__MAIN_TEXT__

Page 1

A T R U S T N E T D I R E C T P U B L I C AT I O N

ISSUE 13 JULY 2014

TRIP OF A LIFETIME TAKE YOUR PENSION WHERE IT WILL STRETCH FURTHER

1


CONTENTS


3


We strive to explore further. Aberdeen Investment Trusts ISA and Share Plan At Aberdeen, we believe there’s no substitute for getting to know your investments face-to-face. That’s why we make it our goal to visit companies – wherever they are – before we invest in their shares and while we hold them. With a wide range of investment companies investing around the world – that’s an awfully big commitment. But it’s just one of the ways we aim to seek out the best investment opportunities on your behalf. Please remember, the value of shares and the income from them can go down as well as up and you may get back less than the amount invested. No recommendation is made, positive or otherwise, regarding the ISA and Share Plan. The value of tax benefits depends on individual circumstances and the favourable tax treatment for ISAs may not be maintained. We recommend you seek financial advice prior to making an investment decision.

Request a brochure: 0500 00 40 00 invtrusts.co.uk

Issued by Aberdeen Asset Managers Limited, 10 Queen’s Terrace, Aberdeen AB10 1YG, which is authorised and regulated by the Financial Conduct Authority in the UK. Telephone calls may be recorded. aberdeen-asset.co.uk

Please quote G TNM 03


JENNA VOIGT

TRUSTNET DIRECT INVESTAZINE Investazine is published by the team behind FE Trustnet in Soho, London. Website: www.trustnet.com Email: editorial@trustnet.com

CONTACTS Editorial Jenna Voigt, Editor Direct line: 0207 534 7661 Alex Paget, Reporter Direct line: 0207 534 7696 Thomas McMahon, Reporter Direct line: 0207 534 7697 Daniel Lanyon, Reporter Direct line: 0207 534 7640 General Pascal Dowling, Head of publishing content Direct line: 0207 534 7657 Advertising Richard Fletcher, Head of publishing sales Richard Casemore, Account manager Direct line: 0207 534 7669 Jack Elia, Account manager Direct line: 0207 534 7698 Photos supplied by Thinkstock and Photoshot

As I write this issue’s editor’s letter, the sun has been shining for weeks, Wimbledon and the World Cup have both finished at exciting and unexpected ends. Who can forget Brazil’s shocking 7-1 loss to Germany? It’s been an exciting summer of sport, but it’s also been a disappointing one for England with the national team out of the World Cup at stage one, Andy Murray’s surprise defeat at Wimbledon and Mark Cavendish’s terrifying crash out of stage one in Yorkshire’s Tour de France. There’s always next year. With the smell of strawberries and cream in the air, it’s time for many of us – myself included – to make the annual pilgrimage to somewhere sunny, even if it’s just down to the Devon coast. Since thoughts of impending holidays are on everyone’s minds, we’ve taken a bit of a light-hearted approach to our summer issue, looking at ways to save you a few pennies on holiday or make the most of the strong pound overseas. There is still plenty of investment insight, but it has come in the form of Investazine’s own “fantasy football” team of funds, which aims to show you how a diversified portfolio of products can work together to achieve your investment goals. We’ll also reveal where your retirement pot could stretch further – and what to watch out for – if you move overseas. Trustnet Direct’s John Blowers also lets us in on his own near-retirement splurge. Thanks for downloading this issue of Investazine. In today’s busy world, we know it isn’t easy to keep up with your investment research. To be sure you don’t miss an issue, subscribe today and your copy of Investazine will be automatically downloaded to your device of choice each month. Happy reading! Your “off to the beach now” editor


THE BIG PICTURE

MACRO & CHEESE What’s happening around the world and how it impacts your portfolio HOLLY THOMAS

6


In line with our special summer edition of Investazine, global financial markets appear to be taking a breather and calming down. Market volatility – the measure of how smoothly market prices are going up and down– has plunged to near record lows. At times of market stress volatility shoots up as the stock market bounces around and buyers and sellers are hastier to act. So you would expect low volatility to be a good thing, right? Low volatility means markets are steadier? Wrong, at least according to many doom and gloomers who point to the period of low volatility preceding market crashes, which almost no investors will like. Historically, the volatility of the US stock market is around 20 per cent per year whilst current volatility is estimated at around 6-7 per cent annualised. The VIX index, also known as the ‘fear gauge’, measures implied volatility across the S&P 500 index. It gives a measure for the expectation of traders in movements across the S&P 500 over a rolling 30-day period.

As we fly past the half way mark, what a year 2014 has been so far. Six months have flown by and not only reversed many of the market trends of the past few years but also brought some huge geopolitical and cultural events.

It has fallen to levels not seen since before the financial crisis in 2007 and whilst it only reflects the US larger companies market, this market has a huge effect on global financial markets and therefore shocks that begin in the S&P 500 can be felt in the FTSE 250. Some investors have been whispering the old John Wayne adage, that things are “quiet…too quiet,” whilst others believe it is

evidence the market is becoming complacent and over exuberant. But are we at a time of taxi drivers giving stock tips and people remortgaging their houses to dump on the stock market? Both are clichéd examples of complacency and exuberance that normally precede a tumble. In short, who knows, but for investors who have done well over the past few years it might prove sage to take at least some money off the table or roll into more defensive positions at until the summer’s deafening silence and the uncertainty it brings has passed. Unless you have been in coma you might also have noticed the Brazilian World Cup has played out to a momentous conclusion in the world’s stadium. Whilst Brazil may wish to forget a certain result - its loss to Germany of 7 to 1 in case you have forgotten – the tournament has shone a light back on one of the world’s fastest growing economies. Investing in Latin America has long been a contentious play, as the continent’s markets have been consistently amongst the most volatile. Volatility of this size can also be bad, especially if you buy at the wrong time or are investing at a short-term horizon. However, a long term investment in the region or even just Brazil, which is by far the region’s largest economy, is likely to yield a decent return but not necessarily for some time and will be felt with lots of, yes you’ve guessed; volatility.

7


STOCKPICKING

POUNDSTRETCHER HOLLY THOMAS

A strong pound means better deals overseas. Holly Thomas reveals the best places to go to get more bang for your buck. Sterling is riding high against a range of currencies, just in time for summer when the peak holiday season is upon us. Choosing your destination according to how the pound fares against the local currency could lead to a much better-value jaunt for you and your family. The pound climbed to its highest level against the dollar in five years in June. It is also standing tall against the euro, South African rand and Turkish lira because of expectations that UK interest rates will rise within the year.

This means that holidaying abroad in certain destinations has become much cheaper. David Swann at Travelex says: “With the pound strong against the majority of the major currencies compared with last summer, holidaymakers jetting off to the US, Europe, Turkey or further east to Thailand will find they have considerably more spending money.� Here are the top destinations to make your money stretch further this summer.

8


DON’T GET STUNG BY THE BANKS If you have gone to the trouble of seeking out a holiday destination where your money stretches further, don’t blow your efforts on paying more than you need to in bank charges while you are away. Moneysavingexpert. com says the wrong choice of plastic can leave a holiday maker spending £1,000 up to £90 worse off. Most debit cards levy a conversion charge, usually 2.75 per cent, plus an ATM withdrawal charge, typically between £1.50 and £5. Most credit card providers add a foreign-usage “loading” on purchases of up to 2.75 per cent. For the first time this summer, people will see the true cost of using their plastic abroad following new rules that came into effect at the start of the year. Known as “currency loading”, the fees that most card providers used to hide within the exchange rate must now be shown separately in statements. The cheapest way to pay for your holiday spending is to use a card that doesn’t charge for use abroad. There are no fees for using Halifax’s Clarity card overseas. Saga and Post Office also offer fee-free cards. When using any card, you may be given the option of paying a bill in the local currency or in sterling. But

US dollar In June the pound rose above the $1.70 mark to reach a level not seen since October 2008, although it has slipped back slightly since then. Anyone changing £500 today would be around $91 (£54) better off than they would have been this time last year, according to Travelex. It is worth bearing in mind that there are other countries that rely on the US dollar, including Barbados and Jamaica. Shopping in the US is ever popular. Beth Higham in the Virgin Holidays Press Office says: “With the dollar currently strong against the pound, now is a great time to travel to the US for a shopping break to kit out your summer wardrobe. While New York is an old favourite with shopaholics, Boston is a great alternative for second-time visitors.” Florida is a popular destination for families. The good news is that America is the cheapest place to hire a car,

many often convert your bill automatically into sterling at their own uncompetitive conversion rate, plus commission of up to 4 per cent. The golden rule is to always ask to be charged in the local currency. You can also get a pre-paid currency card at competitive rates of exchange, allowing you to lock in to a rate when it is favourable – without keeping piles of cash in the house. These cards use chip and pin like any debit or credit card and you can top up online at home and abroad. The charges and fees can vary significantly – Moneysupermarket.com says Caxton FX offers the best rates on both euro and dollar cards. Don’t forget to buy currency before you leave. Foreignexchange desks at airports tend to offer the poorest value, so plan ahead and order cash online from specialists such as FairFX, Caxton FX, Travelex or the Post Office.

according to iCarhireinsurance.com. More specifically, it is in Orlando, Florida where you will pay the least, at just £164 for a week. While now is certainly a great time to visit the US, you may also like to look to the Caribbean or Dubai. Many currencies – including the Barbadian dollar, the east Caribbean dollar, the Hong Kong dollar and the United Emirati dirham – are all pegged to the US dollar.

Euro The pound is 8 per cent stronger against the euro compared with rates last July, meaning an extra €46, or £37, in your pocket for every £500 exchanged. Portugal and Italy are the most expensive places to hire a car, according to the study, so make sure you shop around for the best value you can find using comparison websites such as travelsupermarket.com, kayak.co.uk and carhiresearch.co.uk.

9


Holland, Germany and Belgium are some of the cheapest destinations for car hire. Bob Atkinson at Travelsupermarket.com says: “The real saving for holidaymakers going to eurozone destinations is in the value for money of the cost of living. Higherend restaurants and bars have become increasingly affordable as the strength of the pound has grown.”

Turkish lira The pound is up 25 per cent against the Turkish lira compared with July 2013, meaning an extra 356TRY (£101) for every £500 you exchange. Turkey is among the five cheapest places in the world to hire a car, and over the past few years it has become known as one of the top destinations in terms of best value hotels and restaurants. Even Hollywood’s finest are starting to become tempted, with actress Jessica Alba visiting there in June. The star hit the streets of Istanbul and was seen indulging in Turkish food and traditional clothing.

Thai baht

South African rand

The pound is up 18 per cent against the Thai baht, meaning an extra 3,907THB (£75) for every £500 exchanged. Thailand is known for being good value for money – even without the decent exchange rate. Atkinson says: “Items such as electricals, PCs, games and DVDs are available at highly competitive prices.”

The pound is up 22 per cent against the rand compared with July last year, meaning an extra 1,552ZAR (£89) for every £500 you exchange. Here you will find the cost of eating out and accommodation very inexpensive compared with Europe. Wine is a fraction of the price we pay in the UK – and of a very high quality – and it can be shipped back home. The country is also a magnet for anyone who loves diamonds, which are extremely good value. An “exceptional” 122.5-carat blue diamond was recently unearthed at the Cullinan mine in South Africa – although this may exceed your holiday budget.

Going all in? All-inclusive breaks can help anyone who wants to stick to a certain budget – large or small. Just watch out for the small-print exclusions. In some resorts, for example, only local drinks are included, and a decent wine in certain far-flung places can be very expensive – so don’t forget to factor this in to the overall cost.

10


STOCKPICKING

Are airline stocks still worth buying?

JENNA VOIGT Ah, it’s that time of year when the residents of Britain rush off to their favourite holiday haunts, returning to their jobs with lobster-pink skin and bags full of meat and cheese. While many Brits stay closer to home, soaking up the summer sun in exotic locations such as Devon, Cornwall or perhaps even Scotland, much of the country rushes off to warmer climes such as Spain, the south of France or perhaps further afield.

Consolidated Airlines Group (IAG), the parent company of British Airways and Spanish flagship carrier Iberia. In Europe, cut-price airline Ryanair can offer some stiff competition to the UK airlines, despite its notoriously contentious service.

