Qualifying Non-UK Pension Schemes - QNUPS
QNUPS were introduced on the 15th February 2010 and came about through amendments detailed in Statutory Instrument 2010/51 relating to the UK Inheritance Tax Act regulations. Before changes were made to the pension tax rules in 2006, protection from UK Inheritance Tax (IHT) applied to certain non-UK pension schemes. When the changes were introduced this exemption was unintentionally omitted which resulted in certain overseas pension schemes losing their IHT exemption. With these amendments both QNUPS & Qualifying Recognised Overseas Pension Schemes (QROPS) now enjoy exemption from
IHT.
The Plan is a tax efficient wrapper for pension assets, all funds within the Plan are free from IHT, there are no tax charges on death and the fund will enjoy tax free roll up. Contributions will be made by the member from taxed income or from personal capital, there is no tax relief on payments into the Plan. Contributions can either be single or regular (subject to minimum limits). There are no limits on the amount that can be contributed to the Plan but any transfers into the Plan must be justifiable in line with the client's overall wealth position. QNUPS are not a deathbed planning tool.
Investment choice within the Plan has very few restrictions. Permissible investments include; equities, bonds, gilts, insurance products, bullion, private & public listed company shares, commercial property and previously excluded investments known as Taxable Property; Taxable Property covers investments such as residential property, antiques, fine wine and collectables. Whilst there are virtually no restrictions on allowable investments it is important to remember that the scheme is a pension plan and a low risk strategy must be pursued.
It is possible for the member to borrow up to 25% of the Plan funds, this must be arranged at a commercial rate of interest (which will be paid to the the Plan) and must be repaid before drawdown can commence. It is also a requirement that security must be held against the loan.
Income will be paid gross from Guernsey and subject to the client's marginal rate of tax in their country of residence. It is important that each client receives tax advice in their country of residence to ascertain the tax position there. A lump sum of up to 25% of the fund can be paid to the member (tax free for UK resident members, clients in other jurisdictions will need to seek advice).
Standard retirement benefits and termination events as follows:
■ Normal Retirement Age of 65;
■ Early Retirement Age of 55;
■ Death & Permanent Disability;
However there may be greater flexibility, determined by an individual's circumstances, which will need to be considered on a case by case basis. The member must start to draw an income by the age of 75.
■ A cash lump sum benefit up to 25% of the Plan value, tax free when paid into the UK;
■ A number of flexible benefit income options to be agreed with the client such as fixed term payments and variable income options.
Upon death of the member, all remaining funds within the scheme will be free of IHT. The funds can then be used to pay a dependants pension, be held in trust for future beneficiaries or be paid as a lump sum. Again, it is vital that the member seeks appropriate taxation advice relevant to both themselves and their potential beneficiaries before registering their wishes for disbursement with the trustee. The trustee retains ultimate discretion on any distribution but the member's wishes will be carefully considered before any decision is made.
The Plan is a pension plan that will appeal to high net worth UK residents seeking an alternative to a traditional pension.
Potential clients may have maximised their UK registered pensions and are looking for alternative options or they may be restricted with the new anti-forestalling rules in the UK and are looking for greater flexibility in their retirement plan. It also provides clients with the peace of mind that all funds can be passed upon death to the member's beneficiaries free from IHT and any withholding taxes in Guernsey.
The Plan will also appeal to UK expats with a QROPS that have been non-UK resident for a minimum of 5 complete tax years and are considering returning to the UK, as a QNUPS will prevent their pension funds once again falling under the UK pension regime.
A number of expats may also still be UK domiciled with a potential liability to UK Inheritance Tax. A transfer of assets to the Plan will provide total protection against this potential liability.
In summary the plan offers the following benefits:
■ No UK Inheritance Tax liability;
■ Up to 25% tax free lump sum at pension commencement;
■ No requirement to purchase an annuity;
■ Tax efficiency: no tax on the pension assets within the Plan; pension income paid gross.
■ All remaining funds within the Plan, following death, can be distributed to chosen beneficiaries;
to make contributions with no lifetime limit;
■ Increased flexibility when taking pension income on retirement;
■ Ability to continue making contributions once drawdown has commenced;
■ Up to 25% of the Plan value can be loaned to the member;
■ Choice of investment management;
■ Wide choice of investments, including residential property;
■ Open to all nationalities;
■ No trustee reporting requirement to HMRC;
Contact Derry Thornalley on 0044 1664 444625
Wednesday, 9 June 2010
Tuesday, 30 March 2010
Expatriate Wealth Services
Qualifying Non-UK Pension Schemes (QNUPS)
New tax planning opportunities for British expatriates
On the 15th February 2010, a new UK HM Revenue & Customs (HMRC) statutory instrument came into force, which creates significant opportunities for British expatriates to save local taxes in the country in which they are tax resident as well as UK inheritance tax (IHT).
The UK legislation created a new type of trust known as Qualifying Non-UK Pension Schemes (QNUPS) - which should not be confused with Qualifying Recognised Overseas Pension Schemes (QROPS).
The tax rules for pension schemes are generally more favourable than other investment structures.
QNUPS allow retired expatriates to continue to put money into a pension scheme -
Firstly, there is no maximum age at which you can invest in a QNUPS.
Secondly, you do not need to have any earned income from an employment in order to make a contribution.
Thirdly, there is no maximum contribution that can be made into a QNUPS.
The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.
The benefits of QNUPS for retired British expatriates
A QNUPS is a pension scheme trust and as such you are entitled to take a cash lump sum and income during your lifetime, with the remainder of your fund being able to be passed to your spouse or heirs on your death free from all taxes.
