Dear Friend
Included in this edition of our e-newsletter …
SOCIALLY RESPONSIBLE INVESTMENT
FINANCIAL ADVISORY MARKETPLACE
Well, as ever we are reminded that just a few weeks is a very long time in politics or in this instance, economics and investment conditions. The Corona Virus is wreaking its deadly toll and upsetting the sense of market stability (well, aside from US tech where the shares there are still scraping the sky). It’s not a time to panic but yes, maybe if you want to access your market investments for some funds it is worth deferring temporarily – it is never a good time to access things when there are wobbles afoot but of course with our strategies there is always something we can access and which is unaffected or indeed which may have risen as a consequence of some bad news too. That’s what balance and holding uncorrelated assets is all about. However, do watch-out – the reverberations are likely to keep spreading and these could have a financial impact which governments haven’t considered. Still, commodity prices (like oil) have been falling so at least that is helpful – falling as a consequence of the expectation of less demand as people cannot travel etc. It’s a funny world.
LIQUIDITY
According to some calculations, last year the US Market enjoyed the biggest splurge of liquidity for fifty years. It is sloshing around the rest of the Globe with global indices registering their sixth best year on record and swollen by the outcome in the US.
Now the pessimists amongst us might remember that after previous liquidity surges there have been explosions in asset values and then a bursting of the bubble. I like what Citigroup chief Chuck Prince said just before the 2008/9 crash: ‘still dancing’ – but the point is that whilst you enjoy the party, dance near the door. Aged readers of this tome will remember that I likened the excessive heights as being in an office block with a party on the top floor, the first vestiges of smoke being noticed, some leaving as a consequence but as the party seems to be carrying-on at an ever more fervent pace, they go back-in, past the glow in the basement and then finally they find they are trapped alongside everyone else who thought it could only but continue.
Part of this (all of this?) is reflected in global debt which is ballooning to a record $257trillion. Yes, historically low interest rates ‘help’ in that it is cheap to borrow and easier to make a return on that borrowing that exceeds what it costs you. Of course, not all debt is like that and how much of it represents profligacy either by governments or individuals (and corporations?) as they over-spend on things they cannot afford.
Managed, balanced borrowing is a good thing. Yes, things can still go wrong and destroy the borrower but prudence and managed risk-taking is wise. Pretty much all of us borrow – even if inadvertently – consuming utilities for which we haven’t yet paid is a form of ‘borrowing’ after all. Businesses rely on credit from suppliers too and that is also borrowing, ‘gearing-up’ the business. I have borrowed for many reasons in the past and none is exclusive – I bought my first business premises because the interest and capital repayment costs were considerably less than the comparative rent. I have borrowed to buy my first home (a share in it anyway!) where again, I substituted ‘rent’ for interest. I have borrowed for other business premises and have also borrowed money I didn’t need at very cheap terms against secure assets which I intended to keep for a long time so that then I would have more liquid capital to be able to buy other assets and investments in a marketplace where I could act as a cash buyer where others could not (because banks had so tightened-up the rules). And yes, within that overall mix I have invested in stocks and shares too rather than repay my debts, on the basis that if I am paying a pittance of interest then it is easier to create a return on my investments in excess of the costs I suffer and if I have done this wisely, I can offset the business interest costs for that relevant borrowing against business income too. I also have to make sure that I have accessible funds should something unexpected happen, for contingencies – as well as unexpected opportunities.
Isn’t it true though that too many always borrow up to the hilt – the most expensive house in which to live, the dearest car and other consumables based on the top of their income and then when something adverse happens (which it can) they are in a pickle and seriously compromised and then having to take difficult and often costly decisions? What contingency have they built-in? Have they allowed for interest rates to rise, their income to fall, other issues to materialise which they had not considered? There are then others who cannot handle having a windfall – whether that is an inheritance or whatever – they can’t put it to one side and keep their powder dry till the best/right opportunity arises – they have to ‘spend it’ and oh how often it is not on the wisest thing and once it is spent/invested in that pet property project or whatever, no, you can’t easily access it even if the best thing since sliced-bread appears the next day.
HOW GOOD IS YOUR ADVISER?
Readers will know that we inherited a portfolio of clients when the previous investment management firm went into liquidation (Organic Investment Management Plc). We have been doing our hardest to help these investors, most of whom have suffered losses through inappropriate activities of the firm and even the original advice provided to them to subscribe in the first place. We are helping them with their investment management needs now, dealing with the practical requirements relating to their pensions and of course trying our utmost to guide them in relation to the compensation claims they need to make. Most of what we are doing is not economic to us – it is a goodwill gesture to try to help people in need and yes, if they remain as long-term clients then perhaps yes, they will become ‘proper’ clients of ours too and we can help them more meaningfully in the end. However, it may take years before that pays for us but we were aware of that before we said ‘yes’!
