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Why do we use asset managers?

By Gareth Horsfall
This article is published on: 10th April 2020

10.04.20

In this article I would just like to touch briefly on a subject which, during the good times might seem somewhat banal and maybe even pointless, but when we hit the bad times we can see the merit of why we use asset managers such as Rathbones, Tilney, WHIreland and Cazenove to manage our clients’ money.

During this time in lockdown and financial market instability, I have been listening to a number of webinars from investment managers and financial gurus to try and understand what they think is likely to happen when we exit this crisis. Below are some of the points which I have heard:

Within the next 6-12 months dividends from some of the best dividend paying companies will be slashed or even cut completely, to shore up cash reserves.
Even more focus will be put on the way we live and the way companies operate. We could see an even greater resurgence into ESG (Environment, Social and Governance) stocks. If you are unsure what they are then you can check out the article I wrote on this earlier this year.
We may have seen the bottoming of the markets, but much depends on what will happen in the USA. As it stands, almost 7 million people have already applied for unemployment benefit. If that rate continues it means the US will have an unemployment rate of approx 15% very soon. A level not seen since the Great Depression in 1929.
Any early plateau’s in the infection and death rate in Europe will be a good signal for financial markets.
Companies who were struggling to survive prior to this crisis will likely collapse. A great example of this is the UK retailer Debenhams which, as I write, has just brought the administrators in to look at winding the company up. However, the new tech savvy companies that have responded to changing customer trends will strengthen their position as market competition fails.
Nationalisations are likely, more so in the EU than the UK and the USA. Companies in the travel, retail, and leisure sectors are at the greatest risk of being nationalised. Part nationalisations are a huge drag on company performance and would be areas to avoid when the dust settles.
Smart working could become popular. Companies may start to change their attitude towards office space and allow more smart working for their employees. This could mean potential productivity increases but may also change the dynamics of the property market as well, mainly in the cities.
Is Capitalism dead? A subject which seems to be thrown around whenever we have a crisis. Actually the thinking is, not at all. In fact, one manager thought that there was likely to be a resurgence of ‘responsible’ capitalism. A capitalism that is no longer unfettered, but is more controlled allowing prosperity to grow, while at the same time focussing on our care of the environment, social care and supervision of corporate governance practices. Will we ever be weaned off this perpetual standard of prosperity and GDP growth, which is unsustainable in so many ways?

It is worth just going back to point 1 for a moment, the point about the dividend cuts, and why I entitled this section:

Why do we use asset managers?

Many clients rely on income from their investments to fund their lifestyle. That may include ad hoc withdrawals or regular payments to top up pensions, pay for healthcare costs, pay for schooling fees, and general lifestyle costs. If this is the case, then relying on what has been the traditional investment type for income: bonds and blue chip equities, might be a difficult strategy post crisis.

Now, more than ever, there is likely to be a need to take income from gains in the asset prices, rather than exclusively income derived from those same assets. (Think about it as a property that is rented, but after expenses and taxes earns very little income. However, the property itself has gained in price significantly and you could access those gains to help top up your income! A bit like an equity release plan)

The importance will be to be in the right assets at the right times, to sell the gains when they have been made and secure them as a reserve to pay income payments. If you imagine that most of the major companies could be cutting their dividends to hoard cash to survive this period, while in addition interest rates on cash are likely to be cut even further and the interest rate on bonds are equally likely to fall due to easy access to government cash, then where else can we turn to generate the cash we may need? We must turn to the gains in the prices of the assets that we hold as an alternative way to generate income. This is where the expertise of asset managers comes into play. They research the market, and aim to be in the right geographical and corporate sectors at the right times and look in depth at company balance sheets to predict their future.

It’s going to be a tricky time ahead for many people and relying on tried and trusted methods of generating income that have served you well in the past may not necessarily work in the near term.

I am happy to say that all our clients are with asset managers who we trust to manage our clients money and make sure they have the income they need in the good times and the bad.

Investment Talk

By Gareth Horsfall
This article is published on: 9th April 2020

Let’s talk about our money for a moment. I know it has been the last thing on anyone’s lips in the last few weeks, but as the spread of the virus slows and when life slowly gets back to normal we will start thinking about our financial situation again, and rightly so.

As I am sure you will have noted, in the last few weeks the stock market tanked, strangely predictable in its unpredictability. That probably makes no sense at all (and I am sure the editor of this Ezine will question me about it!) but the history of financial markets shows us that the crashes come from unforeseen events which incite a huge sell off. At the time of writing a rebound in various markets appears to be taking off. How long it will last is anyone’s guess. However, a longer and sustained rebound will come quite quickly and so it is important to remain calm, stay invested and benefit from the upside as well.

