what index levels, interest rates and option prices were.
Doing such a calculation from 1990 onwards for a defensive Autocall based on the FTSE100 suggests that this approach has done more than give a decent balance between risk and return:
2016
1990 Dealing With the Known Unknowns
Of course, we all accept that the next 25 years may look very different from the past 25 years. But any investment area that has shown (a) a good deal less risk for a long-term investor than (say) an index-tracker and (b) a
I FAmagazine.com
return profile like that surely deserves a little study. After all, there are some investors who really can’t afford to wait for the next bull market or sharply higher interest rates before they start earning a decent return.
25
STRATEGISITITLE NG YOU R EXIT February 2016
Strategising Your Exit Louise Jeffreys, Managing Director, Gunner & Co, considers what you need to know today to make the right decisions for tomorrow
The news is full of stories of IFAs buying and selling, merging and partnering. So much so, in fact, that we at IFA magazine have launched a dedicated section on the IFA Magazine website (www. ifamagazine.com) that’s wholly dedicated to Mergers & Acquisitions.
Clients
In recognition of this we also launched Gunner & Co, a specialist brokerage that aims to bring together buyers and sellers looking to negotiate great win-win agreements. This month we’re going to focus on building value in your business, in order to ensure that you get the very best financial agreement. Next month we’ll be looking at ways of getting your business in shape for sale, and in April we’ll conclude with a review of the types of exit strategies in the market, and the suitability of each.
Strengths and Weaknesses “Start with the end in mind.” That’s what Paul Wilson, former Group Chairman of Lansdown Place, which successfully sold to a major acquirer in 2013, told me in our first conversation. And based on the experience I’ve built setting up and negotiating exit strategies for IFAs, he couldn’t be more right. Assuming that you’re looking to exit in the next 3-10 years, the planning really should have started yesterday. And a key starting point is to maximise every growth opportunity you can now. It goes without saying, I hope, that the more value you build in now, the more attractive you are in the market and the better the negotiating position you will have. Growth takes time, investment and risk, so I
find using a model such as the Ansoff Matrix an incredibly beneficial tool to identify and prioritise growth opportunities, and to give focus to the plan. Below is a summary starting with the lowest risk, lowest investment. You may wish to engage in multiple tactics to turbo charge your growth in the next 1-3 years, but the key is to commit to any tactic, with the associated risk in mind. The simplest and least risky growth opportunity is to maximise your return from your existing client group with your existing product mix, known as Market Penetration. For example, maybe only 50% of your client list are truly active, delivering you an ongoing, robust, valuable income. So what about the other 50%? Could a service like Equifax Touchstone take away a significant amount of the ground work and
Market Development
Diversification
Same service proposition, sold to more clients
Widen the service proposition and sell to more clients
Market Penetration
Service Development
Focus on selling more of your current service proposition to your current clients
Sell a wider range to your current clients
Products
26
I FAmagazine.com
STRATEGISI NG YOU R EXIT February 2016
deliver a significant return on investment by analysing your client list? Or by identifying growth opportunities and designing personalised marketing campaigns to reignite this client base? Similarly, looking at the charging structure of your active client base and growing your ongoing revenue is a simple but strategic tactic. The more successful businesses I work with have charging structures aligned to the level of portfolio size per client. It is often the case the charging high fees to HNW individuals is difficult to justify, however having different service propositions, with different benefits such as more face to face reviews, use of investment advice services is a great way to differentiate your clients and allow for a tiered charging structure. Conquering New Territory Market Development, delivering your existing propositions (tiered or otherwise) to a new market, is the next option for growth. You can do this in a number of ways. The starting point is to identify the group of clients you want to target, which will allow you to build a plan of how you will get them. You could make a focused plan to grow any or all of the following groups (or segments) of clients: • Client referrals The easiest and almost certainly a group you are tapping into today. But are you doing it in a planned, focused way? Do you give your clients marketing materialto take away for friends and associates? Do you actively ask for a specific number (say, three) referrals at the end of each meeting? If you have built a strong, long-term relationship with your clients they are likely
I FAmagazine.com
to be very comfortable with recommending you to their friends, but if you don’t ask, it may not come to mind. And if you ask for three, you’ll get more than the typical one or two! • Family groups Hugely valuable at the point of selling your business, managing the wealth of family groups is highly efficient, very ‘sticky’
(client retention tends to be 95%+), and delivers a much longer business opportunity. Could you package your typical proposition to suit a family? Are you regularly recommending ISAs for grandchildren, which by default would start to build a relationship with their parents? Is family interdependency a focussed growth strategy for you? • Completely new segments If your business has primarily been built through referrals, there is a strong chance your new clients will look very similar to your existing clients. New segments are typically demographically identified, so a new geographic segment, or a new age segment. The quickest way to succeed here typically is to buy that segment in – so buying a client book from a retiring IFA say. If you are looking to sell your business in 4 years or more this can be a cost effective way to grow your
business significantly ahead of a strong exit. Service Development Delivering a completely new service to your existing client base, as is the direction of product development, is unlikely to be a simple growth tactic for most IFAs. However, if you have built your business primarily to service transactional business - and by this I imagine your classic high street shop-front business, primarily delivering mortgage and protection solutions to one-off customers - and if you are serious about selling, you can lose no time in realigning your focus to relationshipbased, building strong, ongoing client relationships. That might even mean getting your premises off of the high street, to focus the mind on a client centric proposition strategy. The great thing is your will have built a large database of prospects, so once you are confident in your new proposition, you have clients with relationships you can approach. Diversification is the highestrisk growth approach, involving building a new proposition for a new client segment. For example a robo-advice service for clients typically aged 35-50, who you are not already in contact with, or building a full new business focussed on autoenrolment. This is typically expensive, time intensive and high-risk. Building a diversification growth strategy only really makes sense if you are looking at exiting in more than ten years and if you have the investment and management expertise to succeed. To grow, of course, takes time, so ruthless prioritisation is key at this point.