However, what is frustrating is that for some of the investors, they have sought new advice (which of course is their prerogative and some form of advice is encouraged) but the new adviser is not out to do the best job for the client, really only appearing to be looking to make money for themselves out of the plight of the afflicted investor. Some of these ‘new advisers’ seem to be the original ones who put the investors in the wrong things in the first place…
FCA rules demand that the details of the existing scheme including charging arrangements, etc must be reviewed and understood before a recommendation is made to the client. So how can we understand when a pension transfer case arrives and the instruction is simply to ‘sell everything’ we hold for the client and to send cash to the new pension firm. Really? Is not just even one of the collective investments we have acquired perhaps satisfactory to hold in the new portfolio? What do you mean, the new pot recommended can’t hold anything other than the new host’s funds? What about the costs of the switch for the client – the brokerage on selling everything, the fact that when you sell something you receive the selling price and when you buy the new things you pay the buying price (and Stamp Duty in most instances)? And then what about if the instruction arrives and has to be discharged on receipt but on the day the markets wobble (e.g. last Monday with the renewed worried about the Chinese disease issue)? Oh right – yes everything sold regardless of price. Did the new adviser call to say ‘best put on temporary hold’? No, of course not. So, the values may be 2% lower as a consequence of that alone and just think, waiting a few days, weeks or months may see the disease as an historic event – that isn’t the point; it’s the fact there is no interaction which is the point. And then, what if it takes say a month for the cash to arrive and the transfer processes to be completed before the cash can be reinvested in the new scheme? The time to shuffle is NOT when volatility is high – it could cost the poor chap 10% or more of his money whereas instead, he could have stayed put and his new adviser could have been advising him on the investment portfolio he has under our guidance. Sorry but no, we guess in this instance that the adviser is taking a fee for the advice – probably a chunky, percentage-based charge which is likely to amount to several thousands of pounds and this is of course in the client’s best interests rather than charging him a couple of hundreds to review the diversified assets he holds now… hmmm. I wish the client well but ulterior reason for that transfer seems the case sadly.
It also makes me appreciate that we try so hard in all instances to optimise the results when a client needs some money, or even when they have to leave totally. We ‘deal bar’ the account, try to ascertain what the client needs and when and then optimise the access to that capital over as extended period as is possible so we do not take the terminal decision all at once. We can also then look to match his sales with the purchases for other new clients so each secures the very best prices between the two extremes, cutting-out the middle man. There is little chance (or none) doing that when a simple ‘execute today’ instruction arises as we have a duty to act instantly. What is all our extra effort worth to the client? In the above ‘bad’ example, if say the sale ‘cost’ the client 2% just by being on a bad day, let alone not being able to match buyers and sellers at the time for better prices, then that alone is say a couple of years’ management and advisory fees – ouch. Bet the new adviser never noted that in his recommendation.
SOCIALLY RESPONSIBLE INVESTMENT
This is going to become a hotter topic than perhaps it has been so far but what should investors do – and what should they avoid? There is no challenging the good intentions, of that we can all agree but it is not a clear-cut subject. One of the most unethical things which we have seen over many years is the heavy promotion of a concept for ulterior financial reasons to the seller. The heavy peddling of a range of component investments to people, pretending that in owning investment ‘A’ over investment ‘B’ is doing some good is in itself immoral.
So, what do we include in our universe or is it more a case of what do we exclude? For one environmentally friendly person, indulging in the odd spot of gambling and alcohol is quite acceptable whereas for another, those subjects and the harm which can be wrought to the vulnerable make them absolute no-go areas. Some hate fur farming and leather whilst some see it as an agricultural by-product. Some think private ownership of water assets is bad despite the global market in SRI being plush with water resources. Then there are those who believe solar farms despoil the natural environment or those who support the big energy companies because of their colossal environmental spends. Then, things also change. For example, one form of attractive alternative energy one moment can be frowned-upon the next – is managing woodland a positive (which it is for the biodiversity and also to sustain the timber-burning market which encourages more planting) but is using wood burners negative or positive (rotting wood still gives-off the same carbon of course)? Then yes, you may live in a new home that satisfies all the latest environmentally sustainable products and build principles but did you know that the construction sector is responsible for nearly 40% of total direct and indirect carbon dioxide emissions so would you be better advised living in an existing house which is less efficient?
Clearly, we must not overlook too that companies generally are not slow in reacting to the new principles which affect their business. This can mean their customers too – and last week Tesco announced it is removing all plastic multipacks for example. Was Tesco unethical by having them in the first place or is it now ethical in not having them (or is it impractical doing away with them)?