(As an aside, I would ask that you start to look at your account balances now. We have a tendency to not want to look at our investments during the difficult times and whilst I agree with this at the height of the crisis, when the dust settles, and it is starting to from a financial market perspective anyway, I always coach that it is important to check your money. If nothing else it helps us to understand the phases of investments and how they are nothing to worry about. We can’t always have good news!)

We can see from the examples below what happens after market crashes and why sticking with the plan is more important than trying to time our way out and back in again.

A few examples from previous financial crises:

2008
2009

The collapse of the subprime mortgage markets triggered a recession and made 2008 the poorest year for stocks since 1931. The US market fell 10% in June 2008 and fell 10% again in October 2008, losing 19.12% for the year. On March 9, 2009, the major U.S. indices closed at 12-year lows. Then, the market took off for one of the greatest rallies. From the March 9 2009 lows to the end of 2009, the US market soared 64.83% while the NASDAQ (Tech stocks index) gained 78.87%.

2001
2002

Was much the same. After the four-day closure of the stock market following 9/11, the US market lost 14.26% in a week. But what happened next? A huge gain. The market rebounded 21% in less than three months.

There were more challenges ahead because on October 9, 2002, the US market fell again but by Halloween, a period of only 22 days, it gained 10.6%.

2003

The US market gained 26.4%, and the Nasdaq 50%.

If we go back further the story is always the same. When the markets crash, reference is almost always made to October 19th 1987: Black Monday. (This time was no different.) The US market lost 22.6% in one day! Then the recovery kicked in. During the next two trading days, it gained back all of the loss ending up 2% positive for the year.

If you had invested in the US market a week before Black Monday, you would have lost 30% on your investment in the crash … but if you held on, your investment would have gained 462% over the next 20 years.

1974

With investors fretting over rising inflation and the energy crisis, the US market lost 30% of its value during the first three quarters of the year, but then it suddenly gained 16% in October.

Between 1982 and the year 2000 the US market made a 1,500% gain. This is why we stay invested through the downturns. This is what the market is capable of achieving. There are periodic rollercoaster rides, but these are normal and they should be expected. Even with these nailbiting rides history is definitely on our side.

Take care of yourself

By Gareth Horsfall
This article is published on: 23rd March 2020

Gareth is the Manager of the Italian Office. He writes a regular ezine and below you will find his latest message.

It feels decidedly bizarre to be writing to you in these unprecedented times. I am really struggling with what to write about. Concentration seems intensely difficult. I must have re-written this article about 4 times to date because what I write either seems irrelevant, or even just a little patronising. Money matters don’t seem quite as important right now and although I know that those same money concerns will reappear when we eventually get back to normal, my stories, my facts, my ideas just don’t seem right at this moment in time.

But, I thought that I must write to you, maybe just to relay my experiences to date of the coronavirus and some of my own concerns.

I should start by telling you that I think I may have been infected by the virus.

Three weeks ago my family and I went on a settimana bianca in the north of Italy with 3 other families. In retrospect it was an absolutely crazy idea. At the time the lock down was just being imposed in the Veneto area and we thought, in our wisdom, that we would bypass it. We even convinced ourselves that the clean mountain air and outdoors would do us the world of good. What we hadn’t quite calculated was the proximity to people on the cable car and ski stations and also in the hotel. Two of the men from two of the other families fell ill when we came back. The first had a test done quickly and discovered that he was positive; the second needing to be taking to hospital a week ago due to respiratory difficulties. He was discharged the same day but told he was also positive. Both are now fine. My wife and I both started with very mild flu like symptoms about a day or so after returning, achy bones and, oddly for me, light headaches. Thankfully that has all passed now and we feel fine. We never got tested but can only assume that we also got this virus.

However, the virus itself is less of a concern for me personally. My thoughts always return to the long term economic damage that this will do in Italy in the long run. I won’t go into a discourse in this E-zine, but I do keep thinking that there must be some point where the government will have to accept that the long term economic damage will be greater than the consequences of the virus itself. That is a scary thought, mainly because of all the vulnerable people who could become infected. We have a very close uncle of 77 years old, a Nonna in the family of 92 years old, my own mother in the UK of 71 years old and my suocera of 68 years old, also in the UK. We also have a close friend in the north of Italy whose father has been admitted to hospital with coronavirus. This is a very unsettling time.

The 92 year old grandmother is worth a mention here, because we say that these are unprecedented times, but I spoke with her on the phone the other day only to discuss some of her experiences during the war years. She lives in Southern Italy. She told me about the times when her father (a typewriter mender) would go and trade his services in local businesses in exchange for food: prosciutto, a formaggio, bread etc and then often the soldiers, who themselves famished, would steal everything that the household had. They had to learn to hide the food in secret places around the house. At the same time, tuberculosis was running rife through communities with no access to any pharmaceuticals and with quite basic living conditions. She explained that she lost a number of good, and young, friends during this period. So no matter how bad we have it at the moment, this puts it all into perspective, without wanting to down play the seriousness of the situation.

