Dear Client                                                                                                                                    

What a difference nine months can make!

At the beginning of March, markets and investor confidence had sunk to awful lows and investors were nursing horrendous paper losses after almost two years of price falls. There was talk of a multi-year depression even more severe than that of the 1930s, record unemployment, a collapsing property market, increasing numbers of bankruptcies and repossessions and stockmarkets were priced for Armageddon. Conditions were bleak and of course, for some they still are.

At that time, many so-called experts suggested that valuations would deteriorate further from those lows and indeed, some still maintain this view. For all those investors who listened to these “experts” and either encashed investments, deferred further contributions or simply switched into cash and Gilts, they will now be very unhappy. They have missed out on a tremendous recovery and one of the best ever. Indeed, from a March low of 1755, the UK’s FTSE All Share Index has since recovered to 2700, representing an amazing 56% increase (admittedly still shy of its 2007 high of over 3450). The index pays a healthy net of tax income on top of over 3% too. You will be interested to review the table within which reflects on a selection of share prices at their March 2009 low-point and now. This is a sample only and not all investors hold these.

Over the equivalent period, cash in the bank has paid approximately 2% interest at best whereas the UK Gilt sector has seen approximately 1% growth (excluding income). Gilts look really expensive especially in the face of so much debt to swallow. This demonstrates quite markedly that conditions change rapidly and that markets do not move in straight lines. It also reinforces the “time in the market” rather than the “timing the market” argument, the latter of which will invariably fail. Long-term investors must be patient. Unfortunately, the ultra defensive position adopted by some investors (that in hindsight proved correct during 2008) has been an extremely expensive mistake since March in the face of the best investment opportunity for generations. Indeed, what makes it worse for them is that a relief at being out of markets also accentuates the self belief in their actions so that however cheap the market becomes, usually they don’t get back in, only doing so when conditions have become ‘normal’ again (which means much more expensive) then greed grabs ahold of them as they are fearful about missing out on any more! They become the drivers of the next ‘best thing’ like a Tech or Property Bubble.
Up to March, markets made a mockery of sound, textbook investment management decisions like those we were taking for investors. We were not alone. Therefore, it is reassuring that the experience and knowledge that we were able to draw upon at the time has enabled investors to participate in the latest market rally. In light of the pressure that all investment managers were facing at the time, it would have been very easy to limit further pain by selling everything. This may have appeared welcome by some at the time although justifiably, investors would now be extremely angry about that decision had they suffered the losses and missed the rebound, even if we are not back to previous all-time highs. Our average investors (if ever there is such a thing as everyone is different!) is up anything up to 40% from that worst point. The “correct” course of action is always oh so very easy to see when looking back and certain decisions may invariably appear to have been  “obvious” in hindsight. However, rarely is this a true reflection of reality and the daily decisions that are required and which we take, in what can be extremely challenging conditions. The best and cheapest investments are those no-one wants and the worst are the too popular (too expensive) - remember the Tech Bubble?

As ever, we must remember that market levels reflect the consensus view between both buyers and sellers and that a surplus of one group will sway share prices accordingly. This does not mean that one group is correct and the other wrong and on occasion, this creates short-term anomalies of which we shall endeavour to take advantage for investors. Unfortunately we cannot offer any assurances regarding returns, only offering our best efforts as clearly there is no magic wand or crystal ball to guarantee success. Investors pay the Company an annual fee for the management and safe custody of their investments and as we have done for nigh twenty-five years, we shall use all the tools at our disposal for their benefit. As always, we must position investments based upon future expectations, not events from the past. Remember too that the vast majority of investors are the ‘market’. There is a naivety out there that some investors think their adviser (or themselves) can always be in that tiny minority, which cashes at ‘the top’ and buys ‘at the bottom’, so why they think there’s this special line which treats them differently to the collective human mass, I don’t know!