Although the queue for the easyJet check-in never seems to get shorter, does that mean its share price can continue to rise as it did in 2013? The bestperforming FTSE 100 stock last year was International

Airline stocks suffered a sharp selloff earlier this month after Air France issued a profit warning, siting overcapacity in the industry. Is this a buying opportunity or a sign of further turbulence ahead? 12


Performance of stock over 1 year 70% 60%

International Consolidated Airlines Group

A – International Consolidated Airlines Group (23.4%) B – FTSE 100 (6.8%)

50% 40% 30% A

20% 10%

B

0% -10%

Jan 14

Jul 09 July 2013 – 09 July 2014 © Powered by data from FE 2014

One year: +23.4%

Source: Trustnet Direct

Share price: £3.42

Shares in the recently formed International Consolidated Airlines Group (IAG) soared in 2013, making the marriage of British Airways and Spanish airline Iberia a profitable one for shareholders. The stock was the best performer in the FTSE 100 in 2013, although it has disappointed so far this year, shedding nearly 6 per cent since January*. Analysts continue to back the stock, with Jefferies Group reissuing its buy-rating on IAG in June. Liberum Capital and Credit Suisse also have a buy-rating on the stock, while The Share Centre reduced its buy-rating to “hold” in February after the share price shot ahead 20 per cent from November.

The Share Centre highlights stringent costcutting measures which, although they could pinch the share price in the short-term, bode well for the company’s long-term future. It adds that the firm’s management is making positive noise regarding revenue streams and is phasing out less fuel-efficient 747 jumbo jets in favour of Boeing 787 Dreamliners and Airbus SAS A380s. IAG has only just started to pay out dividends to shareholders, expecting to distribute a nominal 0.3 per cent at the end of the year. That is expected to rise to 1.2 per cent by the end of 2015. IAG is a staple for managers: 17 funds in the IMA universe hold the stock in their top-10, including Old Mutual’s Richard Buxton in Old Mutual UK Alpha.

*All data to 09 July 2014

13


One year: +0.9%

easyJet

Share price: £12.89

Performance of stock over 1 year 45% 40%

A – Easyjet (0.9%) B – FTSE 100 (6.8%)

35% 30% 25% 20% 15% 10% B

5%

A

0% -5% -10% -15%

Jan 14

Jul 09 July 2013 – 09 July 2014 © Powered by data from FE 2014

Source: Trustnet Direct

easyJet was one of the best-performing stocks in 2013, picking up 105.07 per cent last year alone. The FTSE 100 made just 18.66 per cent. This may come as a surprise to passengers accustomed to long queues and al la carte style booking systems, but believe it or not, the discount airline is making a play for business travellers – securing better timetables and even implementing frequent-flyer type perks to encourage customers to keep coming back for more. Although it had a bumper year in 2013, analysts still rate the stock as a strong “buy”. They cite the influence of new chief executive Carolyn McCall, who has helped to turn around the no-frills business model since she took the helm in 2010.

Admans says the airline faces stiff competition from more mainstream airlines that are seeking to cut costs, as well as from its more traditional rivals in the budget airline space such as Ireland’s Ryanair. easyJet has delivered a dividend to shareholders over the past several years and is expected to pay out 2.6 per cent in September. This is forecasted to rise to 2.9 per cent in 2015. In spite of the airline’s out-and-out success in recent years, only a handful of funds hold it in their top-10. These include Caspar Trenchard’s SLI UK Opportunities fund and Tom Dobell’s M&G Recovery portfolio.

The Share Centre’s Sheridan Admans says the business “appears to be going from strength to strength” and is one to hold on to. Analysts at Credit Suisse reaffirmed their outperform-rating on the stock, while Numis Securities also rates it as a “buy”. However, analysts at Liberum Capital are less optimistic about easyJet’s fortunes and have cut their price target for the stock. They now have a hold-rating on the shares.

14


Ryanair Unlike its UK counterpart easyJet, Ryanair has only seen an uptick of approximately 6 per cent in its share price over the past 12 months. However, analysts see more upside for the Irish airline, with the majority rating it a strong “buy”. Ryanair raised €850m last month in its first ever bond offering. The sale was massively oversubscribed, with roughly €7bn of orders placed. Ryanair says it will use the cash to order a glut of Boeing 737 aircraft, claiming the investment will allow it to boost customers by 50 per cent over the next five years. Although the airline hasn’t performed as well in share price terms as IAG or easyJet, the lag wasn’t unexpected. Towards the end of last year, Ryanair issued a warning its profits were likely to fall for the first time in five years, so the dip was well flagged. However, Ryanair chief executive Michael O’Leary expects passenger numbers and fares to creep up by more than 4 per cent over the course of 2014, which he

says will buoy profits. It is also making a push into the business traveller market, making strides to improve customer service and overhaul its website. The company does periodically issue dividends and is expected to pay out 3.2 per cent to shareholders in 2015; however, the company has not committed to an annual dividend so it is not one to depend on for investors in need of a steady and reliable income stream. Leading fund managers such as BlackRock’s Vincent Devlin and Odey’s Feras Al-Chalabi hold Ryanair in their top-10. Performance of stock over 1 year 15% 10%

B

5% 0% -5% -10% A

-15% -20% A – Ryanair Holdings (-14.0%) B – FTSE Eurotop 300 index (9.4%)

-25% -30%

Jan 14

Jul 09 July 2013 – 09 July 2014 © Powered by data from FE 2014

Source: Trustnet Direct

One year: -14.0% Share price: €6.86

15


STOCKPICKING — TRUSTNET DIRECT FUND IN FOCUS

FE Research analyst Amandine Thierree reveals the fund she is tipping to do the best in the current market conditions.

AMANDINE THIERREE

PREMIER PAN EUROPEAN PROPERTY After a period of strong performance from equities, the task for investors is to find areas of the market that can continue to climb – not an easy thing to do when valuations look increasingly stretched.

ALEX ROSS

Ongoing charges: 1.44% 130% 120%

Premier Pan European Property (117.5%) IMA Property (59.9%)

110% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% -10%

Jan 10

Jan 11

Jan 12

Jan 13

18 June 2009 – 18 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

Jan 14

FE Research analyst Amandine Thierree likes the five crown-rated Premier Pan European Property fund, which invests in property equities throughout Europe. “It’s a good recovery play,” she said. “The manager, Alex Ross, is doing something quite interesting in the UK by investing in ‘regenerators’, which tend to be small

companies. This is also a good recovery play.” “The manager is investing in companies which are turning secondary property into prime property. He started doing this a few years ago and he’s already seeing previous investments coming through.” “There’s not a big yield. It’s a play on growth and the next stage of the recovery cycle.” The £106.5m fund is investing in turnaround companies in the UK such as Carpetright and HMV. On the continent, Thierree says the fund is focused on strong brands, especially companies such as Klepierre, which operates large shopping malls in Paris. “This company wants to make trips to a shopping mall an experience,” she said. The fund is not constrained by any particular benchmark, which allows the manager to actively manage his exposure or exit European property markets that he considers fundamentally unattractive, even if the region makes up a large portion of the underlying index. 16


ARE OPPORTUNITIES

EMERGING WITHOUT YOU?

T E MI T

25 YEARS ce

8

9

S

in

Growth in Emerging Markets GDP, 2000–20181

1 2 Ju n e 1 9

Capitalise on States of Emergence with Templeton Emerging Markets Investment Trust (TEMIT) Emerging markets are developing at a rapid pace. This growth offers great opportunity, but navigating the complexities of these markets takes true expertise. At Franklin Templeton, we have decades of emerging market investment experience and a team of dedicated experts on the ground worldwide. This local presence allows us to identify and act on varying states of emergence across the globe.

TEMPLETON INVESTMENT PLAN BENEFITS l Easy access to the exciting growth potential of emerging markets l Invest from as little as £50 per month Invests in TEMIT, the UK’s largest emerging markets investment trust2 l TEMIT: Celebrating 25 years of time-tested investing - 1989 to 2014 l

Past performance is not a guide to future performance.Overseas investments are subject to currency fluctuations and emerging markets may be more volatile than established markets. The value of your investment and the income from it can go down as well as up and you may get back less than you originally invested.

Available in ISAs and our Regular Savings Plan For more information visit www.franklintempleton.co.uk/temit or call for a free information pack on 0800 305 306 1. International Monetary Fund: World Economic Outlook Database (April 2013). 2. TEMIT is the largest trust in the AIC Investment Trust - Global Emerging Markets sector, source: The Association of Investment Companies (AIC), as at 31/05/14. An investment in TEMIT entails risks which are described in the Templeton Investment Plan Key Features and Terms & Conditions. Issued by Franklin Templeton Investment Management Limited, authorised and regulated by the Financial Conduct Authority. Subscriptions can only be made on the basis of the most recent Key Features and Terms & Conditions, which are available from Franklin Templeton Investments, The Adelphi, 1-11 John Adam Street, London WC2N 6HT.


VOICE OF TRUSTNET DIRECT

MIDLIFE ISAs In a quaint old village, somewhere south of Evreux, we pulled up at an inviting bar in the square and shot the breeze in the afternoon warmth.

JOHN BLOWERS HEAD OF TRUSTNET DIRECT Until recently, I couldn’t understand the infatuation with classic cars. Friends who owned one seemed to be constantly ashen-faced at the latest bill for getting them fixed, or reluctantly recounting tales of a journey the car – and consequently themselves – failed to complete due to mechanical failure. Being on first-name terms with the man from the AA never really appealed and I have to say I prefer being surrounded by the cosseting comfort, technology and safety that modern motoring now offers. But something has changed. On a recent trip to the Le Mans Classic (much more civilised than the main Le Mans 24-hour race), I was surrounded by my classic car-loving petrol-head friends and, I have to admit, after bowling down the French back-roads in a lovely old Jaguar XK 150, I began to succumb to the charm.

It transpires that all my classic carowning friends were pretty pleased with themselves as the value of their cars has risen nicely of late. In some cases, by considerably more than the amount of money they have lavished on them. From January 2010 to May 2014, the Hagerty index of British classic cars rose from £35,625 to £47,562, a 33 per cent rise over four and a half years. Not bad. Nothing like the Fidelity UK Smaller Companies fund, which has risen 287.7 per cent over the last five years, but not bad. And I can’t drive a Fidelity UK Smaller Companies fund along the tree-lined roads of France, or polish it on a Sunday morning until it looks like new, or tinker with it in the garage. It’s the same argument with property. You can live in a house – it serves another purpose – while it serves as a decent investment. Whereas an investment in a fund serves only one purpose. Whoooaaah! What am I saying? I should be championing equity

investing, not shooting it down. But in reality I’m telling the same story and it’s a story of diversification of investment. And classic cars have proved themselves a worthy asset class. So what I’m going to do is cash in some of my ISA savings and buy a classic car. I’m running a “SIPP/ ISA” strategy – putting around two-thirds of my investments each month into a SIPP (which is locked away till I retire – a good discipline) and one-third into an ISA so that I can access it at any time for emergencies. And as I sat in the dappled sunshine outside the bar in France, I had an emergency. I had to have a classic car. The great thing about investing for your future in a flexible way is that you can yield to whims like these. It’s still an investment, but let’s hope there’s enough left in the pot for the inevitable repair bills and upkeep. And the AA man. After all, what’s money for?

Data correct as at June 16, 2014 Hagerty classic car index originally quoted in USD and converted at $1.60 to £1

18


TRUSTNET DIRECT PORTFOLIO MANAGEMENT The World Cup is over and there’s yet more disappointment for England, adding to what is now 48 years of hurt. But the major upside – or huge annoyance if you’re not a fan of the beautiful game – is that the Premier League season is now just around the corner. Why am I talking about this in an investment-focused publication? Well, as a former colleague once told me when I started writing about investing, there are a number of striking similarities between assembling a fantasy football team and putting together a portfolio of funds. You want balance – both a good defence and attack. You have a huge variety of choice, but most investors will be drawn to a small number of options because they are perceived to be the best. Also, if you chop and change too much, you will be hit by expensive trading costs. Because of that, and because I’m getting overly excited about the new season, the FE Research team is helping us to put together our starting XI of funds. Each member of the team is on the Trustnet Direct 100 list of recommended funds and will hopefully all bring something different to the table and add to a decent and well-rounded total return. I apologise in advance for the numerous clichés and sometimes very tenuous football analogies…

ALEX PAGET

Trustnet Direct XI Our fantasy fund portfolio

19


G OA L KE E P E R

R I G H T BAC K

Absolute Insight

Henderson UK Absolute Return

£692m 1.01% Yield: 0.31%

Size:

Size:

OCF:

Reza Vishkai

Luke Newman & Ben Wallace

Performance over 5 years 30% 25%

£426m 1.07%

OCF:

Performance over 5 years A

A – Absolute Insight (29.1%) B – IMA Targeted Absolute Return (21.4%) C – 3 month Libid GBP (2.9%)

B

20% 15%

40% 20%

B

0%

C

-20%

10%

-40%

5%

-60% C

0% -5%

-80%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

Starting in goal, you want the most defensive fund you can find with a strong track record of defending capital. There are a couple of options in the Trustnet Direct 100, but Sonja Uys and Reza Vishkai’s Insight Absolute Insight fund is the pick of the bunch. It is a fettered fund of funds, blending five different portfolios together to create a single absolute return strategy. The managers try to make a positive return over any given 12-month period, which is shorter – in theory, less risky – than the timescales used by the majority of funds in the IMA Targeted Absolute Return sector. It has achieved this feat so far, having made money in each calendar year since its launch in 2007. A very safe pair of hands.