27
STRATEGISI NG YOU R EXIT February 2016
This certainly doesn’t mean abandoning clients you have built relationships with over the last 30 years; however, to make time for growth you may need to realign your client communication approach to the ongoing value and profitability of your clients. A one-size-fits-all approach, while easy to implement, may not be the most cost and time-effective. Taking It to the Professionals When you are ready to sell, engaging a professional broker makes the process as efficient and effective as possible. At Gunner & Co. we take time to fully understand your exit aspirations – your financial expectations, your preferred
timelines, and all importantly, the right fit for your clients and perhaps even your team. The objective is to find a buyer who best fits your preferences and who will work with you throughout the deal process to make the process as smooth as possible. Gunner & Co. does not take any fees from a business seller, so there are no financial obligations with engaging our services. Next month I’ll talk you through getting your business operations aligned to a sale, from back office considerations to charging structures – how you run your business has a direct implication on the future exit value.
T: 07796 717346 E: louise.jeffreys@gunnerandco.com
In the March Issue:
In the April Issue:
Get your houses in order
Get to know what you want
• • • • • • •
• • • • • •
Back office system Scanned files Premises/timing High value triggers RDR/Sunset Clause Valuation methodologies Realistic min timeline is 18 months. Can easily be 24+ • Payment structures • Consider the effects on your focus • Start early
28
In the meantime, if you are actively looking to exit now and would like to have a confidential, non-committal conversation I am always happy to share my insight.
Partnership Acquisition National Consolidators Regional Multi-acquires Regional one-off acquirers Advocacy
I FAmagazine.com
H IGH YI E LD BON DS February 2016
The Three Tenors of the High Yield Bond World This was a first for I FA Magazine’s Neil Martin – interviewing three senior fund managers in one sitting. And the High Yield team at Aberdeen Asset Management didn’t disappoint in a wide ranging aria which covered some of the top notes of the high yield bond world. Well, I say three tenors, but Steven Logan, Head of European High Yield at Aberdeen Asset Management (AAM), had to leave after ten minutes explaining, quite understandably I thought, that he was due in a meeting with a client who’s an investor responsible for billions of pounds. And when a client has that much spending power, you don’t say I’ll be there in a moment, once I’ve finished with this journalist! So I was left in the capable hands of AAM’s Mark Sanders, senior investment manager, and Ben Pakenham, senior investment manager, who took the time and trouble to explain some of the basics of the world in which they operate. High yield bonds were born out of a necessity, when corporates could no longer rely on the banks to provide the funding they needed for expansion. More companies have seen high yield as the ideal, or perhaps the only way, of going forward and this has greatly grown the market. “I think that’s the key, ten years ago, when people said high yield, there was basically a US market and not much
I FAmagazine.com
else…” said Pakenham. “Yet now, European high yield is a market grown from €40 billion to €400 billion in the last eight years.” He continued: “It’s an amazing growth rate and part of that is because of fallen angels, but part of it is because of banks who are withdrawing lending to corporates in Europe because they are deleveraging and because they need to shrink their balance sheets and we’re taking their place.” Fallen angels are those companies which have had their credit rating lowered to below investment grade, but that was only part of the picture which has stimulated the huge growth in the high yield bond market. Demographics have played their part, so has the lack of income elsewhere, but it’s the slowing down of the supply side – the banks – which has been the real catalyst. Pakenham again: “Companies which have been borrowing from banks for 50 plus years, that have never needed to issue bonds, suddenly found themselves in a situation where bank financing had dried up and
you know, once you enter a new funding source, you tend to sort of stick with it, unless something goes horribly wrong, “I think European high yield, the growth of it, has been astonishing. It’s also interesting that a lot of the money we’ve raised has been from outside Europe, at a time when the European macro has been quite tricky.” Sanders reflected: “It’s strange in a way, because in the UK market when you go back to the original days when it was Aberdeen and M&G, we were the trail finders for sterling high yield in particular. It related to the PEP and ISA markets, which was a very tax efficient way to hold it. At one stage there was I think one of our funds we used to run that had one million unit holders, and we used to go out and market a 7% yield.” Unsurprisingly, given the introduction to the high yield bond market, the AAM team are keen advocates of the asset class. Pakenham led the charge: “It is just a fantastic product from a long term perspective, I would encourage any kind
29
H IGH YI E LD BON DS February 2016
