Introduction

The following article is designed to give individuals an insight into the different ways we can invest in property. Whether it’s a direct investment into residential or commercial property or putting your faith in one of the many retail funds out there, there are many routes you can choose if you want to get access to this particular asset class. As well as focussing on the various methods of investing, we shall also look at the benefits and drawbacks of putting your money into property, as opposed to different asset classes such as gilts, fixed interest, cash or equities. As this article was written specifically for your accountant’s publication, we shall also have a comprehensive look at the various tax implications of investing in property.

The article will also partly focus on the type of returns that property has provided in the past, so that by the end of this article you should have a much clearer understanding of the nature of investing in property and will be a much better position to decide if this type of investing is for you.

Overview of Property Investing
Investing in property is nothing new to UK investors. The notion of property as an investment really started to take off during the Thatcher years as the Right to Buy scheme encouraged many millions to purchase instead of renting. The new expanding middle class saw the potential for long term growth in rising property prices as opposed to “wasting” money on rent. However it was the Housing Act of 1988 that really provided the background for small investors to plug the housing gap created by the sale of council housing and it afforded tenants a level of protection into the bargain. However, the boom of the years from 1996 to 2007 where house prices rose a staggering 219% (according to Halifax), are a distant memory and common sense has been brought back into the marketplace. The rampant profiteering has given way to a much more cautious approach. There is still good money to be made in investing in property but only if you’re sensible and take good advice.

In the past it almost seemed as if one could not fail to make money out of property. However the reality is, as with all investments, that there are of course risks and in some instances people have lost a lot of money. The last few years have been a large wake up call for those that thought investing in property was an easy ride to fame and fortune. Both Commercial and Private Property have both found the going tough in recent times but investing in these assets is still vital for the diversification and long term growth potential that it brings to a portfolio.

Many of you will think of investing in property simply in terms of buying a property cheap, doing it up and selling it on for a profit, or in terms of Buy-to-let, which is where you buy a property and rent it out as a private landlord. Whilst these are two of the most common ways to invest in property they are by no means the only methods available. In this article we shall take a close look at the many ways we can get exposure to property and also try to analyse the pros and cons of each method we cover. New regulation has made investing in property funds more accessible in recent times and we shall look at the various investment vehicles such as ISAs and pensions and their tax advantages.

We will also look at the potential for growth, income streams, yields and cover the risks associated with property such as defaults and liquidity.

RESIDENTIAL PROPERTY
In this section we will take a look at the various ways of making an asset backed investment in residential property.

Buy To Let
Residential buy-to-let really came to prominence in the1990s and this was due to a number of factors:-

• Buy-to-let mortgages became more obtainable as you could get a loan with as little as a 15% deposit on a property.

• The yields on bonds and equities fell in relative terms making the rental income from property more attractive proposition.

• Strong capital performance during this period also main residential property more appealing.

When entering the buy-to-let market it is very important to do your research and make yourself aware of the potential pitfalls. The popularity of this type of investment meant that many areas of the country (such as parts of London, Manchester and Leeds) led to an over supply of rented properties. This was a big contribution to the price falls of 2008 when the housing market also started to cool. Prices are very heavily affected by supply and demand and economic factors can easily change the demand in different areas. The relative prosperity of an area will go a large way to determining the attractiveness of property investment, as demand will be higher in areas where business is flourishing, local amenities are good and the general demographics mean that people wish to live there.

One of the most important aspects of buying a property to rent out is of course getting tenants in. It is vital to give thought to this when sourcing a property i.e. is this the type of property in the kind of area that will attract tenants paying a decent rate for the rent? Most buy-to-let investors will still have mortgages on the property or properties and these mortgages still have to be paid, even if there is no tenant in the property. When a property is suffering loss of rent this is often referred to as a void period. A void period could also occur when a tenant fails to pay the rent and removing those tenants can prove to be difficult as well as costly. Investors who have borrowed more are most at risk from void periods.

The income (or yield) you can expect to get from a rented property does vary from area to area. Generally though, you will find the more expensive the property, the lower the yield. Rising property prices in the years up to 2007 tended to push down yields. Although property prices have fallen in recent years this has not always meant that yields have increased because rents have also come down in many areas. One feature which has been to the advantage of buy-to-let investors though has been the low interest rates, which in turn have led to lower mortgage rates. This has widened the gap between income and outgoings for many investors resulting in greater yields.

An example of the potential yield on a property can be illustrated as follows:-

A property is advertised at £185,000, with a potential rental income of £850 a month. This means the gross yield would be.

Gross rent = £850 x 12 = 5.51%

Market price £185,000

In reality though, you would incur many costs in purchasing, such as stamp duty, legal fees, survey costs and perhaps the cost of basic furnishings. For the sake of this example let’s say this all comes to £4000. Added to this you will have general management expenses of let’s say around 20%. This will change the above formula to the following:-

Gross rent – expenses = (£850 – £170) x 12 = 4.32%

Market price + cost of buying £185000 + £4000

The above figures do not take into account any void periods which would reduce your yield even further. I have also left out any mortgage expenses which would obviously reduce returns. For example if your mortgage rate on an interest only basis was 4% on borrowings of £138750 (80% of £185000) then you would be paying £462.50 a month which would reduce your yield down to 1.15%. If you were in this situation you really would be relying on capital appreciation to gain out of buy-to-let. If property prices were to fall then you could easily find yourself in a situation of negative equity and struggle to pay off your loan(s).

The reality of the situation just now would tend to suggest that with first time buyers still finding it very difficult to get on the property ladder, demand for rental property still remains high and according to FT.com there are now more than 49 postcodes in the UK achieving more than 6 per cent yield-12 of them in London.