The following advantages are available to you through a QNUPS:
As a pension scheme, a QNUPS is very tax efficient in most countries as it can avoid both local wealth taxes during your lifetime and succession taxes on your death.
A QNUPS also avoids local succession law, so that you are free to choose exactly who inherits your money and in what shares.
Income can be taken from age 55 (after 6th April 2010) or it can be deferred as it does not need to be taken until age 75. In certain countries it can be paid in a manner where a significant portion can be paid to you tax free.
When income is taken it is drawn down from the fund, thus leaving your scheme assets invested. Otherwise the assets grow free from tax.
On death the value of the QNUPS will be exempt from UK inheritance tax and local succession taxes.
A QNUPS offers considerable investment flexibility and choice. Furthermore your assets can be invested and any benefits taken in a currency of your choice, giving you the opportunity to remove currency risk.
The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme. You can have both a QROPS and a QNUPS.
http://www.expatwealth.telegraph.co.uk/template_textonly.aspx?page_info_id=43
New tax planning opportunities for British expatriates
On the 15th February 2010, a new UK HM Revenue & Customs (HMRC) statutory instrument came into force, which creates significant opportunities for British expatriates to save local taxes in the country in which they are tax resident as well as UK inheritance tax (IHT).
The UK legislation created a new type of trust known as Qualifying Non-UK Pension Schemes (QNUPS) - which should not be confused with Qualifying Recognised Overseas Pension Schemes (QROPS).
The tax rules for pension schemes are generally more favourable than other investment structures.
QNUPS allow retired expatriates to continue to put money into a pension scheme -
Firstly, there is no maximum age at which you can invest in a QNUPS.
Secondly, you do not need to have any earned income from an employment in order to make a contribution.
Thirdly, there is no maximum contribution that can be made into a QNUPS.
The rules are sufficiently flexible to allow someone who is 85 years of age and has been retired for 25 years to put large investments into a QNUPS and immediately create significant tax advantages for themselves.
The benefits of QNUPS for retired British expatriates
A QNUPS is a pension scheme trust and as such you are entitled to take a cash lump sum and income during your lifetime, with the remainder of your fund being able to be passed to your spouse or heirs on your death free from all taxes.
The following advantages are available to you through a QNUPS:
As a pension scheme, a QNUPS is very tax efficient in most countries as it can avoid both local wealth taxes during your lifetime and succession taxes on your death.
A QNUPS also avoids local succession law, so that you are free to choose exactly who inherits your money and in what shares.
Income can be taken from age 55 (after 6th April 2010) or it can be deferred as it does not need to be taken until age 75. In certain countries it can be paid in a manner where a significant portion can be paid to you tax free.
When income is taken it is drawn down from the fund, thus leaving your scheme assets invested. Otherwise the assets grow free from tax.
On death the value of the QNUPS will be exempt from UK inheritance tax and local succession taxes.
A QNUPS offers considerable investment flexibility and choice. Furthermore your assets can be invested and any benefits taken in a currency of your choice, giving you the opportunity to remove currency risk.
The trustees of a QNUPS have no reporting obligations to HMRC unless the scheme also holds any assets transferred from an authorised UK pension scheme. You can have both a QROPS and a QNUPS.
http://www.expatwealth.telegraph.co.uk/template_textonly.aspx?page_info_id=43
Friday, 26 March 2010
Spotlight on Total Return Bond funds
Basic portfolio planning suggests that some form of fixed interest holding is a fundamental part of any diversified investment portfolio. The simple rhetoric for this being that the performance (of the majority) of fixed interest assets often work in the opposite direction to equity assets, therefore providing a cushion during stock market declines, thus helping to lower overall portfolio volatility.
The fixed interest element of many portfolios is most commonly a bond fund, although there are many to choose from and the success of the different types of assets that they hold can have dramatic effects on the returns of the fund. For example, some bond funds will specialise in purchasing government debt, others in mortgage loans, corporate debt, and more popular recently; emerging market debt.
The popularity of Total Return Bonds (sometimes referred to as 'Strategic Bonds') is a reflection of the current paltry bank interest rates, forcing investors to take a fresh look at bond funds as they hunt for a better return without having to purchase equity related funds. The UK's Investment Management Association (IMA) Strategic Bond sector recorded strong interest from retail investors in January, with GBP284m in net sales, a monthly record, making it the second most popular asset class for the month.
Unlike traditional bond funds, the remit of a Total Return Bond fund allows it to hold different types of fixed interest assets, on a global scale, thus further diversifying the investor's portfolio. Thus, a typical Total Return Bond will hold varying proportions of the asset classes mentioned above, depending on the manager's conviction at the time. This makes managers of such funds ideally equipped to counter the effects of fluctuating inflation and bank interest rates.
In addition to holding the correct types of assets at the right time, other key considerations affecting the performance of a Total Return Bond funds are 'credit quality' and 'maturity term'.
The credit quality of a bond held within a Total Return Bond fund is as important and topical now as ever before. Some of the world's largest companies have succumbed to financial difficulties over recent years and the corporate debt that they owed, in some cases, was never re-paid. Therefore, a more conservative option for investors is to carefully choose a fund that holds corporate debt of a minimum, higher quality, such debt is rated by independent third parties such as Standard & Poor's.
