Welcome
Fiona Oliver, Business Director, Partners Wealth Management (PWM)
04 10
Surplus cash in a business Kat Smilewicz, Partner, PWM
Inflation: bad for portfolios, good for society? Ian Rees, Investment Director, Ruffer LLP
06 14
Mitigating currency risk when buying property abroad
Mar Bonnin-Palmer, Head of Partnerships, Moneycorp
Welcome to our third edition of PWM Insights. Summer is here and, for many of us, it is a time of greater relaxation, more freedom from our routines and potentially exciting travel opportunities. Warm weather and more hours of sunlight can be the perfect tonic we need.
In contrast, many people will be worried about the fact that inflation is at its highest level for 40 years, currently at 9.1% as I write. There is no doubt that inflation will be less transitory and more ingrained over the period ahead.
The first question we are being asked by clients is ‘how far will this go?’ People are more than aware of the fact that inflation is forecast to keep rising this year, with The Bank of England suggesting that rates could rise to 11% later this year before it starts to slow next year. The Bank of England also suggests that this will then fall back in around two years to the more desired number of 2%.
The second question many clients currently pose is ‘what should I do about this?’ Many investors are now accustomed to political, financial and economic factors causing volatility. There is no doubt that the COVID-19 pandemic has resulted in market volatility for all investors.
We also see that economic and geopolitical events, such as the war in Ukraine, always prompt investors to question whether now is a good time to invest or remain invested. As an investor, it is important to remember that some market volatility is inevitable, and that short-term turbulence may need to be endured to achieve your longerterm goals. Here are three tips that could help you:
Investment requires a disciplined approach and a degree of holding your nerve when markets fall. Experienced long-term investors know that the worst investment strategy you can adopt is to jump in and out of the stock market, panic when prices fall and sell your hard-earned investments at the bottom of the market. We should also remember that volatility creates opportunities for investors.
Successfully achieving your longterm investment goals requires balancing risk and reward. By selecting a broad range of assets in line with your attitude to risk, objectives and time horizon, diversification aims to provide the potential to improve returns for your elected level of risk. Equities are, however, one of the long terms ways to combat inflation.
Ongoing financial advice and planning are essential to help position your portfolio in line with your objectives and attitude to risk, and to develop a well-defined investment strategy tailored to your personal objectives and risk profile.
I recently read an article by Stuart Soroka (US based Professor of Communications and Political Sciences), where he outlines the human tendency to prioritise negative news over positive news.
If you look at the broadsheets on any given day, you will need
to be 5 or 6 pages in before you read anything positive. He cites that we are predisposed both neurologically and physiologically, to focus on negative information since the potential costs of negative information can far outweigh the benefits of positive information.
We know that this is a period of market volatility, which happens from time to time, and this is unsettling for many. By working together, our expertise and constant focus on both the markets and your financial plans means that you are in good hands. Together we will ride out the volatility and move back into a period of calm.
The PWM team and I hope that you enjoy the latest edition of PWM Insights. If you have any questions about any of the topics covered, please reach out to your PWM adviser or contact us on info@ partnerswealthmanagement.co.uk or 020 7444 4030 for an initial conversation.
“
As an investor, it is important to remember that some market volatility is inevitable, and that short-term turbulence may need to be endured to achieve your longer-term goals.”
One of the financial planning areas Partners Wealth Management have been advising on a lot recently is surplus cash in corporate bank accounts. We come across more and more businesses that are cash rich and do not know how best to manage their cash positions.
We’re very well equipped to help them, be it through tax-efficient extraction of cash from the business or managing the cash within the corporate structure. We can also help ensure that some of the cash is moved out of our clients’ taxable estates.
Let us start with pension contributions. Having spoken to a number of PWM advisers, who deal with hundreds of corporate clients between them, the unanimous conclusion
is that pension contributions are a greatly undervalued tool of managing business cash positions. As a business owner and director, you can make employer contributions to your own pension, which is treated as business expense, and so can be offset against the business’ corporation tax. If you compare it to paying a salary, you don’t only save the tax but also up to a 13.8% National Insurance (NI) contribution that otherwise would have to be paid.
“ We can advise on the best options available to you, calculate how much exactly you can put into a pension scheme, and how much tax you can save.”
The benefits are clear:
1
Saving corporate tax and potentially NI contributions.
2
Building a pension fund in your name that can support you in retirement from age 55.