I don’t want to write anymore in this E-zine other than to say that, after much reflection, I will continue to send them. I will stick to my main theme of matters relating to money and living in Italy. I hope they serve, either as useful information or at the very least a distraction from what we are going through. I can’t say how frequent they will be since trying to manage life in close quarters with the family is probably the hardest thing about the whole situation, but my promise is that I will write with some more E-zines.

In the meantime, I want to wish you the very best health wherever you are. If you are ‘vulnerable’, please take care and take precautions. We may have some way to go yet and the psychological toll might be more taxing than the physical. Either way, we can get through it stronger than before.

It has also been my intention since the lock down in Rome to call all my clients and speak on the phone and find out how you are. I am slowly getting through the list but my time is governed by the home office situation, so if you read this and you haven’t heard from me yet then please just drop me a quick email (gareth.horsfall@spectrum-ifa.com), whatsapp message or text (+393336492356) and tell me that you are your loved ones are all in good health. I would really appreciate it!

I look forward to the end of this and getting out and about again to visit you, so we can cheer our survival of this lockdown period together over a nice glass of Italian wine! (We will need to support our local Italian businesses, and cantine, more than ever after this)

Stay Safe

By Gareth Horsfall
This article is published on: 11th March 2020

11.03.20

As I write this E-zine financial markets are entering free fall due to the events surrounding coronavirus in the last few weeks, no more so than in Italy.

It certainly seems a very difficult and strange time to be living in, and clearly is spooking the financial sector. However, in this E-zine I want to offer some rational thought about this and why this is neither a time for panic nor something that we should think is out of the ordinary. It is certainly unprecedented from a health point of view and I hope you can remain safe during this time, but it is just another ‘unpredictable’ event from the perspective of our money and will have the short term effect of scaring investors.

We should all think back to the events of 2008 / 2009 and remember the thoughts and feeling we had when the world’s media told us that we were heading into a financial crisis of unforeseen proportions and that Armageddon would prevail. This is no different, from a financial point of view, and should be thought of no differently. It will throw up opportunities for those who are sitting on cash and should be a time of reflection and restraint for those of us who are fully invested.

I would like to add that I do not wish to minimise the effects of this virus in any way. I understand that there could be many at risk, myself included: I have suffered from asthma all my life, and we also have members of the family who are at very high risk of developing severe problems from the virus if everything we are to believe is true.

Equally, what I am about to write should in no way be taken as a conspiracy theory and born out of superstition. I am going to write based on historical facts and reflect on the behaviour of humans. We have tended to exhibit and repeat the same patterns of behaviour in very similar circumstances throughout history.

EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDS
This is the title of one of my favourite books written in 1841 by author Charles Mackay.

It is one of my favourite reads because it is a historical account of the typical behaviour that we. as humans, exhibit

repeatedly. There are many examples throughout history, which are discussed in great detail in the book and which I will come to in a moment, but let me ask you:

Just because all the governments around the world, all the doctors, all the councils and all the media say that coronavirus could be the greatest threat to mankind, does this make it true?

This might seem a rather provocative statement to be making, but it does bear thinking about for a moment. Some suggest that the coronavirus may be no more serious than the regular flu, although some estimates suggest it may be worse. The facts to date cannot prove either way. Clearly, given that we have no idea how it will manifest itself, it makes sense to adopt urgent measures but it may turn out to be no more than another SARS / MERS/ Ebola (interestingly Ebola virus kills 9 out of 10 people who get infected, but the alarm over that was nowhere near the panic over coronavirus). In addition, we have had panic surrounding mad cow disease, swine flu and avian flu. None of these have gone on to prove to be any more than a passing moment of concern and affected a small proportion of the population overall.

The book I have mentioned above is well worth reading, if you have the opportunity, and explains how as humans, we tend to exhibit behaviours which reinforce one another. In our case, the government creates the alarm, therefore the doctors must respond with equal alarm and response / preparation ( they are afterall paid by the government), the media equally react in an alarmist way because it helps them to sell their services, the people become alarmed and start stock piling because they fell under threat. The problem is that is is now hard, in a communal state of panic or enthusiasm, for one to stand out and say ‘maybe this is not the case’, because they are ostrazied or ridiculed and called out for being unreasonable.