Bonds are held for a set amount of time, with an amount promised to be paid to the holder (i.e. the fund manager) at maturity. Continued global economic uncertainty means that the further away the maturity date of a bond, the greater level of uncertainty is attached to the bond. It is no coincidence, therefore, that trends point to many fund managers purchasing shorter-term bonds in a bid to reduce the likelihood of defaults. Conversely, some fund managers will hold longer-term bonds owing to the attractive yields they offer, in a bid to attract purchasers.
Taking all of the above into account, management of Total Return Bonds is considered an extremely specialist discipline. One of the most widely regarded managers in the industry is Allianz PIMCO's Bill Gross, manager of the Allianz PIMCO Total Return fund - the largest mutual fund in the world.
The fixed interest element of many portfolios is most commonly a bond fund, although there are many to choose from and the success of the different types of assets that they hold can have dramatic effects on the returns of the fund. For example, some bond funds will specialise in purchasing government debt, others in mortgage loans, corporate debt, and more popular recently; emerging market debt.
The popularity of Total Return Bonds (sometimes referred to as 'Strategic Bonds') is a reflection of the current paltry bank interest rates, forcing investors to take a fresh look at bond funds as they hunt for a better return without having to purchase equity related funds. The UK's Investment Management Association (IMA) Strategic Bond sector recorded strong interest from retail investors in January, with GBP284m in net sales, a monthly record, making it the second most popular asset class for the month.
Unlike traditional bond funds, the remit of a Total Return Bond fund allows it to hold different types of fixed interest assets, on a global scale, thus further diversifying the investor's portfolio. Thus, a typical Total Return Bond will hold varying proportions of the asset classes mentioned above, depending on the manager's conviction at the time. This makes managers of such funds ideally equipped to counter the effects of fluctuating inflation and bank interest rates.
In addition to holding the correct types of assets at the right time, other key considerations affecting the performance of a Total Return Bond funds are 'credit quality' and 'maturity term'.
The credit quality of a bond held within a Total Return Bond fund is as important and topical now as ever before. Some of the world's largest companies have succumbed to financial difficulties over recent years and the corporate debt that they owed, in some cases, was never re-paid. Therefore, a more conservative option for investors is to carefully choose a fund that holds corporate debt of a minimum, higher quality, such debt is rated by independent third parties such as Standard & Poor's.
Bonds are held for a set amount of time, with an amount promised to be paid to the holder (i.e. the fund manager) at maturity. Continued global economic uncertainty means that the further away the maturity date of a bond, the greater level of uncertainty is attached to the bond. It is no coincidence, therefore, that trends point to many fund managers purchasing shorter-term bonds in a bid to reduce the likelihood of defaults. Conversely, some fund managers will hold longer-term bonds owing to the attractive yields they offer, in a bid to attract purchasers.
Taking all of the above into account, management of Total Return Bonds is considered an extremely specialist discipline. One of the most widely regarded managers in the industry is Allianz PIMCO's Bill Gross, manager of the Allianz PIMCO Total Return fund - the largest mutual fund in the world.
China hold of America over currency pressure
Emerging Asia is expected to grow at more than twice the pace of the global economy this year, led by China and India, International Monetary Fund official John Lipsky said. The economy of "the world's most dynamic region" will expand by about 8.5 percent in 2010, IMF First Deputy Managing Director Lipsky said on Wednesday. The world economy is forecast to "bounce back" to growth of about 4 percent in 2010 and 4.25 percent in 2011, he said.
Pressuring China to revalue its currency won't succeed or solve the trade gap with the U.S., Vice Minister of Commerce Zhong Shan said. "The Chinese government will not succumb to foreign pressure to adjust our exchange rate," Zhong told reporters on Wednesday, during a trip to Washington to meet with U.S. officials and lawmakers. "To force the appreciation of the Yen will be counterproductive." China, which has held the Yen at around 6.83 per dollar for the past 20 months to aid exporters, has been criticized by lawmakers who are looking for the Obama administration to take retaliatory action through import tariffs. Representative Sander Levin, a Michigan Democrat and acting chairman of the U.S. House Ways and Means Committee, held a hearing on Wednesday in which he called China's yen policy "bad for the rest of the world" and said the "status quo is not sustainable."
America's Standard & Poor's 500 Index has set new highs, while China's benchmark stock index failed to surpass its August peak. Better-than-estimated earnings and record-low interest rates have helped propel the year long rally in U.S. stocks, driving the S&P 500 to the highest close since September 2008 this week. By contrast, the Shanghai Composite Index stalled after rising to a 14-month high in August.
Pressuring China to revalue its currency won't succeed or solve the trade gap with the U.S., Vice Minister of Commerce Zhong Shan said. "The Chinese government will not succumb to foreign pressure to adjust our exchange rate," Zhong told reporters on Wednesday, during a trip to Washington to meet with U.S. officials and lawmakers. "To force the appreciation of the Yen will be counterproductive." China, which has held the Yen at around 6.83 per dollar for the past 20 months to aid exporters, has been criticized by lawmakers who are looking for the Obama administration to take retaliatory action through import tariffs. Representative Sander Levin, a Michigan Democrat and acting chairman of the U.S. House Ways and Means Committee, held a hearing on Wednesday in which he called China's yen policy "bad for the rest of the world" and said the "status quo is not sustainable."
America's Standard & Poor's 500 Index has set new highs, while China's benchmark stock index failed to surpass its August peak. Better-than-estimated earnings and record-low interest rates have helped propel the year long rally in U.S. stocks, driving the S&P 500 to the highest close since September 2008 this week. By contrast, the Shanghai Composite Index stalled after rising to a 14-month high in August.