-100%

A – Henderson UK Absolute Return (-89.7%) B – IMA Targeted Absolute Return (21.4%) C – Bank of England Base Rate (2.5%) Jan 10

Jan 11

A Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

There are a few options we could go for at right back, but we think Henderson UK Absolute Return is the best choice. Luke Newman and Ben Wallace’s fund, like Absolute Insight, sits in the IMA Targeted Absolute Return sector. However, it is in the team as an attacking full back. The reasoning behind this is that while the managers want to preserve capital, they actively try to make money from their short book by betting against shares they think will fall, instead of just using it to hedge risk. It lost 0.44 per cent in 2011, so it isn’t air-tight at the back, but gives plenty going forward – the strategy returned close to 30 per cent in the crash year of 2008.

20


C E N TR E BAC K

C E N TR E BAC K

Fidelity Moneybuilder Income

Jupiter Strategic Bond

£3.08bn 0.56% Yield: 3.49%

£2.10bn 0.74% Yield: 5.20%

Size:

Size:

OCF:

OCF:

Ian Spreadbury

Ariel Bezalel

Performance over 5 years 55% 50% 45%

Performance over 5 years C B A

A – Fidelity Moneybuilder Income (46.7%) B – IMA Sterling Corporate Bond (49.1%) C – BofAML Euro-Sterling Index (52.4%)

40%

90% 80% 70%

A – Jupiter Strategic Bond (84.8%) B – IMA Sterling Strategic Bond (54.5%) C – iBoxx Sterling Non Gilts All Maturities (51.2%)

A

60%

35% 30%

50%

25%

40%

20%

30%

15%

B C

20%

10%

10%

5% 0%

0%

-5%

-10%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

The first of our two centre-backs is Fidelity MoneyBuilder Income, which sits in the IMA Sterling Strategic Bond sector and is run by the highly experienced Ian Spreadbury. The fund is more of a no-nonsense centre back because, while the manager can invest across the whole sterling bond market, Spreadbury has a clear defensive tilt within the portfolio. The reason for this is that he is far more interested in delivering a dependable source of income than capital growth. It should protect you if markets fall, but you don’t want it on the ball too much in the opposition’s final third.

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

The five crown-rated Jupiter Strategic Bond fund, on the other hand, is our ball-playing centre back. Manager Ariel Bezalel has a strong track record, topping the sector over five years, as well as a very “creative” portfolio. Although he doesn’t take risk for risk’s sake, he is willing to make punchy calls within the fund to generate income. For example, he was one of the first in the Strategic Bond sector to buy up Greek and Cypriot debt. Solid at the back, but will maraud forward when needed.

21


L E FT BAC K

D E F E N S IVE M I D F I E L D E R

HSBC Open Global Property

Artemis Income

£88.5m 1.35% Yield: 1.69%

£6.70bn 0.79% Yield: 3.70%

Size:

Size:

OCF:

OCF:

Dr Guy Morrell

Adrian Frost

Performance over 5 years

Performance over 5 years

80%

110%

70%

A – HSBC Open Global Property (72.9%) B – IMA Property (62.6%)

A B

60% 50%

90%

A – Artemis Income (99.7%) B – IMA UK Equity Income (101.4%) C – FTSE All Share (96.4%)

B A C

80% 70% 60%

40%

50%

30%

40%

20%

30% 20%

10%

10%

0% -10%

100%

0% Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

-10%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

We have opted for the HSBC Open Global Property fund at left back, which will give us some diversification away from equities and bonds.

Most investors will want a core UK equity income fund to hold together their portfolio, and we are no different.

Unlike other funds in the IMA Property sector, it invests in both direct property and property shares. It is a fund of funds, so charges are slightly higher. However, by blending both direct and indirect property, the manager aims to achieve a more rounded total return.

Our standout choice, with its solid long-term track record and shrewd management team, is Artemis Income. It offers exposure to the UK’s largest dividend-paying companies and the managers have a good track record of income generation. Given its large cap focus, the fund won’t keep up with the sector during a fast-rising market.

Property is by no-means a completely safe asset class, but it can help to buffer the portfolio against potential losses from our equity funds during periods of stress.

However, it is in the portfolio for its managers’ expertise and its ability to protect capital; it is not there to get forward.

22


D E F E N S IVE M I D F I E L D E R

AT TAC KI N G M I D F I E L D E R

Newton Global Higher Income

JOHCM UK Dynamic

£4.20bn 0.80% Yield: 3.70%

£226m 0.94% Yield: 3.09%

Size:

Size:

OCF:

OCF:

James Harries & Nick Clay

Alex Savvides

Performance over 5 years

Performance over 5 years

110%

160%

100% 90%

A – Newton Global Higher Income (97.4%) B – IMA Global Equity Income (94.0%) C – FTSE World index (99.0%)

C A B

80% 70%

A – JOHCM UK Dynamic (132.9%) B – IMA UK All Companies (101.2%) C – FTSE All Share (96.4%)

A

120% B C

100%

60%

80%

50%

60%

40% 30%

40%

20%

20%

10%

0%

0% -10%

140%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

Like Artemis Income, Newton Global Higher Income is in the portfolio to generate income and deliver a decent long-term return, rather than to shoot the lights out. It is primarily a large cap portfolio and has generated a high level of income since launch. The manager, James Harries, is relatively cautious on global equity markets and is therefore not willing to take undue risks within the fund. It is in there to add a bit of nous and as Harries holds just 14 per cent in the UK, it shouldn’t get in the way of Artemis Income.

-20%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

There are a couple of options in this playmaker role, but we have gone with Alex Savvides’ JOHCM UK Dynamic fund. In this more aggressive position, we wanted a fund that has a wide remit of stocks it can hold. While we don’t want something that could lose us as much as 20 per cent in a month, it needs to be able to take part in rising markets. Savvides’ value approach helps the fund to outperform when sentiment is high, but because he targets companies that pay a yield, his fund doesn’t plummet when uncertainty arises. The fund invests across the UK market, so has a high degree of flexibility, and given its more nimble size compared with other IMA UK All Companies funds on the Trustnet Direct 100, Savvides has no constraints implementing his views quickly and efficiently.

23


L E FT W I N G Henderson European Selected Opportunities

RIGHT WING Somerset Emerging Markets Dividend Growth

S om e r s e t C a p i ta l M a nag e m e n t

£1.70bn 0.90% Yield: 0.50%

£6.67m 1.33% Yield: 2.40%

Size:

Size:

OCF:

OCF:

John Bennett

Ed Lam

Performance over 5 years

Performance over 5 years

100% 90% 80%

A

A – Henderson European Selected Opportunities (96.8%) B – IMA Europe ex UK (84.7%) C – FTSE Europe ex UK (79.8%)

B C

70%

40% 35% 30%

A

20%

60%

15%

50%

10%

40%

5%

30%

C B

0%

20%

-5%

10%

-10%

0% -10%

A – Somerset Emerging Markets Dividend Growth (24.4%) B – IMA Global Emerging Markets (1.7%) C – MSCI Emerging Markets (2.5%)

25%

-15%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

Again, for our left-winger we wanted a higher risk equity fund and we decided to use Henderson European Selected Opportunities. European equities certainly fit the bill of being higher-risk, given the region’s ongoing uncertainty. However, with the ECB announcing negative deposit rates and likely to soon begin its own quantitative easing programme, it could be a real winner over the next few years. Bennett is in for making a number of contrarian calls within his fund, including a high weighting to peripheral banks. If you want to take the footballing analogy even further, consider it as a natural rightfooter playing out on the left. It goes against the grain, cutting in on to its favoured foot and bamboozling the full-back.

-20%

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

There is no doubt that emerging markets have been massively out of favour for some time now. However, few people would bet against the sector delivering healthy returns over the long-term, given that it includes some of the world’s fastest-growing economies. We’ve gone with Somerset Emerging Markets Dividend Growth, because while it is a relatively new fund, it is highly rated within the industry and is regarded by many experts as the natural successor to the sector-topping First State and Aberdeen funds. Although the fund is there for its growth characteristics, the fact that it concentrates on dividend-paying companies means that it has managed to deliver a positive return over the last few years while the sector and its benchmark have lost money. Consider it good at tracking back. 24


STR I KE R Marlborough UK Micro Cap Growth

RATINGS YOU CAN COUNT ON Size:

£406m 0.83%

OCF:

Giles Hargreave Performance over 5 years 250%

A – Marlborough UK Micro Cap Growth (213.9%) B – IMA UK Smaller Companies (150.1%)

A

200% 150%

We identify the best funds and fund managers, so you can focus on the best possible service for your clients.

B

100% 50% 0% -50%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

24 June 2009 – 24 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

For our lone striker, we are going for a very high risk fund and are paying little attention to its ability to defend capital. Step forward Marlborough UK Micro Cap Growth. Managed by the highly experienced Giles Hargreave, the fund invests in the smallest companies the UK market has to offer. The share prices of these companies can swing quickly, but over the longer term they have delivered considerably higher returns than their larger rivals. Hargreave has more than 40 years’ worth of experience in smaller companies and has a huge team of analysts behind him. They attempt to pick tomorrow’s largest companies today, so it is one to buy and forget about. It can go missing when markets fall, but it is the fund to be in during a fast-rising market.

FE Crown Fund Rating

FE Alpha Manager Rating

FE – THE ADVISERS’ CHOICE* Find out more at trustnet.com/ratings2014

*UK advisers’ preferred choice of research and ratings (source: The Platforum Adviser Survey, July 2013). 25


TRUSTNET DIRECT PORTFOLIO MANAGEMENT

Holidays can be an expensive business. Family holidays even more so, especially if your children are of an age where you have no option but to go away during the peak schoolholiday season. Once you take into account everything you need to buy in advance and hire when you are there, and combine that with flights and holiday accommodation, costs quickly add up. However, there are plenty of things you can do, both before you go and when you are away, that will enable you to enjoy a great holiday but with slightly less financial pain.

Debts on the beach Ways to cut costs on holiday

NEAL UNDERWOOD

One option is to look at going away at a cheaper time of year. Schools are strongly opposed to parents taking children away during termtime, but there may be a cheaper time to go, depending on your destination. The summer holidays are typically the most expensive time, but it may cost less to go during “shoulder season” – the time between high and low season – or at half-term in winter, or even during the Christmas or Easter holidays.