The other issue is that individuals and institutions can go wrong with their investment too, taking alternative energy ideas as factual and then finding sometimes that assumptions do not always reward in the same way as they expect. When many are based on some form of government subsidy, for example, such things can come to an end and indeed parts of the science can be unproven. There have been plenty of examples of solar and wind investments going bust and the latest problems seem to be impacting biomass plants where both Hadrian’s Wall Investments and SQN Asset Finance have announced necessary downward revisions on the values of loans they have made to anaerobic digestion plants, impacting investors’ funds accordingly. Unfortunately, we have some exposure to the latter whose shares are now trading at far too large a discount even if the whole bad assets were written-off (which won’t happen) but that is what can arise when panic sets-in and more people sell shares than are prepared to buy. However, it reminds us and should remind investors that these alternative ideas come with risks too. We have bought some more at the lower price levels though we shall await the Company’s strategic review outcome of course. Have a look at this report by JPM too which suggests sustainable energy costs could plummet and thus the returns from that sector – which presently rides on a big premium (alongside ‘infrastructure’ investments). https://citywire.co.uk/investment-trust-insider/news/renewable-funds-could-plunge-40-on-cannibalisation-threat-say-jpm-analysts/a1317406?re=71527&ea=517077&utm_source=BulkEmail_Investment+Trust+Insider+Daily&utm_medium=BulkEmail_Investment+Trust+Insider+Daily&utm_campaign=BulkEmail_Investment+Trust+Insider+Daily&
What is clear, however, is that simply selling a concept for a big fat profit to unsuspecting investors to salve their consciences is unethical and does not do the job which needs to be considered. Fair enough to exclude certain types of companies from one’s portfolios but it is not helpful to become pious and overlook some other obvious companies just because they happen not to be on someone else’s definition list.
We do offer an ‘unethical exclude’ option with investments and are revising constantly how we tackle this subject but it is certainly not easy for anyone and as I say, the intentions can be very honest. Perhaps the best way of impact is both in how you spend your money (which can best reflect your sentiments) and also how you give your donations to support causes which further your specific goals. Campaign activities can also be considered – even against companies in which you may have some investment of course. Now that may indeed be proactive rather than simply shelving the idea altogether!
FINANCIAL ADVISORY MARKETPLACE
The world has changed dramatically over the years insofar as financial advisers are concerned. There are far fewer advisers now despite the apparent need for even more and since the removal of commission in 2013, the profession has enhanced itself dramatically even if some firms are still selling ‘product’ and taking a chunky ‘transaction fee’ of up to 6% in some instances and which is just like a conditional commission, if you ask me and often these sums are hidden in the small print.
However, there is an element of ‘dog-eat-dog’ out there too with new start-ups throwing large sums at the industry and so as a consequence offering very juicy packages to attract established advisers to join them. Will this lead to increasing prices for consumers – probably. However, what quite a few of their targets don’t seem to realise is that if a chunky salary and big bonuses for new business generation are involved (and most of these businesses aren’t so worried about servicing existing clients, as we are!), then the new employer will be expecting results. We heard recently where the new employer firm expected £1million of new funds to be added to the coffers each month from their new adviser – and that is certainly going some… and we have to wonder what sort of advice and service that is for the sorts of people who are our typical clients. We don’t reward any staff on what they generate specifically but instead on such old-fashioned things as longevity of service, responsibility-taking and care of clients and qualifications in their specialist field but clearly these others are going to be paying based simply on what they ‘sell’. It is an interesting conundrum and we shall have to see how it plays-out in time and whether the staff turnover will be high amongst those who don’t or can’t ‘sell new product’ all the time.
RISK WARNING
Stock market investments can offer income through the payment of dividends and interest and good opportunities for capital appreciation over the longer term. By this, generally we mean periods in excess of five years, preferably much longer. However, we can never promise you particular returns, especially in the short-term. At any point in time but especially in the short term, your capital could be worth less than the original amount invested as some of the selected holdings may fall in value, regardless of expectations at the time of acquisition. We may also invest in funds that hold overseas securities. The value of these investments may increase or decrease as a result of changes in currency exchange rates. Returns achieved in the past cannot be relied upon to be repeated.
To remind you, why do I send out occasional emails? Because everyone can save money. We have no connection with any companies mentioned and you have to make your own contacts and satisfy your own enquiries. What is in it for us? If we can prove that we are knowledgeable and that our service and advice have good value, then you might contact us for professional financial planning and investment help. You don’t have to do that though and there’s no charge for emails. If simply they save you money, then accept them with our compliments! However, you’ll know where we are!
If you have any queries of any form or indeed any subjects you think I could include, please contact me. I also refer you to our website www.miltonpj.net. We celebrate our 35th anniversary in 2020 and have been publishing a well-respected independent column in the local Paper for most of that time and free client newsletters as well.
Do not forget however the usual caveats – this is not ‘advice’ and you are encouraged to seek that before embarking upon any financial route involving investments, etc.
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