European Shares Rise
European shares rose on Thursday, ahead of a European Union meeting to help heavily indebted Greece as investors focus on sovereign debt concerns. European Union leaders will hold a two-day summit, divided over how to help Greece and maintain confidence in the euro. Focus on sovereign debt problems is likely to persist, after a Fitch downgrade of Portugal's debt rating on Wednesday and a pledge by Dubai's government to support the restructuring of debt-laden state-owned firms Dubai World and Nakheel by providing USD9.5bn in new funding. "The Greek problem hasn't gone away and you have got the Portugese downgrade reminding us that some economies are still vulnerable. The Greek problem would affect markets more if it spread significantly to Spain. That would be the bigger worry," said Bernard McAlinden, investment strategist at NCB Stockbrokers.
Britain's leading shares were flat in early afternoon trade on Wednesday, little impacted by a UK budget that held few surprises. "He (Alistair Darling) has reiterated measures that are aimed at cutting the deficit but stocks and sterling are generally unchanged and I don't think there's anything in the budget that requires action to investors," said Joshua Raymond, market strategist at City Index.
German business confidence surged this month, the Ifo institute said on Wednesday, as a weaker euro boosted export prospects and winter's end paved the way for a resumption of consumer spending and construction. Government stimulus measures put in place to combat last year's recession have also helped keep a lid on unemployment, which held steady at 8.2 percent last month. The German economy, Europe's largest, will resume expansion in the second quarter after the coldest winter in 14 years curbed activity in the first, the Bundesbank said earlier this week.
Britain's leading shares were flat in early afternoon trade on Wednesday, little impacted by a UK budget that held few surprises. "He (Alistair Darling) has reiterated measures that are aimed at cutting the deficit but stocks and sterling are generally unchanged and I don't think there's anything in the budget that requires action to investors," said Joshua Raymond, market strategist at City Index.
German business confidence surged this month, the Ifo institute said on Wednesday, as a weaker euro boosted export prospects and winter's end paved the way for a resumption of consumer spending and construction. Government stimulus measures put in place to combat last year's recession have also helped keep a lid on unemployment, which held steady at 8.2 percent last month. The German economy, Europe's largest, will resume expansion in the second quarter after the coldest winter in 14 years curbed activity in the first, the Bundesbank said earlier this week.
Monday, 22 March 2010
Playing China
The annual media frenzy surrounding the Chinese New Year - inflated this year by the news that Anthony Bolton will be trying his hand at investing in China - may eventually have subsided. But the case for investing in attractive Chinese businesses over the next 12 months remains robust, according to Charlie Awdry.
At age 31, Mr Awdry has managed to carve out a name for himself as manager of the Gartmore Chinese Opportunities Fund, taking over the reigns of the signature fund only five years after joining the investment manager as a graduate trainee. Mr Awdry's quick rise through the ranks sees him continually cropping up on lists of the City's 'rising stars'. And if you're looking for a pure China play, the Gartmore Chinese Opportunities Fund - launched more than 25 years ago - remains a favourite on adviser and analyst lists, having posted first-quartile returns over three, five and 10 years. Indeed, it remains one of the top performers in its sector.
As part of Gartmore's team of emerging markets specialists, Mr Awdry has clocked up hundreds of company meetings in China, and prior to taking over the fund, he spent six months working for the company in Hong Kong. Asked about Mr Bolton's arrival on his turf, Mr Awdry gives a diplomatic response: "Anthony Bolton is a very successful investor, and from my understanding of his investment process, he likes value. If a guy like that is coming into the market, it shows there is value, which is a pleasing sign."
At age 31, Mr Awdry has managed to carve out a name for himself as manager of the Gartmore Chinese Opportunities Fund, taking over the reigns of the signature fund only five years after joining the investment manager as a graduate trainee. Mr Awdry's quick rise through the ranks sees him continually cropping up on lists of the City's 'rising stars'. And if you're looking for a pure China play, the Gartmore Chinese Opportunities Fund - launched more than 25 years ago - remains a favourite on adviser and analyst lists, having posted first-quartile returns over three, five and 10 years. Indeed, it remains one of the top performers in its sector.
As part of Gartmore's team of emerging markets specialists, Mr Awdry has clocked up hundreds of company meetings in China, and prior to taking over the fund, he spent six months working for the company in Hong Kong. Asked about Mr Bolton's arrival on his turf, Mr Awdry gives a diplomatic response: "Anthony Bolton is a very successful investor, and from my understanding of his investment process, he likes value. If a guy like that is coming into the market, it shows there is value, which is a pleasing sign."
Friday, 19 March 2010
Brazilian Property: Not such a nutty idea
"We're not a bunch of ex-bankers who fancy a bit of property. Most of them didn't have a clue." So says James Morse, chief executive of Squarestone Brasil. The Brazilian shopping centre specialist is hoping to raise £250m on Aim later this month, promising to take the "western mall concept" over to Latin America. If it succeeds, Squarestone will be the first significant overseas property fund (OPF) to list on London's junior index for nearly three years.
The property boom spawned hundreds of OPFs promising investors a high-risk, high-reward gamble on property markets in the emerging economies of India, China, Eastern Europe and beyond. Often run by ex-bankers, these funds were usually highly geared, and paid far too much for assets of dubious quality. The credit crunch ended the foreign holiday; values plunged, tenant markets collapsed and loans remain deep underwater.
Conscious of the chequered history of Aim-traded property funds, Squarestone Brasil has a simplistic management structure (avoiding the OPF cliché of an external fund manager able to cream off extortionate fees). The fund will be seeded by two large retail malls in Sao Paulo which Squarestone already manages (Bonsucesso Mall, which is tr ading, and a 50 per cent stake in Golden Square Mall, which completes in 2011). Three more development sites totalling 1m sq ft are also being eyed.