of pensioner, plus ten-year investor to think about having a significant weighting in high yield, because it does have such great risk adjusted return profiles over the long term, and you know it’s almost regardless of when you buy it. “The timing is slightly less relevant because our market tends to re-price quite quickly. Obviously defaults will pick up at some point, but you’ll get higher coupons in the future and whilst you might take a bit of pain in the short term, over the long term it’s not a problem”. Sanders takes up the running: “When you’re
younger, you can buy the accumulation, when you retire you can switch it to distribution, so it works very well. It’s also very robust; equity markets are very high risk; we tend to take the view that high yield is the next step down. Because you have that in market as companies tend to borrow more. However today, we’re simply not seeing that negative behaviour”. Sanders said that the main issue they face at the moment, against a backdrop of more demand for the product, is that the banks are starting to come back into the game. He pointed out that over the
last five years the banks have been happy to step away, and borrowers have increasingly come to the high yield market, but now they see attractive terms on offer and want back in. The issue is, said Sanders, is that companies have also moved on and see the attractive relationship they have with the bond guys who are locked in for five years. However, banks still want to play on their own terms and company management teams are tired with the covenant waiver and other fees that can be charged. Sanders added that they are also getting the benefit of a positive equity market, supported by an equally positive IPO scene. He also made the point that even though the lights are also on green, as they say with clients, you always have to take a step
Sanders joined Aberdeen and Pakenham joined shortly afterwards and, in his words, reunited Batman and Robin back with high yield bonds: “It really does come back to credit, underlying defaults, and what these companies are doing with the money”. “Over the past ten years high yield has outperformed both equities and ‘govvies’. Obviously now and then it has a sell-off, but what we’re finding now is that people are looking for that sell-off as a buying opportunity”. As for how the team originally got together, Sanders explained how he and Pakenham worked together at New Star Asset Management. In 2011 Sanders joined
30
I FAmagazine.com
H IGH YI E LD BON DS February 2016
Aberdeen and Pakenham joined shortly afterwards and, in his words, reunited Batman and Robin. At this part of the talk, Pakenham chipped in that he was Batman, whilst Sanders was Robin! There was a great deal of laughter at that, which seemed to reflect the ease with which the team work. As Sanders said: “We have a mixture of youth and experience, I think it’s a good mix. We have lots of different nationalities and the approach is very much about credit, credit and more credit. And we like doing site visits, we like visiting steel plants, or whatever. We believe in meeting the management, kicking the tyres. You do a lot, credit is like a big jigsaw, you’re always trying to put it together”. Sanders also said that they had been on some odd site visits, although we’ll keep the details of those for another feature! The pair also added that the team had no politics, no big egos, and when you hear that, you always assume that the very opposite is true. However, with these three, you kind of believe it. As to whether you get the message about high yield bonds depends on your position and the clients you might be advising. But, the final point was made with some conviction, that the AAM High Yield team is in a good position to grow globally, and that this is one asset class that is here to stay and make its presence felt. Postscript Since this article was written, there have been some concerns about the state of the $10 trillion corporate bond market and how it would cope with a major market event. Much of the debate on the subject has been led I FAmagazine.com
by CEO of Aberdeen Asset Management Martin Gilbert who in a recent speech warned about the threat of a run on the corporate bond market. His main assertion is that the Bank of England and other central banks should be considering the option of becoming what’s known as “buyers of last resort”. He told the Financial Times’ City Network: “I think central banks should consider stepping into the corporate bond market and buying corporate bonds in a period of severe market dislocation”. By doing this, said Gilbert, it would ensure that a run would not take place and that a panic would be avoided. His concerns are borne out of the fact that the corporate bond market has
become much less liquid than was previously the case, as regulation has stopped banks from fulfilling their traditional role as providers of abundant liquidity. The backdrop is of course that when interest rates start to rise, some investors might leave the corporate bond market and go back to more traditional savings plans. The fear is that this would lead to a liquidity crisis. Gilbert believes that a crisis in the bond market is unlikely, but there will be pressure exerted when interest rates go up and fears of having enough liquidity in the market increases.