Investing In Your Own Home
Many clients often say to me words to this effect: ‘My house is my pension’. By this, what they really mean is: ‘I’m going to pay off my mortgage as soon as I can and watch my property value grow. Then when I need money when I’m older I’ll just sell my property and move into a smaller home and live off the profits’. Whilst there is nothing inherently wrong with this in theory putting all your eggs in one basket aside), in practice it is often a completely different story. One of the main drawbacks is that when it comes to down sizing, it may not be so easy to give up a family home where there may have been so much emotional investment over many years. Your own property is not just an investment it is also a home and not so easy to dispose of as a result. The introduction of flexible mortgages has made it much easier for people to pay off their debts much quicker by over paying their regular mortgage payments. With many people now paying very low historic rates it should be a very attractive proposition to make over payments. However the other side of the argument might be that if you are paying off debt at rates as low as 2% for example, then that is the return you are getting for your money if property prices are not appreciating. In most parts of the country property prices have in fact been falling. So perhaps just now is not the time to take a short term view on your own property.

In general though, people are attracted to property investment because they see it as a good bet for long term growth. The owner-occupier market has tended to drive forward property prices in the UK and prices have tended to follow the growth in average earnings. However as always past performance is not necessarily a guide to future performance and the sharp fall in house prices in 2008 was a reminder to us all that property is the same as any other asset i.e. it can go down as well as up. Probably the most well known housing bubble of recent times occurred in Japan where house prices tumbled throughout the 90s and have only recently started to move in a positive direction again.

Overall forecasts for the UK housing markets make gloomy reading. According to the National Institute of Economic and Social Research NIESR house prices will fall 4.5 per cent I real terms and an average of 1.5 per cent per annum in the subsequent 4 years.

Land Registry: House prices have been trending down for the past 12 months

This pessimistic forecast tends to be backed up by others such as estate agent Right Move who have predicted a 5 per cent fall this year and Royal Institute of Chartered Surveyors (RICS) predict that prices will fall a minimum of 2% but no more than 5 %.

Rent a Room
Another way to make money from your own property is to let out rooms to lodgers. The main advantage of this is that you will pay no tax as long as you will pay no income tax as long as the rent does not exceed £4250 a year. You will need to live in the property at the same time as your tenant and the property will continue to be exempt from capital gains tax as your principle residence. However if the letting extends beyond the limits set, the part of the gain that is attributable to the part of the property that is let is chargeable to capital gains tax. However there is an exemption of the lesser of:

• £40,000; and

• An amount equal to the exempt gain on the part of he property occupied by the owner

COMMERCIAL PROPERTY INVESTMENT
Investing in commercial property is in many ways just like investing in buy-to-let in so much that you finance the purchase of a building in an area you have researched and put a tenant in to pay you rent. In a market where we have falling house prices it may make sense to go down the commercial route simply to spread your investment risk.

Commercial property is split into three separate sectors;

• Office buildings;

• Industrial properties(factories and warehouses); and

• Retail (shops).

The commercial property element does tend to be more specialised than other areas of the sector. You will find that a very significant proportion is owned by insurance companies and pension funds.

As with residential property selecting the right tenant and the right area are very central to your success. The quality of tenant and their ability to pay is obviously going to play a big part in how successful you become. Remember that you are going to be renting to businesses rather than individuals which can mean that your tenant is more reliable. Commercial property leases are generally longer as this added security does add value to the property (traditionally commercial properties are valued as a multiple of the rent they produce). The average lease term has come down in recent times. Where once it was not uncommon to see 25 year leases the average term has now reduced to less than 10 years. Rent reviews usually take place around every 3-5 years depending on the length of the lease and are designed to allow the landlord and tenant to adjust the rent to an ‘open market value’. Traditionally rent reviews were on an ‘upward only’ basis meaning that they could never come down but this has proved to be contentious in recent times because of the low inflationary environment we find ourselves in just now. There has been political pressure to change to a system where rents are linked to inflation or turnover.

Using a Pension to Invest in Property
In recent times using a pension vehicle such as SIPP (Self Invested Pension Plan) or SSAS (Small Self Administered Scheme) has proven to be a very popular way to invest in commercial property. By far the most common use of a SIPP has been through small businesses using their pension funds to buy their own business premises. Changes to the pension rules in 2006, means that it is now possible to do this, even if the property is already owned by them or someone connected to them. However it should be noted that these types of arrangements are subject to strict criteria must be done on a commercial basis. That is rent paid to a SIPP must be a market rent.

Buying your pension within a SIPP has several tax advantages. The rent you pay to the pension fund can be paid free of tax because it is a deductable business expense. If you sell your property when it is contained within the pension fund then there is no capital gains tax payable. Also, if you die before age 75 and haven’t started taking your pension yet then your property can be paid into your estate free of inheritance tax.

Past performance of Commercial Property
The values of this sector tend to be cyclical in nature. They have often moved in the opposite direction to the residential sector and equities. An example of this is when commercial property showed very little growth from1982 and 1986 when the stock market was booming, but rose sharply in 1987and 88, remaining virtually unscathed by the crash in October 1987. This led to a property bubble, especially in London. However the bubble popped and from 1989 to 1992 the market experienced a major crash. Since then it’s been a bit of a roller coaster ride with good followed by bad spells. The next major crash happened in 2008 when values fell by an average of 26.3% (source: IPD UK Annual Index). The commercial property market has steadily recovered from it’s bottom in 2009 and from June 2010 to June 2011 the FTSE UK all Property Total Return Index (NAV) returned 10.22 % (source: www.ftse.com).