26


Before you go Pick a good value destination. The best value holiday destinations this year are places such as Bulgaria, the Czech Republic, Portugal, Spain and Turkey. According to the Post Office’s Worldwide Holiday Costs Barometer, which measures the cost of a basket of eight items – including a cup of coffee, an evening meal, a glass of wine and sun cream – in total these will cost £31.84 in Algarve, Portugal, while you would pay £76.59 in Sorrento, Italy. Avoid flying at the weekend. Flying out on a Tuesday is, on average, the cheapest day overall. Sunday is the most expensive day to fly home, so tailor your holiday plans based on the cost of flights. If you can be flexible with flight times, this can also save you money. Flights at unsociable hours are often cheaper. Seek out hotel deals. There are all manner of ways of booking holidays, from looking online to high street travel agents. If booking online, search out the best

deals. One website may offer an identical room in the same hotel for a cheaper price than another. If dealing with travel agents, be prepared to haggle. Many will reduce the price, throw in something for free or give a better deal on currency exchange. Look at whether an all-inclusive deal makes sense. You will obviously pay more for an allinclusive package versus half or full board, but if it includes all your meals and drinks, it may end up being good value for money. Check carefully what it does and does not include. Some, for example, only include domestic alcoholic drinks. Look for a good deal on travel insurance. As with anything, shop around. Some insurers give great deals if you take out an annual policy online. Book car-hire in advance. If you need to hire a car when you are away, book it in advance. Car-hire prices increase during peak season, so the earlier you can book, the better. If you use a baby seat, see

if you have the space to take your own with you, perhaps as carry-on luggage, otherwise you may end up paying well over the odds to hire a seat that is not quite the right size anyway. Hertz, for example, charges more than £70 for hiring a child car-seat. Even discount airline Ryanair allows passengers to bring approved infant car-seats on board for free, although there is a £10 charge for seats for children over the age of two. Book your airport parking. Advance parking fees at airports can typically cut the cost of paying on the day in half. It may even be that there is a cheaper way of getting to the airport, such as taking a coach, which would remove the need to pay airport parking at all. Use a commission-free travel money exchange. The Post Office, The Currency Club, Debenhams and Travelex Travel Money, for example, all offer commission-free currency exchange. Look at their exchange rates for the best deal and bear in mind that a larger transaction often means you get a better rate. As mentioned above, you may also be able to negotiate a commission-free deal with your travel agent. Use a credit card with attractive terms for usage abroad. Read the small print and check whether there is a fee for using the card overseas. The Saga Platinum Credit Card, for example, has no foreign-usage fee anywhere in the world and an APR of 11.9 per cent. The Halifax Clarity Credit Card has no charge within Europe, but a 1.9 per cent usage charge elsewhere. The APR is 13 per cent. 27


When you are on holiday Take advantage of transfers included in the price of the holiday. It may take a little longer to get to your hotel and that taxi rank may look tempting, but if you have already paid for a coach transfer, sit back and let the driver take the strain. Check out typical taxi fares. If you have an idea of how much it should cost to get from A to B, you are much less likely to be ripped off by a taxi driver who sees unsuspecting tourists as his lunch ticket. Ask at the hotel whether any upgrade is possible. It may seem unlikely, but if you don’t ask, you don’t get. There may just be a more expensive room available that you can stay in at no extra cost. If the hotel offers free Wi-Fi, use it. Data usage on mobile devices such as phones, tablets and laptops can be expensive abroad. You should also check your data plan with your mobile phone provider to see if you will have to pay extra for calls, texts, downloads or internet usage abroad. Check out the cost of excursions. There will inevitably be places you want to visit while you are away. But it may be that the excursion offered by your travel company is not the cheapest

option. Talk to an agent in the local town and see if a similar trip is available for a cheaper price. Look out for food and drink deals. Many hotels do some form of happy hour during the day or early evening, where drinks may be half-price or two-for-one. Similarly there may be fixed price all-youcan-eat meal options that could be worth looking at. If you are eating out, look at the prices on the menu. Restaurants and bars in tourist areas usually charge a premium, so it could be worth venturing a little further afield to find more reasonable prices. You also get the added bonus of mixing with the locals. Check the prices on any items you are buying. Hotel gift shops, while convenient, are often vastly overpriced. Items may well be cheaper in a local supermarket, for

example. Many shops also allow and indeed encourage haggling, so it is always worth seeing if you can get a better price. If you need to see a doctor when you are away, check the medical professional you are seeing has their costs covered by your medical insurance or, if applicable, European Health Insurance Card (EHIC). Your travel company representative or the hotel reception should be able to help you with this. In general a few clear rules of thumb apply. Doing your research pays off. There will almost always be a cheaper option; then it is a case of weighing up whether that represents value for money. For anything you have not paid for in advance, whether it be excursions, meals or gifts, try to shop around and only pay for something when you are comfortable with it.

28


SCOTTISH MORTGAGE INVESTMENT TRUST

SCOTTISH MORTGAGE WAS ORIGINALLY LAUNCHED TO PROVIDE LOANS TO RUBBER GROWERS IN MALAYSIA IN THE EARLY 20TH CENTURY.

While others stick to the indices, we are free to choose. Scottish Mortgage Investment Trust has its own way of doing things. So it’s hardly surprising that the Trust’s portfolio looks nothing like the index, after all, we are active rather than passive investors and we firmly believe that the index is an illustration of ‘past glories’ rather than future prospects. In fact, our abiding principle has always been to invest in tomorrow’s companies today. We give ourselves time to add value by being patient investors in an impatient world. But don’t just take our word for it, over the last five years Scottish Mortgage has delivered a total return of 225.7%* compared to 100.7%* for the index. And Scottish Mortgage is low-cost with an ongoing charges figure of just 0.50%†.

Standardised past performance to 31 March each year**: 2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 Scottish Mortgage

76.6%

24.2%

-2.9%

18.5%

28.9%

FTSE All-World Index

48.4%

8.4%

-0.2%

17.1%

6.8%

Past performance is not a guide to future performance. Scottish Mortgage Investment Trust is managed by Baillie Gifford and is available through our Share Plan and ISA. Please remember that changing stock market conditions and currency exchange rates will affect the value of your investment in the fund and any income from it. You may not get back the amount invested.

GLOBAL GROWTH Scottish Mortgage Investment Trust

For a free-thinking investment approach call 0800 917 2112 or visit www.scottishmortgageit.com

Baillie Gifford – long-term investment partners *Source: Morningstar, share price, total return as at 31.03.14. †Ongoing charges as at 31.03.14. **Source: Morningstar, share price, total return. Your call may be recorded for training or monitoring purposes. Baillie Gifford Savings Management Limited (BGSM) is the manager of the Baillie Gifford Investment Trust Share Plan and the Investment Trust ISA and is wholly owned by Baillie Gifford & Co, which is the manager and secretary of the Scottish Mortgage Investment Trust PLC. Your personal data is held and used by BGSM in accordance with data protection legislation. We may use your information to send you information about Baillie Gifford products, funds or special offers and to contact you for business research purposes. We will only disclose your information to other companies within the Baillie Gifford group and to agents appointed by us for these purposes. You can withdraw your consent to receiving further marketing communications from us and to being contacted for business research purposes at any time. You also have the right to review and amend your data at any time.


TRUSTNET DIRECT PORTFOLIO MANAGEMENT Once the preserve of Romantic poets such as Byron and Shelley, and more recently the young and carefree student, the gap year is now most popular among the over-55s. Baby boomers are now setting off to globe-trot in record numbers, backed up by reasonably healthy financial circumstances and mortgage-free houses. For the Romantics, the Grand Tour was all about cultivating the high culture of the European Renaissance and for the youngsters of today it is more likely to

involve a beach in a sunny part of the world where the exchange rate is favourable and beer is cheap. But for the “grey gappers� of today, it is more about re-tipping the scales in favour of that very 21st century idea: the work-life balance. Having toiled at the office coal-face for 30 years or more, a generation who were born in the shadow of World War II may well have travelled extensively for work or their holidays, but the idea of setting off into the sunset on a yacht rather than taking up beekeeping is a relatively new one. Former governor of the Bank of England Sir Mervyn King is one such advocate, after pushing in his chair

Around the world in 80 years (or less) How to save for a trip around the world DANIEL LANYON

30


on the Monetary Policy Committee for the last time and giving up on setting interest rates in favour of planning a gap year in 2014. He is not the only one who has left a high profile and lucrative career to see a bit of the world and get away from the office. Peter Voser, the former chief executive at Royal Dutch Shell, and former Diageo boss Paul Walsh, both in their late 50s, left their respective multinationals in pursuit of a lifestyle-change and travel. Johann Rupert, the 62-year-old billionaire chairman of the Cartier watches and Montblanc fountain pens group Richemont also said he was planning to head to Antarctica after recently stepping down.

Closer than you think However, you don’t have to be a multimillionaire CEO to afford your dream trip and it may even suit those nearing retirement age more than the young tousledhaired students armed with a backpack and a credit card. With university fees now hitting almost £30k for a typical three-year degree programme, many young people are put off the thought of extra debt and delayed earnings. The numbers actually seem to suggest a recent decline in the proportion of young people taking gap years. In contrast, a Post Office travel insurance survey found one-quarter of over-55s intend to take a gap year. But before you throw caution to the wind and set sail around the world, there are some important financial considerations to check first.

Sir Mervyn King is not the only one who has left a high-profile and lucrative career to see a bit of the world.

“This generation didn’t really have the obligatory gapyear that the younger generation has, so it’s fitting that it should be available,” says Dennis Hall of Yellow Tail Financial Planning. However, Hall advises a cautious approach to planning finances, particularly regarding ISAs, tax and pensions.

Funding Probably the most important question every potential beachcomber should ask themselves is whether they can afford it. Hall says ideally you want a job to come back to if money is a strong concern, in which case a sabbatical before retirement makes more sense than a first port of call when you retire. “Those on a sabbatical (largely unpaid) will still be employees and will have a job to go back to, so this is one of affordability, though some of their investment strategy and savings will be put on hold for a while,” he said. However, saving up for your big trip away is another option and can be done through a separate investment account over several years. Another way to fund your travels if you are over 55 is to draw down some or all of your pension early under the new rules unveiled by chancellor George Osborne in the most recent Budget. 31


My Gap Year checklist

Other things to consider

1

Flights – The cost of these can add up, particularly if you’re planning to fly back to the UK several times during your trip.

3 Those pesky taxes – Find out what taxes you owe, particularly in regard to ISAs and rental income.

2

Budget – This should take into account all known costs, as well as some unexpected ones. This will all depend on the nature of your trip, but at a general level should include an amount set aside each week for essentials such as food and accommodation as well as travel and other day-to-day expenses.

4 Long-term savings – Investigate how your pension – both state and private – could be affected by a gap in payments. 5 Money, money, money – Ensure you have access to foreign currency and banking facilities.

This carries some risk, especially if you choose to invest it, but crucially it is also subject to income tax and therefore will take an initial hit, which reduces the potential for capital appreciation in retirement. If you are living off your savings, a steady, income-paying fund is a good option to ensure you’re getting a reliable income while overseas. Keep in mind investors will lose out on the compounding effects of reinvestment by taking this income, but for those already in retirement, it is likely to be part of the plan.

Costs Although no two gap years are the same, all will involve extensive costs, many unforeseen – meaning the more you have in reserve, the better.

For example, going on a roundthe-world sailing trip will involve a lot of costs that are difficult to plan for, according to two globe trotters who recently jacked in their corporate jobs in favour of sailing the seven seas. According to Hall, one way to offset this may be to rent out your house if you are away for a longer period of time, or it may be possible to reduce costs by arranging a house swap with people from other countries you intend visiting. Renting out your house, while involving substantial costs for removal and storage, may be a smart move according to lettings agency Belvoir, which predicts strong growth in the UK rental market to continue for the next few years as demand grows.

Hall says pension contributions will be the biggest problem area, especially if you are away for a complete tax year with no UK earnings. However, he says it is less of a problem if your gap-year straddles the tax year and that pension shortfalls can be made up with carry-forward provisions. He says there could also be an issue with ISAs too, particularly if you are a non-UK resident for a complete tax year. A banal but crucial detail is how you access your cash while abroad, but Hall says this can be as important as making sure you have the funds in the first place. “Look for low-cost foreign currency, either through a pre-funded credit card or using a bank that has low costs for foreign currency withdrawals. I use CaxtonFX for my currency needs, but there are other firms doing something similar.” “You need a bank that has good online capabilities and you also need to forewarn them of where you are visiting and when, to ensure that they don’t cancel cards and facilities because they suspect fraud.” Insurance can also be an unexpected headache as the costs for anyone in their fifties tend to be higher and so should be planned for accordingly.

32


UP-TO-DATE INVESTMENT INSIGHT IS JUST A CLICK AWAY SUBSCRIBE TO INVESTAZINE AND IT WILL AUTOMATICALLY DOWNLOAD TO YOUR DEVICE EVERY MONTH.

CLICK TO SUBSCRIBE NOW

33


COVER

Trip of a lifetime JENNA VOIGT

Take your pension where it will stretch further 34


Britons are constantly being bombarded by headlines heralding the death knell for pensions in the UK. No, few people could get by living on the state pension alone, but many savers are struggling to build up a pension pot sizable enough to give them a decent income in retirement. And it’s no help that interest rates on cash are at record lows, even if they may rise sooner rather than later. With so many woes to consider at home, maybe it is time to pack up your bags and head off to that beachfront property in Spain, chalet in the French Alps or outback paradise you always dreamed of. According to data compiled by Expats & Offshore, there are a number of places where your UK pension could let you live like a king, although there are a number of factors to consider before bulking up on sun cream and shipping off for sunnier climes. Paul Davies, director at Global Qrops, says the number-one consideration for expatriates in retirement who are thinking about moving abroad is currency risk. “One of the things to consider is currency risk and it’s key wherever you move in the world,” he said. Davies says the majority of workplace and private pensions will pay out their income in sterling, which could be a real danger for savers living in countries with nonsterling denominated currencies. “If you’re living in a country where the currency is going to fluctuate, that’s going to change what income you receive each year.”