COM PLIANCE DOCTOR February 2016
Senior Management & Certification Regimes Are two heads better than one? Lee Werrell discusses
Although the Principles for Business and the Code of Practice for Approved Persons were adopted from the 1st December 2001, they were born of one regulator in attempt to start moving away from a prescriptive and rules based regulation regime. Move through to 2005 and the Financial Services Authority had already made substantive changes to the Code of Practice for Approved Persons and Final Notices started to cite breaches of “Principles” over and above rules. The banking crisis of 2008 exposed significant and exceptional shortcomings in banks’ governance and the unethical culture and behaviours which underpinned it. Some hurried changes were implemented in 2009 but these were tweaks, seemingly as a knee-jerk reaction. Wind forward to June 2012 when the Parliamentary Commission on Banking Standards (PCBS) was
32
established to consider the professional standards and culture of the UK banking sector and report on lessons to be learned. It was obvious that the old rules were inadequate and didn’t anticipate the collusion and manipulation that was rife. This was the start of the new regime plans. The FCA made some changes for the first day of their takeover, but there was still a lack of input from the PRA, other than minor exceptions. Due to these disagreements, a new look at the overall regime was necessary, with the two heads of regulation having appropriate input. And this was due to the PCBS fundamentally concluding that a lack of proper accountability contributed to the gross mismanagement of key risks that then crystallised and contributing to the failure of public trust in the banking (and financial services) industry as a whole. The PCBS made a number of recommendations regarding improving individual accountability in the banking sector which were then incorporated into the Financial Services (Banking Reform) Act 2013 (henceforth
stated as the “Act”). The Act made significant amendments to the Financial Services and Markets Act 2000 (FSMA) and, in response, the newly formed regulators, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) released a joint consultation (FCA CP14/13 and PRA CP14/14) at the end of July 2014 with their specific proposals for creating a new regulatory framework to encourage individuals to take greater responsibility for their actions. The further intention was to make it easier for both firms and regulators to hold individuals to account. The proposals were applicable to UK banks, building societies, credit unions and PRAdesignated investment firms. Simultaneously the FCA and PRA also released a joint consultation on the implementation of new remuneration rules (FCA/ PRA CP14/14) which sought to introduce changes to remuneration structures. Jointly the two consultations were seen by the regulators as a package designed to reinforce the trend of greater responsibility, transparency and accountability across the
I FAmagazine.com
COM PLIANCE DOCTOR February 2016
regain ing
the pu blic
tr us t ov er t im e.
industry, with the objective of regaining the public trust over time. Recently, and following the change of emphasis, the industry has seen a marked increase in direct intervention by regulators and a move to a more ‘intensive’ approach to supervision. Additionally, the role and responsibility of the Compliance Officer has increased, but notably this has included CEOs, chairmen and boards being asked to provide written attestations and representations of compliance with regulatory standards. This new framework, with its emphasis on individual accountability for both senior individuals and for a wider range of employees, is the culmination of this trend. The regulators set out in
I FAmagazine.com
their consultation papers that they expect the new framework to become an integral part of their approach to Authorisation, Supervision and Enforcement. This means that they will look to ensure that key individuals have clear roles and responsibilities throughout their careers. Probably the main and serious message that firms and individuals should take from this is that regulators will expect greater levels of individual accountability from more people across the industry than ever before. As well as increasing the regulatory burden on firms and individuals in ‘steady state’, the need to adapt to this new regime may catch out those firms which are constantly playing “catch-up”
with the regulations due to lack of strategy or for some other reasons may not be properly prepared. The following table provides the general mapping of SIFs to the SMFs under the PRA and FCA. Remember that roles need to be reviewed and assessed and a straight mapping across may not be appropriate for your firm. The table is taken from the joint CP PRA 41/15 and the FCA CP 15/37. http://www.fca.org.uk/static/ documents/consultationpapers/cp15-37.pdf
33
COM PLIANCE DOCTOR February 2016
34
I FAmagazine.com
The Investment Offering an investment where your clients’ funds are insured against capital shortfall. Therefore your client is assured that their investment monies are guaranteed to be returned to them in the event of default of the loan note.The assets are UK based and none of your clients’ funds will leave the UK. Your client will receive an insurance policy defining the insurance and security for their investment money.
THE INVESTMENT BENEFITS • • • • •
Capital insured investment! Investment return 8%pa UK based Asset based Low investment threshold
AGENT BENEFITS • Excellent commissions • Commissions paid weekly • Suitable for private investors, pension funds, fund managers
We are seeking IFA’s, fund managers, advisors with High Net Worth Individuals
• The advisor should be experienced in the financial sector and/or in the alternative investment sector.
• Offer your client a diverse portfolio investment with high returns and insurance to protect their money.
• Please note that unless all information required is provided we are unable to call back as we have designated advisors dependent upon client base types. Please leave your name, business name and contact number.
