Using diversification wisely across your investment portfolio is easy to put in place once you have a clear idea what your options are.

The purpose of this in depth investment article is to explain what is meant by proper diversification and the use of “Multi-Manager, Multi-Asset Class” investing, which aims to grow your money in real terms (i.e. after inflation) by investing across a broader range of asset classes than traditional investments do.

Let’s get started!

Traditional investment portfolios consist mainly of UK equities (or stocks) and UK sovereign bonds (or gilts), with some smaller allocations typically to cash and property. Most of the investment is usually invested into the stock market which can, as we’ve seen recently, lead to some substantial losses from time to time.

At IFS we have access to Discretionary Fund Managers who take a different approach and do not exclude the many different asset classes from their processes. Using quantitative analysis and assessments they can construct and manage the most appropriate investment portfolio for you, based of course on your risk profile and your investment goals.

Traditional fund managers judge themselves against appropriate industry benchmarks whilst the managers we work with judge themselves on whether they have given you a real rate of return.

Next, lets look at what types of asset classes that might be included in such a diversified portfolio.

GOVERNMENT OR SOVEREIGN BONDS
Sovereign bonds are debt securities issued by national governments and are hence often simply called government bonds (in the UK we call them gilts).

Like all bonds they pay interest (or coupons) and carry the promise of repayment of the money lent (i.e. principal) at some point in the future (i.e. at maturity).

Sovereign bonds are often defined as ‘risk free’ since they are backed by the credit of a national government that can raise taxes and/or print money to repay the principal.

INVESTMENT GRADE BONDS
IG Bonds are those bonds issued by corporate entities that are independently rated as having the lowest risk of default. There is a sliding scale for each bond analyzed by each agency. For example S&P investment grade ratings span everything from ‘AAA’ to ‘BBB’. Below this, bonds issued by riskier companies fall into the higher yield category below.

HIGH YIELD BONDS
Often referred to as ‘junk bonds’ these bonds are issued by companies who are seen by rating agencies as being of higher risk of default. For S&P anything below a ‘BBB’ is high yield. As a consequence of being higher risk, the coupons of these bonds or the interest rates the companies pay will be higher than investment grade.

FIXED INCOME RELATIVE VALUE
This is the name for a common investment strategy in bond markets that seeks to generate returns irrespective of market direction. Managers will try to find trades where the prices of two or more similar bonds are unjustifiably different and will sell the ‘expensive’ bond to buy the ‘cheaper’ bond thereby locking in a ‘spread’. This could be for example; Tesco bonds versus Sainsbury or even French Government bonds versus UK Gilts.

DISTRESSED DEBT
Distressed debt securities are those where the issuer (a government or company) is in default (i.e. not paying interest or principal). It also tends to include those issuers who are on the verge of default as opposed to actual default. In this situation there can be high returns for those investors prepared to step in and buy the debt of bankrupt entities at low prices in order to influence any restructuring or turnaround plans.

The returns can be high for those investors who have analysed the turnaround potential correctly and who can spot the best bonds to own for this, as each bond issued by a bankrupt entity has different entitlements to any future payback.

LONG ONLY EQUITIES
This is the most common equity strategy and involves the buying and holding of equity positions, generally, but not exclusively for the longer term. There is no ability to reflect a negative view on an individual security other than by not owning it.

The strategy has many different styles such as Growth, Value or Thematic where the type of equity owned conforms to the manager’s view of what should do best over their investment horizon.

EQUITY MARKET NEUTRAL
This is another common equity strategy that seeks to generate returns irrespective of market direction. The approach has common characteristics with Fixed Income relative value mentioned above.

Managers will seek to offset (or hedge) the risk of owned (or ‘long’) positions falling by neutralising all the risks that they do not want to take. For example; selling an index future to offset market risk or selling a basket of similar stocks to offset the risk of the sector falling.

EQUITY LONG-SHORT
This is the most common of hedge fund strategies where a manager will seek to generate returns by having two types of positions - long positions where profits are made when the price of a security rises and short positions where profits are made when the price of a security falls.

The actual positions themselves are generally decided by using the same fundamental analysis that a long only manager uses although there are many other decision making tools using more technical (or non fundamental) analysis.

Equity long/short has as many styles as long only equity (value, growth, sector based, theme based, small cap etc etc) but the fundamental difference is that managers can actively make profits from falls in securities prices as opposed to just avoiding losses.

The long short manager can employ many more instruments (such as options) and portfolio construction techniques (such as borrowing money to leverage up exposures) than a long only manager can use.