Despite the rally, UK markets remain 25% below 2007 highs and certain investments remain heavily depressed against original purchase prices, not least some of the high-profile former ‘very safe’ banking heavy-weights such as Royal Bank of Scotland and Lloyds. There have been other disappointments too, which have encountered difficulties for varying reasons. It makes little sense to sell something when it has already fallen, if the greater likelihood based on daily reappraisal is for improvement and recovery.

For interest, I refer back to our newsletter in March as a reminder of what we were saying at the time. This conflicted with all the pessimistic pundits who had the stage. Our strength of conviction has rewarded handsomely. We are still here, whereas many are not; we have seen the demise of Lehman Brothers, Bear Stearns, Halifax, Bradford and Bingley, Northern Rock and New Star. How long has your investment manager been at the helm, if it’s not us at twenty-five years?

We said: “We remain optimistic that conditions will improve over the coming years and that existing investors are best advised to avoid cashing-in prematurely. For those with money to invest long-term, conditions are now very attractive indeed. Shares are incredibly depressed but markets will recover. Afterall, we are still eating, drinking, clothing ourselves, driving the car, using the telephone, seeing the doctor for medicines and paying insurance premiums. Suppliers of this produce and these services are not going away.”

Of course, we cannot become complacent. The economy faces many challenges over the coming years and inevitably there will be some further volatility within markets. As ever, some companies will outperform whereas others disappoint. Valuations remain below 2007 levels but we are cautiously optimistic about the future as generally speaking, despite the pessimism, markets are still not expensive and with interest rates set to remain low, large amounts of uninvested cash, which are earning next to nothing, will be applied to markets and existing share prices should be supported. In fact, it may sound superstitious but it could be the case that those with cash and bonds are the next sector to suffer - perhaps from a dose of hyper-inflation. Spread your eggs around now!

I do hope that you find this Newsletter helpful and that 2010 is a better year for us all. Perhaps, after a torrid couple of years, we can look forward with greater certainty and hope. I wish you all a very happy Christmas and New Year.

My very best wishes.
           

PHILIP J MILTON DipFS CFP FCIB FPFS
Chartered Financial Planner
Fellow of The Personal Finance Society

Whilst not exhaustive by any means, below is a commentary concerning how markets treated just three of what might be considered ‘boring’ companies’. We hold these for some investors now. This shows how frustrating the market can be but also the opportunities!

Rentokil Initial

Rentokil Initial plc employs over 78,000 people in over 50 countries. Services include: pest control (like a colossal project to control rodent infestation in Libya!), package delivery (which has benefited from Royal Mail’s problems), interior landscaping, catering, cleaning, washroom solutions and textiles. It is one of the largest business services’ companies in the world, operating in many major economies. The group announced its third quarter results recently (6 Nov) with pre tax profit at £24 million, up from £11.1 million in the same period a year ago with turnover of £583 million. Last December the shares dropped to 31½p (on borrowing fears), since which time they have been up to 118½p, almost four times higher! As a result, Rentokil is back in the FTSE 100. Borrowing is being managed carefully but this was a clear case of markets over-reacting on the downside. ‘Clever’ investors were still selling at 31½p.......

Costain Group

This month, engineering, construction and public infrastructure company Costain has been appointed to assist a roadworks’ programme in the Midlands arising from the Government's fiscal stimulus plan. The work, which will be undertaken with Lafarge, is worth up to £250m over two years. 'This framework appointment further strengthens Costain's position as a market leader in highways’ maintenance in the UK and supports our near-term visibility of forward earnings,' chief executive Andrew Wyllie said.

In November 2008 the shares dropped to just 19p before recovering to 35p in late August 2009 (following announcements that it entered the second half of the year with a record order book, robust finances and a net cash balance exceeding £100m!). The shares have since drifted back to 28p but are very attractive we believe.

United Utilities

The Group's core activity is that of water distribution services in the North West with a £2.4 billion turnover. In addition, the group also operates within infrastructure management. Pricing pressure from Ofwat and a reduction in the dividend has seen the share price slump by 54%. The group’s business remains highly defensive unless people stop using water and electricity! Turnover will not be influenced much by our general economy and with a net of tax dividend income of over 7% it remains a very attractive, value holding within strategies (but some ‘shrewd’ investors will have sold because it was ‘risky’ as it fell by half - that’s when we started buying).