Ex-MEPC man Mr Morse is now a Brazilian resident, and his team has spent three years on the ground working up the business plan with local investment bank BTG Pactual, which has signed a letter of intent to potentially partner Squarestone on project funding if the listing succeeds. Looking at the economic statistics, it is easy to get caught up in Brazil's carnival atmosphere. However, investors should be aware of the long-term nature of development projects, and unpredictable nature of returns.
Written by: Claer Barrett
The property boom spawned hundreds of OPFs promising investors a high-risk, high-reward gamble on property markets in the emerging economies of India, China, Eastern Europe and beyond. Often run by ex-bankers, these funds were usually highly geared, and paid far too much for assets of dubious quality. The credit crunch ended the foreign holiday; values plunged, tenant markets collapsed and loans remain deep underwater.
Conscious of the chequered history of Aim-traded property funds, Squarestone Brasil has a simplistic management structure (avoiding the OPF cliché of an external fund manager able to cream off extortionate fees). The fund will be seeded by two large retail malls in Sao Paulo which Squarestone already manages (Bonsucesso Mall, which is tr ading, and a 50 per cent stake in Golden Square Mall, which completes in 2011). Three more development sites totalling 1m sq ft are also being eyed.
Ex-MEPC man Mr Morse is now a Brazilian resident, and his team has spent three years on the ground working up the business plan with local investment bank BTG Pactual, which has signed a letter of intent to potentially partner Squarestone on project funding if the listing succeeds. Looking at the economic statistics, it is easy to get caught up in Brazil's carnival atmosphere. However, investors should be aware of the long-term nature of development projects, and unpredictable nature of returns.
Written by: Claer Barrett
A Golden Era For Stock-Piking
In the last 12 months, the stock market has enjoyed one of its greatest-ever rises; the FTSE 100 is 2500 points higher than its low point on March 3 2009. However, it is not just the size of the rise in the market that's notable. There have been two other curious features of the rally.
First, it's been a great time for stock-pickers, because shares' returns have been positively skewed. For example, in the 12 months to March 15, 60 out of 102 stocks in the FTSE 100 rose by more than the index's 44.8 per cent. Such outperformance is unusual.
What's more, many more FTSE 100 stocks have done exceptionally well than have done exceptionally badly. Across the 102 stocks in the index, the standard deviation of price changes in the 12 months to March 15 was 68.6 percentage points. However, only one stock (Resolution) did one standard deviation worse than the median stock (Experian), whilst 12 stocks did one standard deviation better. Ten stocks did half a standard deviation worse than the median, whilst 29 did half a standard deviation better.
This means that if you had picked stocks at random 12 months ago, there was a better than evens chance that would would have beaten the market. Take, for example, the 10th worst stock in the index - United Utilities. It rose 17.1 per cent in the year to March 15, under-performing the index by 27.7 percentage points. However, the 10th best stock - Anglo American - rose 139.8 per cent, beating the index by over 90 perce ntage points.
A stock-picker with an unbalanced portfolio and only average luck would therefore have out-performed the index handsomely; a random picker had an equal chance of picking United Utilities or Anglo American a year ago.
A second odd thing about this recovery is that high-beta stocks have done even better than one would expect. For example, in the five years to March 2009, Barclays had a beta with respect to the All-share (based on monthly returns) of 1.7. You'd therefore have expected it to rise by 79.2 per cent, given the All-share's 46.6 per cent rise in the year to March 15. In fact, it rose 372.9 per cent. This is not an isolated example. Of the 10 highest-beta stocks in March 2009, nine subsequently did better than their beta predicted; the exception was Lonmin, which rose just 59.5 per cent. On average, these 10 rose 200 per cent - that is, they tripled in price - compared to the 97.4 per cent gain predicted by their betas.
There might be a common theme linking these two curiosities - and indeed, the sheer scale of the rise in the market. The connection is disaster risk. A year ago stocks such as Barclays, Prudential or Vedanta were carrying not just market risk (the danger they'd fall a lot if the market fell), but disaster risk too - the danger that they'd be almost wiped out by a financial cataclysm. They were priced lowly to reflect this danger. As the danger of catastrophe has receded, so these stocks have gained a double boost - once from disaster risk being priced out, and again from the ordinary beta effect.
Because the FTSE 100 has a disproportionate number of stocks which carried some disaster risk - banks, resources stocks and highly-geared firms - so a disproportionate number have done well in the last 12 months.
If this theory is right, it could have a slightly unpleasant implication for stock-pickers. With disaster risk now largely priced out, the potential for many stocks to significantly beat the index is a lot less. That suggests that stock-picker s might find the going tougher in the next few months.
Written by: Chris Dillow
First, it's been a great time for stock-pickers, because shares' returns have been positively skewed. For example, in the 12 months to March 15, 60 out of 102 stocks in the FTSE 100 rose by more than the index's 44.8 per cent. Such outperformance is unusual.
What's more, many more FTSE 100 stocks have done exceptionally well than have done exceptionally badly. Across the 102 stocks in the index, the standard deviation of price changes in the 12 months to March 15 was 68.6 percentage points. However, only one stock (Resolution) did one standard deviation worse than the median stock (Experian), whilst 12 stocks did one standard deviation better. Ten stocks did half a standard deviation worse than the median, whilst 29 did half a standard deviation better.