PRIVATE EQUITY
Private equity is an asset class that holds equity securities in companies that are not quoted on a public stock exchange.

There are many different styles of investing in this class ranging from venture/growth capital (investing in start up or young companies) to leveraged buyouts (where typically mature companies are bought out from existing shareholders using a mixture of private equity money and debt).

Private equity tends to seek out those companies who have found it very difficult to access funding from the public stock markets, usually because they are too young and unproven or because the public markets have lost confidence for whatever reason in the business and are reluctant to provide additional funding.

LISTED PRIVATE EQUITY
The funds that private equity firms raise from their own investors can also be listed on the stock exchange offering a wider investor base the chance to gain exposure to underlying investments outlined above. These listed funds are subject to the same rules and obligations of any listed company and can trade at premiums or discounts to underlying value.

MACRO HEDGE FUND
A hedge fund strategy which uses ‘top down’ economic analysis to make investments at the ‘macro’ level i.e. away from specific company positions tending more towards investment in equity indices, currencies or government bonds (as a way of implementing views on interest rate movements).

The positions tend to be large and in very liquid instruments and global in nature. The strategies can be driven by the same fundamental analysis used in every asset classes but also often employ more technical or quantitative strategies.

GOLD
Gold is a precious metal that due to its historic use as the ultimate store of value, and means of exchange is still regarded as a bona fide investment security in times of uncertainty. Gold, like other precious metals, is a commodity with a universal price and is fungible i.e. equivalent no matter who produces it. These characteristics alongside its physical nature become attractive when confidence falls in the value of ‘paper’ money.

COMMODITIES
Commodities are goods without meaningful intrinsic differentiation that generally trade with one universal price and are broadly equivalent no matter who produces them.

Prices are heavily influenced by simple supply and demand rather than intangible qualities such as branding. Soft commodities are goods that are grown (sugar, coffee, grain etc) and hard commodities are mined (copper, iron ore etc).

Commodities as an asset class are different from the other major classes because holding them does not generate a cash income (like a dividend or bond coupon) and instead incurs costs (such as transport or storage).

REAL ESTATE OR PROPERTY
Real estate is land and improvements on that land such as buildings that are fixed or immovable. This is the simplest definition although the precise legal one changes with geography.

Generally the asset class splits into residential (i.e. housing) and non -residential (e.g. commercial). Returns can be made from obtaining rents and through increase in capital values.

Exposure to the asset class can be taken directly or via investment in broad funds. These funds can be private or listed on an exchange.

INTERNAL HEDGES
In our context, these are generally positions taken in order to hedge portfolio risk. For example, foreign exchange hedges or equity index futures positions that insure against unwanted risks in the underlying asset class.

CURRENCY OVERLAYS
A specific subset of the internal hedges mentioned above where we actively seek to smooth out or remove the risk of returns being overly influenced by moves in the foreign exchange markets.

Diversify Risk Within Your Investment Portfolio: SUMMARY

Please remember that it is impossible to completely exclude risk from all investments.

However it is essential that risk be quantifiable, managed and compensated for by the expected return. Here at IFS Wealth Management we have a rigorous approach to establishing the level of risk you are comfortable with and match this with the type of investment we feel is most suited to help you achieve your returns.

If you would like to find out more about some of our investment approaches please get in touch with me directly on this free phone number 0800 321 3508.

I’m incredibly busy today, but what I’m writing to you is important for women here in UK.

European Bureaucrats have issued an edict… sadly, against you.

You may or may not have heard about the new, bleakly entitled “EU gender directive”, which will come into force on 21st December this year. If you have a life and haven’t heard about it, then here’s what our friends in Europe have ruled for our lives now…

From 21st December 2012 it will become illegal for insurance companies to charge more for insurance based on gender. This will have huge repercussions.

Sadly for the fairer sex, they will be the biggest losers.

If we look at the example of life insurance, women have traditionally paid less than men for a very valid reason, because statistically they live longer. Now thanks to this crazy ruling, all actuarial common sense flies out the window and women will find themselves paying on average 15% more for life insurance.

So if you are thinking of taking out insurance or simply want to review your current protection needs then now is the time to look at it. It’s about to get a lot more expensive!

Losing 15% to Brussels is a lot, especially if you had been thinking about investing in a Whole of Life Plan because that 15% could have done a lot of good, invested carefully in an insurance plan that also helps you create a legacy for loved ones after you too.