Contact Sarah on 07881 272934 or email integrityprotect@gmail.com Integrity Protect. 11/12 Jellicoe Court. Admirals Landing. Atlantic Wharf. Cardiff. CF10 4AJ
COM PLIANCE DOCTOR February 2016
Not just for the Banks HM Treasury published a policy paper on 15 October 2015, confirming that the Senior Managers Regime (“SMR”) will extend to capture all FSMA authorised firms in the UK, including interdealer brokers, hedge funds and asset managers from 2018; not really that very far away. This move to SMR is intended to encourage individual accountability for decision-making in financial services firms as a whole. The first phase of the SMR will, from 7th March 2016, affect banks, building societies, credit unions and PRA designated investment firms. As usual, a consultation period will precede formal proposals for applying the SMR to other authorised firms, however, the policy paper suggests that it will apply in a broadly similar way. Phase 1 The actual changes, published in advance in the FCA’s CP15/9, will replace the current Approved Persons Regime (APER) for banking sector firms. Key changes include: • The SMR being narrower than the current APR, allowing regulators to focus on authorising and
supervising the most senior and influential staff in banking sector firms. • The list of prescribed responsibilities under the Senior Management Arrangements, Systems and Controls sourcebook (“SYSC”) will be expanded to include financial crime, developing and overseeing remuneration policies, and overall responsibility for compliance with the Client Assets Sourcebook. • Each application for any senior manager approval must include a statement of responsibilities (SoR); significant changes to any SoR must be notified to the FCA. • Firms must submit and certify an accurate “responsibilities map” illustrating management and governance arrangements. • The introduction of a Certification Regime will shift the burden of assessing the fitness and propriety of certain staff members onto the relevant firms. • Introduction of the Code of Conduct (COCON) Handbook under the High Level Standards section. The FCA hopes that these rules (see COCON 2) will bolster good conduct at all levels, thereby increasing
public trust in both the banking system and in the regulatory response to bad behaviour. However, firms will need to act early to prepare for the changes introduced by the new regime. New Senior Managers will appear on the FCA register from above date. Individuals currently approved to perform a significant influence function in a relevant firm will be eligible to transition into the new SMR role via a grandfathering notification; the final deadline for firms to submit their grandfathering notifications (including their responsibilities map and SoRs) is 8 February 2016. Phase 2 For other FSMA authorised firms, the Treasury acknowledges there is a challenge of rolling out the SMR and Certification Regime to the other 60,000 entities; therefore, the target implementation period for the extended regime is provisionally set at 2018. The consultation period and deadlines have not yet been announced.
The first ph ase of th e SMR wi ll, fr om 7 th March 201 6, affe ct banks, build ing so cieties, credi t un io ns and PRA des ignate d inve stme nt firms
36
I FAmagazine.com
COM PLIANCE DOCTOR February 2016
Key Points to Consider Having been involved in these SMR projects, Lee Werrell would point out that the suggestions set out below are more pressing for banking sector and nominated PRA firms in the short term, but other authorised firms would do well to start thinking about adjustments early on. Preparation It would be prudent for firms to begin identifying the staff roles that will require pre-approval under the SMR. Roles need to be thoroughly assessed regarding whether any areas of responsibilities require clarification and what (if any) overlap there may be. Joint responsibility does not halve the accountability. All this, and HR concerns, process changes etc. need to be considered before any SoR can be prepared. In addition, firms should consider whether any changes should be made to hiring and monitoring procedures as part of the Certification Regime, which may include detailed compliance training for affected staff. Individual Accountability The SMR originally introduced a “presumption of responsibility” under which the relevant senior manager is guilty of misconduct where an authorised person under his management contravenes a relevant requirement. The Treasury has now acknowledged that reversing the burden of proof is disproportionate, and the measure has been removed. Senior managers will still face a statutory duty to take reasonable steps to prevent regulatory breaches in their areas of responsibility. The
I FAmagazine.com
gravity of this responsibility needs to be borne in mind when considering the application of the SMR to staff, as set out below. To Whom Will the SMR Apply? Senior Individuals The SMR will apply to individuals who are subject to regulatory approval and will focus on all senior individuals who hold key roles or have overall responsibility for key areas. The onus is on firms to identify the senior individuals who have overall responsibility for the activities of the firm, regardless of their job titles or in which entities they may be based within a group structure. Non-Executive Directors Non-executive directors (“NEDs”) in the following positions will be subject to approval and inclusion in the SMR: Chairman, Chair of the Risk Committee, Chair of the Audit Committee, Chair of the Remuneration Committee, Chair of the Nomination Committee, and Senior Independent Director. The FCA has clarified that the SMR will not apply to “standard” NEDs, i.e. those NEDs who do not chair specified subcommittees of the board. Smaller Firms The FCA has stated that the regime is designed to be proportionate, with less complex firms requiring fewer preapproved senior managers. However, there is no indication that de minimis exemptions will be included in the new regime; instead, proportionality is to arise as a by-product of less complex group structures
and business activities. Certification Regime The Certification Regime, which will operate in tandem with the SMR, requires banking sector firms to certify the fitness and propriety of staff carrying out functions that could involve a risk of significant harm to the firm or its customers. Examples of such functions include giving investment advice, executing client orders and administering benchmarks. This fundamental shift means that decisions as to who should or should not be an approved person will no longer rest with the FCA (except for senior individuals caught by the SMR), and it will also place new hiring and monitoring responsibilities on all firms. Wider Scope It appears from the Treasury’s policy paper that the SMR will apply in a similar manner to other authorised firms: it will replace the APR entirely, and any new senior manager appointments will need to be approved by the regulator. The Certification Regime will apply to individuals who are not carrying out senior management functions but are still capable of causing “significant harm” to the firm or its customers; this is expected to capture the remaining approved persons within a firm and possibly additional employees who are not currently approved persons. Firms will need to assess the fitness and propriety of such persons during recruitment and certify ongoing fitness and propriety at least annually. In its update from the December
37
COM PLIANCE TITLE DOCTOR February 2016
publication, the PRA indicates the requirements for assessing fitness and propriety for individuals (including NEDS) in Chapter 4 the document accessed at http://www. bankofengland.co.uk/pra/
Documents/publications/ ss/2016/ss2815update.pdf. Documentation Firms will need to produce and submit a responsibilities map under the new SYSC 4.5.
