pwm insights edition one
Inside... Five New Year financial resolutions
2022 through the eyes of Vincent Van Gogh
Portfolio Diversification: Art – tangible and aesthetically pleasing
2022
PAGE EIGHT
2022 through the eyes of Vincent Van Gogh
© wjarek – stock.adobe.com
www.partnerswealthmanagement.co.uk
Contents 05 Welcome James Roberts, Managing Partner, Partners Wealth Management (PWM)
06 Five New Year financial resolutions James Roberts, Managing Partner, PWM
08 2022 through the eyes of Vincent Van Gogh Ben Kumar, Senior Investment Strategist, 7IM
12 Portfolio Diversification: Art – tangible and aesthetically pleasing Shea Goli, Contemporary Art Specialist, Gurr Johns
3
4
PWM Insights
Edition One
Welcome James Roberts Managing Partner, PWM
Welcome to the inaugural edition of our new look PWM Insights. The aim is simple – we seek to provide insights into opportunities, threats or new methodologies in investment, tax and financial planning towards your life goals. I want to first touch on the question we were asked the most last year – ‘Is sustainable investing a gimmick or a bubble?’. I would respond by looking at technology. In 1999, the technology and dot com market inflated and crashed. However, by 2021, anyone who took an aversion to tech following that saga had excluded themselves from the dominant investment theme of the next two decades. This is how we see sustainable investment – it is a long-term play and the champion companies who come through in biotech and fuel will be the transformers of the next decade. Expect volatility, but also expect long-term success. Our award winning PWM Green Matrix research lifts the lid on investment groups playing at sustainable investing as a fad and those engaging deeply and making a true impact.
www.partnerswealthmanagement.co.uk
“
Being at the forefront of technology, we were in a strong position to capture the technology revolution, which has given rise to the growth of flexible working and digitalised financial services.”
The second most frequent question advisers were asked is perhaps pandemic-related. ‘Can I retire?’ or as often ‘When can I retire?’ The pandemic served – and continues to serve – as a catalyst, encouraging people to reflect on not just their finances, but their life plans in general. That has led to a huge demand for our award-winning finance modelling software, described by some clients as a crystal ball, in offering an insight into future finances. This year, we have had more clients referring our advisers to others than we have in the past, and it’s been a real privilege to work with their colleagues, families and friends. Being at the forefront of technology, we were in a strong position to capture the technology revolution, which has given rise to the growth of flexible working and digitalised financial services. While we embrace flexible working, we still see tremendous value in maintaining face-to-face interaction with our clients. We suspect there will be geopolitical
headwinds for some time, with communication and nimble portfolios being more important than ever, and we are poised for that. Human communication is the key to good outcomes in difficult times. Perhaps unusually, the theme I would like to end on is that of wealth enjoyment. While we place emphasis on wealth preservation and management, it’s important to also recognise enjoyment. We save and invest to offer ourselves security, but should remember that it is also there to be deployed in the pursuit of happiness. We hope the preservation and growth of wealth that we may have assisted in during the pandemic, encourages confidence that assets are to be enjoyed as much as preserved. On that note, we hope you enjoy PWM Insights and we very much look forward to continue working with you. From the rest of the PWM team and I, we wish you a happy, healthy and prosperous 2022.
5
6
PWM Insights
Edition One
Five New Year financial resolutions James Roberts Managing Partner, PWM
January is traditionally a time to reflect, look forward and resolve to adopt better practices or meet goals you may have set yourself. One area we can have control over and influence is our financial health, and the act of planning tends to quell the fear of uncertainty as it focusses minds on the future. Considering the Bank of England’s recent interest rate rise and the forthcoming Spring Statement on 23 March, it is not too late to consider whether you have fully utilised all the tax planning allowances available to you. In preparation for the end of the tax year, we have set out five tips for you to consider now, and act on any which are relevant to you:
1
Top up your pension Pension contributions have been – and continue to be – one of the most tax efficient and flexible ways to save money. Currently, the annual allowance for contributions is £40,000, a figure that has not changed since 2016. However, the figure does decrease if your income is higher than £240,000. It is also key to note that any unused allowances from the previous three tax years can be ‘mopped up’, so now is the ideal time to perform your own financial health check and utilise any unused allowances.