INDIRECT INVESTMENT IN PROPERTY
So we’ve covered investing directly into property but what about an alternative way? Over the last couple of decades investing into funds dealing in property has become a really popular place to put your money. One advantage of investing in this way is it allows you to diversify your portfolio by getting exposure to property, without the expense associated with the previously discussed methods. Here are some of the ways it is possible to invest indirectly into property:

• Property unit trust/OEICS and investment trusts;

• Shares in listed property companies ;

• Real Estate Investment Trusts;

• Student Accommodation Funds

Property Unit trusts and Investment Trusts
This is a convenient way to invest as little as a few hundred or thousand pounds into one of the many regulated property funds out there. They give the investor a wide exposure to property and usually have sufficient liquidity to allow investors to realise their holding when required. Authorised unit trusts are those that are allowed to the general public. They can invest up to 100% directly in property and the fund manager has the power to defer redemption requests by up to 6 months. There are now about 20 UK based unit trusts specializing in property. Performance over the last 12 months has ranged from +6.2 (Close Freehold) to -6.23 (Aviva). Source: www.morningstar.co.uk

The main differences between Unit and Investment Trusts are:

• Unlike Investment Trusts a Unit Trust cannot borrow money to invest.

• In a Unit trust the price of units is directly linked to the value of the investments held by the fund, whilst in an Investment Trust the share price will move independently of the net asset value, depending on level of demand.

The fact that Investment Trusts are permitted to borrow money makes them more risky. Also, it is important to check on the status of investment trusts, as many of them are in fact offshore companies.

UK Property Companies
This is another way to invest in property with much more liquidity, although there can be a lot more leakage in terms of tax. With this you are simply buying shares in one of the 60 or so companies listed on the London Stock Exchange. Different property companies do different things as some can hold property as an investment whilst other are more concerned with development and can be more like construction companies. Many do both. With this comes varying degrees of risk as the development based companies can have erratic sales whilst those who hold on to the property have a secure income form rent. Most of the property companies that could convert to REITs have done so in recent years have done so (more than 80% according to www.bpf.org).

Real Estate Investment Trusts (REITS)
Most of the larger stock-market property investment companies have converted to the REIT format after they were introduced to the UK market in 2007. A REIT has more tax breaks than a normal property company and it must be a closed ended company and listed on a recognised stock exchange and widely available for private investors. REITs are also a good way to get exposure to global property shares which helps with diversification. As far as performance is concerned there are so many REITs out there and they vary so much it is difficult to give a figure for the whole sector, however one of the most popular in the UK is the Skandia Global Securities Fund run by LaSalle, which is down 12.83 per cent this year and that is after a 2 year rally on the back of a 51.46 loss in 2008 (source www.trustnetoffshore.com). This goes some way to exemplifying how volatile certain types of property funds can be.

Student Accommodation Funds
Still a relatively niche sector Student Accommodation has never-the-less been attracting a lot of attention over the last few years so I though it was worth a mention in this article. The main reason for their recent surge in popularity has been some of the performances. The Brandeaux Student Accommodation Fund for example has consistently returned around 10% p.a. since launch in 2007. It should be noted though that there are problems with liquidity as shown by the fund suspension in 2009 for 3 months. It does however seem to be pretty resilient to downturns perhaps due to successive Governments promotion of further education.

TAXATION
This is obviously a vast subject and worthy of whole books on its own given the nature and diversity of property investing, but I’ll touch on what I think are some of the main points of interest on this subject.

Buy To Let
All expenses must be incurred ‘wholly and exclusively’ for business purposes and must also be incurred on an ongoing basis in order to earn income. Non-revenue expenses are regarded as capital expenses and will be deducted from the capital gain when the property is sold.

The following is a list of allowable expenses:-

• Interest and finance payments

• Motor and travel

• Accountancy and legal fees

• Repairs and renewals

• Insurance and service charges

• Training costs

• Advertising and marketing costs

• Office costs

The main difference between the taxation of your own property and any commercial venture, such as buy-to-let, is that you will pay capital gains tax on disposal of any property that is not your main residence.

Commercial Property
As we’ve mentioned above capital gains tax can be a big liability for property investors but there are a few reliefs available:

• Indexation relief (for properties bought before April 1998)

• Taper relief, and

• The annual exemption (currently £7900)

There are other ways to use commercial property as a tax efficient investment such as investing in funds through an ISA. The current limit for individuals is £10680 in any tax year. As we’ve mentioned putting your property within a SIPP has tax advantages such as freeing it up from inheritance tax, it grows free from CGT and the rent you pay to the pension fund is an allowable expense.

As we know tax can be a very complex issue and that is why it’s important that you take professional advice in relation to any aspect of property investment you plan on undertaking.

CONCLUSION
In conclusion we have seen that there are many ways to get exposure to property as an investment and the biggest problem with this asset i.e. liquidity is not as relevant to indirect investment as it is to direct investment. Property can be a very expensive asset to invest in and it is clear that your initial research will be vital in the process. However the attraction of long term growth still exists and I still think that property has a role to play in any properly diversified portfolio.

In contrast to bonds or equities property is a physical asset…you can touch it, feel it, walk around it and that has to be worth something. Just be prepared for a few headaches along the way and remember property is not something simply to be dabbled in.

]]> http://www.williamgeorgeifa.co.uk/2011/11/15/a-guide-to-investing-in-property/feed/ 0 http://www.williamgeorgeifa.co.uk/2011/10/28/europe-the-final-frontier/ http://www.williamgeorgeifa.co.uk/2011/10/28/europe-the-final-frontier/#comments Fri, 28 Oct 2011 08:00:12 +0000 William http://www.williamgeorgeifa.co.uk/?p=708

All investors are taught early in their careers that the two dominant emotions in financial markets are fear and greed.
Cold rational analysis of facts is all well and good but when emotion takes hold it over-rides everything else; to paraphrase one of the most important adages, JM Keynes preached that the markets can remain irrational longer than anyone can remain solvent.

It is also a truism though that every scare story that has ever spooked markets has been highly credible at the time.
Whatever story it is that is driving sentiment has to be based in reality. Like a good horror film, the greatest terror comes from what is unseen, unsaid and implied. The markets have not recovered from the trauma of the 2007-2009 crisis and still carry the baggage of that great banking disaster. This has become their Achilles Heel and any mention or suggestion that we are heading to another banking meltdown triggers hyperventilation and a panic attack.