The map will specify a firm’s management and governance arrangements in a single document, with the Board confirming annually that there are no gaps in the allocation of responsibilities.
There are four main areas where Compliance Consultants believe the new regimes will impact on all firms
Governance
Policies and Procedures
Data, Systems and Technology
People and Culture
In Conclusion
38
Challenges and Considerations There are a great many details which cannot be explained here but are relevant to or provide guidance for small firms (assets under ÂŁ250 Million). However, there are four main areas that Compliance Consultant believe will impact all firms by the new regimes.
Policies and Procedures The new regimes will cover a significantly wider population with the addition of the certified and conduct layers, and firms will need to design robust frameworks, especially for the certified regime. Self-supervision of a significant population in the certified regime is new and a considerable challenge.
Governance The regimes ultimately require robust and well evidenced governance frameworks including clear articulation of legal entity level committee structures and their respective roles and responsibilities.
People and Culture One of the key aims of the new regime is to transform the culture and raise standards in banking. As a result, the SMCR necessitates changes to capabilities, culture and HR processes to underpin behavioural change.
Data, Systems and Technology The increased focus on evidentiary requirements means the regimes will require quality management information to underpin responsibilities. There is also an opportunity to automate and streamline many of the requirements of the regime using technology solutions. If you need to review your arrangements, test applicability or test their functionality, get an independent compliance consultancy with qualified, SMR experienced, practical and competent staff.
I FAmagazine.com
E D’S RANT February 2016
The Roar of the Crowd Index funds and ETFs are huge, but can they really bring on a financial stampede? Michael Wilson is sceptical If you’ve been bothered by the last nine months’ stock market volatility – and I’m guessing that you have? – then you’ve probably been pondering the reasons as much as the rest of us. The thing is, the reasons being proposed range from the fundamental to the downright wacky. I’m going to talk today about one of the less expected variants, but one that we can’t afford to completely ignore. Can trackers such as exchange traded funds really be contributing to market instability? Let me say that I’ve got my doubts. But at least let’s give the issue a proper airing. The Usual Suspects Before we do all that, though, let’s look at the more obvious candidates for the market’s recent jumpiness. Yes, it’s hard to disagree with the pundits who say that the world feels like it’s lacking in political direction. There’s a divided Europe that is struggling to make economic progress, and another one in Japan. There’s a China that seems to have moved into a consolidation phase at just the moment when we were hoping it could carry us through a thin patch elsewhere. There’s a foul-tempered American middle class that just might elect Donald Trump next November. And a scarily violent situation in the Middle East. Behind it all is the looming likelihood that oil prices, the basis of our industrial
40
economy, will struggle to stabilise this year. But none of this on its own is enough to answer the question. Just why are our markets so very volatile? And why are we seeing so much of a decoupling between national markets - and so little decoupling between asset classes? You’ll probably have your theories, and I’ve got mine. But it strikes me that we’re
The ship might overturn without warning if enough of the passengers decided to rush to the port or the starboard side
entering a phase where it’s not so much what you do that counts - it’s who you are. (American seems to be a good place to start, unless you’re a dollar-based investor trying to broaden your global portfolio into other currencies.) And that seems to land us squarely back in the realms of sentiment, not analysis. The March of the Trackers Now, sentiment is a fickle beast at the best of times. Ben Graham, who we’ll be talking about shortly, was in no doubt that irrationality was part of the investment market’s make-up. But I’m indebted to the Financial Times’s John Authers for suggesting recently that the rapid growth of exchange traded funds and other index trackers might be
having an amplifying effect on the market’s mood swings. Indeed, he went a bit further than that. The chances are, says Authers, that passive trackers, and especially ETFs will play a critical role in hastening any future stock market crises if they should happen. Ooof, wait a minute. Surely we jest? The entire global market in ETFs is currently worth around $3 trillion, according to Deborah Fuhr‘s excellent ETFGI, and at its current rate of expansion it might break $5 trillion by 2020. So yes, $3 trillion is a lot of money – let’s call it $450 for every person on the planet. But it pales into relative insignificance against the size of the international equity scene. Three trillion dollars is, for instance, equivalent to barely one twentieth of the combined stock market capitalisation in the world’s 20 biggest financial markets. (Or about 12% of America’s own major markets, or broadly similar to the total size of Shanghai or Hong Kong or the EuroNext.) Three trillion dollars is roughly one sixth of the United States’ government debt, or a thirtieth of the global government bond market, whose assets are touching $90 trillion. If the entire ETF market were sold off tomorrow, the resulting three trillion of liquidity would keep the world’s government bond markets spinning for a whole five days. Big deal.