2
Utilise your annual Capital Gains Tax (CGT) allowance and consider realising any gains Up until the end of the tax year, each individual can use their 2021/22 CGT exemption of £12,300 to realise capital gains from investments without paying additional tax. Remember that spouses/civil partners can transfer assets between themselves, allowing both individuals to benefit from this individual exemption. Although it seems unlikely the exemption will be withdrawn, we cannot rule out that the CGT rates may increase, and using gains effectively is a sound financial decision and could be extremely advantageous. Therefore, it is preferable to realise any gains before the Chancellor of the Exchequer’s Spring Statement. Current CGT rates for those in the higher tax band or additional rate taxpayers are 20% on gains from chargeable assets and 28% on
www.partnerswealthmanagement.co.uk
7
Get in touch If you would like to discuss any of the points raised, please contact your usual Partners Wealth Management adviser, or contact us on info@partnerswealthmanagement.co.uk or 020 7444 4030 for an initial conversation.
gains from residential property. If rates did rise to match income tax, as has been speculated, that could see some capital gains being charged at 45% tax.
3
The next interest rate decision will take place in February, so now is an opportune time to review your mortgage and lock in a fixed rate deal while interest rates are low. It is unlikely that interest rates will drop below where they are currently sat.
Review your mortgage Due to the uncertainties caused by the COVID-19 pandemic, interest rates have been at historically low levels for quite some time, with the Bank of England increasing interest rates from 0.1% to 0.25% for the first time in three years last December. This can have positive and negative effects, especially as the rise was driven by high UK inflation, as prices have been rising at their fastest rate for a while. The central banks believe that increasing interest rates will encourage people to save and discourage borrowing, therefore taking cash out of the economy and slowing things down.
4
Maximise your ISAs and JISAs It is highly unlikely that the Individual Savings Account (ISA) allowance will be removed, but it is still important to take advantage of this tax efficient savings scheme and maximise contributions of £20,000 per person annually, where possible. It can also be valuable in the long term to make use of the Junior ISA (JISA) allowance with a contribution £9,000 per child.
5
Consider Venture Capital Trusts (VCT) and Enterprise Investment Schemes (EIS) For individuals with significant income and an appetite for risk, it may be worth considering the 30% income tax relief that can be gained from investing in private equity through VCT and EIS. While these schemes are extremely tax efficient vehicles, it is crucial to take care when investing due to the high-risk nature associated with investing in small businesses and it is important to seek regulated advice. The five action points raised above may have been considered as part of your annual new year financial review. If not, we suggest that we consider them together, so that we can ensure that all the tax planning allowances available for you have been fully implemented prior to the end of this financial year, and before the Spring Statement. It is important to remember that taxation will depend on your individual circumstances and may be subject to change in the future.
8
PWM Insights
Edition One
2022 through the eyes of Vincent Van Gogh Ben Kumar Senior Investment Strategist 7IM
Investment managers need to think like Vincent Van Gogh. Not in every sense (two ears where possible, please), but certainly in the artistic one. Van Gogh’s most famous paintings walk the same line that any investor talking about the future must tread: they sit between total abstraction (I’m thinking of some of Picasso’s obscure stuff) and complete precision (such as engineering blueprints). Unfortunately, halfway through every December, the financial world forgets to paint like Vincent. Normal practice goes out of the window and people start talking in terms of calendar years and decimal points. All of a sudden, they are making exact forecasts of where the FTSE 100 or USDGBP will be in 380 days’ time. For about two weeks, everyone pretends they’re an engineer, despite spending most of the year holding a paintbrush. And, as you’d expect, the output is useless. As in, not of any use – to the people making the statements, or the people reading them. False precision is ultimately just false.
At 7IM, we never forget that we’re painters. When we think and talk about the future, we’re aiming for the sort of detail Van Gogh gave us in The Starry Night. We don’t want to be so vague as to be useless, but we don’t need to pick out every individual star, or house, or tree. You’ll note an obvious omission – no mention of COVID, and that’s deliberate. We’ll keep our eyes open in the short-term, but over the timeframes we’re thinking about here, there’s no useful picture to be painted. So, forget calendar years and crystal balls; instead enjoy our post-impressionist1 approach to what the future might hold for investors.