This means that if you had picked stocks at random 12 months ago, there was a better than evens chance that would would have beaten the market. Take, for example, the 10th worst stock in the index - United Utilities. It rose 17.1 per cent in the year to March 15, under-performing the index by 27.7 percentage points. However, the 10th best stock - Anglo American - rose 139.8 per cent, beating the index by over 90 perce ntage points.
A stock-picker with an unbalanced portfolio and only average luck would therefore have out-performed the index handsomely; a random picker had an equal chance of picking United Utilities or Anglo American a year ago.
A second odd thing about this recovery is that high-beta stocks have done even better than one would expect. For example, in the five years to March 2009, Barclays had a beta with respect to the All-share (based on monthly returns) of 1.7. You'd therefore have expected it to rise by 79.2 per cent, given the All-share's 46.6 per cent rise in the year to March 15. In fact, it rose 372.9 per cent. This is not an isolated example. Of the 10 highest-beta stocks in March 2009, nine subsequently did better than their beta predicted; the exception was Lonmin, which rose just 59.5 per cent. On average, these 10 rose 200 per cent - that is, they tripled in price - compared to the 97.4 per cent gain predicted by their betas.
There might be a common theme linking these two curiosities - and indeed, the sheer scale of the rise in the market. The connection is disaster risk. A year ago stocks such as Barclays, Prudential or Vedanta were carrying not just market risk (the danger they'd fall a lot if the market fell), but disaster risk too - the danger that they'd be almost wiped out by a financial cataclysm. They were priced lowly to reflect this danger. As the danger of catastrophe has receded, so these stocks have gained a double boost - once from disaster risk being priced out, and again from the ordinary beta effect.
Because the FTSE 100 has a disproportionate number of stocks which carried some disaster risk - banks, resources stocks and highly-geared firms - so a disproportionate number have done well in the last 12 months.
If this theory is right, it could have a slightly unpleasant implication for stock-pickers. With disaster risk now largely priced out, the potential for many stocks to significantly beat the index is a lot less. That suggests that stock-picker s might find the going tougher in the next few months.
Written by: Chris Dillow
High Yield Treasures
For all but the last two months of 2009, sales of corporate bond funds trounced everything else in the UK investment universe, as income-hungry investors balked at the meagre returns on cash and fled from equity funds after the meltdown of late 2008. Then, the tide turned. Bond fund sales are in retreat, and many experts now think it’s time to take the 'fixed' out of 'fixed income'.
Some institutions have started doing just that. Chris Taylor at Blue Sky Asset management says institutional money managers are reducing their exposure, because they're afraid of a price bubble developing. T Bailey recently reduced the bond exposure of its cautious managed fund from 20 per cent to 5 per cent, while John Chatfield-Roberts at Jupiter told The Sunday Times that the 'easy money' had been made and that now was the time to sell.
Spreading it thinner
The stampede into corporate bonds and bond funds kicked off when credit spreads – the difference between corporate and sovereign debt – widened sharply in late 2008, as fearful markets priced in Depression-era default rates. Seeing the opportunity, investors moved in quickly. As prices recovered, those spreads narrowed again, to pre-crisis levels. The risk-reward equation is no longer so favourable. Bonds look fully priced.
Companies weren't slow off the mark, either. With bank lending moribund, there was also a flood of new bond issuance. Dealogic estimates that 2009 European corporate bond issuance alone increased by 55 per cent in 2009 from 2008, to over $1.34 trillion.
Bubble trouble
That's led to fears of a bubble, and there are several sharp objects that could burst it. One is resurgent inflation, triggered by the energetic expansion of narrow money around the world. Inflation is always bad for bonds because their interest payments are fixed, and so easily eroded by rising prices. Another is potential problems in the sovereign debt market. Gilt auctions are still well subscribed, but as Chris Dillow has pointed out, sentiment can sour quickly. If it does, falling gilt and Treasury prices would certainly drag corporate debt down with them.
Bond-market veterans point to the precedent: 1994. Back then, interest rates were slashed to drag economies out of the early-1990s recession. But they soon went back up when growth resumed. Mark Holman, managing partner at TwentyFour asset management, points out that at the start of 1994, 10-year gilt rates were a little over 6 per cent, but had topped 9 per cent by September, thanks largely to a series of US interest-rate hikes. "In price terms, that eroded almost 20 per cent of investors' capital," he said.
So if bonds are no longer the answer, what is? You need to get creative, and look beyond the traditional income-generating staples. Hybrid securities, structured products and dividend growers (as opposed to yielders) are some examples.
Some institutions have started doing just that. Chris Taylor at Blue Sky Asset management says institutional money managers are reducing their exposure, because they're afraid of a price bubble developing. T Bailey recently reduced the bond exposure of its cautious managed fund from 20 per cent to 5 per cent, while John Chatfield-Roberts at Jupiter told The Sunday Times that the 'easy money' had been made and that now was the time to sell.
Spreading it thinner
The stampede into corporate bonds and bond funds kicked off when credit spreads – the difference between corporate and sovereign debt – widened sharply in late 2008, as fearful markets priced in Depression-era default rates. Seeing the opportunity, investors moved in quickly. As prices recovered, those spreads narrowed again, to pre-crisis levels. The risk-reward equation is no longer so favourable. Bonds look fully priced.
Companies weren't slow off the mark, either. With bank lending moribund, there was also a flood of new bond issuance. Dealogic estimates that 2009 European corporate bond issuance alone increased by 55 per cent in 2009 from 2008, to over $1.34 trillion.