Davies says it wasn’t that long ago when British expats were flocking to Australia, benefiting from an exchange rate where the pound was worth AU$2.60. For a saver receiving an annual income of £10,000, that turned into a handy AU$26,000. But the picture doesn’t look so bright anymore, after the exchange rate between the pound and the Aussie dollar took a nasty turn and sterling reached as little at AU$1.45, reducing that income to just AU$14,500.

READ THIS BEFORE YOU MOVE ABROAD Investigate how currency fluctuations will affect your income. Ask whether your pension should stay in the UK or move abroad with you. Invest in the market you’re going to live in. Investigate and understand the tax implications. Consider whether you should sell your home in the UK. Don’t forget about inheritance tax planning.

HOW STERLING STACKS UP

£1= $1.82 (Canada) $1.70 (US)

173.32 (Japanese yen) €1.25 (Euro)

55.21 (Thai Baht) 102.31 (Indian Rupee)

13.84 (Argentine Pesos) $1.81 (Australia) “You only need one year where Data from 23 June 2014 the exchange rate drops drastically and you might not be able to afford to live,” he said. That said, according to Expats & Offshore’s data, savers who decided to retire in Spain, for example, would benefit from an even lower level of inflation than those retiring in Switzerland, where the Consumer Price Index is higher than any country included in the study. Watch out if you’re heading for a lovely retirement community in Florida. Private healthcare costs in the US are eye-wateringly high and will erode your pension income by a far greater extent than moving somewhere like Thailand, which has the lowest healthcare spend. As Davies points out, most people move abroad for emotional reasons rather than financial ones. However, he says once investors have thought about the currency risks, the next step is to consider all the financial implications on pensions and assets in the UK.

35


“You need to ask yourself, ‘should my pension stay in the UK or should it move with me?” he said. “It’s a big subject and hopefully it doesn’t put people off moving. People should take the rose-tinted glasses off for a second and realise there are things that could be detrimental to their finances if they don’t attend to them.” Another major danger that could hit savers in the pocket is the tax implications of the country they are planning to move to. Davies says it is important that savers understand how their investment income will be treated in their new country. He points out some countries, such as France, are effectively tax-neutral. They have a double-taxation agreement with the UK which means savers only get taxed in one country. However, he warns there are other countries, such as Argentina, where the double-taxation agreement is fragile and could fall apart should the political situation between the two countries worsen. And moving to a country such as the US, where the Internal Revenue Service (IRS) likes to gobble up as much of your income as possible, could see savers hit with taxes in both countries, depending on which state you choose to live in. Davies says there are a number of positives to moving abroad, as some overseas schemes offer more flexibility than those in the UK. However, he adds that there are a limited number of schemes available. Savers who want to move their pension abroad need to transfer it into a scheme approved by the HMRC. These schemes are known as Qrops, or Qualifying Recognised Overseas Pension Schemes. The fees for making these changes vary, but Davies says an investor with a pension pot of £200,000 should expect to pay roughly £6,000 initially for advisory and setup fees. Ongoing charges also vary, but he says they are roughly 1 per cent on average. Another thing expatriates need to think about is inheritance tax (IHT), especially if they buy property overseas. “If you’re not cutting off your ties with the UK, it could mean you’re still considered UK-domiciled, so your entire estate falls under IHT regardless of where your

assets are,” Davies said. “It’s not just what you keep in the UK in the event of your death.” Finally, Davies says it’s important to think about what savers will do with any property they own in the UK. While they could sell and take the assets abroad, it is often a good idea to become an overseas landlord and add a stream of income if they don’t need a lump sum. This should help in the event of extreme currency fluctuations and will give savers somewhere to come back to should they decide to return home. Once all of these questions have been answered, it’s time to get planning. There are plenty of opportunities out there if living abroad is your cup of tea – and you don’t mind switching to coffee. Per Capita Private Spending ($) on Healthcare by Country Consumer Price Index by Country 0

1,000

2,000

Mexico

$3,925 77.39 $1,300

Canada

87.90 $823

Spain

77.18 $891

France

100.21 $993

Germany

87.14 $523

South Africa

48.55 $2,210

Switzerland

Soudi Arabia Thailand Malaysia

143.88 $378 61.80 $360 68.14 $83 45.95 $285 48.66 $1,448

Singapore China Japan

103.04 $176 54.12 $560 94.13 $1,101

Australia 10

4,000

46.96

USA

Russia

3,000

$490

108.51 50

90

130

170

Source: www.expatandoffshore.com

36


TRUSTNET DIRECT PORTFOLIO MANAGEMENT

SAM SHAW

Blank cheque? The best ways to blow your lump sum

Pensions minister Steve Webb probably should have received a nice little “thank you” note from Lamborghini for his infamous name-check around the time of the Budget, which opened the door to greater pension flexibility for all Britons, allowing them to cash in their pension pots without restriction from next April. But while the knee-jerk reaction was that the new rules sounded the death knell for annuities, other sectors beyond supercars may also flourish. Let’s take a wander into fantasyland for a moment, where responsibility and real life are of little importance, and imagine some of the more innovative ways to blow your lump sum than the one first suggested by Mr Webb.

SUPER FAN Inspired by the World Cup this year? Maybe you’d like to “do an oligarch” and hope for a better scorecard than England managed in Brazil? Buy your own football team? Why not – the business case certainly stacks up. According to Deloitte, which publishes an Annual Review of Football Finance, the capital expenditure of the top 92 English clubs is expected to exceed £1bn over the next five years, generating combined revenues of £4bn in 2014/15. Roman Abramovich paid £140m for Chelsea when he bought the club a decade ago – mind you, he has pumped in a whopping £2bn over that period so perhaps the return on his investment has yet to come. 37


MONUMENTAL SPEND Could you build a monument in honour of your greatest love?

development opportunity for would-be leisure entrepreneurs.

TECHNICALLY BRILLIANT Go, go gadget… spending! If you’re a gizmo king (or queen), you’re probably up to speed with the latest iThing, wireless device and complete entertainment system. But do you have a Black Diamond? The titanium mobile phone is just one of five produced, and is available for a modest $310,000 (£182,000). It is “spec’d to impress” with quadband and Wi-Fi, Bluetooth, two-inch TFT screen, 4MP camera, VOIP and two massive diamonds. Just don’t leave it on the back seat of a cab...

Shah Jahan, emperor during the Mughal Empire’s richest period, was so devastated when his third wife Mumtaz Mahal died giving birth to their 14th child, he built the Taj Mahal. India’s most famous memorial cost 32 million rupees back in 1631 when it was built. A series of currency conversions results in an inflationadjusted sterling price of more than £680m today. Probably what it feels like to fund a family of 14 children...

ISLAND DREAMS Maybe you’re more the “get away from it all” type. In which case, get thineself an island. If it’s good enough for Sir Richard Branson, it’s good enough for you… in this hypothetical world of which I write. For a mere snip of $3.4m (£2m), you could pick up Isla Maje, a few miles off the coast of the Pacific Ocean in the Gulf of Panama. Or why not go all out and buy its sister island Majagual as well for just $800,000 (£470,000) more? The idyllic pairing is not only a visual, ecological and cultural gem, with legend stating pirate activity took place on their shores, but don’t forget the long-term. Both Islas Majagual and Maje represent a fantastic

Otherwise, your kids would most definitely be impressed if they invited their mates around for games night and their adversary was none other than a Nintendo Wii Supreme. For just under $500,000 (£293,000), if you were one of the lucky three to have one – before they became victims of built-in obsolescence – you could have enjoyed gaming in a 22-carat gold and diamond device. But would it get you the highest score?

SPACE INVADERS Back when the Russians were the only ones offering private space flights, the price tag sat well into the 10s of millions, recalls Guy de Blonay of the Jupiter Financial Opportunities and International Financials funds. Today, however, space tourism is much more accessible, offered by the likes of Virgin Galactic for a far more reasonable $250,000 (£147,165) per person. De Blonay says: “It could be quite interesting for someone who was approaching retirement and wanted to do something totally memorable with a genuine once-in-alifetime opportunity.”

38


“To be one of the first people up there, experience 3G and enjoy the view… these flights can now be enjoyed by up to six people, so why not make a family trip of it and blow it all on a one-off unique family experience that you will all certainly never forget?”

But if you’re going to run around the world, why rush? Do it slowly and live a little.

A LITTLE SPOT OF LAND

Jones has the opportunity in one fund (he also runs the Strategic Bond fund at RUTM) to put his money where his mouth is.

But it’s not just those in the financial sector that are looking to get away from it all. Jason Pidcock, manager of the Newton Asian Income fund, also seeks a degree of escapism. What would he blow his lump sum on?

As you might expect from an ethical bond fund manager, Rathbone Unit Trust Managers’ Bryn Jones recommends doing just that.

“Why not jack it all in, invest your lot in charity bonds, live off the income, and travel the world living in a hut in Nepal, helping out while living amongst all the poor and disadvantaged communities?” “You’d get a lot more out of the gift of giving, a greater degree of satisfaction that would outweigh any material gain or certainly anything I’ve done in my career, and get money back to fund your trip,” Jones offers.

“A few acres of land. You can walk your dogs on it, have picnics and it won’t be debased by central bankers.” Touché. A cool £500,000 would buy you a single acre freehold of Cotswold countryside, allow you to enjoy the garden of England at its finest, unspoilt by the City’s tension and greed. If you wanted to develop something more habitable and were granted full planning permission, the plot would house a stunning luxurious family home… but you might need to find another lump sum in order to do so.

WORLD TRAVELLER Something in the middle? A luxury world tour usually tops most people’s wish lists. You can find a whistle-stop tour for around $120,000 (£70,000) per person, taking in some of the globe’s leading luxury destinations, courtesy of the international hospitality of Four Seasons. In a nine-stop whirlwind month-long tour, you could venture from LA to Hawaii, French Polynesia to Australia, Bali to Thailand and visit that good value Taj Mahal. Stop by Turkey on your way back to London and spend anything that’s left in the Grand Bazaar while unwinding in the opulence of the Topkapi Palace.

With an average pension pot of £35,600 yielding the average of 4 to 5 per cent per annum and such modest means needed to live on, it doesn’t actually sound like such a pipe dream – for a while, anyway.

PARTY ANIMAL But for the more frivolous of mind, it’s your lump sum. It’s your (imaginary) retirement. It’s your final chapter. So throw the mother of all retirement parties. While the Palace of Versailles may not have granted Kim Kardashian and Kanye West permission for their nuptials to take place on its turf, for other gala events and cocktail parties, the Gallery of Battle or the Grand Opera are both available for private hire. The naked venues can be hired for the now-not-so-ridiculoussounding budget of €70,000 (£56,000) and €60,000 (£48,000) respectively. But you might need to get a friend or business partner to chip in their lump sums to provide the necessary party mood, food, music and décor. After all, why scrimp? 39


ANALYSIS

Taking the long road home THOMAS MCMAHON

FE Trustnet takes a trip back from Brazil the long way, and stumbles across some exciting investment opportunities in exotic places.

Performance of fund vs index over 3 years 5% 0% -5% -10% -15% -20% -25%

B A

-30% -35% -40% -45%

A – Allianz Brazil (-27.3%) B – MSCI Brazil 10/40 (-25.9%) Jan 12

Jan 13

Jan 14

Jun

30 June 2011 – 30 June 2014 © Powered by data from FE 2014

BRAZIL

Source: Trustnet Direct

Brazil seems to have all the ingredients to become a powerhouse economy and many analysts are telling us to watch out what happens when the spending power of its middle class is finally felt.

The country’s economy is heavily dependent on the fate of its miners – unfortunately, this has been the worst performing part of the global economy for some time, but won’t be forever.

The country dominates the regional economy and is the first port of call for many investors looking to get exposure to Latin America.

Allianz Brazil owns many of the biggest companies on the Brazilian stock market, including Banco Bradesco, brewer Ambev and miner Vale.

The most successful Brazil-focused fund of the past three years has been Allianz Brazil, managed by Carlos de Leon.

The fund has much less in miners and natural resources companies than the market as a whole, however, with just 9.1 per cent in oil and gas and 7.1 per cent in basic materials compared with a combined 29 per cent for the benchmark.

It has been a rough few years for Brazilian equities, however, and even worse for active managers. De Leon’s fund has lost more than the index over three years, although less than all of its peers.