But don’t just take my word for it.
Let’s look some of the evidence:

GREAT RECESSION 2008 / 2009

Merely 10 years ago we had a very similar experience, when financial markets collapsed after the bundled mortgage debt crisis that led us into the crash of 2008 / 2009. However, isn’t it interesting that leading up to this crisis, economists and central banks told us that the world was in permanent state of growth and could likely maintain 3% per annum; estate agents told us that property prices would keep on rising; even banks and financial institutions believed the hype and continued to offer highly risky investments to risk averse investors because they believed that stability was the new norm:

The Guardian 30th January 2007: Still going through the roof – the property boom goes on
Fortune 500: July 12th 2007: The greatest economic boom ever
Harvard Business School: 27th December 2007: Chimerica’ and the Global Asset Market Boom

No one could challenge the norm at the time, for fear of being branded the one who wanted to end the status quo. The same logic applies to financial exuberance as it does to fear about a global pandemic. Just because everyone says it will be this way doesn’t necessarily mean it will be (if you haven’t seen the film, ‘The Great Short’, then I would suggest it as a great example of the treatment of those who go against the masses).

TECH BOOM 2000

For those of you with a memory of the events surrounding the financial market collapse of 2000, you might remember that running into the collapse we were told that the internet would change our lives forever and in ways that we could not imagine. The theorists were absolutely right. But unfortunately, they had not thought to add a timeline to that prediction. Financial market exuberance took over followed by collapse. At the time economists, central banks, financial institutions and pundits in the media bought into the same rhetoric, that the internet would reshape our lives immediately. Little did they know that it would take about another 10 years for the effect to happen. Just because everyone says it will be this way doesn’t necessarily mean it will be.

WITCH MANIA

In the mid 1400’s Europe was fixated with the idea that every calamity that befell a person was the cause of a witch. Here is a passage from the book:

“But in the early days of ‘little knowledge’ this grand belief because the source of a whole train of superstitions, which in their turn, became the fount from whence flowed a deluge of blood and horror”.

The writings are not a million miles removed from the fear surrounding coronavirus. In this case, just because everyone said it was true didn’t mean it was. More horrendous is that those who challenged the belief were deemed to be witches themselves and didn’t live to see their reality come true.

THE CRUSADES

I won’t go into the historical account of how the Crusades came about, but we can reflect on a passage from the book, which in some ways mirrors what we see today:

” Fanaticism and the love of battle alike impelled them to war, while the kings and prices of Europe had still another motive for encouraging their zeal (in the case of the Crusades it was money and land grab). Policy opened their eyes to the great advantages which would accrue to themselves…….Thus every motive was favourable to the Crusades. Every class of society was alike incited to join or encourage the war; kings and the clergy by policy, the nobles by turbulence and the love of dominion, and the people by religious zeal……skillfully directed by their only instructors”.

POPULAR FOLLIES OF GREAT CITIES

This phrase is to illustrate the power of the word to spread far and wide and for superstition and hypothesis to become fact:

“And first of all, walk where we will, we cannot help hearing from every side a phrase repeated with delight……by men with hard hands and dirty faces – by saucy butcher lads and errand boys – by loose women – by hackney coachmen, cabriolet drivers, and idle fellows who loiter at the corners of streets….it seems applicable to every circumstance, and is the universal answer to every question; in short, it is the favourite slang phrase of the day, a phrase that, while its brief season of popularity lasts……throws frolicsomeness over existence and gives them motivation to talk as well as their more fortunate fellows in a higher stage of society”.

MONEY MATTERS

So, to bring the subject of this E-zine back to money matters for a moment I would like to write that what we do and how we act now is of utmost importance to the long term health of our personal finances.

Most people will be in one of two situations right now. The first are those who, for whatever reason are sat on cash which available for investment. Whilst financial market collapses might seem the worst time for investment they are quite the opposite. They are the greatest opportunities. The opportunity to see substantial gains on investments when the volatility settles. It is in no way easy to invest when market indicators are all red and the financial media are professing Armageddon, but they are wrong. I know this from experience because I had the fortune to have some cash in 2008 when the financial crisis happened. You have to get through the volatility and the psychological reluctance, but long term returns on most assets during these times are substantially greater than at other times.

However, a word of caution. Financial crises can create imbalances in certain sectors. It is wise not to just jump into any asset during this time, but to invest in a well balanced portfolio based on your own attitude to investment risk.

The other class of investor is those who are fully invested (I include myself in this category). We are investors who have been invested and should remain invested during these periods (not accounting for anyone who must disinvest because of cash needs). Panic is not an option. Level headedness must prevail. And if you are unsure of what to do then you can always pick up the phone and speak with me. This is my 5th financial market crash in my career. I have coached many clients through periods like these and suspect I will have to coach many more, so if you are in doubt then please do get in touch and we can talk about how it affects your personal situation.