Still, there’s still enough time to get your insurance sorted out before December’s deadline. If you need help, give me a call on 0800 321 3508 or text WINS to 0131 510 1925.

By the way, am I the only one who thinks this is a crazy ruling?

Today I share with you a considerably wise strategy that’s proving very popular, particularly with older clients. Specifically this is all about creating a legacy for either your children or grandchildren by taking out a Whole of Life Policy.

What Is a Whole Of Life Policy?

A Whole of Life policy is a life insurance policy which is paid for the whole term of a person’s life thus ensuring that a lump sum is definitely paid out on death. This contrasts with a term assurance policy which ends after a specific term. Whole of Life contracts can also have an investment element to them, unlike a term contract which is for protection only. They can be written in single lives or joint lives (first or second death) and can also be put into a trust which keeps them outside the estate for IHT purposes.

Why Create A Legacy?

There of course many reasons why clients may want to pass money on to their families. However I’ve found that many of my older clients are particularly concerned about the challenges their grandchildren will have to face in future. Tuition fees are only going one way and that is up, 100 per cent mortgages are a thing of the past and bigger deposits are needed for that first property. You may simply want to give your children/ grandchildren the kind of start in adult life that was not available to you. Whatever your motivations a Whole of Life policy is a great way to help plan your inheritance.

So How Does It Work?

“Why don’t I just give my money away?” I hear you say. Well for one, the limits are quite restrictive. Here are the current rules about gifting money without paying tax:-

You are allowed to give away a total of £3,000 each year, without any tax implications after your death.

Bear in mind that this is the total annual amount that you can give away, NOT a total amount you can give to each beneficiary, each year.

It is also worth noting that your Annual Exemption can be carried forward for one year if it has not been used. In other words, if you did not make any gifts of money during last year, you can give away a total of £6,000 this year. Equally, if you gave away £1,500 last year, you’ll be able to give away a total of £4,500 this year.

The Annual Exemption cannot be carried forward by more than one year.

Taking that annual exemption and investing it into a Whole of Life policy is quite revealing…

If we were to take this annual exemption and split it over 12 months (£250 p.m.) the sum assured for a 65 year old male would be £130,012.*

For a female at 65 the sum assured would be a whopping £176,491! *
If you were to affect a joint life second death plan and take both your annual exemptions of £3000 into one policy then the sum assured would be £352,409. *

If we were to use this last example and assume both lives were to live another 20 years then the total they would pay into this policy would be £120,000. Pretty good value for a sum assured of £352,409 I’d say! Of course you may live shorter or longer but it is fantastic legacy planning no matter which way you look at it (remember this can be written in trust which effectively takes it outside your estate for IHT purposes).

Conclusion

Using the above figures you can see why this is a very sensible option to consider if legacy planning is important to you. Whole of Life policies are however much more complex than simple term assurance so it is important to take sound professional advice, which is of course where we come in. Please get in touch if you would like more information. You can call me free, direct on 0800 321 3508.

*All figures based on 65 year old non smoker on a balanced basis.

Hi all,

In a rush trying to get everything finished up for the weekend, but our friends over at Canada Life have kindly provided us with an excellent summary of George Osborne’s latest budget.

There are some important changes so it’s well worth downloading these valuable PDFS and even printing them if you so wish.

Here they are for you…

2012 Budget Summary PDF

Tax Tables 2012-2013 PDF

Until next time, got to go, or my wife is sure to be on my tail, I’m late for my tea!

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

(Some buy to let mortgages are not regulated by the FSA).

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

(Commercial mortgages are not regulated by the FSA).

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

(Commercial mortgages are not regulated by the FSA. The value of investments can go down as well as up, as can the income derived from them. Past performance does not guarantee future growth or income and you may not get back the full amount invested.).

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

(Some buy to let mortgages are not regulated by the FSA).

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

(Commercial mortgages are not regulated by the FSA. Taxation: Level and bases of, and reliefs from, taxation are those currently applying but are subject to change and their value depends on the individual circumstances of the investor. The value of investments can go down as well as up, as can the income derived from them. Past performance does not guarantee future growth or income and you may not get back the full amount invested).

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.

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

As time rolls on and the date for the beginning of the possibly the biggest ever changes to our pensions system, I thought it was a good time to speak out to all you employers and employees out there who will be effected by this.

Make no mistake about it, employers are going to face additional cost and administration burdens under this new pension regime. However, the good news is that there is time to plan and prepare, but time is running out.