40


Performance of trust vs index over 5 years 80% 70%

A – Vietnam Holding Trust (65.7%) B – MSCI Vietnam (6.1%)

A

60% 50% 40% 30% 20% 10%

B

0% -10% -20% -30% -40%

VIETNAM The long journey over the Pacific takes us to Asia and Vietnam, which has been one of the more successful exotic stock markets of the past few years, with the MSCI Vietnam index up 14 per cent. The country is considered a frontier market – one with a lower level of economic development than the emerging markets. These have done better in recent years as the emerging markets have struggled, largely because they are less dependent on global trade, which has been slow, and more on internal development. This means they rely less on Chinese demand for their products. In fact, Vietnam has been carving out a niche as an alternative site to China for foreign investment in manufacturing.

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

30 June 2009 – 30 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

This is one of the themes played by the Vietnam Holding trust, run out of Switzerland with a value approach, meaning it looks for cheap companies that are undervalued by the wider market. It holds companies engaged in agriculture – including fish production – and domestic consumption. It is up 66 per cent over the past three years. The trust’s managers note that with the late arrival of McDonald’s to the country it can now be compared using the Economist’s famous “Big Mac” index, which measures the price of the burger in different countries to show whether a currency is under- or over-valued. They say the country’s currency is massively undervalued on this measure, while the stock market is also cheap compared with the region.

The former communist country has also been opening up to foreign investors, reducing restrictions on external trading of shares. There is certainly a lot of money in the country, but very few methods for foreign investors to access it. One way investors can buy in is through the Qatar Investment Trust, a £100m portfolio run from Doha by a subsidiary of the Qatar Insurance Company. Banks and financial services make up 46 per cent of the fund, with a further 16 per cent in industry. The largest holding is 16.4 per cent in Qatar National Bank.

QATAR Further to the West, it still seems likely that the next World Cup will be held in Qatar, although corruption allegations could yet see these plans allayed. The large amount of oil money in the country helped it win the bid – supplying the cash necessary to build brand new stadiums and heavy duty air conditioning for the 50°C summer.

It does have a performance fee, but the rules drawn up by the board mean this is unlikely to be paid for some time. Qatar was elevated to emerging market status earlier this year. This is expected to lead to greater interest from international investors, which could in turn push up equity prices.

41


However, there are few methods of gaining exclusive access to it. There is an exchange traded fund (ETF), Global X Nigeria Index – ETFs are passively managed investment vehicles that track an underlying index and rise and fall in line with that index.

NIGERIA Our long journey home takes a detour via Africa, which a growing number of industry professionals are saying could be on the verge of something big. Nigeria in particular excites many managers, who expect it to be the breakthrough nation on the continent. It has a young, rapidly expanding population which is already the largest in Africa at 174 million.

Other than that, you would have to look to funds with a broader remit that are taking a bet on the country. Charlemagne Magna Africa has 24 per cent in the country and JPM Africa 20.1 per cent. Investec Africa Opportunities has an 18.5 per cent weighting while the Templeton Frontier Markets fund has 11.85 per cent. The last one gives access to the broader frontier market universe, which includes countries in Asia and elsewhere.

The JPM Turkey fund, run by Oleg Biryulyov, was up 44.65 per cent in 2012 and is up 30.19 per cent so far in 2014. Biryulyov’s fund is highly correlated to the index, which means it should do well when the Turkish stock market rises and badly when it suffers. It is heavily into financials, with a number of banks in its top-10 holdings.

TURKEY Straddling the gap between Asia and Europe lies Turkey, another market to have received strong investor attention in recent years. The Turkish market was one of the best performers of 2012 and is one of the best performers so far this year too.

Like most of the countries on our tour, Turkey has political issues that have caused many investors to steer clear, but frontier market fund manager Sam Vecht is a big fan. He used the political problems at the start of the year to buy more of his favourite stocks cheaply and has reaped the rewards in his BlackRock Frontiers Investment Trust. The market has been highly volatile, however, and lost serious money in 2013.

42


Performance of trust vs sector and index over 2 years 30% 25% 20% 15%

A

10%

B

5%

C

0% -5% -10% -15%

A – BlackRock Emerging Europe (14.3%) B – IT European Emerging Markets (10.8%) C – MSCI Emerging Europe (3.8%) Jan 13

Jan 14

Jun

30 June 2012 – 30 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

EASTERN EUROPE Another area Vecht likes is Eastern Europe, which brings us to the last leg of our journey back from Brazil. The manager’s BlackRock Emerging Europe trust has done well in recent years despite the annexation of Crimea and the troubles in Ukraine. Some commentators expect the region to rebound strongly as western Europe recovers, having suffered during the years following the financial crisis.

Vecht’s fund has 51.8 per cent in Russia, 21 per cent in Turkey and 13.4 per cent in Poland. It also has large positions in Turkmenistan and Romania. Banks and oil companies make up most of the largest positions, although there are internet-related stocks in Russia as well. The extra diversification gives it a bit more protection from the effects of sudden economic and political crises that frontier and emerging markets are prone to.

/ www.feanalytics.com

CELEBRATING 10 YEARS 43


4 01

ULY 2 1J

your

15

£

up

,0 0 0

potential

On 1 July 2014 the ISA limit increases to £15,000 giving you the opportunity to invest an extra £3,120 tax-efficiently before 5 April 2015. However, The M&G ISA and The M&G Junior ISA don’t just offer tax-efficiency, they offer so much more. Experience of over 80 years Focused on long-term, active investment management since 1931.

Flexibility to reach your goals Potential to help meet a variety of investment objectives.

Expertise of our fund managers With freedom to follow their own investment approaches and focus on long term returns.

The value of stockmarket investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested. ISA tax rules may change in the future and ISA tax advantages depend on your individual circumstances.

Choice of funds Covering equities1, fixed interest2, multi-asset and property.

Enhance your ISA potential with M&G Call: 0800 389 8600 Visit: www.mandg.co.uk/isa

Source of AUM: M&G Statistics as at 31.03.14. 1Equities: Shares of ownership in a company. 2Fixed interest: A loan in the form of a security, usually issued by a government or company, which normally pays a fixed rate of interest over a given time period, at the end of which the initial amount borrowed is repaid. This Financial Promotion is issued by M&G Financial Services Limited and M&G Securities Limited which are both authorised and regulated by the Financial Conduct Authority in the UK and provide ISAs and other investments. The registered office of both companies is Laurence Pountney Hill, London EC4R 0HH. M&G Financial Services Limited is registered in England No. 923891. M&G Securities Limited is registered in England No. 90776. JUN 14 / 49838


ANALYSIS There’s something about Spain the British absolutely adore. In the first five months of 2014, 21.4 million people visited Spain and almost 22 per cent of those were Brits, according to Spanish government figures. Many of us cut our teeth on package tours as we took our first faltering steps beyond our shores. But for many, a holiday wasn’t enough – they wanted a place in the sun and much of the development growth in the Costa del Sol and Costa Brava can be attributed to large demand from UK and other European buyers keen to own their own piece of paradise. The financial crisis and the exposure of systematic – in some cases institutional – planning corruption turned the dream to a nightmare. For many people that nightmare continues, as 90,000 British nationals registered with the Spanish authorities – almost a third – returned to the UK in 2013.

Spain and gain

The reasons are simple. The country has gone through a sovereign debt crisis and the economy is still in dire straits. Unemployment is endemic – 30 per cent across the country, with youth unemployment in regions such as Andalucia at around 50 per cent. Despite this, the property market has seen considerable growth as Brits try to secure their piece of foreign soil.

Is now the time to buy a holiday home in Spain? PADRAIG FLOYD 45


This year’s model Martina Heynemann, managing partner of Costa del Sol-based agency Viva, says that in 2013, 42 per cent of her firm’s buyers were UK residents looking for mostly two-bedroom, two-bathroom apartments, though demand for villas is on the up. “We are also noticing an increasing interest in and demand for newbuild homes of contemporary design and currently our buyers are predominantly end-users and larger investors rather than the many smaller investors we used to see before.” With prices at close to 50 per cent lower than before the crisis and approximately one million properties on the market, there are certainly bargains to be had – especially with the banks keen to sell off the houses they have repossessed over the past six years. But it is a very regional market which is reflected in price differentials, says Chris Mercer, director of Murcia-based agency Mercers. Mercer’s firm targets the value-formoney end of the market, or “sells Fords rather than Mercedes”, as he puts it. “You can find some homes for very good prices, such as an apartment for €35,000 on a golf course inland, but the average price for a two-bedroom property is €50,000. Those looking for a three-bed and bathroom property with its own pool can expect to pay €150,000, considerably less than in the neighbouring regions.”

Transferring £200,000 Monitored company

Exchange rate

Fees

Net benefit value *

Citibank

1.2292

£nil

€245,839.26

FairFx

1.2361

£nil

€247,220.00

First Direct

1.235

£25.00

€246,969.13

HiFX

1.2397

£nil

€247,940.00

Moneycorp*

1.2454

£nil

€249,080.00

Post Office

1.2352

£nil

€247,040.00

Santander

1.2358

£25.00

€247,129.25

1.243

£8.00

€248,590.06

1.2475

£995.02

€248,252.74

The Co-Operative Transferwise

Source: Consumer Intelligence “Forex Tracker”, 19th June 2014 – Rates collected between 09:04 – 09:44 (excluding Moneycorp) * Source: Moneycorp, 16/06/2014

Some banks charge higher fees and even if you use a specialist currency exchange you should be prepared for unpleasant surprises – these fees may vary between countries and the receiving institution may levy additional charges, says Ian Hughes, chief executive officer of Consumer Intelligence. “If you need a specific amount to arrive in order to make a payment, you should check carefully with the ForEx provider and make sure that they will guarantee the amount you want to arrive definitely will arrive. Consumers should check carefully before making a payment.” Charges are not only levied by overseas banks for non-residents. Investors repatriating money to a UK bank may discover they are charged 3 to 4 per cent of the transaction amount, greatly

undermining their return on investment. One way investors can guard against nasty surprises is by using a forward contract to neutralise the risk of currency volatility, says Andrew Woolley, executive director of international payments at currency specialist Moneycorp. “A forward contract allows you to agree an exchange rate in advance, so you know exactly what rate you’ll get on the day you make your transfer. Locking in an exchange rate is beneficial as it manages the risk you are exposed to from significant currency fluctuations.” So if you believe the exchange rate is the best it can get, you can lock in that rate with a provider so you know exactly how far your money will go when it comes to pressing the button on the transfer.

46


Inland properties will often be considerably cheaper, unless they are luxury villas/cortijos or in popular towns and villages. Sheena Campbell-Royle, founder of Spanish property specialist Strategic & Buy, says that while prices may be depressed, some of these regions have weathered the storm very well. “Brits love Costa Blanca, but the high-end residential market has not lost a lot of value. In some places such as Majorca, Ibiza, Barcelona, Madrid and Marbella, the recession has been pretty well contained.” Investors should not be bewitched by any potential savings either. The market does not operate like the one in the UK and CampbellRoyle recommends appointing an independent adviser to avoid any expensive mistakes.

The nitty-gritty The purchase process in Spain uses a notary public, but their role is only to ensure both parties are clear on the terms of the contract, that the terms comply with the law and that relevant taxes are paid. There are many other things an investor must consider. The location of the property is usually paramount, but not just for the view. While infrastructure links are important and reflected in the cost, coastal regions may come under the Ley de Costas or Coastal Act, so ensure the property has the correct permits and licences in place. Buying in large complexes may appear attractive for ambience or proximity to the beach, but they can be difficult to sell or rent in

€225,000 Barrion Gótico quarter of Barcelona old town, via Lucas Fox. 59m2 , one double and one single bedroom, bathroom, integrated living and kitchen/diner.

€450,000 Ground floor apartment in Gracia, near Barcelona, via Lucas Fox. Two double bedrooms, one single bedroom, kitchen, bathroom, large private terrace with private pool.

€3,000,000 Spectacular 215m2 three-bedroom apartment on Barcelona’s most exclusive boulevard, Paseo de Gracia, with views of Gaudi’s Casa Batlló. This is an opportunity to purchase a unique property located on Barcelona’s most desirable street. The apartment combines an exquisite interior design and modern comfort. Via Lucas Fox.

€49,000 Two-bedroom apartment, Murcia via Mercers.