Inflation splits the generations There’s an inflation battle brewing between the generations. Anyone who was an adult through the seventies and eighties has a clear and visceral memory of high inflation and the stresses it can cause. But since the early nineties, high inflation hasn’t been a problem in the developed countries. So, people born later than the mid-seventies don’t have that emotional connection to the phenomenon – it’s academic rather than real. Trust me, I’m one of those without that experience! And you can tell me as much as you like about the dangers and risks of high inflation, but you can’t make me feel it.
www.partnerswealthmanagement.co.uk
© GiorgioMorara – stock.adobe.com
In the world of finance and economic policy, there’s going to be a shift over the next few years. We’re heading for a point where even 50-year-olds aren’t going to have really lived through inflation. The people in charge are changing from those who lived through an inflationary period, and those who didn’t. Rishi Sunak was born in 1980… We’re not too worried about sustained levels of high inflation in the near term – although extra-low interest rates still mean savers need to invest. But as the heads of central banks and governments shift over the next decade, we wouldn’t rule out a change in the inflationary environment. >>
“
So, forget calendar years and crystal balls; instead enjoy our post-impressionist approach to what the future might hold for investors.”
9
10 PWM Insights
Edition One
2022 through the eyes of Vincent van Gogh Continued
Stop talking about “technology” companies
© GiorgioMorara – stock.adobe.com
I bet you can’t list the five largest US information technology companies… Did you go for Apple, Amazon, Facebook, Google, and Microsoft? Maybe Tesla snuck in? If so, you’re wrong, but not alone. Common perception of ‘tech’ companies differs from their technical classifications. Facebook, Amazon and Google aren’t ‘information technology’ companies in the current way investors view the world. Facebook and Google are ‘communications services’ businesses, as are Netflix and Twitter. Amazon and Tesla are in the ‘consumer discretionary’ sector. When these sector definitions were developed2 in 1999, the world was only just getting to grips with the potential of information technology – computing. Now though, technology is involved in pretty much every business going. Saying something is a tech company is not helpful. Is it a sales software company or a semiconductor manufacturer? A virtual healthcare provider or a financial payments system? A smartphone maker or a social network? Talking generally about technology won’t cut it for much longer. The next decade might see the market sector disappear. Instead, it will be embedded at the heart of every other sector.
www.partnerswealthmanagement.co.uk 11
China; in or out? For decades, the easy way to invest in China was to invest in developed market companies with a Chinese presence: luxury goods manufacturers, car-makers, or hardware providers, based in the US, or Germany, or Japan, but with a high proportion of Chinese revenues. That’s going to change. We see a two-system world developing. As a US company you won’t be able to trade with China. As a Chinese company, you won’t be able to trade with the US. Anyone stuck in the middle will have to choose where to target their business model – serving two masters is unlikely to work. Chinese manufacturing capabilities are now at, or beyond, developed market levels, and Chinese demand is shifting to domestic businesses (strongly guided by the government). The best access to 1.4 billion Chinese consumers is likely to be direct, through buying the onshore equity markets in Shanghai, Shenzhen and newly launched Beijing.
Risks are everywhere. Stock markets in China are less than twenty years old, still treated as a casino by many locals, and subject to wild swings. The government can wipe out whole industries with a statement, and legal protections are far from assured. Geopolitical belligerence and human rights issues add a further moral dilemma. Foreign investors will continue to feel powerless. But we’re getting close to decision time. Embrace investing in China, for all its perils, or ignore the most significant economic force of the next two decades. This is not an easy choice. But avoiding short-term pain in Chinese equities is likely to be the big mistake in the long term. The world is changing, and we have to change with it. That’s three pictures from our gallery of the future, which are shaping the way we think about portfolios for 2022 and beyond. We’ll keep painting and investing in this way – and we’ll always share our thoughts once they’re ready for display. Ultimately we think that, like most of Van Gogh’s landscapes, the future looks bright (if a little blurry).
1
I spent most of my life thinking that Van Gogh was an Impressionist, but then during a lockdown walk, I found a blue plaque on a house two roads away from me. It turns out that in 1873-1874, Van Gogh lived in Stockwell. I did some reading and discovered my mistake. Post-impressionist. It also explains why a local café is called Van Gogh, something which was a total mystery to me before!