I FAmagazine.com
E D’S RANT TITLE February 2016
Chickens and Eggs And that’s where we get into chicken and egg territory. Oh, for sure, a simple ETF index tracker is a passive instrument that can do nothing else but go where the market commands it to go. But it does mean that, whenever the London Stock Exchange
participants from every part of the financial world, whether they want to be there or not. You see, the trouble is that the index trackers are themselves being shadowed (and bought) by thousands of active fund managers who wouldn’t dare to call the market illogical as long as their bonuses were likely to depend on it. Even if they felt in their hearts that the market’s direction was completely stupid. Yes that does sound like the Emperor’s New Clothes, but you wouldn’t want to be the courtier who didn’t bow to the ridiculous, would you?
announce all forthcoming changes. Since March 2014, the announcement date has been 12 business days before the actual implementation date. Just so that the equity markets can have the time they need to get their trades into place without panicking each other. There are some sensible exceptions to this quarterly/12 day rule – if a company’s market capitalisation were to shoot through into FTSE-100 territory at short notice, it could be into the index within days rather than having to
gets telecom fever or a bout of the oil industry sniffles, the sheer traffic of automated trades chasing those shares (or selling them, as the case may be) can be enough to move the market all on its own? Yes, say the doomsters, the combined weight of physical ETFs and other trackers in the major markets can be enough to turn the humble stock market index – which is just a number, remember, not an asset in its own right – into a raging torrent that has the proven ability to suck in
Run for Cover If you doubt the power of the indices, and hence of the passive index trackers, consider a very old problem that the LSE has faced for more than thirty years. Every quarter, the constituents of the FTSE-100 index are adjusted so as to make sure that it represents the UK market’s 100 biggest companies and not numbers 101 or 102. But such was the hideous rush of on-the-day trading by index trackers that the FTSE people were quickly forced to pre-
wait its quarterly turn. But on the whole, the system works well enough. Authers lists two further compelling examples of the ways that index changes can create stock market pandemonium. The first, he says, is apparent in the trading rush that happens every June when the Russell indices — very important for US fund managers — get their annual update and revision. (Often, he says, they drive the heaviest trading of the year.)
But of course, I’ve been guilty of a massive oversimplification here. The issue is not that ETFs and similar trackers are substantial in terms of their asset size. It’s that they exert an influence that goes far beyond their own financial orbits.
I FAmagazine.com
41
E D’S RANT February 2016
His second example also came to our attention last June, when the MSCI emerging market indices unexpectedly decided not to include Chinese A shares after months of determined lobbying from Beijing. The result, some say, was that a lot of the leveraged expectations of a big inrush of foreign money into Shanghai were overturned, more or less overnight. And from that point onward, the peak and subsequent nosedive in China’s A shares was more or less inevitable. Is It Only Physicals? Ah yes, you might be saying, but not all ETFs are physical. Perhaps a third of exchange traded products (including nearly all commodity products) are synthetic and don’t involve buying and selling physical things like shares at all? A handful of swap trades and Bob’s your proverbial. The trouble is, that’s a short-sighted view, because sooner or later the impact of those derivative trades will feed back to the value of the base product. Whether it’s the All-Share or the Texas Intermediate price, you can bet that the market will be sure to notice which way the wind’s blowing. In the case or oil or gold or copper, the speed of that impact may be complicated by political factors, by production issues or simply by the size of the global stockpiles. But you get my drift. Oil That’s the worry with oil producers at the moment. Oil has always been a hideous mix of demand, supply, extraction technology, bunker stockpile politics – oh, and of course, geology. Oil ETCs (they’re not ETFs, strictly speaking)
42
are vulnerable to something called contango, which can happen when prices diverge substantially from the dayto-day oil price per barrel. We’re going to be hearing a lot more about contango this year. And its feedback effect on real-world oil markets is always immediate. How Big Does the Stampede Have to Get? So we’ve got a situation, according to the doomsters, where the ship might overturn without warning if enough of the passengers decided to rush to the port or the starboard side. And unquestionably, the considerable cash liquidity of ETFs would appear to make them a hazardous cargo in a marginal situation. But how marginal would it have to get? Answer, of course, we don’t know. What we do know is that all major stock markets operate limits on daily volatility, which are designed to shut down trading if the stampedes should get too bad. As to whether that would stop off-market trading as well is something that goes well beyond my pay grade. But it would at least enforce a cooling-off period, which would be good for stability. And the Answer? Can anything be done to stop the all-conquering march of the trackers? It’s hard to disagree with Mr Authers that one of our best hopes lies in the rapid growth of ‘alternative’ ETFs that don’t simply follow a major index in the usual way. So-called smart beta ETFs are still passive investments, but they’re designed so as to achieve different goals from their core market counterparts. For instance, by focusing on smallcaps or high yielders, or by mirroring some obscure index that tracks the fortunes
of coal miners or coastal shippers or Broadway shows, or…. oh, think of your own off-the-wall instruments. Beyond that, it’s sensible to ask just how sensitive to volatility tracker investors really are? For many, the last ten years have been an object lesson in the merits of holding on in times of adversity - and that’s not likely to change as long as passive trackers and long-term buy-and-hold strategies play such a large role in pension or income investing. The world is changing shape, and the turn of the last century’s priorities won’t necessarily shape what comes next. Back to Ben Graham So much for the scare stories - and very frightening they are, too. But forgive me for pointing out that the threatened gyrations of the global equity scene wouldn’t have troubled old Benjamin Graham one little bit. His landmark investment work, The Intelligent Investor (1949) was built around the idea that the financial markets were prone to simply losing their minds about proper valuations from time to time - and that the days when Mr Market knocked on your door with ridiculously cheap offers were the relatively few days when a serious investor could make a fortune. Has anything changed in the intervening 67 years? I don’t think so. How about you?