The summer months have seen global markets of all descriptions running scared by Europe. The argument is terribly and deceptively simple: the debt can has been kicked down the street for too long and a number of European countries can no longer meet their obligations.
Defaults on sovereign debts, it is argued, are inevitable and will lead to losses on these bonds, the majority of which are held by European financial institutions. These losses in turn will lead to bank insolvencies as national governments can no longer afford to fund further bail outs, the banking and insurance system will collapse and the world will again run out of money. This, so the theory runs, will result ultimately
in the breakdown of civil order.

If we ignore for a moment the more extreme elements of this, the early stages of the argument are highly credible and soundly based on facts. The extraordinary additional factor is that although there are any number of potential solutions to the problem, all these seem to be excluded by the inability of European politicians and bureaucrats to agree on which day of the week it is, let alone a restructuring of Greece’s debts. We have already seen one bank, Dexia, requiring State support from France and Belgium as a result of the protracted political machinations but even the writing of another cheque for hundreds of billions of euros does not appear to be sufficient incentive to come to any conclusions.

It would be wrong to chide only Europe for a lack of leadership. In the UK the Coalition government is riddled with contradictions and internal dissent. In the United States the unseemly squabble in the summer over the raising of the debt ceiling highlighted not only the parlous state of the finances of the world’s largest economy but also that Obama is a lame duck president limping towards election
year in 2012. Japan has had yet another change of Prime Minister with Yoshihiko Noda taking over from Naoto Kan after the latter’s 15 months in office. Noda is Japan’s ninth Prime Minister since 2000 and the third this decade. It is another investment adage that markets hate uncertainty; regrettably this uncertainty has become institutionalized across the developed world.

The cloudy environment is not without a silver lining. In the first instance there is no need for the worries about the development of Europe to turn into reality. The issues are solvable. Second, it is only times of market distress that uncover irrational value. Calm markets tend to value assets highly efficiently; when emotion takes over assets become mispriced. It is now commonplace to see the equity dividend yield of good companies being higher than the yields available on its bonds. This implies that the market is expecting global dividend growth to be zero and possibly negative over a period of many years, a scenario that is massively too pessimistic in anything other than Armageddon. For the long term investor prepared to be both sensible and patient, the returns offered by a good number of quality equities have rarely been better.

Markets have also tended to forget that there is a world outside Europe. Economic data is indicating that the United States has suffered another lull, albeit one rather sharper than in 2010, and that it is now starting to recover. The widely derided state of the housing market is at least stable and is even starting to show some tentative signs of improvement. We should also bear in mind that affordability is high and mortgage rates at record lows. Unemployment remains very high at around 9% but also has a silver lining as it acts as a dampener of wage pressures and therefore core inflation. Confidence surveys are very low, but these are affected both by the stock market and by the persistent
over-reporting of bad news by a media industry plagued by overcapacity. Activity levels, in contrast, especially the much analysed monthly surveys of Manufacturing and Services by the Institute of Supply Management, paint a much healthier picture.

Not only do we believe that the United States economy is none too shabby but we also see healthy signs from China, the world’s second largest economy. The official data indicates a soft landing (meaning a slowing of growth rather than anything worse); manufacturing is holding steady, the services sector is still growing rapidly and inflation looks to be peaking. More importantly to us we are neither seeing, nor hearing, companies trading with China describing anything other than very healthy growth.

This peaking of inflation is very important. Both hard and soft commodity prices have been falling over the summer in response to tight credit markets, slower global growth and improved agricultural conditions. This is reducing pressure on non-core inflation across the world, meaning that we expect the tightening monetary conditions in a number of emerging economies to come to an end, and that we believe interest rates across the developed world will stay at exceptionally low levels for a very long time.

In turn this means that although yields on bonds, especially gilts, have hit record lows this year, we are dubious that we shall see meaningful rises in the near or medium term. Inflation should fall quickly in early 2012, while the pressures on public finances that we discussed earlier mean that an increase in government borrowing costs is highly undesirable. The expected drop in inflation however does not mean that we have revised our long standing positive view on index-linked gilts which should continue to provide attractive and stable returns. Nor do we see gold falling out of favour for anything other than the short term; gold is the archetypal investment in fear, this being one commodity for which we see persistent strong demand.

Europe is the conundrum that must be resolved. If the politicians and central bankers can agree on one of the many possible solutions to the debt issues the markets will very quickly stabilize. But for as long as they continue to prevaricate, greater grows the danger of precipitating
another banking crisis. More than ever, investment portfolios need to be diversified and of the highest possible quality

October Market Commentary
Williams de Broe

I am increasingly talking to clients who have pensions, but who aren’t being given regular financial reviews or who aren’t having their attitude to risk assessed regularly. It is absolutely vital that you receive regular financial reviews on you pension and that you have your attitude to risk assessed at least annually to ensure your pension is performing in a way you want it to and that when you get to retirement you receive the amount of income you want and need to live a comfortable lifestyle.

How much investment risk is right for you?

Every investment involves risk and, generally speaking, the greater the return (or growth) being sought, the greater the risk that needs to be taken. The problem is that while it is easy to measure return, it has been very difficult to accurately measure the amount of risk being taken. We’ve seen many examples in recent years of investors not fully understanding the level of risk they were taking until it was too late -  gold, commercial property and residential buy-to-lets spring to mind. On the other hand, there are many investors who are so risk averse that they fail to meet their long-term goals. Understanding the right amount of risk to take is possibly the most important aspect of any financial plan.