Tax Efficient Saving - plan ahead as tax WILL rise

Investors aged fifty and over before 5 April 2010 can subscribe up to £10,200 towards ISAs for this tax year, up from £7,200. For all younger investors, the increased ISA allowance is available from April. With inevitable tax increases (to meet burgeoning levels of Government spending), our encouragement is to use every possible means of protecting savings from tax. This includes pensions too.

With cash ISAs paying anything from just 0.5% to 3%, you may wish to enquire about our own market ISA options. We offer three distinct ISA options, ranging from our low-medium risk High Income ISA, which gives exposure to 1,300 underlying Corporate Bonds from the widest possible range of collective funds anywhere (currently offering regular tax-free interest of over 6% per annum) through to our stocks and shares’ ISAs. Cash ISAs may be transferred to our market ISAs too now, although not appropriate for everyone. Market ISAs cannot be transferred to cash ISAs and therefore, any switch is non-reversible.

Many investors took advantage of this option in the Spring by transferring into our High Income ISA, “locking in” even higher income available then and remarkable capital gains from our safest ever strategy too! Here was a case of “having your cake and eating it”! It’s not that life-long opportunity now but it’s still very good!

Our ISAs accept lump-sum contributions from as little as £1,000 or regular subscriptions from only £50 per month. This can be an excellent means of accumulating a nest egg for the long-term, to repay a mortgage, to help fund retirement or to fund children’s education for example. Income and capital gains are protected from tax so you can rest assured that the taxman will not be taking a further slice of your wealth!

As priorities change from accumulating wealth to starting to enjoy some money, investors may draw an income from the ISA by way of dividends and interest that it generates. This need not affect the value of the plan which still has the opportunity to grow over time.

Click here for further details of our strategy choices.

Retirement Plans - do keep us updated

It is absolutely imperative that you keep us apprised of your clients’ plans in terms of drawing pension benefits. As we have explained previously, this will help us help you in structuring the pension plan(s) accordingly. For example, where an individual is a few years off retirement they may have a larger portion of their pension still invested in shares. However, this allocation may need to change as retirement approaches, in favour of more stable holdings for example. This will reduce the impact of any market volatility as the key date draws closer.

Therefore, where we manage a Transact Pension for one of your clients please do let us know their future retirement plans and keep us apprised of any changes.

Behavioural Science and Investment

Studies in this area have enabled us to better understand what we all might do in a given set of circumstances against what ‘rational analysis’ prescribes. Typically, the outcomes are very different! Invariably this is driven by human emotion and past experiences. Often there are two broad classes of irrational tendency when investing, whether that’s shares, property or whatever; overreaction and underreaction. The former is most prevalent following a bad experience, when you are likely to become more risk averse, leading people to panic sell shares, for example, at the worst possible time (when usually the risk of selling  presents the biggest risk of all, afterall, look at market performance since March, a thumping 50% gain on the FTSE 100 and income on top). At the opposite end of the scale, after investments have rocketed, you become more confident and receptive to risk and simply do not act at all (to sell) or perhaps you buy more because of your misplaced confidence in ‘your skill’ (when it is higher risk as downside potential is far greater, of course). From a purely unemotional standpoint, the opposite behaviour is more advisable (buy low and sell high) but of course we are not robots and feelings also determine what you  do, whether sensible or not!

“A simple rule dictates my buying: Be fearful when others are greedy and be greedy when others are fearful. And most certainly, fear is now widespread....Fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings’ hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.” Warren Buffet - October 2008
(we printed this in our March newsletter too)

Interestingly, our decisions also tend to be influenced by the subject. Afterall, if our homes fall by half their value, many more investors would consider buying (because houses seem cheap) than would apply if the asset in question was shares. Instead, their argument is more likely to be that shares are too risky!). Tangibility is one reason I suppose but still it makes no logical sense at all! Shares are real businesses, which trade with you and me for profit, employ people, have assets and hope to grow. However hard it may be, you must do your best to recognise these traits in yourselves and distance yourselves from emotion when making investment decisions as otherwise you will select the wrong option and live to regret it. Add a good dose of patience and you have the best recipe perhaps!