2
www.msci.com/documents/1296102/11185224/GICS+Methodology+2020.pdf
This article has been provided by 7IM, our corporate partner. This insight presents their views and underlines their asset and investment methodology. Any reference to specific instruments within this article does not constitute an investment recommendation.
The information and / or any reference to specific instruments contained in this document does not constitute an investment recommendation or tax advice. Capital at risk. The value of your investments and the income from them may go down as well as up, and you could get back less than you invested. Tax rules are subject to change and taxation will vary depending on individual circumstances. Past performance is not a guide to future performance.
12 PWM Insights
Edition One
Portfolio Diversification: Art – tangible and aesthetically pleasing
Shea Goli Contemporary Art Specialist, Gurr Johns
Traditionally the art market has had a fairly casual relationship with the stock market; works of art can go up in value even when the market crashes, making it an attractive option for a diversified investment portfolio; this attraction has been further enhanced recently by a decade of low interest rates and ‘cheap money’. Any potential return from art is based predominantly on supply, demand and a series of specific and often-volatile market trends make it critically important to consult with a trusted adviser with an ear to the ground in the marketplace. What can start as simple curiosity can develop into a lifelong passion with the right tools and advice. It is important to educate oneself by looking at art; visit galleries and museums, read about the areas which fascinate you, and seek the guidance and advice of a professional art adviser. There are few certainties in the art market, and artworks are generally more likely to increase in value over the medium to long term, so once you can pinpoint your tastes and interests, it is always best to collect with a view that any purchase could be hanging in your home for a long time. This way, no matter what happens to the value of the art, you own something that you love and that you want to live with.
www.partnerswealthmanagement.co.uk 13
“
Before engaging in the marketplace, it is important to establish an objective and a strategy.”
Generally speaking, there are three tiers of investing:
Collecting for passion vs investment
1. Lower priced objects by young, emerging or relatively undiscovered artists. Although higher risk and speculative, these acquisitions have the potential to provide higher returns. 2. Higher value objects by midcareer and established artists, which have often shown stability in the marketplace in the medium to longer term. 3. Extremely high-priced objects for blue-chip trophy pieces, which often reflect the rarity of the objects or the egos of potential buyers. Often established artists make prints and editions, which offer the opportunity to enter into their markets at a lower price point. These usually hold their value, sometimes even making attractive returns (for rare prints or limited edition runs resold at the right time).
Collecting should always be primarily driven by passion; if collecting has yet to become something you are passionate about, you should, at the very least, collect what you like. Whilst an artwork’s investment potential is important, ultimately - like any investment - there is no cast-iron guarantee that there will be a return. The beauty about investing in art can be that inherently there is never a loss because you still live with an object you love. Historically, and somewhat ironically, the collections which have tended to show the greatest financial returns are those which were built through a passion for art, and with little priority placed on investment value. The most valuable examples sold at auction include the personal collections of Yves Saint Laurent and Pierre Bergé, Victor and Sally Ganz, Linda and Harry Maklowe, and Peggy and David Rockefeller; and while these are major names, this trend is reflected at every level of the market. >>
Before engaging in the marketplace, it is important to establish an objective and a strategy whereby first and foremost, you are collecting pieces that you are drawn to aesthetically, and which have been vetted by a professional adviser to ensure the greatest potential to hold their value.
14 PWM Insights
Edition One
Portfolio Diversification: Art – tangible and aesthetically pleasing Continued
What should investors be wary of? Investors should seek the advice of a professional adviser to vet the authenticity of a work, the fair market value, price, seller, and provenance. These are important aspects that help determine how much to spend on a work of art. There are two main marketplaces from which to buy art: 1. The primary market, meaning a new artwork bought for the first time through a gallery or directly from an artist’s studio. 2. The secondary market, meaning a previously traded artwork usually bought through auction or from an art dealer. Both have their pros and cons and serve different purposes in the art world. Seeking as much objective information as possible about the work of art and an artist’s market is paramount either when investing in emerging art or when buying on the secondary market. Art is not a regulated investment so there can be a lot of misleading information out there.