If you are a client who has invested capital through one of our selected group of asset managers then please feel comforted that they have everything under control and have made provisions for these unforeseen events (i.e. investing a proportion of the assets in gold and other low volatility safe haven assets). What we are going through is quite normal and I suspect will be something we look back on with great interest in the not so distant future. In the meantime, if you yourself, or anyone you know is at risk from the virus please take all measures to stay safe.

The Spectrum IFA Group Conference 2020 – Athens

By Gareth Horsfall
This article is published on: 28th January 2020

28.01.20

The Spectrum IFA Group Conference 2020 - Athens

This year The Spectrum IFA Group annual conference was held in Athens. I attended it from the 23rd to the 26th January. As usual we had 2 full days of conference and a little time to ourselves as well. The time to myself this year proved enlightening as you will see from the image above. This is 100% Greek graffiti. I happened to stumble across it during a lone walking tour early in the morning, not so far from the Roman Agorà. It certainly gave me a chuckle, but also give an insight into the mentality of a certain sector of Greek society (whoever they might be), although it’s no surprise given their ongoing economic malaise at the hands of the EU.

Graffiti aside, the conference was full of the usual morsels of information (some more controversial than others) flowing from the investment and financial sector, but we were also treated to some much more interesting information on a bigger theme which is more likely to have an impact on our lives and the way we invest in the future. In this E-zine I will touch on the morsels, and the big idea that is circulating in asset management circles.

So let’s start with the appetizers:

TRUMP

If you follow the news you will know that the impeachment of US President D. Trump is underway. Whilst it was felt that this is uninteresting for investment markets, what is stranger is the opinion that Trump has actually been good for the US economy, employment and corporate profits. This is indisputable regardless of your opinion on his moral values. I can recall a conversation I had with a female taxi driver in Rome just before Christmas who was also telling me something similar. She said that no matter what you think of him, he has pretty much lived up to the promises he made to the US voting public. Love him or loath him, does this mean he could be in for another term? We will find out later this year.

Conversely, the financial markets are much more concerned about a US future led by Bernie Sanders or Elizabeth Warren. This would likely lead to periods of big instability in the financial markets and in our investment portfolios. It begs the eternal question about morals versus money!

TRUMP'S TRADE WARS

Take no notice. They don’t matter. The fact that Trump can tweet about trade wars and the markets hardly take notice anymore just shows that the ongoing details of the trade spats between nations has little effect on our investments. Trade Wars will take 5-10 years to resolve and so have very little bearing on our investment objectives. However, this doesn’t mean to say that we shouldn’t be mindful of them, for example too much exposure to companies who are heavily invested into Chinese imports are potentially companies to avoid or have a minimal allocation to.

BREXIT

Most of you know my personal position on Brexit (I am a reluctant remainer, just to be clear!), but if you are an ardent remainer you may not wish to read on.

The financial marketeers feel that the general election result for Sig.Boris will bring a period of stability to the UK. Most of the asset managers said that they had been increasing their allocation to UK companies significantly since the vote. They are also expecting to see that he will have to follow through on a number of election pledges which could mean massive infrastructure investment and a lot more spending. This will create big opportunities for UK companies as they fall out of the EU.

US companies are also very positive about the UK’s prospects (quelle surprise!). To give you an example, the UK market is the third most important for Estee Lauder, the cosmetics firm, behind the USA, NO 1 and China NO 2. They are keen to invest and grow in the UK, despite Brexit.

And for all the talk of companies upping and offing to the EU, in reality companies such as Packard UK will maintain their base in the UK, but also open EU operations to ensure continuinity across their EU markets.

THE EU

The big question for the EU is who is going to pay the bills moving forward? When the UK leaves the EU it will leave a massive funding gap and smaller less economically prosperous countries will have to fill the gap. How will this work and is it a sustainable model? Only time will tell.

WHATS THE BIG IDEA?

It may not surprise you to know that the big theme to this years conference was ESG investing. You may be wondering what that is? It stands for Environment / Social / Governance investing. We should also add healthcare into the mix. But, this is generally known as ethical investing, sustainable investing, environmentally friendly investing, green investing, or any number of other terms. But one thing is clear. This is BIG and it’s here to stay.

This is going to be a theme that is everywhere. There is not one person that I talk to who is not worried about the amount of plastic they use, or the slow pace of adoption into circular recycling and a society based on renewables rather than throwaways.

But it’s coming, and expect the pace to pick up. The general consensus of opinion was that any business or sector that fails to adopt, or adapt to the challenges we face in the coming years will very likely go out of business. Consumers are being selective about who they do business with and are making choices based on how company policy sits with their personal views. Equally investment managers have realised this trend are are also aligning their asset management styles with those of their customers, because they can see that prospective investors will avoid investments based on how they match with their ethical views. This in itself could be the biggest catalyst for change that we see. Asset managers are the worlds largest allocators of capital in the world: investment funds, pensions funds, sovereign investment funds etc and now they are starting to look at not just where they place money, but question why they do it. This could be the catalyst we see for real change.