Matching your attitude to risk to your investments

The good news is that it’s now possible to accurately assess not only the level of risk of an investment, but also your individual attitude to risk. By matching the two, we are now able to give you the peace of mind of knowing that you are neither taking more risk than is comfortable for you, nor too little risk and so reducing the chance of meeting your goals. Financial markets are becoming ever more volatile, the array of investment products is becoming more and more complex and, over time, your own personal circumstances will change so it’s more important than ever to correctly understand the amount of risk you are taking. What’s more, the sophisticated tools now available not only allow us to assess your attitude to risk and recommend the right initial mix of products, but mean we can keep your investments on track over time.

What could the consequences of not having regular financial reviews be?

Black Monday – October 1987.

By the end of October the UK Stock Market had dropped more than 26%, the US Stock Market dropped more than 22%, Hong Kong and Australia both dropped more than 42%. To this day the reason it happened is still argued about.
(Source On this day BBC website)

Between February 2006 and February 2011 the difference in performance in the best and worst funds in the IMA UK All Companies sector was 140% (the equivalent of 28% per year).
(Source: Lipper Hindsight 22nd March 2011. Bid to Bid with income net of UK tax reinvested)

Over the last 5 years, the Canada Life/ Henderson Multi Manager 4 fund has given an annualised return of (– 1.2%) meaning £1,000 invested 5 years ago would be worth £942. This fund had a volatility (a measure of the amount of risk the fund manager has taken) of 4.1

Over the same time period the Phoenix R Sol/ Newton Balanced fund has given an annualised return of 8.5% meaning £1,000 invested 5 years ago would be worth £1,503. This fund had a volatility of 4.2
(Source Money Management May 2011)

If these statistics worry you, if you don’t know how your fund has performed in relation to its benchmark, if you don’t receive regular financial reviews on your pension or if you just want to talk through any concerns you may have please contact me on the number free phone number or drop me an e-mail.

The speed at which markets can shift direction is a constant source of amazement. It was only last autumn that the great fear was that the western world was following Japan into a multi-decade period of low growth and persistent deflation. Debts had to be repaid, it was argued, and the only way for this to be done was slowly and steadily. And until this was done there was no basis for a resumption sustainable growth in the UK, United States or Europe. But now this is all forgotten. Markets are instead abuzz with inflation, food prices, commodities and the timing of interest rate rises. There are no guarantees that this phase will last any longer than the previous Japanese obsession and we expect that these sudden and severe changes in sentiment will characterize the year ahead. We thus retain our diversified strategy, leaning towards a cyclical recovery but not to the exclusion of any other potential eventuality.

The trends in markets we are seeing in the early stages of 2011 can be traced back to the announcement of the restarting of quantitative easing in the United States last autumn. Since that time we have seen investors globally rebuilding their protection against inflation; prior to then the relative valuations of equities and bonds showed that deflation was seen as the greatest threat facing markets. UK equities yielded more than gilts for the first time since the 1950s, other than at the bottom of the market crashes in 2003 and 2009. This time it was not the result of the text book irrational selling at the bottom of a crash, but came instead from the lowering of bond yields. The Federal Reserve Bank’s insistence however that it will add up to $1 trillion to its purchases of treasury bills has shaken investors’ confidence in these extreme valuations. Almost to the day of the announcement we have since seen equities given renewed life, commodities surging, bond yields rising and gold underperforming.

You can download this Market Commentary as a PDF file by clicking here  or continue reading online 

 Other economic indicators are remarkably benign. Manufacturing data from around the world, and in the United States in particular, is very strong. One credible explanation for this is that the economy has completed a phase of restocking, after inventories were cut to the bone in the aftermath of the 2007-09 crisis, and is now instead reacting to genuinely better end user demand. Though much of this demand is coming from emerging markets there are also good reasons to believe that western economies are also strengthening. The US Services ISM for example recorded its 14th consecutive month of growth in January and is growing at the fastest rate since this particular data series was started in 2008 (source Institute of Supply Management February 2011). The picture is complex though and is still not backed up by either the labour or the residential housing markets, both of which remain stubbornly resistant to all attempts to help. 

Increases in food prices and soft commodities are happening also because of poor climatic conditions around the world. Shortages in a number of key foods can be traced back to the Russian heat wave and fires last summer, through to the current flooding in Australia and drought in large areas of South America. Most recently the United States has indicated that its stocks of wheat and soybeans are at their lowest for 15 and 40 years respectively (source ReutersJanuary 2011). There is no doubt that these price rises will result in the reported rates of inflation increasing around the world very rapidly throughout the first half of the year. Additionally the price of oil has been rising steadily, recently exacerbated by the unrest in North Africa; here in the UK increases in duties are making the problem worse. Mervyn King, the Governor of the Bank of England, has warned that the consumer price index is likely to reach 5% in early 2011, more than twice the level that the Monetary Policy Committee (MPC) is mandated to achieve. Unfortunately the MPC has only one weapon at its disposal, interest rates. It may argue that the factors driving inflation higher are food and energy, both of which are outside of its control, and the planned public expenditure cuts and tax rises this year are already imperilling the fragile recovery. The pressure on the Committee to raise interest rates will only intensify as the year progresses, but its potential use of higher interest rates is akin to attempting crowd control with a nuclear bomb.

The civil unrest seen initially in Tunisia and latterly in Egypt has reminded the investment world of some of the risks associated with investment in developing countries. ‘Emerging markets’ have been viewed as the financial equivalent of a free lunch and have attracted vast investment inflows. Experience teaches that at times like this something unforeseen is inevitable; this time around it is political risk. The reaction thus far however has been remarkably measured and we are not seeing a wholesale flight to safety, despite a small dip in global equities and an accompanying rise in the price of gold. We were rather  more concerned by the response to China’s announcement that its GDP grew by 10.3% in 2010. This is slightly higher than had been expected, but is nonetheless within a few percentage points of its long term average. That equity markets fell on this news suggests to us that fears of overheating and inflation in emerging markets are growing and are likely to become more prominent over the first half of this year, especially as food prices continue to rise. Food typically plays a much more important part in the calculations of inflation in emerging rather than developing markets and it is most unlikely that we have seen the last of either the market’s concerns or public demonstrations as a result of unaffordable basic foodstuffs.