*
For more info on ETFs see ETF magazine with this issue.
I FAmagazine.com
TIME to look again
Innovative solutions, defensive investments TIME provides tax efficient investment solutions and we’re proud to say we’re rather good at it with more than £500 million of assets under management and a 20 year track record of success. What stands us apart in our market is our focus on seeking consistent stable returns for our investors, which we deliver through a defensive investment strategy.
We offer the longest track record of all BPR providers (20 years and counting)
Our distribution team of 19 provides national coverage to help advisers provide solutions tailored to their clients’ needs
We focus on capital preservation throughout our investment solutions
What do we look for when investing? Predictability
We’re dedicated to the adviser market; we don’t accept direct client investments
We pride ourselves on providing genuine transparency about where and what we invest in
Asset backing Income generation
Find out more 020 7391 4747 questions@time-investments.com time-investments.com This notice is aimed at financial advisers only and is not intended for retail clients. TIME Investments is a trading name of Alpha Real Property Investment Advisers LLP and is authorised and regulated by the Financial Conduct Authority.
We have an in house team of 12 investment specialists, offering a real depth of experience
RICHARD HARVEY February 2016
Won’t Get Fooled Again Hands off my generation’s cash, says Richard Harvey At the behest of the Good Lady Wife, I have recently adopted a Roger Daltreyesque hairstyle with centre parting, and bought a new pair of funky blue specs. She wouldn’t express it in quite these terms, but there is no doubt these little cosmetic vanities are borne out of her fear that I might be on the slippery slope towards old git-dom. Entirely unjustified, of course. For instance, I haven’t drifted so far right in my view of the world that I’d consider re-posting those Britain First messages on Facebook, with their foam-flecked fury about anyone born south of Calais. And I’ve never been tempted to pen a letter to the Daily Express railing against the theory of global warming/ continued membership of the EU/the Communist leanings of Comrade Corbyn (add lashings of vitriol as appropriate) or joining the ageing whingers and moaners propping up the bar at my local pub. Mark you, it’s a battle. I try not to shout at the telly, but the surfeit of pre-Christmas saccharine as the winners of ‘Strictly Come Dancing’ and ‘The X Factor’ blubbed their eyes out and jabbered on about their ‘journey’ had me jamming a fist into my mouth to stifle an outpouring of invective. Bring back National Service (whoops, slipped up there).
44
However, if the tendency to intolerance and the mind’s migration towards bigotry increases with age, then the nation will soon be lumbered with tens of thousands of VGOGs (Very Grumpy Old Gits). According to the Office for National Statistics, the number of centenarians living in the UK has jumped by 72 percent in the past decade, and almost all babies born this year will live to at least 90. With the prospect of increasing hordes of healthy and active pensioners comes the pressing issue of how they pay their way and, when they do finally sign in to the Sunset Home for the Terminally Enfeebled, their care. The government knows,
up for the one year deal, with a 2.8 percent annual return proving so alluring that eager applicants crashed the online application system. Now the one year bond has come to an end, and unless subscribers act promptly on receiving their notice of maturity, they will automatically be enrolled into one of NS&I’s Guaranteed Growth Bonds yielding as little as 1.45 percent for one year - and there are plenty of better deals than that. Without the advice of an assiduous IFA, there will be a Dad’s Army of pensioners whose savings will be dumped into products with weedy returns. It’s not just NS&I - there are plenty of other providers who sneakily transfer savings into low-yield
With the prospect of increasing hordes of healthy and active pensioners comes the pressing issue of how they pay their way it and IFAs know it. The topic is considered intractable, and the lack of imaginative solutions is depressing (at least it is, if you are my age). Even short-term efforts to deliver pensioners a relatively decent return on their savings seem to be withdrawn with indecent haste. Take the 65+ Guaranteed Growth Bonds from NS&I. Some 470,000 savers signed
schemes, and they’re often slower than a clapped-out mobility scooter in telling their clients. Which is simply not acceptable. Outrageous in fact. They should be banned from ever selling financial products again. Horsewhip the lot of ‘em. Or is that just the reaction of a member of the Society of Enraged Old Fascists?
I FAmagazine.com
Compatibility: Requires IOS 6.0 or later. Compatible with iPhone, iPad, and iPod touch. This app is optimized for iPhone 5. Available on Android.
Twenty Four Seven IFA Magazine, Britain’s premier online portal and print publication for financial advisers, has launched its ver y own app designed to help you stay up to date with all the latest financial and economic news as it happens.
Main Features: Reviews Features Funds Market and Economics Trading Expert FCA Compliance Jobs