Let’s talk of some examples where real change is taking place:

PUTTING THE CUSTOMER AND EMPLOYEE FIRST

Consumers and employees are the real capital of any business. Maximizing shareholder returns is now under the spotlight. People are making choices based on how businesses treat their customers and also their employees. Happy employees make for higher profits and more prosperous businesses. To give you an example, I rarely fly Ryanair anymore ( unless I am forced to do so). I struggle with their budget approach to customer service and lack of employee care.

Similarly there is a company in the US called Clorox. They make a range of household cleaning and consumer goods. They recently embarked on a cost cutting exercise and looked to reduce the administration budget by 10% with the introduction of new technology and artificial intelligence into their business. That would normally mean a cull of 10% of the admin workforce but rather than make them redundant Clorox chose to re-employ them into more innovative jobs and to use the human capital in a more productive way. In this way they are being seen as a company with a social conscious and become more investable.

TAX

PLASTIC AND ENVIRONMENTAL IMPACT

I touched on the company Estee Lauder above, but they are also worth mentioning in terms of their record on plastic reduction and environmental impact. 18 months ago Estee Lauder had no view on plastic in their business or the environmental impact of their business on the world. Today they have a permanent board member responsible for monitoring and exploring every aspect of their ESG footprint ( Environmental / Social / Governance) and they have made the decision to move all their plastic products to glass containers.

We can also talk about Rentokil. Not a company with the best ‘green credentials given its use of chemicals and record on non-humane disposal of pest animals. But, Rentokil have understood the changing trends of consumers and the CEO has put in place a process to find 100% non toxic chemicals to eradicate pests. He also wants to find humane solutions for the treatment and disposal of pest animals and insects. However, this comes at a price and typically it costs 3 times more for these solutions…is the customer ready to pay this price yet? This is the kind of journey that a company like Rentokil has to monitor and adapt to.

SOCIAL ASPECT

The social aspect of investing has also become a prominent factor in a company’s’ investability. This may have less environmental credentials, but the investors are now looking at products where companies have taken time to consider the true purpose of a product and alter it accordingly.

To explain this we can use the example of the US households goods company Clorox again. They have a wholly owned subsidiary of the business which is a charcoal maker in the USA and has a market share of approximately 50% share of the entire US charcoal market.

A few years ago they asked themselves, What is the purpose of charcoal? One might say it is for cooking, heating, etc. But they found that its purpose is to facilitate social gatherings. The biggest users of charcoal in the USA are age 25 and under. Charcoal’s primary purpose is social gatherings for millenials. So, Clorox conducted research and found that most people have a beer when they BBQ and that it takes, on average, 13 mins to drink. They went away and adjusted their charcoal recipe so that it came to the optimum cooking temperature after 15 minutes. Sales have rocketed. They showed that they were thinking more about the reason for their product and adjusting it to their clients needs and tastes.

Lastly, let’s take a look at the:

HEALTHCARE SECTOR

and then a short word of warning

The world is aging rapidly and countries around the world are going to have to adapt to older populations. The Italian healthservice, the NHS and many other governmental run health services are going to struggle to cope with the demands from an increasing number of patients in the next 10 years. Technological solutions will be required to meet these needs and these solutions are coming. Innovation is happening: robots and artificial intelligence are already taking the place of surgeons and are proving, in a lot of cases, better than human doctors at performing basic operations. Virtual reality is also a development which might mean a doctor can work in many places at the same time.

An example of a company spearheading development in this area would be the Smith and Nephew, leaders in global medical technology. They have developed wound dressings that can last for 3 or 4 days and notify the nurses when they need changing. This is time saving for nurses to concentrate their time on more important and potentially more urgent matters.

This is just one example, but one where rapid change is already taking place.

And lastly a word of warning: BUBBLES

Like any trend, but especially investing trends, they can find momentum and then become ‘too’ popular. This could also be the case with ethical investing. It has seen massive interest in the last 12 months and whilst it is recognised that these trends are here to stay, because consumer behaviour is changing, it could create bubbles in investment markets. So, whilst it is impossible to say right now what will happen, it is not outside the realm of possibility in the next couple of years that these trends start to take hold and more and more people pile into this sector.

However, you can avoid the worst of this, even if you want to be a part of it. Simply avoid anything too good to be true, don’t invest in anything without a track record, use professionals to guide you and avoid investments that merely have a trendy sounding name without doing some research first.

Change is coming, and probably faster than we might think.