Corporate profitability has remained impressive. Companies the world over are reporting steady growth not just of post tax earnings but also increasingly of revenues. The challenge as 2011 progresses is whether or not companies will be able to pass on rises in input costs (from more expensive raw materials) or whether they will have to absorb all or part of these in their margins. Perversely the latter scenario is probably the healthier for markets in the long run; a softer labour market means less upwards pressure on wages and thus less need to raise interest rates. We expect that acquisition activity will be high this year and we are especially encouraged by prospects for dividend growth. A number of companies, most notably BP, have resumed payments to shareholders after hoarding cash throughout last year. The aggregate levels of cash on company balance sheets is extraordinarily high (source Evolution Securities January 2011), suggesting that in these days of negative real interest rates, this will either be returned to shareholders via a variety of means or else used to fund expansion. Both of these should be very positive for equities

We continue to tread warily, preferring to add money to the markets on weak days, or weeks, or months, rather than chasing prices upwards. But the odds are shifting in favour of a third consecutive profitable year rather than a return to ‘double dip’ and recession.

Steady as she goes 

Investment markets remain resolutely nervous. This, though, is a thoroughly good thing and means that we can continue our long-standing strategy of cherry-picking exceptional value as and when prices fall, rather than the alternative of having to chase runaway prices upwards. The latest bout of the collywobbles has come from Ireland, which has followed Greece into the euro crisis locker. Whether or not this was justified will be argued over for many years, but the timing in taking the wind out of the sails of the optimism that had built over the previous couple of months was fortuitous. The damage done to global equity markets has been very slight, while bond markets are reacting more to the Federal Reserve Bank’s expansion of the American programme of quantitative easing and the heightened risk of inflation that this brings.
 
 The markets are still prepared to back neither inflation nor deflation as the more likely course of events with anyconviction. The reaction to the Federal Reserve’s announcement of its trillion dollar extension to its bond purchase programme was to buy equities and commodities, but this was no more than a minor swing in the relative valuation of asset classes and has already unwound slightly. There is an additional factor here that as we near the end of what has been a highly challenging but ultimately rewarding year, fund managers will be looking to bank the returns that they have made rather than run the risk of seeing thes evaporate during December.
 
 You can read the full article online or download the PDF version of this investment advice and market commentary.
 Click here to download
 
 Equity and bond markets are still telling us different stories. The low bond yields, especially in the UK where they are well below the rate of inflation, tell us that something akin to Japan is the most probable outcome for the developed world. Equities, on the other hand, are in neutral territory and look fairly valued against a scenario of steady but positive growth. We do not see this conundrum changing until it becomes clear whether or not the American quantitative easing programme is working and raising inflation; given that this is not due for completion until June 2011 and the effects will not be seen until the middle of 2012, when we should expect that next year will give us more of the same. The markets will react randomly to each incoming data item as we swing from the need to protect against higher inflation to scares of deflation.
 
 We are worried that we are falling into the habitual industry trap of explaining what has just happened and to use this as the basis for forecasting the next year; these swings will not be the only factor in play and others will inevitably develop.
 
 We may see more euro crises unless the ECB and European governments actually get to grips with the whole situation, we may see a sharp slowdown in emerging markets, we may see soaring company profits and a new mergers and acquisitions cycle. But our core expectation is that 2011 will look much like 2010 and we go forwards into 2011 targeting returns in high single digits. Our aim is that any extra returns from better markets should be treated as a bonus.
 
 There are many grounds for believing that 2011 will be another ultimately successful year for the UK equity market. Dividend growth is increasing nicely regardless of what does or does not happen with BP’s payment, backed by high earnings cover, good cash generation and generally strong balance sheets. Crucially, the confidence for companies to act in a more shareholder-friendly manner is coming from steadily improving trading conditions. Indeed, with the exception of the house-builders, it is difficult to find any sectors where we are not seeing improvements in both top and bottom lines. There are some issues with the public sector facing outsourcing businesses, but even these are speed bumps rather than u-turns.
 
 The direction of the FTSE 100 is still mostly determined bythe miners. The significance of this is that we are seeing market gains despite the persistent underperformance of the banks and the lacklustre performance of the pharmaceuticals. The 100 Index, though, disguises that the broader market has been much stronger. In the year-to-date the 100 has added less than 5% while the 250 is 16% up. This is a very significant difference, which interestingly is mirrored in the US where the S&P 500 is 7% up in 2010 versus over 18% for the Midcap 400 (all data: source Reuters).
 
 Our fundamental equity research process has been a consistently reliable guide to over and under valuation in the market. With the FTSE 100 trading in the 5700 to 5800 region we have been finding it increasingly difficult to find stocks that we can recommend. This reverses very quickly however when the market drops back closer to 5500. If we now take roughly 5600 as our starting point for our 2011 expectations, a total return of 10% for the year equates to year end expectation of close to 6000, assuming a 3.5%dividend yield and no change in the p/e ratio.
 
 
 Despite our conviction in the long term growth and merits of Asian emerging economies in general, we have some shorter term concerns over the relative news flow. The levels of optimism are excessive and the positive stories well known. The long standing discount rating of emerging markets has faded, whereby p/e ratios are now in line with developed markets. Emerging markets, led by India and China, are in a monetary tightening cycle, while the developed world, led by the United States, is again loosening. Moreover the US is introducing more quantitative easing at a time when many of its economic data are taking a turn for the better. We are thus mindful that we may well see better buying opportunities for those wanting or needing to top their weightings in emerging markets.
 