With regards to the levels of savings, an employer can put up to £40,000 into a pension per tax year per employee, which is an immediate saving of £7,600 in corporation tax. There are some instances, where the contribution can be much higher than that (using Carry Forward or setting up Defined Benefit Small SelfAdministered Pension schemes with accelerated pension contributions based on actuarial calculations), and so the potential tax saving increases. Here, at Partners Wealth Management, we can advise on the best options available to you, calculate how much exactly you can put into a pension scheme, and how much tax you can save. >>
Please note that this article is intended for educational purposes only and should not be taken as investment advice. You must be aware that the value of your investments may go up and down and you could receive back less than you originally invested. Tax rules are subject to change and taxation will vary depending on individual circumstances. Please consult a financial adviser before making any investment decisions.
As a next step, we can also help with managing the funds for you once outside of the business.
An additional benefit of making pension contributions and building a pension pot is that the savings accumulated within the pension environment, can be passed to selected beneficiaries free of inheritance tax (subject to certain conditions). Therefore, a business owner and director, who makes a pension contribution can save both on corporate tax and also inheritance tax on death.
Another financial planning tool we use with our clients to improve tax position for cash rich businesses is, investing in Venture Capital Trusts (VCTs).
Once the cash has been paid out of the business (be it through a salary or dividends), it can then be invested into a VCT with an income tax relief in the form of a 30% tax reduction on the director’s annual tax return. Just as an example, on an investment of £50,000 into the new ordinary shares in a VCT, £15,000 can be offset against an investor’s income tax liability in the year of investment when the shares were issued. To qualify for VCT income tax relief, the subscribed shares must be held for a minimum of five years. Moreover, VCTs offer tax free dividends, and so a dividend of 5% equates to a taxable dividend of 7.41% for a higher rate taxpayer and 8.1% for additional rate taxpayers, for example.
cash in a business
“ We offer a number of solutions, depending on specific goals, particularly time horizon, and also directors’ attitude to investment risk.”
There are more complex ways of managing the cash positions of a business, like reviewing the legal structure of the business. This must be looked at alongside an accountant and lawyer with the clients’ best interests in mind.
Once the cash balance in the business is at a satisfactory level, we can help manage the cash within the business. We offer a number of solutions, depending on specific goals, particularly time horizon, and also directors’ attitudes to investment risk.
For those more risk averse, with shorter time frames, we would suggest using a cash hub. A cash hub offers active management of cash deposits to improve returns on your money with access to the whole savings market.
A great benefit of using a cash hub is splitting the risk across a number of financial institutions. For those prepared to take on investment risk, we can also help structure investment portfolios within the business.
To sum up, cash is a great asset for any business to have as it ensures smooth transactions. But if in surplus, it should be incorporated into longer term financial planning to make sure it is utilised in the most tax efficient manner, with real value of money in mind.
A VCT is a complex investment and you should always seek advice before investing. While these schemes are extremely tax efficient vehicles, it is crucial to take care when investing due to the highrisk nature associated with investing in small businesses.
To find out how PWM’s Tax Optimisation Strategy can help you, please contact your usual Partners Wealth Management adviser, or contact us on info@ partnerswealthmanagement.co.uk or 020 7444 4030 for an initial conversation.
As inflation has soared to its highest level for 40 years, financial markets have taken fright, with most bond and equity markets down significantly so far in 2022. In fact, the US is now officially in a bear market, and inflation pressures show few signs of fading – quite the contrary.
But here’s a controversial thought. In one respect, a good dose of inflation may just be what society needs.
Over the past four decades of generally declining inflation, wealth inequality has increased massively worldwide. Since 2008, this process has been turbocharged by the Global Financial Crisis and the Covid pandemic as central banks responded by cutting interest rates and printing money to buy financial securities. This has driven up the prices of almost all assets from stocks and bonds to houses, fine wines and art.
This article has been provided by Ruffer LLP. This insight presents their views and underlines their asset and investment methodology.
So, the old, who have accumulated assets over their lifetimes, have become richer, while the young have become relatively poorer. Meanwhile, business owners and shareholders have profited at the expense of workers, whose bargaining power has been eroded by two long-term trends: the weakening of the unions; and the advent of cheap foreign labour (via outsourcing or immigration).
Over time, inflation should help to redress the balance. This will be done partly through higher wages for workers, helped by the move towards more secure supply chains in light of the pandemic and the new cold war with Russia and China.
But what’s good for society at large will feel pretty painful for investors. That’s because the second way it will redress the balance is by eroding the real value of most assets. A whole generation brought up on consistently low inflation and
interest rates is now discovering the damage higher inflation can do to portfolios. Can investors do anything to guard against it?