2020, here we come…

By Gareth Horsfall
This article is published on: 6th January 2020

06.01.20

This is the start of a new decade and it will surely bring fresh challenges for all of us, but there is much to look forward to as well.

Climate change is constantly being talked about, we can look forward to a reduction in single use plastics from 2021 in the EU, electric car sales are showing the highest growth in numbers, our current model of economic growth is under question and more focus is being placed on corporate welfare of customers, employees and ecological footprint. In addition, technology is bringing about massive disruptive change to old industries who have had their feet under the table for too long. This is not all without serious challenges but if we work together we can get the results that we need for the benefit of everyone, no matter which side of the political spectrum we might sit on.

My biggest lesson over the last decade

We can’t expect everyone to agree with us about everything. Brexit has been an exponentially steep learning curve for me, one which I have learnt alot from: Tolerance more than anything, but also challenging norms and preconceived ideas. I also learnt that illness is the most democratic thing of all: it spreads regardless of money, age, sex or political views.

My resolutions for 2020

(I make them once a decade)

I aim to reduce my use of social media massively to avoid any influence from fake news (If Sig. Zuckerberg won’t regulate it, then I am afraid I won’t use his platform as much), to read alot more books, try and understand more the people who have differing views from myself, attend a Salvini rally at some point (this is a strange one, but I attended a Sardine manifestazione in December 2019 and I wanted to get a balanced view, so committed myself to attending a political rally of Salvini – watch this space), continue to reduce plastic (Oh my god, how hard is that in Italy), eat less meat and maintain a healthy lifestyle.

And on those bombshells, I would like to wish you first and foremost the best health, and also happiness for the next decade.

Happy New Year 2020

My next article ‘8 reasons to be wary of yourself in 2020’ will be released shortly.

Political shock in the UK

By Gareth Horsfall
This article is published on: 13th December 2019

13.12.19

Dear Readers of my articles

I am writing you a very short email today after what appears to be somewhat of a political shock in the UK. I will refrain from further comment until I have had time to let things sink in and I can discuss possible financial consequences in a rational manner.

However, where one loses another gains, as the saying goes, and one of the fortunate consequences of this vote in the UK is that it will bring, I think, short termed optimism and bear favourably on pounds sterling. I doubt this will continue as the reality of leaving the EU strikes home once again, and let’s not forget that a NO Deal scenario is now a real possibility again.

My point is that as I write this GBP: EUR has bounced to 1:21. If you have money in GBP and you need to convert to EUR you might be staring at a very favourable rate. I am not making any assumptions on where it will go during the course of the day, weeks ahead or even months, but compared to the last few years the exchange rate is quite attractive for sterling conversion to euro.

It was predicted that this would happen after a Tory majority win, so take advantage where you can.

Enjoy the day ahead as news comes in and we start to find out what the future holds for UK politics.

DETRACTIONS FOR INCOME TAX PURPOSES IN ITALY

By Gareth Horsfall
This article is published on: 4th December 2019

I am often asked which expenses can be detracted from income in Italy. These serve to reduce your potential tax liabilities.

Unlike a lot of countries where allowances are offered on a certain amount of income each year (e.g. the UK and the first £12500), Italy does not offer any such allowance, but instead uses a complicated system of detractions and deductions of certain living expenses. That list covers a multitude of items, such as eco bonus for re-construction work to your home, funeral expenses and medical expenses.

A new criteria that has been imposed as of 2020 is that a number of these must now be paid only by traceable means of payment (bonifico, bancomat or credit card). If they are not paid with one of these methods then they are not deductible.

The following table, taken from an article in Sole24Ore is a good reference tool to see which expenses can be deducted, at what % of the total cost and whether they can be paid in cash or not.

I hope you find it useful. If you are not claiming for any that you might be eligible for then I would advise you have a conversation with your commercialista about them.

Sterling after Brexit

By Gareth Horsfall
This article is published on: 3rd December 2019

03.12.19

In this article I want to look at what has happened to sterling since Brexit and the outlook. In 2015, when the world seemed a lot more secure, GBP v EUR was trading over 1.40 and life seemed good. Anyone holding GBP based assets and incomes would find that their money went a long way. Today it is trading at 1.17.

With all this confusion it inevitably causes some uncertainty. This seed of uncertainty has shown itself nowhere better than in the continued daily swings of GBP v EUR.

It has been a while since my last E-zine. I am sure that it won’t go unnoticed that this E-zine is coinciding with the UK general election on December 12th. At the present time the Conservatives are polling for a small majority, but it would seem to be anyone’s guess as to the ultimate result.

A RECENT HISTORY OF STERLING
Around the start of 2016, after the Brexit fuse had been lit, sterling started to fall as the Leave campaign gained ground and the markets reacted nervously to a potential Leave outcome.