 Gold is still the asset for all seasons. Not only is underlying mellow yellow metal is seen as a hedge against the end of fiat currencies (exceptionally unlikely), a falling dollar (which depends where you are on the other side of the deal), a rising dollar (ditto), higher inflation (which defies logic) and deflation (marginally less tenuous). While we also know that the increased liquidity in gold will mean that it correlates with everything else if we see another dash for cash, we retain our weightings for the time being for the shorter term diversification benefits.
 
 Finally we would like to take this last opportunity in 2010 to wish everyone a very happy Christmas and a prosperous
 
 New Year.
 
 Jim Wood-Smith
 
 Director, Head of Research
 
 by kind courtesy of Williams de Broë

The November Financial Guide and Market Commentary from Williams De Broë is now available to download. A quick summary is available below with a link to download the full article. 

The confirmation by the Federal Open Markets Committee at its November meeting that it is resuming its process of quantitative easing has set markets racing. The major global indices, including the Dow Jones, S&P 500, FTSE 100,

The full monthly financial commentary for November is available to download or read online as a PDF file.

Please click here for this financial market commentary , by kind courtesy of Williams de Broë

 The tortoise and the hare
 It is a year of fine margins. The unexpectedly excellent September has turned a potentially poor third quarter into an excellent three months for both equity and bond markets. For a change, the UK has led the way with the FT All Share rising by more than 12% since the start of July, though the US was not far behind after the 10% increase in the S&P 500 Index. The high single digits seen in many European bourses are also impressive. Emerging markets have again been impressive, led by the rise in the BSE Sensex, the main index in India, to over 20,000 for the first time since its brief nudge over this important level in early 2008. The lesson of the year to date though is to tread very carefully. Each time markets have given clear signs of being set for a significant move up or down, they have very quickly executed a volte face and our optimism is thus tainted with both scepticism and caution.

 This monthly financial commentary is available to download or read online as a PDF file.

Please click here for this financial market commentary , by kind courtesy of Williams de Broë

What sort of investor are you? Whilst all of us like to believe that we take our investment decisions based on calm analysis of all available information, the truth can be a little less flattering.
 
 Behavioural finance is the analysis of the psychological factors, or behavioural biases, which influence the decisions that investors make. Even with the benefit of highly relevant and unequivocal information, emotions can sometimes cause investors to ignore or trivialise what they view as disagreeable’ facts and in the process reach an incorrect conclusion.
 Being aware of the existence of these social, cognitive and emotional biases can help investors judge whether or not behavioural issues are influencing their decisions. In investment terms, there are two distinct sets of biases
 - heuristic-driven biases and frame dependence biases.

 
 Heuristic-driven biases
 A heuristic bias is the use of experience-based techniques and strategies to help solve a problem. This might involve calling on a ‘rule of thumb’, making an educated guess, intuition or just plain common sense in order to reach a decision. An example of a heuristic bias is where an income-seeking investor insists on utilising only income-producing funds, doggedly refusing to  consider capital growth funds for the same purpose. Not only does that bias severely curtail their choice of investments, it may also have an adverse effect on their income.
 
 Frame dependence biases
 Sometimes decisions are influenced by the manner or circumstances in which the investor receives information. The ‘frame’ could be an external influence  such as a newspaper article or a TV programme, or indeed the individual’s emotional state at the time. If investors were entirely frame independent, they would always make rational investment decisions.

 When it comes to the uncertainties inherent in saving and investment, people don’t behave like computer models: many individuals either completely ignore,  or give little consideration to the hard facts. In so doing, investors make seemingly irrational or illogical decisions which usually prove detrimental to their interests. It can be more fruitful to approach the subject of investment in a dispassionate and openminded manner, taking account of all (and only) the
 pertinent facts and overruling as many of the biases  as possible.
 
 What’s the solution?
 Attempting to ignore your own behavioural biases is nearly impossible, which is why it can be beneficial to effectively ‘outsource’ your investment decisions.
 AT ifs Wealth Management we can lead you through a proven process that accurately reflects your investment profile and your attitude to investment risk. Furthermore, by allowing investment professionals to manage the task
 of asset allocation and individual fund selection within the parameters of your investment profile, you can help ensure that your own emotions don’t cloud the decision-making process.

Diversification is a key part of any sensible investment strategy. But managing a handful of different investments can be time consuming, and the charges can mount up. The company I represent, Integrity Financial Solutions is delighted to have joined forces with Merchant Investors Assurance Company Limited (“Merchant Investors”) and Sanlam Fund Solutions to offer you an exclusive investment opportunity which gives you that all important diversification but with a minimum of hassle, and at a competitive cost.

The MI Carnegie Cautious Fund

With over 2,000 individual Unit Trusts and OEICs to choose from in the UK alone, creating a flexible portfolio of funds is quite a challenge. Not only does it take time and skill, it is expensive to make fund switches because of initial charges.

However there is an easier and cheaper way to create a diverse portfolio.

The MI Carnegie Cautious Fund is what is known as a ‘Fund of Funds’, an expertly managed portfolio of other funds that can be changed quickly in response to manager moves, economic developments or market events.

The Benefits of the Fund of Funds approach

• Diversification. Investments are spread across a range of regions, sectors, asset classes, and fund management styles in one portfolio
• Easily managed. The fund manager will be adjusting, reviewing and rebalancing the fund holdings on a regular basis on your behalf, saving time, paperwork and cost
• Actively managed. The portfolio is actively managed by a specialist team of investment experts to select the most appropriate combination of funds in accordance with the agreed portfolio mandate

Risks

As with any investment that is in part dependent upon the performance of the stock market, the returns from this fund are not guaranteed. The value of the investment funds and the income from them can go down as well as up and past performance is not necessarily a guide to the future. This means your initial capital investment may be at risk. The performance of funds holding assets denominated in foreign currencies will also be subject to variations in currency rates.