€159,000 Three-bedroom, three-bathroom villa, Murcia via Mercers.

a falling market. So the type of property is also important, it is not just a question of location. Perhaps the highest-profile pitfall in the Costa Brava and Costa de Sol areas concerns illegal developments. Many developments have now been “normalised” by local government, but don’t just assume the one you are viewing has been cleared, says

Louise Reynolds, director of Spanish property agency Property Venture. “A good local lawyer, with no conflict of interest, should be able to verify the validity of documentation: if there are any gaps, whether everything is upto-date, the detail of an individual contract and generally act on a buyer’s behalf,” she says.

47


“Be particularly careful of buying properties on reclassified, nonurban land and check all the necessary permissions have been obtained.”

It’s the little things that count Check for debt on a property, too, says Campbell-Royle. Unlike the UK, debt is lodged against a property rather than an individual and the

unwitting buyer could get a nasty shock. “If you do proper due diligence, it is difficult to buy a property that later on is found to have problems,” she says. “Those coming to Spain for a second property tend to be on a tighter budget. All that glisters is not gold either in the UK or in Spain, so make sure you get the right advice.” Costs are different from the UK and so budget on 10 to 12 per cent of the sale

price in fees. That breaks down as 8 per cent for the equivalent of stamp duty, plus legal fees and registration. Some people will consider this high, but in a market that still records prices at 50 per cent of historical highs, that is a small premium to pay. Finally, don’t forget the cash itself. Very few UK investors will be borrowing from a Spanish bank, so charges and exchange rates on transferred money could cost an investor dearly if they are not on top of their game.

It’s getting better all the time

AN ENGLISHMAN’s HOME Prices vary regionally, with the most popular having the most buoyant markets. That said, few have escaped 50 per cent losses since the financial crisis and so there are bargains to be had.

starts at around the €100,000 to €300,000 mark, and goes up to prices of €2m.

Coastal regions are the most sought after for the UK investor, but popular markets attract a premium.

The islands have always been more desirable and the average price is around €400,000 to €500,000. Some of this is driven by new rules that grant a visa to those with a minimum investment of €500,000 – which can be over multiple properties – and is attracting interest from investors in Russia, the Middle East and China.

A small two-bed property in Murcia may be priced at €50,000, while a similar property may be €75,000 or more in the Costa del Sol or Costa Blanca.

The Balearics remain the most sought after, with one estate agent claiming to have sold 16 homes in 2013 for more than €2m. It expects to double that figure this year.

Madrid and Barcelona remain prime locations and like London, sellers can name their price. The mid to upper end of the market

Meanwhile, Majorca’s fashionable Port d’Andratx saw 20 homes change hands for values in excess of €5m in 2013.

By applying some simple common sense, and undertaking the usual due diligence of a major investment, most UK investors will find navigating the Spanish property market relatively simple. Exchange rates have made Spanish property more affordable in recent months. For some people at or approaching retirement age, a property investment at these kinds of prices is even more attractive when financial markets remain volatile while offering meagre returns.

48


ANALYSIS

JOSHUA AUSDEN

Trust in your ISA With the new ISA – or NISA – now up and running, investment trusts may offer a better way to make the most of your £15,000 limit. The new ISA rules which came into effect on 1 July bring improved flexibility for investors as well as a higher tax-free limit of £15,000 a year. Cautious investors, or those saving up for something large in the near future such as a wedding or a holiday, are likely to put the bulk of their allowance in cash, although it is difficult to get a yield of more than 3 per cent at the moment. To get anything more than that, you have no choice but to take on more risk. Open-ended funds are the go-to product for investors who want to get exposure to the UK’s stable of talented active managers, but investment trusts are becoming an increasingly popular option for retail investors.

49


Trusts have a number of key advantages over their open-ended rivals. They can gear, or borrow money, to take higher-conviction positions in stocks. Unlike a fund, they can also stash dividends away for a rainy day, making it easier to raise their income payout year after year. The main difference between funds and trusts from an investment point of view is that the latter can be traded at a “premium” and a “discount” to the value of their underlying assets, depending on how popular they are. By buying a trust on a discount, you can get exposure to companies for a lower price than they are worth. Investment trusts usually go on to big discounts when they and/or their asset class are out of favour. When this happens, they are hit by a double-whammy effect of a falling share price and a widening discount. For bargain hunters out there, this can create opportunities. If you think an asset class is set for a reversal in fortunes, you can benefit from a much more positive double whammy of rebounding share prices and a narrowing discount. This is one of the main reasons why trusts have generally outperformed funds since the lows of the financial crisis. Take FE Alpha Manager Harry Nimmo’s Standard Life UK Smaller Companies trust for example, which has vastly outperformed its open-ended equivalent since the lows of March 2009, with returns in excess of 250 per cent. A moderate level of gearing has also helped.

What’s the difference between an investment trust and a fund?

Rising equity markets and improving sentiment have led to a general tightening in investment trust discounts in recent years, with many studies suggesting that valuations are the highest they have been since 2007.

A trust is a closed-ended company that trades on the stock market like any other stock. If an investor wants to buy in, someone must first sell their Performance of trust and fund since Feb 2009 shares unless new ones are issued.

200% 180%

A – Standard Life UK Smaller Companies Trust (32.5%) B – Standard Life UK Smaller Companies fund (148.2%)

160% B

140% 120% 100% 80% 60% 40%

A

20% 0% -20%

Jan 10

Jan 11

Jan 12

Jan 13

Jan 14

Jun

30 June 2009 – 30 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

Performance of trusts, sector and index in 2014 8%

An open-ended fund is simply a pool of cash that invests in a basket of assets. Unless the manager has closed the fund to new money, investors are able to buy in as they please.

6% 4% 2% A

0% -2% -4%

B

-6% -8% -10% -12% -14% Jan 14

A – Standard Life UK Smaller Companies Trust (0.7%) B – IT UK Smaller Companies (-4.2%) C – BlackRock Throgmorton Trust (-11.4%) D – Standard Life UK Smaller Companies fund(-9.7%)

D C Jun 1 January 2014 – 30 June 2014 © Powered by data from FE 2014

Source: Trustnet Direct

“The key is to find a good manager, and if the opportunity comes to buy them at a decent price, it’s a bonus,” he said.

There are always asset classes that are out of favour, however, and pockets of value are arguably evident in some trusts with an emerging markets, smaller companies or commodities focus.

A good way to find out whether a trust has seen its discount come in significantly is by tracking it on the very useful Association of Investment Companies (AIC) website.

Ewan Lovett-Turner, an analyst at investment trust-specialist Numis Securities, says it is worthwhile buying into top managers when their discounts spike.

“Analyse investment companies” has a sub-section called “Discounts”, which tells you what a trust’s current discount or premium is compared with its one- and three-year average, as well as its one- and three-year low.

He warns against trading frequently in and out of trusts to tap into these opportunities, not least because it is expensive to do so on most platforms.

Trawling through the numerous AIC sectors, I have found a number of trusts on double-digit discounts, 50


some wider than their historic averages and headed up by an FE Alpha Manager. Here are some trusts that are currently on high discounts that may be of interest to bargain hunters out there. Remember – discounts and premiums can move very quickly, so keep an eye on how these change on either the Trustnet Direct factsheets or the AIC website.

Small cap trusts Smaller companies have had a stellar run since the financial crisis, with many tripling investors’ money since the low after Lehmans. Markets have been choppier in 2014 however, with the FTSE Small Cap index up just 0.84 per cent year-to-date, and the average trust in the IT UK Smaller Companies sector down 3.82 per cent. Among the worst performers are Nimmo’s Standard Life trust and FE Alpha Manager Richard Plackett’s Throgmorton Trust, which have both made double-digit losses.

Plackett joined in July 2008. It has returned 145.6 per cent over the period, compared with 109 per cent from the average trust in the sector. Lovett-Turner points out that Plackett is currently on a short sabbatical but has every confidence he will return and says that investors are in safe hands with co-managers Mike Prentis and Ralph Cox.

The trust is on a discount of just over 10 per cent at present, which Lovett-Turner says allows investors to get exposure to a quality manager at a fair price – especially if you are optimistic that emerging markets are due a stronger period of performance.

Emerging markets trusts The more obvious standout area for value at the moment is emerging markets, with trusts suffering at the hands of a poor period for the asset class. The MSCI EM index has returned just 14.64 per cent over two years, while developed markets – measured by the MSCI World index – are up 49.88 per cent. Lovett-Turner says there is an interesting dynamic in quality emerging markets trusts such as Aberdeen New Dawn IT, Edinburgh Dragon IT, Schroder Asia Pacific IT and Templeton Emerging Markets IT.

A widening discount over the period as a result of widespread profit-taking has contributed to the significant falls and has pushed the Throgmorton trust on to a discount of 13.2 per cent at the time of writing. This compares with a oneyear low of 5.35 per cent and a oneyear average of 11 per cent.

“There is a dynamic in this sector where discounts tend to trade between 5 and 10 per cent. They are quite range-based, which is based mainly on big shareholders such as the City of London trust buying when they are good value and selling when they are on the more expensive side.”

Lovett-Turner thinks the trust has the potential to rebound from this low in the short-term, but more importantly sees it as an opportune time to get exposure to a manager of Plackett’s calibre.

“When they go into the doubledigits, they do start to look interesting.”

The BlackRock-led trust has performed very strongly since

managers in the world in FE Alpha Manager Hugh Young.

Among those on a discount of more than 10 per cent at the moment is Aberdeen New Dawn, which is headed up by one of the most respected Asia Pacific

Trustnet Direct ISA Account Benefits LOW COST We only sell clean share classes of funds meaning they are typically half the annual cost of funds you may be used to buying (0.75% instead of 1.5% annual management charge). ONGOING VALUE Control you ISA within its own distinct portfolio, allowing you to monitor and manage its performance and use our tools to get the best from your investments. FREE Your ISA included FREE OF CHARGE within your Trustnet Direct Account. FLEXIBLE You can invest in funds, shares, investment trusts and ETFs within your ISA at Trustnet Direct. SUPPORT At Trustnet Direct, we’ll be providing ongoing editorial guidance to help get the most out ot your money, so you’ll never feel you’re on your own. AIM shares can now be put into an ISA.

Open an account www.trustnetdirect.com

51


COMMENTARY

Where the fund managers go on holiday BRYN JONES “We went to Morocco in the spring and would certainly go again. At that time of year, it was the only place to go that was less than a four-hour flight and with 30-degree heat. The place we stayed was at the foothills of the Atlas mountains, perfect for a 20-mile run in the morning.” Rathbone Ethical Bond (www.trustnetdirect.com/fund/factsheet/0WF6)

KEVIN MURPHY “Egypt – not only are you guaranteed good weather, but as a contrarian’s destination, it is also good value.” Schroder Recovery (www.trustnetdirect.com/fund/factsheet/05AO) Schroder Income (www.trustnetdirect.com/fund/factsheet/NNC9)

HARRY NIMMO “I’ll be driving to Finland via Newcastle , Amsterdam, Germany and Sweden and then coming back via Poland. We know people in Finland and my wife used to have a business that imported clothing from the country. Also, slightly bizarrely, I am the honorary consul for Finland in Edinburgh.” Standard Life Investments UK Smaller Companies (www.trustnetdirect.com/fund/factsheet/SL89)

52


Witan wisdom

TM

“Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy.”

Groucho Marx (1890-1977)

Make the most of your savings by investing in an ISA. The benefits of ISAs are fairly well-known but you may wonder why should you consider Witan for your stocks and shares ISA. Witan Investment Trust offers diversified exposure to global markets using a multimanager approach. Our global portfolio offers exposure to the world’s major equity markets thereby offering diversification by geographical region, industrial sector and individual stock. We are the only global equity multi-managed investment trust, which means in addition to striving to deliver added value we seek to smooth out the volatility normally associated with a single manager. Contact us to find out more about the Witan Wisdom ISA.

Witan Investment Trust is an equity investment. Please remember that past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise, as a result of currency and market fluctuations, and you may not get back the amount originally invested. For further information, simply scan or take a picture of the QR code using your Smartphone. It couldn’t be easier!

Witan wisdom ISA TM

Visit www.witanwisdom.com

Call 0800 082 81 80

Issued and approved by Witan Investment Services Limited. Witan Investment Services Limited is registered in England no. 5272533 of 14 Queen Anne’s Gate, London SW1H 9AA. Witan Investment Services Limited provides investment products and services and is authorised and regulated by the Financial Conduct Authority. Calls may be recorded for our mutual protection and to improve customer service.


