So the Fed has cut interest rates by a large 0.5%, helping to push Sterling to its highest against the Dollar and Euro since April 2022 (that’s a 23% gain on the Dollar since September 2022 – or a 23% loss on your unhedged US shares and bonds of course).
If the Pound retains its strength on higher interest rates, then soon it will be as high as it has been against both since 2016. This is welcome news but there are fears that the Fed needs to cut more severely, both because the economy has weaknesses which will escalate and indeed for the cynic, that the cost of the State’s borrowing is becoming so high that lower financing costs will help.
Here at home, rates have been kept the same and the latest retail sales show a jump above expectations, swollen perhaps by the spending on gifts for the Prime Minister, his Wife and other Cabinet members (the Clothes’ cabinet perhaps) – ahem! It is a strange thing however; on the one hand the media clamours about the poor and the cost of living crisis and then the figures (and the quantity of people who can afford to attend the latest Taylor Swift or Oasis concert for example) belie that. Have I misunderstood something?! Yes of course there are plenty who can ‘afford it’ but plenty I guess who choose to spend and then plead they don’t have enough money to buy their necessities… maybe I am just becoming cynical but certainly one thing lacking in our Society is an adequacy of basic financial education and expectation management. Both are needed, to counter the misery which such inadequacy of management and the almost inevitable debt which can come alongside that brings – and hopefully greater life contentment without that burden too.
However, at the same time we hear that Consumer Confidence has been hit by fears over the Halloween Eve’s Budget. The word ‘spooked’ has been used and that is understandable. Governments make mistakes and the significant unfunded public sector pay awards, alongside the blanket and blunt removal of the Winter Fuel Allowance (whether right, universally, or wrong) are perhaps the first two of the new Administration.
The one positive about ‘fears’ is that many people have accelerated their plans whilst tax rates are low, so it may be the case that the Government receives a tax windfall. For example, if someone sells an asset with a big gain within, if they pay lots of tax (albeit at say 20%), that is more than zero if instead they didn’t sell at all! Likewise this is true if a rich person declares a dividend from their company to avoid a possible penalty on those and pays 39.35% tax on it ‘now’ as opposed to leaving the money in the Company…
So who needs advice?
I was reminded of the invaluable advisory and guidance interactions we have with so many of our clients when two senior investment professionals noted they too have advisers, with there being an assumption ‘out there’ that of course ‘they can’t need them’. That, I believe, is coupled with ‘our problem’ that we don’t necessarily do a good enough job in reminding clients how valuable our assistance to them really is (and sometimes just being connected to us so they have someone to whom to turn when they have a query).
Or maybe we don’t charge enough because it isn’t valued as much as it should be (don’t worry, we’re not planning increases)! Of course, there are some people who we can’t help – they just don’t engage and don’t cooperate, even with offers of free help to ensure they are doing the best thing(s) for themselves at that moment. This has even included encouraging some defrauded investors from the client bank we saved and encouraging them to claim their due compensation, of tens of thousands of pounds in some instances.
This is combined with the new format of mass sales by companies like PensionBee and True Potential which, in reality, aren’t expected (or set-up) to actually give ‘advice’ – they comment generically about their ‘product’ but their investors have to decide what they want to do and what is best based on the specific binary answers and then instruct. Do the customers of such companies and those using the insurance and investment companies direct realise that? I don’t expect so.
The best value of our help may be when big events and decisions arise – such as retiring ‘what should I do’ and things like that and what about market collapses (they happen) – where do these people go for guidance to stop them doing wrong things at wrong times? I predict that the levels of encashments at the next big market rout will rocket as these customers will have nobody between them and the big ‘Sell! Sell! Sell!’ red button (on their handy phone app showing the ever-declining value of their life savings) to crystallise their losses (I haven’t even talked about doing their best to ensure that what they actually own is the right portfolio of assets for them in the first place of course!).
We hope that our clients know they can trust we are doing our absolute best for them whatever the flack being thrown at us by markets and geopolitical events so they don’t have to worry and have sleepless nights, not that we can avoid such things either but we are there to take the stress and do what we believe are the best things at the worst of times and they can often be very uncomfortable actions for us too.
Of course all those unengaged people know our fees are too expensive to afford aren’t they? No. Without any obligation to do anything, we provide significant guidance without any specific charges at all, either to participating clients or guiding new prospective clients. Really, it is a case of ‘can you afford not to have guidance?’ The simple answer is ‘no’.
When I set-up almost 40 years ago, I set myself a challenge. That was that I can help any and everybody who comes to me for guidance, whether they have lots or little. I am happy to note that with the myriad client circumstances I have seen that that has been true – not that everyone wants to listen too of course!