Reassuringly experienced

Integrity Financial Solutions has worked closely with Merchant Investors and Sanlam Fund Solutions to determine fund strategies that may be suitable for their clients.

Merchant Investors offers clients choice, innovation, flexibility and service of the highest quality. Their products are cleverly designed to take advantage of the best opportunities available on the market. All administration is carried out in-house and they pride themselves on the high calibre of their staff. Merchant Investors currently administers over £1.5 billion in assets.

Sanlam Fund Solutions is part of an independent portfolio manager, and has access to the full range of managed funds available in the marketplace. Their managers are experienced at analysing the market and identifying the most appropriate funds to meet the objectives of the MI Carnegie Cautious Fund.

Objective

The MI Carnegie Cautious Fund will be actively managed by Sanlam Fund Solutions, the fund manager selected by Integrity Financial Solutions, and appointed by Merchant Investors.

The main objective of the fund is to provide an attractive total return for clients over the longer term, taking a defensive attitude to risk. This is a low-medium risk fund aimed at growth over periods of at least 5 years. The fund’s peer group is the Association of British Insurers (ABI) Defensive Managed sector.

Is it easy to switch funds?

Yes. You can switch out of the MI Carnegie Cautious Fund at any time by choosing another fund or funds from Merchant Investors’ Pinnacle Range of funds. Switching is currently free within all MI’s products. If you appoint a new financial adviser, you may still be able to invest in the MI Carnegie Cautious Fund.

What will it cost?

The estimated Total Expense Ratio (TER) of MI Carnegie Cautious Fund is 1.68%. Integrity Financial Solutions will receive 0.25% of this total cost per annum.

The legal structure…

• The legal structure of the MI Carnegie Cautious Fund is as follows:
• This fund can only be accessed via pension and investment products issued by Merchant Investors;
• Merchant Investors establishes and administers the fund which is a unit linked fund, the assets of which form part of its long term business fund;
• Sanlam Fund Solutions is the appointed investment manager of the MI Carnegie Cautious Fund;

Merchant Investors has appointed Sanlam Fund Solutions as the investment manager under the terms of the investment management agreement between them, which sets out the responsibilities of the investment manager.

Merchant Investors and Integrity Financial Solutions are authorised and regulated by the Financial Services Authority (FSA). Sanlam Fund Solutions is the trading name of Principal Investment Management Limited, which is authorised and regulated by the FSA. Clients investing in the MI Carnegie Cautious Fund will normally be protected under the Financial Services Compensation Scheme through the product wrappers of Merchant Investors and the advice given by Integrity Financial Solutions.

Merchant Investors, Sanlam Fund Solutions and Principal Investment Management Limited are all part of the Sanlam UK group of companies.

If you want any more information about this exciting new partnership fund just give me a call on the free phone number above.

Hi everyone, I thought it timely to bring you my latest thoughts regarding where we are in investment terms, concerning the downturn which continues to grip western economies so powerfully.

There is much debate about whether we are in a bear market rally at the moment or whether we have hit the bottom and are now on our way up again. Evidence can be found for both views and it is useful to note that there is no obvious consensus on this position at the moment.

Those with defensive portfolios will be hoping we are in a spike and those holding cyclical stocks and banks are hoping this is a more sustained rally.

So, what is the evidence for each argument?

From an optimists perspective certain economic data can point to things getting better relatively rather than absolutely. Despite the Bank of England’s caution, it seems that the effect on corporate earnings has not been as bad as forecast and that the increase in unemployment is slowing.

Globally there are more positive data points, especially the Purchasing Managers Indices (PMIs) in both manufacturing and services.

I would also highlight the following areas: the UK PMI figures; the BRIC PMIs (now above 50 collectively); German manufacturing orders, and to top it all, US weekly job claims are now dropping.

The stress testing of banks in the US has been completed without markets finding any chinks in the armour although this may be a slow burner as interbank lending, whilst picking up, is not flowing just yet.

The market in general is continuing to deleverage and the fact that a number of hedge funds have completed some of this and have in some cases stopped shorting the market has also helped. Outside of the traditional core areas the emerging markets and especially China have shown some encouraging data although the shift to a more domestic based demand will take more time even with large stimulus packages.

This evidence however is at best unpredictable – as is shown in the UK housing statistics which have fluctuated in message over the last few months with different surveys indicating opposing trends. Whilst activity has been picking up it is still well below the norm and prices are still coming down. A number of economists want to see this stabilising before they will declare more confidence in a sustained recovery.

Manufacturing inventories are always a good indication of the overall state of the economy and these are continuing to decline. Whilst there is some time lag with this indicator, these days improved communication mean that the lag is shorter. Production will only increase when orders are required which is not yet happening.

Unemployment is increasing, although the rate of increase is falling – unemployment tends to generate more unemployment due to reductions in demand so there may be some way to go before the situation improves.

The Chicago Board of Trade produce equity volatility statistics and these show the market considerably above trend at the moment. Many feel these levels of volatility need to come down before equities can move forward in a more consistent manner.

On balance, the weightier of the two arguments is probably on the negative side, particularly given the latest forecasts for GDP growth in places like the US. Some experts are arguing that the market has rallied too early, before the fundamentals are in place to back this up and that we will see some profit taking bringing the market into a lower trading range.

We can continue to compare statistics for some time but it won’t prove conclusively whether markets are now on a consistent upward trend, or whether we are in a temporary blip. Perhaps the strongest point to take from the debate is the fact that these arguments are taking place at all – this is a clear indication that the downward trend has been broken suggesting at least that there is some positive, or should I say less negative, news to interpret.

From an investment perspective, all the speculation and the uncertainty adds substantial weight to the old arguments for being invested over the longer term and that regular saving is the sensible approach in this environment rather than attempting to time markets.

Anyhow, that’s how the view looks from here!