How much do you need to start a collection and where would you begin? A case study in how to go about investing in the art world. Individual works can be found from only a few thousand pounds, and it’s possible to start building a collection from a budget of around £25,000, although the bigger the budget, the better the chance of a return in terms of both quality, and investment. A common approach is for a client to enlist the services of an adviser to help inform and educate them about contemporary art. The adviser should show them exhibitions and introduce them to the various types of art available on the marketplace. They may walk them through an art fair or a museum to help the client to develop a clearer idea of what they like. Once there is an understanding of taste, a client sets some clear objectives with their adviser i.e. ‘I’d like to invest 10% a year in art, mostly in emerging artists but with a few established pieces on which to hedge the majority of the collection’. The adviser helps the client get access to available works, negotiates on their behalf and filters material to make sure they are getting the best examples available. In time, the more art one sees, it is almost inevitable that tastes and preferences change, and the collection might develop in a different direction. This is where the adviser can help to deaccession pieces privately or at auction and to make room for new acquisitions.
Emerging markets in the art world vs emerging markets in the financial world The art world is growing rapidly and, over the last decade in particular, there has been a fundamental shift, driven both by the internet, and by the rapid growth of Asia. Since the emergence of Covid, the international art market has continued apace through digital innovations, including online gallery tours, auctions and digital content. During this time, we have also witnessed the growth of non-fungible tokens (NFTs), a fastdeveloping area of the market which is currently attracting a lot of speculative investment. Geographically, Asian collectors have become firmly established in the market. Traditionally a large part of Asian spending took place in Hong Kong or at international sales of Asian art: however over
www.partnerswealthmanagement.co.uk 15
recent years there has been a significant shift towards Western art. In 2021, Asian buyers represented 31% of Christie’s sales worldwide, and at Sotheby’s, they placed bids on 46% of lots that sold for more than $5 million. The market continues to be excited by emerging markets in Africa and South Asia in particular. Before Covid, major art fairs and biennales were important calendar fixtures, such as the 1-54 Contemporary African Art Fair, which bridged the gap between international collectors and local African artists. Over the last two years though, we have seen how productive digital viewing rooms and social media platforms like Instagram have been at bringing new artists to market. They have widened access to new artwork and nurtured new collectors. >>
“
Over the last two years, though, we have seen how productive digital viewing rooms and social media platforms like Instagram have been at bringing new artists to market.”
16 PWM Insights
Edition One
Portfolio Diversification: Art – tangible and aesthetically pleasing Continued
Compared to other emerging markets in the finance world, these markets remain rather slow in gaining predominant market share. This is due to less exposure of artworks by international artists in marquee auctions, museums, and galleries in the United States, China, and UK that dictate the market. An exception to this is African art, which has gained more popularity as a result of growing support for art made by African-Americans and other marginalised demographics formerly left out of discourse. The art market often mirrors to some extent the larger sociopolitical changes of the day. For the most part though, we are seeing a growing demand for Western artists in emerging market regions from a new generation of collectors.
Where in the world should an investor look for new emerging talent? There are galleries across the world that specifically showcase the work of emerging artists, and art fairs can be a timeconvenient place to discover new talents.
The Master of Fine Arts (MFA) thesis shows are also a great place to discover new artists; their annual thesis exhibitions are usually open to the public. For example, every summer the Royal Academy exhibits new work by the students finishing their postgraduate study at the Royal Academy School in London, as does Goldsmiths. In the United States, Yale hosts an annual MFA thesis exhibition featuring work from candidates across painting, sculpture, photography and graphic design. There are many other universities that specialise in fine arts that do the same. Emerging art has never been more popular in the market. Now mega galleries, such as David Zwirner and White Cube, have partnerships with younger galleries or have created their own special programs focused on emerging artists (often presented digitally and more openly), which they show alongside more established names.
Shea is a contemporary art specialist at Gurr Johns. She advises private and trade clients on acquisitions and sales, valuations and collection management. She is based in London and is also a patron of the Serpentine. Gurr Johns, founded in 1914, is the leading independent firm specialising in art advisory and valuations. The company acts as a discreet and trusted advisor to private collectors, family offices, attorneys and art institutions, navigating the art market to ensure that clients achieve best value.
To discuss building, selling or valuing your art collection, please contact Sgoli@gurrjohns.com
www.partnerswealthmanagement.co.uk It is important to take professional advice before making any decision relating to your personal finances. Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from, taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor. No part of this document may be reproduced in any manner without prior permission. © (2022) Partners Wealth Management LLP