Bubble trouble
That's led to fears of a bubble, and there are several sharp objects that could burst it. One is resurgent inflation, triggered by the energetic expansion of narrow money around the world. Inflation is always bad for bonds because their interest payments are fixed, and so easily eroded by rising prices. Another is potential problems in the sovereign debt market. Gilt auctions are still well subscribed, but as Chris Dillow has pointed out, sentiment can sour quickly. If it does, falling gilt and Treasury prices would certainly drag corporate debt down with them.
Bond-market veterans point to the precedent: 1994. Back then, interest rates were slashed to drag economies out of the early-1990s recession. But they soon went back up when growth resumed. Mark Holman, managing partner at TwentyFour asset management, points out that at the start of 1994, 10-year gilt rates were a little over 6 per cent, but had topped 9 per cent by September, thanks largely to a series of US interest-rate hikes. "In price terms, that eroded almost 20 per cent of investors' capital," he said.
So if bonds are no longer the answer, what is? You need to get creative, and look beyond the traditional income-generating staples. Hybrid securities, structured products and dividend growers (as opposed to yielders) are some examples.
Saturday, 27 February 2010
New Oil Finds
The rising oil price and the return of risk appetite pushed many oil shares higher during 2009. With sector conditions remaining benign, identifying the real stars of 2010 could prove more challenging, although with exciting exploration campaigns under way or about to start around the world, this year's winners are likely to be those most successful with the drillbit.
BP statistics show that the world has vast proved energy reserves of 1.3 trillion barrels of oil and 185 trillion cubic metres of natural gas. At current rates of usage, that's equivalent to over 40 years' usage of oil and over 60 years' usage of gas – even if we never find another barrel of either.
With such reserves to fall back on, one might question why oil and gas exploration is even necessary, particularly with the growing (albeit from a low base) contribution from renewable sources. The answer has two parts. First, usage will almost certainly not remain at current levels.
Second, an often-quoted industry mantra is that "the easy oil has been found", or at least the easy oil still accessible to western explorers has been found. BP statistics show that 86 per cent of global proved reserves lie under the control of Opec (Organization of Petroleum Exporting Countries) and Former Soviet Union countries. With a flourishing global oil services industry to provide technical extraction expertise where necessary, these countries no longer need to call in western major oil firms to help them develop their fields. If they do call in western majors, it's now more likely to be on contracts to increase production.
BP statistics show that the world has vast proved energy reserves of 1.3 trillion barrels of oil and 185 trillion cubic metres of natural gas. At current rates of usage, that's equivalent to over 40 years' usage of oil and over 60 years' usage of gas – even if we never find another barrel of either.
With such reserves to fall back on, one might question why oil and gas exploration is even necessary, particularly with the growing (albeit from a low base) contribution from renewable sources. The answer has two parts. First, usage will almost certainly not remain at current levels.
Second, an often-quoted industry mantra is that "the easy oil has been found", or at least the easy oil still accessible to western explorers has been found. BP statistics show that 86 per cent of global proved reserves lie under the control of Opec (Organization of Petroleum Exporting Countries) and Former Soviet Union countries. With a flourishing global oil services industry to provide technical extraction expertise where necessary, these countries no longer need to call in western major oil firms to help them develop their fields. If they do call in western majors, it's now more likely to be on contracts to increase production.
Friday, 26 February 2010
The Investment Page: Spotlight on Multi Asset Funds
Investors desire to spread investment risk, coupled with a low interest rate environment in which it is difficult to get reasonable returns on cash, are two of the main reasons behind the increased popularity of 'multi-asset' funds.
The term 'multi-asset' refers to funds which invest across several asset classes and fund managers, which means investors are not exposed to the market gains or losses of just one asset class (or fund manager). Ultimately, multi-asset managers create the potential for capital growth and the conditions where the better performers may offset the poor performers.
The rationale is straightforward. No single asset class can be guaranteed to top the performance charts each year, so it seems prudent to have exposure to a broad mix of investments, including property, private equity, commodities and hedge funds. Relatively new as a concept, this new breed of multi-asset fund (brought about as a result of 'UCITS III' legislation) is a natural extension of the more traditional 'balanced' fund, which is restricted to invest in just two asset classes - equities and bonds.
Balanced funds grew in popularity in the wake of the stock market slump, triggered by the bursting of the dotcom bubble in the late 1990's. It is no coincidence then that multi-asset funds are proving so popular amidst the current market uncertainty. It is following such times that investors have become increasingly attracted to funds that can effectively act as a one-stop-shop for all of their investment needs.
Such funds are often referred to as 'core funds', the idea being that, given their diverse yet balanced remit, they account for the majority of the investment at the core of a portfolio, with other smaller, themed funds (known as 'satellite' funds) serving as an exposure to riskier assets. The notion is that a 'core' fund acts as a constant, stable base, whilst the 'satellite' funds are regularly re-assessed and changed in accordance with market trends. The 'core/satellite' approach is one that lends itself to medium to long term savings, such as pension provision or holdings in life assurance contracts.
There are obviously no guarantees, although basic theory around diversification suggests that investors can maximise their chances of making good returns over the long term by building a balanced portfolio that invests not just in a range of different equities, but in a variety of assets too. So, if one investment takes a dip - as invariably happens over the medium to long term- the whole portfolio doesn't get wiped out.
Steve Brann, manager of the Hansard Forsyth Wealthbuilder Balanced fund (X806 (EUR), B11(GBP) and C551 (USD)), available in HIL and HEL, commented on the outlook for his multi-asset fund in 2010 "Regardless of the prevailing shape of the current recovery, the unique nature of this crisis means volatility is likely to remain high whatever the trend direction.
