Investment Newsletter - May 2013

Investment Newsletter | May 2013

Money Marketing Awards 2013

Best Wealth Manager

Markets Flying Again After a strong start to the year, stockmarkets took a little bit of a pause in March and April.

However, the rally is now back with a vengeance!

After reaching 6,529 on 14 March, the FTSE dipped as low as 6,249 on 5 April. However, this has proved a temporary blip and as I write (15 May) the FTSE has reached a new high of 6,700. It has not been at this level since 2007 and only around 300 points off the record high set in December 1999.

Markets have been driven up by a combination of improving economic data and by central banks who continue with their unprecedented stimulus.

The rally has been somewhat unusual as it has been driven up by the more “defensive” stocks, rather than “cyclical” companies. Defensive stocks are those that tend to do well whatever the economic environment and that pay higher dividends. These tend to outperform in falling markets, hence the term “defensive”.

Normally, in a market rally of this strength it is the cyclical stocks, which are more linked to the global economic cycle, which outperform. This has not been the case this time as investors who had previously shunned equities, re-entered the market in the more cautious stocks.

However, many of those more defensive names are now looking somewhat expensive relative to the rest of the market. We suspect that as the global economy improves investors will rotate their equity portfolios into more cyclical stocks.

Portfolio Changes We are tweaking our portfolios to benefit should this be the case. We have just made two switches within our equity portfolios for discretionary clients, firstly switching the Artemis Income fund to the Miton Multi Cap Income fund.

The Artemis fund is predominantly invested in large cap defensive stocks, whereas the Miton fund will invest in any size of company from AIM stocks to multinational giants. Both aim to provide a steady return through a high dividend yield.

We are also making a change within our global speculative portfolio, switching out of the

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the FCA register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Money Marketing Awards 2013

Investment Newsletter | May 2013

Best Wealth Manager

Dimensional Global Emerging Markets fund and into the Schroder Asian Alpha Plus fund. We believe Asian stocks look better value than the wider emerging markets.

Our UK Dynamic portfolio, which normally outperforms in a rising market, has underperformed this time, dragged down by the poorly performing M&G Recovery. This fund holds many of the cyclical companies mentioned above and so we are retaining it for now.

We may make a further switch at some point in the near future to include more smaller companies in this portfolio.

Fund Rebates - Another Tax Take?

You may have read in the financial press recently that HMRC are to start taxing “rebates” on fund management charges so we thought it appropriate to summarise the position and outline the impact.

Currently, when we buy a fund, we usually receive a discount on the standard annual management charge.

Sometimes this discount is built into the fund as we buy “institutional” share classes where possible. This means that instead of paying 1.5% for the Invesco Perpetual Income fund, for example, the cost to our clients is only 0.75%.

Alternatively, there are occasions when we may buy the “retail” share class which costs the full 1.5%, but then a 0.75% rebate is returned to clients by way of a cash payment which is credited to your Nucleus or 7IM accounts. The net cost of the fund is the therefore the same as the discounted institutional class. However, HMRC have now decided these rebates should be taxable.

The industry has always taken the view that a rebate is simply a refund of charges paid, so is not “income”. HMRC disagree, and from the start of the current tax year these rebates will be taxed as income.

The Good News Firstly, the impact of this tax on our clients is limited as there are only a few funds where we have bought the retail share class.

For a typical balanced portfolio, the weighted cost of the funds is 0.51%. Taking into account the impact of the tax, this will rise to 0.55% for a 20% taxpayer and 0.62% for a 40% taxpayer.

Note that this will typically only apply in your “general” account (which is directly taxable), whereas ISAs, pensions and offshore bonds will not attract this tax.

We will move to institutional share classes where possible to avoid this tax. However, we will not do this immediately due to potential out of market and capital gains implications.

Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the FCA register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Money Marketing Awards 2013

Investment Newsletter | May 2013

Best Wealth Manager

Instead, we are working with Nucleus and 7IM to come up with a way of moving from the remaining retail to institutional share classes at platform level, avoiding out of market risk and capital gains. This may take a little longer, but if this is not done correctly the impact could be greater than the tax saved.

Note that this tax change does not apply to previous tax years and so will not be included on the consolidated tax vouchers you receive for 2012-13. The tax statements for 2013-14 will include the rebate information.

The Future The industry is challenging HMRC’s interpretation of the tax rules, however this will become irrelevant from 2016 onwards.

This is because the FCA (formerly FSA, Financial Services Authority) have decided to ban cash rebates in the future anyway. Some platforms have used cash rebates to fund their services rather than make an explicit charge as Nucleus and 7IM do.

For example, there is no explicit charge for using Hargreaves Lansdown’s platform for most funds. This is because Hargreaves keep the fund rebates rather than crediting them to the client.

Hargreaves is paid by the fund managers rather than the client.

The FCA have concluded that this is not too much different to a commission payment and could potentially cause bias. For example, they might promote those funds that give them the biggest rebate. The FCA have therefore banned rebates for the same reasons they banned commission.

In our view, this is a little like throwing the baby out with the bathwater, as it is very different when a platform passes this rebate (or discount) to the client in full.

However, in general, we welcome this move as it will make the industry more transparent as a whole and hopefully lead to lower fund charges in the long run.

Mike Deverell

Investment Manager

Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United Kingdom Visit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Conduct Authority. Equilibrium Asset Management is entered on the FCA register under reference 452261. The FCA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission

Market Views | May 2013

Money Marketing Awards 2013

Best Wealth Manager

General Economic Overview The global economy has generally picked up, with emerging markets, Japan and the US doing much better. The UK economic picture looks more optimistic than it has for a while, and could surprise many by improving more than expected.

Interest rates are unlikely to rise for some time, and more quantitative easing is possible in the UK. Inflation has subsided globally as commodity prices fall back, but remains high in the UK.

Asset class key + positive - negative = neutral (normal behaviour)

+5 -5

strongly positive strongly negative

Equity Markets We remain positive taking an 18 month view, based on company valuations. Projected earnings look reasonable given the improving economic environment.

Outlook

+1

Fixed Interest Corporate bonds and gilts have continued to rise even as equity markets have rallied. We do not think this bond rally can continue forever, although selected funds could do well. We may reduce fixed interest at some point this year.

-2

Commercial Property Capital values have been falling but this appears to have leveled off. If capital remains stable then the asset class could produce reasonable returns from the rental yield. We have recently reentered the asset class and may top up as the economy improves.

-2

Cash With interest rates remaining at record lows, returns on cash could remain below average for some time.

Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and alternative equity, neutral fixed interest and hold 3% to 5% property.

A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall.

These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.

-5