The traditional balanced portfolio relies on a negative correlation between equities and bonds. At any given time, one of the two assets should be rising, helping to protect the portfolio against the downturn.
But, as we enter a new regime of greater inflation volatility, investors are discovering that those two core anchors in their old portfolios are moving downwards in tandem.
If – as we believe – this is only the start of a new era of higher and more volatile inflation, investors may want to rethink their approach. We believe the answer is an active portfolio which is genuinely unconstrained and so has the flexibility to pursue capital preservation, rather than tracking – or attempting to beat – a market index. >>
Ian joined Ruffer in 2012, after graduating from the University of Bath with an honours degree in economics. He spent 2017 in Ruffer’s Hong Kong office working as an equity analyst covering emerging markets and is a CFA charterholder. He has been co-managing the Ruffer Diversified Return Fund since its launch in 2021.
“
But what’s good for society at large will feel pretty painful for investors. That’s because the second way it will redress the balance is by eroding the real value of most assets.”
Continued
After all, if your manager outperforms the index by 2% but the index is down 25%, you’re still left with a massive loss.
Of course, some assets – such as commodities and inflation-linked bonds – are widely viewed as inflation hedges. So why not cram the portfolio with those?
Unfortunately, it’s not that straightforward. While these assets have a role to play and we have a significant exposure to gold, commodities are also influenced by other factors, such as supply and demand issues, geopolitical risks and currency moves, so they can decline in value even at times of rising inflation. Similarly, inflation-linked bonds are generally driven not by the current rate of inflation, but by investors’ expectations for future levels.
Inflation: bad for portfolios, good for society?
“
Inflation-linked bonds are generally driven not by the current rate of inflation, but by investors’ expectations for future levels.”
In addition to this, they are vulnerable to duration risk – that is, that rising interest rates could drive the bonds’ value down. We think inflation is likely to be volatile for some time, with sharp falls and rises as the economy adjusts to the post-pandemic realities. In that case, these inflation hedges would tend to lose value in the phases when inflation is declining, and timing such fluctuations is notoriously difficult.
So, to help preserve capital when mainstream assets are falling, our portfolios include less conventional assets – namely derivatives. For example, we have for some years had a sizeable holding of long-dated index linked bonds, based on our view that ultra-loose monetary policy would ultimately lead to higher inflation.
Throughout this time, we have used interest rate payer swaptions to hedge our duration risk. These have allowed us to retain this core portfolio position while reducing our vulnerability during periods of rising yields. Similarly, we have used derivatives to hedge against steep declines in equity indexes. We also sometimes take opportunistic positions to benefit from sharp falls in single stocks. Recent examples include areas of overexuberance in technology stocks.
We have a significant allocation to cash. When inflation is high, many managers avoid cash, because inflation erodes its value over time. But we see it as a protection against more severe declines in other assets – the real value falls in bonds and equities can be much more severe and, crucially, as a reserve we can use to take advantage of any opportunities arising from the volatility in equity and bond markets.
Of course, we have to pay for these derivatives, and this can act as a drag on performance, particularly when mainstream assets are rising. But that is a price we are willing to pay for assets with a negative correlation to our equity holdings in the event of a severe market downturn.
The market environment now demands investors be active and nimble. Cautious but brave. The balance will be difficult to strike, but essential for the longterm preservation of capital in a changed world order.
The views expressed in this article are not intended as an offer or solicitation for the purchase or sale of any investment or financial instrument, including interests in any of Ruffer’s funds. The information contained in the article is fact based and does not constitute investment research, investment advice or a personal recommendation, and should not be used as the basis for any investment decision. References to specific securities are included for the purposes of illustration only and should not be construed as a recommendation to buy or sell these securities. This document does not take account of any potential investor’s investment objectives, particular needs or financial situation. This document reflects Ruffer’s opinions at the date of publication only, the opinions are subject to change without notice and Ruffer shall bear no responsibility for the opinions offered. More information: ruffer.co.uk/disclaimer
This financial promotion issued by Ruffer LLP, which is authorised and regulated by the Financial Conduct Authority in the UK and is registered as an investment adviser with the US Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. © Ruffer LLP 2022. 80 Victoria Street, London SW1E 5JL ruffer.co.uk
Mar Bonnin-Palmer Head of Partnerships, Moneycorp
Whether buying a holiday home abroad or relocating permanently overseas, the process of purchasing a property is meant to be exciting. When purchasing a property in a different country, you are faced not only with alternative languages, processes and procedures, but also the addition of currency conversion. This presents a potential cost implication based on the available rate of exchange at planning, exchange and completion.