COMMENTARY

Vorsprung durch technik (Advancement through technology)

JAMES ANDERSON

You can do anything you want in Berlin. Only crossing empty roads without the permission of the little green electric man with a jaunty hat, one of the sole survivors of the unlamented East Germany, evokes discontent. This observation is hard to avoid and hence unoriginal. Yet it is important. It conveys both the tolerance that is so refreshing a contrast with too much of Berlin’s past and the whiff of the 1920s that it still carries. But it also illustrates the marked contrast between Berlin and the bourgeois sensibilities of West Germany’s recent centres of power and corporate responsibility. For all that, Berlin is the seat of federal authority and the key to decisions that are central to European politics and economics. However, it is equally and profoundly a metropolis that has little in common with the rest of

the country. Perhaps this is also true of London, but Berlin has no confidence at all that it is a model, powerhouse and guide for the rest of the country. Such a view would, it scarcely requires saying, be risible in Munich, Stuttgart or Frankfurt, even if Berlin were confident enough to propound it. My plan to work in Berlin for an extended period was initially prompted by the wish to understand better the motivations behind the political power that it carries (often reluctantly). It has long seemed strange and exploitable that markets pay such exorbitant attention to the posturing of the London financial and media establishment while barely contemplating or caring what Berlin thinks – or more importantly, does. This appears to us to be a practical example of persistent market inefficiency.

Europe seen from Berlin There still appears to be no evidence that the Berlin government has any intention of deserting the eurozone. Moreover, events in the last year have considerably encouraged the German establishment in adhering to existing European policy. Domestically, the two anti-euro political parties have respectively collapsed (the FDP) and failed to enter the Bundestag (the AfW). Only the federal court in Karlsruhe has any significant potential qualms about monetary assistance, as even the Bundesbank appears to accept the Merkel, Schauble and Draghi mix of policies. The dominant view in official Berlin is that the European periphery has begun to see the benefits of its traumatic experiences of recent years. It is generally accepted that this has been less about inflexible

54


German backing for austerity than about a necessary reform process bringing greater economic flexibility and political honesty to bear on structurally troubled countries. Inevitably it is the fortunes of Spain and Italy that are of dominant interest. There is little patience for the notion that the problems of either country are primarily the result of eurozone membership. Global economic crises would have shown up their serious weaknesses whatever the institutional framework. The question is instead whether that membership gives two critical partners the impetus to make structural reforms that they would otherwise have refused to confront. This is not an obviously unfair critique. If the current policies can be maintained for a reasonable period then sustained growth is thought to be achievable in both countries. The remarkable decline in long-term interest rates in peripheral Europe and the indications of modest economic growth returning in southern Europe have created confidence that the turmoil has been worthwhile. There are many who would like to see a similar reform dynamic in France and regret that such seems unlikely. Perhaps speculation that Merkel would eventually like to move to Brussels may help to advance such a cause.

Berlin does not admire finance In this it captures both the local ethos and the national consensus. The 2008-to-2009 crisis removed any temptation to emulate the Anglo-American model. There is little appetite to allow its

interests to dominate Europe. If there is one policy that unites the different geographical and political strands of the broad German establishment, it is that the German economy and its companies must be kept out of the hands of speculators and in those of families and foundations. The return of Deutsche Bank to industrial sense from its unrewarding venture into finance capital is eagerly awaited. This requires the retirement of its Goldman Sachs-trained chairman. Energy policy has been the most evident failure of the German government in recent years. What probably amounts to more than €100bn of solar subsidies has failed to lower overall national emission levels, to sustain a local industry of global value or end Russian gas imports. European energy policy under a feeble German commissioner has only exacerbated the situation. The domestic decision to ban nuclear power has been the cause of many of these unintended miscalculations. It is, however, doubtful that major change is imminent. There is full awareness that powerful and successful companies such as BASF must have competitive energy prices. At the same time there is a strong conviction that in the longterm, alternative energy sources will be both economically rewarding and environmentally necessary. The required fiscal, industrial and political compromises are to be endured in the meantime. There is little sympathy for Putin, but nor is there much belief that his danger should be equated with that of the Soviet Union. This is hardly surprising in a city that has learnt to differentiate between serious and

very present danger and mutual political posturing. Talk about the deteriorating conditions in Ukraine seems less apocalyptic when strolling across what was once the death strip of the Berlin Wall.

The Berlin economy Although this is the capital of Europe’s most powerful economy, there is much local emphasis on the comparative poverty of Berlin. It sees itself as “poor but sexy” in the words of the longstanding mayor. This is backed by a deep suspicion of what are perceived as the rich, privileged, conservative, hierarchical and complacent cities of recent German economic leadership. Berlin has very little in common with Munich from wealth to local politics to conceptions of urban beauty. This predates the division of East and West Berlin. An extraordinary surge of manufacturing activity in late 19th-century Berlin left a radical political heritage and cramped living conditions more redolent of Glasgow or Philadelphia than princely and agricultural Munich. The aging radicals who fled to West Berlin to avoid military service and to riot in 1968 reinforced an entrenched suspicion of capitalism that Brecht would have been proud of and that the economic collapse of the East only reinforced. This has many admirable consequences. There are audiences of thousands available at any time of the day or (preferably) night ready to boo Deutsche Bank. There is a willingness to think critically and radically that has little in common with the persistent, incremental and successful family capitalism of rich Germany.

55


The consequences of the complex history of Berlin have combined in an entirely unpredictable manner to create an extraordinarily vibrant and innovative local culture. Here is a city with a population lower than it was in 1914, but with a dense urban geography dating from before then. Much of the housing stock after the fall of the Wall was far too decrepit to appeal to shortsighted speculators. Nor could they see that ramshackle factories and breweries were ripe to serve as unique artistic spaces, nightclubs and cafes in a manner quite obvious to any aspiring member of the creative class. Moreover, the anti-capitalist ethos made it inevitable that even newly fashionable areas would still remain stocked with a social mixture unthinkable in more conventional world cities from Shanghai to New York. After all, even newly enriched Prenzlauer Berg refuses to let owners add balconies as this would mean that prices would rise too far. But even if Prenzlauer is out of reach for many Germans, price is the ingredient that makes Berlin unique. Rental costs are

approximately 70 per cent below London levels. Educational costs are low, university standards are rising sharply and opportunities for foreigners to gain admission are pleasingly high. Entertainment is cheap and very plentiful. It has therefore become a haven for the young of almost anywhere, looking for almost anything from a job to social welfare to freedom. The irony is that this idealistic and ostensibly anti-capitalist brew may well have created the near perfect ingredients for modern economic development. It has translated into a flurry of youthful, quirky, highly skilled and intensely multicultural start-ups that is entirely accidental and much the better for being so. After all the doomed efforts to create alternative Silicon Valleys (or mere roundabouts), Berlin may just have done so via serendipity. Heavy industry will not return to recreate 19th century Berlin, but from software to healthcare, the potential replacements are starting to emerge. As yet, this dynamism is comparatively hard to channel into the Scottish Mortgage portfolio.

But it is becoming easier. We have a holding in Kinnevik which is a major backer in Rocket Internet and Zalando. Rocket is probably the most interesting venture capital group anywhere outside Silicon Valley. It is turning innovation into an industrial process from a downat-heel building in central Berlin, while Zalando has become one of the world’s largest internet clothing retailers from an equally modest communist-era structure a mile further east. Over the coming years we hope and expect that we can find more opportunities of similar pedigree. Some of these may be unquoted ventures. This reflects our belief that from the catastrophes of the 20th century, Berlin is rapidly becoming the most important key to understanding European economic, social and political prospects in the 21st century.

James Anderson is manager of the Scottish Mortgage Investment Trust at Baillie Gifford.

56


RATINGS YOU CAN COUNT ON We identify the best funds and fund managers, so you can focus on the best possible service for your clients.

FE Crown Fund Rating

FE Alpha Manager Rating

FE – THE ADVISERS’ CHOICE* Find out more at trustnet.com/ratings2014 *UK advisers’ preferred choice of research and ratings (source: The Platforum Adviser Survey, July 2013).


COMMENTARY

Final destination What are final salary transfers and should you take advantage of them before they go away? JAMES BAXTER*

Swapping a guaranteed pension income for life for a self-invested personal pension account – known as a SIPP – is not a transaction that everyone will want to perform. However, the transfer will make considerable sense for people who want greater control of a significant family asset and there are strong reasons to consider doing this, even if you ultimately decide to stick with your scheme.

Under the current rules, savers have the option of transferring from a final salary pension scheme into a SIPP. This gives them the flexibility to take the money as cash from April 2015.

Why look at a transfer now?

Transfer values are inversely proportional to gilt yields, so while gilts yields are at long-term lows, transfer values are correspondingly at long-term highs. Transfer values will fall again if/when gilt yields and interest rates start to rise. Clearly, if you are going to forgo a guaranteed income, you need to get as much money in exchange for it as possible. Current values offer a pretty attractive swap and won’t last for ever.

What is a SIPP? A self-invested personal pension (SIPP) is a type of pension plan that enables the individual to choose and manage their investments, with all the tax incentives of a regular workplace plan.

The new flexible drawdown pension rules introduced in the 2014 Budget, which are due to come into effect after April 2015, will create a massive difference between the options to vary income and create family capital from a personal pension compared with a fixed final-salary pension.

Recognising that these rule changes make transferring out more attractive, the Government has flagged the possibility of banning transfers in future if they are seen to be destabilising the economy. Who will likely benefit from a transfer?

Someone who understands and is comfortable with the extra responsibilities and risks taken on

58


when they switch a set income to an invested account that needs managing, carries risks and requires ongoing maintenance.

Someone attracted to getting a very different “shape” of benefits from an invested account versus the lifetime income. This usually means extracting more value earlier on in life at the expense of income later in life. This can be a good trade-off when combined with a sensible alternative plan for longterm security.

Someone with a big enough transfer value, or other incomegenerating investments, that they can withstand a degree of risk to future income.

Can I transfer my final salary pension?

Transfer values only apply to someone who has left or is about to leave a scheme and has yet to draw their pension. You can’t transfer out once you are in receipt of a pension.

To get your transfer value, you need to contact your old employer’s pension scheme administrators. They generally take four to six weeks to arrive, but may take longer at present as administrators are receiving high levels of requests. You are entitled to obtain a transfer value on a freeof-charge basis at least once a year.

take advice from an appropriately qualified adviser. Advisers require special permission from the FCA to advise on final salary transfers, so not all advisers will be able to do this.

What advice do I need?

You need to fully understand the benefits you will leave behind and the ones that will open up to you when you switch to a personal pension account so that you can decide what type of scheme suits you the best. This will include thinking about your spouse’s benefits, cash options, early and late retirement options and the new flexible drawdown rules.

You need to see whether the transfer value is attractive relative to what you give up. This is known as a critical-yield calculation and tells you what you will need to earn as an investment return on a personal pension to get better value for money than staying in the scheme.

• •

You need to understand all the risks implicit in both options. Above all, you need a plan of what you will do with the transfer value if you take it. This includes: — Choosing a personal pension provider — Deciding when to make withdrawals of cash and income

The transfer value offered to you will usually be valid for three months, giving you time to decide what to do.

— Selecting investments for your pension account or appointing an investment manager to do this for you

The decision to take a transfer value is both complex and irreversible, so it is important to

James Baxter is managing partner at Tideway Investment Partners.

CASE STUDY David, 56, had a deferred final salary pension from his old employer that was forecasted to pay him £34,750 per year from age 63, in seven years’ time. He was offered and accepted a transfer value of £618,000, from which he took an immediate tax-free cash sum of £154,500 to pay off his and his wife’s mortgage and invest £20,000 in ISAs. As a self-employed accountant, David expects to work into his late 60s and intends to leave the balance of the fund to grow until then. If he had stayed in the scheme, it would not have been possible to access the cash sum without taking the pension, which David did not need. In this case the transfer value would need to have made 4.7 per cent per annum net of costs in average investment returns to match the scheme payout on a like-for-like basis to the age of 90. This was before factoring in the ability to maximise the tax-free cash sum and withdraw it seven years earlier.

59


NEXT ISSUE

THE ACTIVE PASSIVE DEBATE An increasing number of young investors are turning to passively managed funds in their portfolios. A major reason for this is the lower fees offered by these models, as they don’t pay a manager to make decisions about their holdings. Active fund management houses are therefore under more pressure to justify their fees and deliver the outperformance investors are paying for. At a time when markets have

been rising and there don’t appear to be too many setbacks on the horizon, using cheaper passive funds seems like a good idea. But the flip-side is that when markets fall, your investments tumble along with them. In our September issue, Investazine will be wading into the active versus passive debate. Which side of the fence do you fall on? Until next time. 60

Profile for FE Trustnet

Investazine issue 13  

Investazine issue 13  

Advertisement