Philip’s health update

As many readers will know, Philip was admitted to Derriford Hospital on 16 November for a scheduled triple heart bypass operation and at the time of writing this newsletter he was recovering well. He will be working hard from home mainly until the New Year, making full use of his email no doubt! Philip would like to thank all well wishers for their cards and kind comments. All technology has been established so he can keep a wary eye on everything!

Congratulations! 

In recognition of their efforts, the Company was delighted to appoint Mr Simon Marsh and Mrs Nikki Baker as Assistant Directors of the Firm in September. Simon is one of our highly qualified financial advisers and joined the Company in June 2007. Nikki is Philip’s invaluable personal assistant and joined in October 2007.

(Pictured, Nikki, Simon and Lee (left to right))

Our congratulations also go to Mr Lee Wenham who has been appointed Head of the Taxation and Accountancy Department. Lee joined the Company in June 2004.

Our Website

We were delighted to launch our new and much improved website in the Summer. The address is www.miltonpj.net Please do visit our fresh and simple layout which contains details of all we do and profiles of some of our key personnel.

Forms can also be downloaded and there are various links to other useful websites, including that of Transact for investors seeking valuations for example.

Tax Tips

Age Allowance Trap

In the tax year in which you have your 65th birthday you are eligible for higher tax allowances (which exempt income from Tax) called “Age Allowance”. These are at a higher rate again when you reach 75.

In 2009/10 if you are 65 to 74, the allowance is £9,490. If you are 75 or over the allowance is £9,640. This compares to the standard personal allowance of £6,475. Entitlement to Age Allowance depends upon an individual’s total income and the full allowance is available providing annual income does not exceed £22,900 for 2009/10. However, above that, the allowance is cut by £1 for every £2 of income (although it cannot fall below the standard personal allowance).

Particularly for individuals with income between £22,900-£28,930 it makes sense to reduce taxable income. This could include sheltering money from tax (applying funds to an ISA or a pension for example) or transferring savings to a spouse.

Limited Company Tax

Corporation Tax is a tax on limited companies and other organisations. Currently, the rates are:

1. The small companies’ rate (profits of up to £300,000) is 21%. This rises to 22% from 1 April 2010.
2. The main rate is 28%.
3. For profits over £300,001, a marginal rate relief applies. Most profits in excess of £300,000 bear tax at a marginal rate of 29.75%. 

Changes to National Insurance contributions and the new 50% Income Tax threshold have altered choices for directors between drawing dividends or taking a (higher) salary. Nevertheless, if you are in a position to choose between the two, a dividend usually remains the more efficient. In light of the tax changes from 6 April 2010, some may wish to bring forward dividend payments into this tax year, if funds are available. A useful tip for those with limited companies and for employees - get the ‘employer’ to cut your pay and subscribe to a pension for you. This will save National Insurance on you both - and top rate tax too!

After Hours

My England

Goodbye to my England, So long my old friend,
Your days are numbered, being brought to an end,
To be Scottish, Irish or Welsh that's fine,
But don't say you're English, that's way out of line.

The French and the Germans may call themselves such,
So may Norwegians, the Swedes and the Dutch,
You can say you are Russian or maybe a Dane,
But don't say you're English ever again.

At Broadcasting House the word is taboo,
In Brussels it's scrapped, in Parliament too,
Even schools are affected. Staff do as they're told,
They must not teach children about England of old.

Writers like Shakespeare, Milton and Shaw,
The pupils don't learn about them anymore,
How about Agincourt, Hastings, Arnhem or Mons?
When England lost hosts of her very brave sons.