The exchange rate between sterling and the euro fluctuates constantly. During times of increased volatility, these fluctuations are more aggressive, and the cost implications can be significant over a shorter time period. Globally, interest rates, energy costs, economic performance, political uncertainty and global conflicts are saturating the news, all of which has an impact on the foreign exchange markets. Exchanging your funds when buying a property could prove costly if poorly managed, particularly during volatile periods. If well managed, you
could use this volatility in your favour to achieve a better rate and even stretch your budget to benefit from positive rate movements.
The year opened with a GBP/ EUR exchange rate at 1.189. In March, following the European Central Bank’s (ECB) reluctance to increase interest rates despite dangerously high inflation, we saw the currency pair hitting a six-year high at 1.211. However, soon after, the ECB showed signs to follow the UK in the fight to tackle inflation. Slowly and at
points aggravated by Russia’s invasion on Ukraine, we have seen the GBP/EUR levels oscillating between 1.18 and 1.14.
Those exposed to the US dollar (USD) have seen great volatility, too. Typically, in an unpredictable market, the US dollar benefits from its ‘safe haven’ status, whereby investors sell their
Of course, investment in property does not come without risk. Real estate is a relatively illiquid asset and your return can also be affected by currency fluctuations and market conditions.
riskier, higher yielding assets and purchase more stable assets like the US dollar, thus increasing its value. Over the past six months, we have seen this in full force as the value of the pound has diminished from a year high of 1.3714 on 14 January, to finding itself down to 1.2013 on 15 June, before levelling off around the 1.22 mark. This is a 14% loss in value of the GBP against the USD in this range over the past six months and has been driven by global conflicts, UK political uncertainty and the release of economic data by both governments and central banks.
For a buyer looking to purchase a property of €1 million, the difference in cost between the high and the low is £48,000. Whilst this figure is unlikely to be the difference between affordability or not, it is significant enough to be taken seriously, especially as it’s something that cannot be influenced by the buyer throughout the process.
The first aspect a buyer should decide is their budget range before beginning their search. They should then consult a currency market specialist who will guide them through their purchase.
Time is valuable here. The more time you have, the more equipped you will be with guidance on how to take advantage of rates. It is essential that property buyers are organised to ensure they benefit from the tools available to manage potential risks to their budget caused by volatility. >>
To some extent, market specialists can anticipate when the market will typically move in a certain direction by factoring in upcoming events. They will then discuss your timings and budget with you, providing you with a tailored solution to help limit the risks you face against a volatile market and put in place boundaries to ensure you stay within your property purchase budget.
Here are some examples of the tools available to you and how they can benefit your exchange:
A spot contract is an agreement between you and your market specialist to exchange money and buy foreign currency at the present exchange rate. This is the most common and traditional form of currency exchange and is suited to addressing any imminent currency transfer needs such as a deposit for a property.
This allows you to fix a rate of exchange up to two years in the future in advance of a payment. This tool is very popular among property buyers as it allows them to fix the whole price of the property ahead of completion giving them the peace of mind and the certainty of how much they are going to pay for the property.
You could target a rate of exchange and if that rate is hit, we could either buy the funds for you automatically, or notify you for your permission to buy. With the same principle we can set up a limit order to protect your transaction in case the rate falls below a certain level. This suits those who have some time on their hands and are optimistic that the rate might improve within their time frame. One of the advantages of the market order is to ensure that the currency is bought at the desired level even if the market only touches that level very briefly – and this includes when the markets are closed for trading.
Regular payment plans are ideal if you have monthly bills or mortgage repayments to pay, or are receiving income or a pension from overseas. Making automatic transfers takes all the hassle out of making payments and there are also options to fix the exchange rate for extra security over the payment amounts.
About Mar Bonnin-Palmer
Mar Bonnin-Palmer is the Head of Partnerships at Moneycorp and she is based in the company’s headquarters in London. Mar started her career as a lawyer in a London firm specialised in international conveyancing and she moved to foreign exchange more than 15 years ago. Her legal background helps her assisting clients in complex transactions dealing with the funds involved in the sale of overseas properties or handling international estate cases.
Mar and her team assist Partners Wealth Management’s clients to plan the best way to organise their international payments by offering them the best guidance and competitive exchange rates.
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