If 2008 was the year of near apocalyptical collapse and 2009 the year of the rally on a rising tide of recovering confidence, then 2010 is likely to be a year of divergence and volatility. The rally in risk assets has been driven by an abundance of virtually-free central bank credit and unprecedented peacetime spending spree by governments.
The outlook for 2010 will vary depending on which country you are looking at. This year will be all about managing the exit of Quantitative Easing and will be the year for true asset allocators and multi-asset investors to come to the fore."
The term 'multi-asset' refers to funds which invest across several asset classes and fund managers, which means investors are not exposed to the market gains or losses of just one asset class (or fund manager). Ultimately, multi-asset managers create the potential for capital growth and the conditions where the better performers may offset the poor performers.
The rationale is straightforward. No single asset class can be guaranteed to top the performance charts each year, so it seems prudent to have exposure to a broad mix of investments, including property, private equity, commodities and hedge funds. Relatively new as a concept, this new breed of multi-asset fund (brought about as a result of 'UCITS III' legislation) is a natural extension of the more traditional 'balanced' fund, which is restricted to invest in just two asset classes - equities and bonds.
Balanced funds grew in popularity in the wake of the stock market slump, triggered by the bursting of the dotcom bubble in the late 1990's. It is no coincidence then that multi-asset funds are proving so popular amidst the current market uncertainty. It is following such times that investors have become increasingly attracted to funds that can effectively act as a one-stop-shop for all of their investment needs.
Such funds are often referred to as 'core funds', the idea being that, given their diverse yet balanced remit, they account for the majority of the investment at the core of a portfolio, with other smaller, themed funds (known as 'satellite' funds) serving as an exposure to riskier assets. The notion is that a 'core' fund acts as a constant, stable base, whilst the 'satellite' funds are regularly re-assessed and changed in accordance with market trends. The 'core/satellite' approach is one that lends itself to medium to long term savings, such as pension provision or holdings in life assurance contracts.
There are obviously no guarantees, although basic theory around diversification suggests that investors can maximise their chances of making good returns over the long term by building a balanced portfolio that invests not just in a range of different equities, but in a variety of assets too. So, if one investment takes a dip - as invariably happens over the medium to long term- the whole portfolio doesn't get wiped out.
Steve Brann, manager of the Hansard Forsyth Wealthbuilder Balanced fund (X806 (EUR), B11(GBP) and C551 (USD)), available in HIL and HEL, commented on the outlook for his multi-asset fund in 2010 "Regardless of the prevailing shape of the current recovery, the unique nature of this crisis means volatility is likely to remain high whatever the trend direction.
If 2008 was the year of near apocalyptical collapse and 2009 the year of the rally on a rising tide of recovering confidence, then 2010 is likely to be a year of divergence and volatility. The rally in risk assets has been driven by an abundance of virtually-free central bank credit and unprecedented peacetime spending spree by governments.
The outlook for 2010 will vary depending on which country you are looking at. This year will be all about managing the exit of Quantitative Easing and will be the year for true asset allocators and multi-asset investors to come to the fore."
The Investment Page: Dollar Falls
The dollar fell for the first time in three days on Wednesday against the euro on speculation that Bernanke will hold interest rates near zero to support growth in the world's largest economy. The dollar weakened versus 14 of 16 major counterparts.
The Investment Page: Gold Falls
Gold fell more than 1 percent to USD1,089.75 an ounce as a price slip below USD1,100 sparked technical selling, and amid caution ahead of Federal Reserve chair Ben Bernanke's congressional testimony later on Wednesday. "If, as we suspect, he maintains the clear stance to a loose monetary policy, the market will buy dollars on the hoped-for support this will give the economy," said Credit Agricole in a note.
The Investment Page: European Orders Rise
European industrial orders unexpectedly rose for a second month in December led by a surge in demand for capital goods such as machinery and equipment. Orders to industrial companies in the 16-nation euro area rose 0.8 percent from November, when they gained 2.7 percent, the European Union's statistics office said on Wednesday. The euro's 9.6 percent drop against the dollar in the past three months is making European exports more competitive just as the global economy gathers strength.
The Investment Page: China Stocks Rise
China's stocks rose for the first time in three days on Wednesday, led by power producers and health-care companies, as investors sought industries that would be most shielded against a slowdown in the economy. "The market is turning to defensive stocks with solid earnings prospects," said Dai Ming, a fund manager at Shanghai Kingsun Investment Management & Consulting Co. "The market is likely to be range bound given the government tightening."
The Investment Page: Hong Kong Economic growth Beats Expectations
Hong Kong's economic growth beat estimates in the fourth quarter and Financial Secretary John Tsang forecast an expansion of as much as 5 percent this year as he moved to counter the risk of a property bubble. Gross domestic product rose a seasonally adjusted 2.3 percent from the previous three months. "It is good that the government is taking a pre-emptive move before a risk in the property market forms," said Kelvin Lau, a Hong Kong-based economist with Standard Chartered Bank.
The Investment Page: Japan exports climb
Japan's exports climbed at the fastest pace in almost 30 years in January, supporting the nation's economic recovery as falling wages damp demand at home. Shipments abroad advanced 40.9 percent from a year earlier, the biggest increase since February 1980, the Finance Ministry said in Tokyo on Wednesday. The growth was led by the biggest advance in exports to China since 1985, while shipments to the U.S. increased for the first time in more than two years.
Subscribe to:
Posts (Atom)