We are not Europeans, how can we be?
Europe is miles away, over the sea.
We're the English from England, let's all be proud,
Stand up and be counted - shout it out loud!

Let's tell our Government and Brussels too,
We're proud of our heritage and the Red, White and Blue,
Fly the flag of Saint George or the Union Jack,
Let the world know - WE WANT OUR ENGLAND BACK !!!!

British Newspapers

Commenting on a complaint from a Mr. Arthur Purdey about a large gas bill, a spokesman for North West Gas said, "We agree it was rather high for the time of year. It's possible Mr. Purdey has been charged for the gas used up during the explosion that destroyed his house."

(The Daily Telegraph)

Irish police are being handicapped in a search for a stolen van, because they cannot issue a description. It's a Special Branch vehicle and they don't want the public to know what it looks like.
(The Guardian)

A young girl who was blown out to sea on a set of inflatable teeth was rescued by a man on an inflatable lobster. A coast guard spokesman commented, "This sort of thing is all too common".
(The Times)

At the height of the gale, the harbourmaster radioed a coast guard and asked him to estimate the wind speed. He replied he was sorry but he didn't have a gauge. However, if it was any help, the wind had just blown his Land Rover off the cliff.
(Aberdeen Evening Express)

Mrs. Irene Graham of Thorpe Avenue, Boscombe, delighted the audience with her reminiscence of the German prisoner of war who was sent each week to do her garden. He was repatriated at the end of 1945, she recalled - "He'd always seemed a nice friendly chap but when the crocuses came up in the middle of our lawn in February 1946, they spelt out 'Heil Hitler'.''
(Bournemouth Evening Echo)

Lost Colonists of America

Following an article in the North Devon Gazette in July, Philip, volunteered to have his DNA tested to establish whether he was related to Lost Colonists of America.  The Mayor of Bideford, Mr Andy Powell, is trying to establish whether Bideford ancestors were among the founding fathers of America, prior to the Pilgrim Fathers setting sail from Plymouth. You can find some of the fascinating history on the worldwide web - it is worth reading!

As some of you will be aware, Philip is a keen local historian and has traced his North Devon roots back to at least the 17th Century on both sides of his family and was interested to establish whether he could trace them back even further.

A Henry Mylton was on the ship’s List. Philip’s DNA has been sent to Texas for analysis. Through his DNA it is possible to show not only if Philip is related to namesakes in America but at what point in history it took place. He has since found a forebear who travelled on “The Supply”, a sister ship of the Mayflower and that Miltons established roots in Virginia too!

Trimstone Manor Country House Hotel

With the nights drawing in and the clocks having changed, we know that Christmas is just around the corner and our thoughts will be turning to cards, presents, mince pies and carol services, in fact, all the trimmings. But this year why not do something different for your Christmas or New Year celebrations? Trimstone is open for business and with breaks from only £100 per person per night to include Christmas Lunch and all meals, perhaps it’s time to let someone else do the cooking! We are also open to non-residents for Christmas Day and for a sumptuous six course meal (and festive canapés and coffee on top), it is only £54.95. Early booking is recommended as we only have a few places left!

There are also three delicious Christmas Party menus to choose from at Tyme Restaurant at Trimstone, starting from only £16.45 per person for three courses and which will be available throughout December. Larger parties are welcome. Please do contact the Hotel on 01271 862841 if you’d like to visit!

PLEASE NOTE

The comment contained within this newsletter is the opinion and copyright of Philip J Milton & Company Plc. No outside institution is employed specifically to provide comment which is based entirely upon the Company's independent view of worldwide markets and economies at the time of publication. The values of market investments and their income can fall as well as rise. Any performance/prices quoted within are based on details at the time of writing and specific clarification and individual comment is necessary if action is being considered. Please note that some of the ancillary products such as accountancy and executorship services are  not regulated by the Financial Services and Markets Act 2000. The value of your home is at risk if you do not keep up repayments on a mortgage or other loan secured upon it (written details are available on request).