This concept does resonate with the ‘converted’ who have recognised the value of being ‘in our Club’ and indeed, it is very humbling to us quite often. This week some long-standing clients wrote in response to our unsolicited review letter of their finances noting how the tax changes from last April are likely to affect them and making some proposed changes to improve their position (changes that don’t incur any special costs for the guidance):-
I/we also like your alternative suggestion but as we don’t fully understand all the complexities of these strategies we are going to ask you to make the correct decision for us, after all we have trusted you for over 25 years and feel that you have always had our best interest in mind, so why change now!
Investment Trust charges
Great news indeed – the FCA and Government have suspended the MiFID rules on charges’ disclosure for Investment Trusts, with legislation expected to be effective in the New Year. We are proud to have been involved in that lobbying too.
So with one fell swoop, Investment Trust charges will appear significantly lower even though nothing, apart from better understanding, has taken place. This will also mean that our own schedules to clients for cost disclosure will be usefully lower (we are obliged to reflect the underlying funds’ charges).
Whilst it won’t happen overnight, more fund managers and investors will resume buying these very attractive investment vehicles as they will appear cheaper and of course, frequently with better attractions than their open-ended brethren, such as when sporting deep discounts, etc but of course that is not the only part of the equation. Our clients will enjoy the rerating when that happens! It could be as much as 5-10% of capital gains based on average discounts now. Trusts could also start to borrow more (at very cheap rates) to invest for enhanced returns for shareholder investors, as the cost of that will also not be a factor. Well done to those leading the campaign – we were pleased to be a part. Curiously, other advisers and managers will be obliged to look at them again for their customers, as they will be cheaper than some of the other fund formats they are using presently too.
Let me give you an example. One property Trust we own suggests the annual costs were almost 9%pa so investors and managers shied-away as that looked very expensive. However, in reality that will now drop to 0% as the usual costs of running the business (of investing in and managing property) are excluded (just like they are for all the other listed companies running their businesses). This silly behaviour (and managers dumping such stocks to avoid the conversations on charges with investors, trustees, boards and compliance) has meant that the shares have been far lower than it is likely they would have been if this anomaly had not existed. That’s why we have been filling our boots… (even if we had to reflect that misleading figure in our ‘costs and charges schedule’ every April) and that particular example sits at a discount to the underlying asset value that if (when?) unlocked, would give us a capital return of 233% and whilst we wait, an income from net rents of circa 10%pa for us. And that has nothing whatsoever to do with the market or the economy. It is a simple technical aberration, just needing investor patience.
It is not a minute too late; research suggests that since the launch of Infrastructure Trusts 18 years ago it’s now an unprecedented three consecutive years without any new funds raised. This was the primary cause. It’s funny, however, that the pressure to sort the problem (hence to allow funds to raise new money from investors again to help fuel renewables and other such projects) came from the profession and not from ‘governments’ which need such projects to help achieve its other targets for the green revolution!
Good news / bad news
Pleased to report Riverstone Credit Opportunities’ redemption of a quarter of our shares at the net asset value took place – $1.017 per share versus a present share price of 76c. We are likely to continue buying more to see the exercise repeated and meantime receiving a generous income from loans’ interest. Of course as the pot shrinks, the risks ostensibly increase so we shall be wary but there is plenty of distance to go first.
We have received confirmation of our 90p tender offer for our proportionate RM Infrastructure too – the shares remain 76p on the market. That’s an 18% uplift. Those funds will be recycled into yet more and similar opportunities. Further capital distributions will follow as the underlying loans are redeemed.
Thumbnail sketch
It’s time to do another of those old-fashioned investment stories so here goes. There is a commercial property company, with assets in several countries, not the UK. The Fund is listed in the Channel Islands and the shares, at today’s price, give an income yield of nigh 10%, paid from the net rent after deductions. Yes, we have a stake for clients and it doesn’t look pretty. The shares are trading at the lowest ever (we have just bought some more at a 6% discount to the market to clear an impatient institutional holder). However, the net assets are over 50p and on top of that, the Company benefits from maintenance and servicing contracts too, so it’s more than just a rental and development company.
I wish I had enough money to buy all the shares and then just to sit and wait, selling a few properties to clear the borrowing and well, keeping the rest for profit for free. No, there is not an immediate catalyst for change but it will come. Let’s say that the shares rally to reflect the assets. Well, let’s discount the valuer’s last pessimistic figures by say 20%. We’ll be receiving our income and the share price will have risen by 225%. For now, however, all we have to be is… be patient.
My best wishes
Philip J Milton DipFS CFPCM Chartered MCSI FPFS FCIB
Chartered Wealth Manager
Fellow Of The Personal Finance Society, Fellow Of The Chartered Institute Of Bankers