There are four basic steps that can help employers plan.

1. Find out when the staging date is

This will give employers a deadline for implementation and a point to work back from. The staging date will be based on how many workers an employer has or, if there are less than 50 workers, the last two characters of the employer’s ‘Pay As You Earn’ reference.

There are more than 40 staging dates spread over four years from 2012. Larger employers will go first, smaller employers last.

You can find out your corporate client’s staging date by using this handy staging date calculator from Scottish Life.

2. Find out the duties that are likely to apply

Every employer will have some duties to perform but the duties will be different depending on the types of worker they employ. As a rule of thumb, any worker over age 22 and under state pension age, and who earns more than around £7,500 a year, will be treated as an ‘eligible jobholder’.

These workers will need to be automatically enrolled into a pension scheme by their employer. As long as these workers stay in the pension scheme, the employer will have to pay contributions. Those workers who don’t fall within this category will still have to be offered a pension scheme by the employer, and in some cases the employer will have to pay into it.

3. Review pension provision

Employers who already offer some form of pension provision will need to make sure that their existing scheme meets a minimum standard. This generally means that there must be a minimum contribution rate, made up of both employer and employee contributions.

If the scheme isn’t up to scratch contributions will have to increase. Building up these contributions to the minimum standard slowly could be preferable to employers rather than waiting until the last minute and facing a high up-front bill.

Employers who don’t have a pension scheme will have to set one up sooner or later. Again, starting to do this as early as possible would help employers to build the scheme up at their own pace.

4. Consider the impact on the business

There is no doubt that automatic enrolment will have cost implications for every employer, large or small. Employers will need to consider how they will meet these costs.

• Can they simply absorb the costs, potentially reducing profits?

• Will the costs of their goods or services need to increase?

• Will staff remuneration structures have to change?

• Will HR processes and systems need to change?

• Will business plans need to be adjusted to reflect the increase in costs?

These are just some of the questions that finance directors and business owners will need to address. Planning ahead, well before the staging date, could help smooth any cost increases, avoiding last minute shocks.

It’s clear that employers will face a major challenge when their employer duties start. With the economic climate as it is, it is probably even more important to plan as early as possible. It won’t be easy but help is out there. If you wish to have a free initial consultation with us please just get in touch and we’ll be more than happy to have a chat about your situation.

The newly published seventh report on the state of retirement savings from Scottish Widows has just been released and it doesn’t make particularly pleasant reading. Whilst there does seem to be a slight increase in consumer understanding of pension provision, particularly in the public sector, the sad fact is that we are still a nation where around half the population still does not contribute adequately to a pension and around one-in-five is actually doing nothing at all.

Here are some of the main findings:-

• Only 51% are making enough provision for their retirement. This is up from 48% in 2010, but below the 54% in 2011.

• 20% are saving nothing in 2011, compared with 21% in 2010

• The gender gap between men and women has fallen to the lowest on record. 53% of men compared to 50% are preparing adequately.

• The age gap has widened, with 59% of over-50s preparing adequately for their retirement, compared with 47% of those between 30 and 50.

• The income group which currently appears to be preparing best for retirement is those earning between £30,000 and £50,000. It appears that high-income groups are not as focussed on retirement provision.

• London is the region currently preparing worst for retirement, while Wales and the West Midlands are best-placed this year.

Characteristics of different savings groups

• Most people who are saving adequately are typically, male, married and in the latter part of their career. They are also relatively modest earners. They are likely to expect a decent company pension but may also have significant savings of their own.

• Those who are somewhat under-saving (6-12% of income) are often younger than adequate savers. Generally they work in the private sector and have more than one pension arrangement.

• Those who are seriously under-saving (up to 6% of income) are largely mid-career and may well earn a relatively decent income. They may well have high levels of debt and are self-employed or work for a small company.

• Common characteristics from the non-savers include having relatively low income, being single or divorced and are likely to change job frequently.

These type of reports may well be packed full of statistics and mumbo jumbo, but I do think they perform a vital role in helping us understand how we can begin to implement change in a nation that appears to be largely indifferent to the concept of planning for a financially secure retirement.

The report goes onto look at the likely impact of automatic enrolment and NEST which will begin to get rolled out in October 2012. Support for automatic enrolment does appear quite strong with only 11% expected to opt out.

This is a subject I will be covering a lot in the coming months, primarily because it is such big news in the pension world. However if any employer or individual needs any more info at this stage please don’t hesitate to drop me a line.

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.