Immediately after the Referendum, June 24th 2016, when the result was announced, GBP fell the most against a world basket of currencies since the introduction of free floating currencies in 1970. On June 24th 2016 it had it’s largest ever one day fall of 13%. To put this into context, when George Soros famously ‘broke the Bank of England’, and made billions by betting against sterling in 1992, resulting in its subsequent ejection from the exchange rate mechanism, sterling only fell by 4.3%. In 2009 at the height of the financial crisis sterling lost 16% but over an 11 trading day period between 8-23 September 2009. The Brexit effect was huge.

I remember calling some currency brokers in the City of London early in the morning of June 24th 2016 and asking what was happening on the trading floor. The only responses I got were “fortunes have been made this morning!” and “it’s chaos over here”.

Roll on 2019 and as you will see from the charts below, since 2017, after the drop, sterling has traded within a range of values and has only experienced a ‘relative’ peak around the middle of this year.

STERLING CHART 2015 TO 2019

STERLING CHART 2017 TO 2019

WHAT DOES THE FUTURE HOLD FOR GBP V EUR?
In my travels around Italy to talk to clients this is the most asked question. Since the highs of 2015, there has been an approximate 20% loss in the value of your GBP assets and incomes. For anyone living on a fixed income, i.e. pensions or living from assets, this is starting to have an effect. In the past year the number of clients asking to top up their income from their assets has increased. This withdrawal effect represents a net reduction in your overall asset base, when that money might have been spent on future medical needs, inheritance for children, or just for future living costs.

Therefore, it is no surprise to me that I am asked frequently for my opinion on the matter, and additionally whether you should be thinking about converting assets into euro, to hedge against further falls.

MY RESPONSE
I have been speaking to asset managers in London and currency specialists over the last year about this subject to try and get a feel for the ‘word on the street’. I can tell you that the theme has always been the same and nearly all asset managers say the same thing. Sterling is desperately undervalued if we measure it against the fundamentals such as productivity of the economy, GDP v debt etc. Very simply, this means that when compared against all measures, sterling should be trading quite a bit higher against the Euro. The uncertainty surrounding Brexit is depressing the value more than anything else, rather than the actual event itself.

The rational thinking is that the currency markets, at this point in time: 3 years after the vote, are desperate for an outcome, whether that be a deal or remain (we cannot exclude no-deal, but for now it appears to have been put to rest). If we are to assume that the Conservatives win a majority (no matter how small) then there could be a bounce in sterling in anticipation that Boris Johnson’s deal is likely to be passed in parliament and provide the certainty that the financial markets are desperately searching for. The deal being passed ‘could’ create conditions for ‘another rimbalzo’ in the price of sterling. My guess is that it would bounce quickly after any decision was taken, although these are only educated guesses.

You may now be thinking, ‘how much would it likely rise?’. Well, if I knew that then I would be a very rich man indeed. In all honesty, no one can say for sure. I am not a betting man but I wouldn’t be looking to place any sizeable bets on it even if I were.

I remember that at The Spectrum IFA Group annual conference in January this year in Portugal, we had a speaker, David Coombes from Rathbones Asset Managers. He gave his outlook for sterling based on the 2 parameters he had set for the fund he manages. In the event of no deal he had GBP/EUR at 0.9 and in the event of a return to remain he placed GBP/EUR at 1.4. He went on to say that for any scenario in between you can pick your own point.

Going further in my own assessment of things, I personally think that if a deal is passed, or remain wins (in my dreams), then sterling is going to rise, but by how much I wouldn’t like to say. However, we must remember that ‘getting Brexit done’ is a illusion in itself. Passing a deal in parliament is only the start. The UK then has to formally leave the EU and start negotiating trade deals around the world. Some will likely fall in place very quickly, Canada, Australia, South Africa, maybe even the USA, but the deal with the EU and important future trade deals with India, China etc will likely take years and may not be as good as Brexiteers might hope for.

To give you an example of how difficult these trade deal negotiations might be, let’s take the example of Switzerland versus China and their trade deal which they struck in 2013. Everyone is aware of the rapid growth of the Chinese economy and how almost every nation in the world would like to strike a free trade deal with China to access the billions of growing middle class individuals and a rapidly growing consumerist economy. Switzerland is one of very few countries outside the Asia Pacific region to do so. However, Switzerland had to make some large sacrifices to get that deal, mainly that the Chinese negotiated FULL and free access to the Swiss economy for a period of 10 years during which time Switzerland would have only very LIMITED access to certain sections of the Chinese economy. The Swiss deemed this to be a good deal! It just goes to prove that deal making around the world is not going to be as easy as the Leave campaign would like us to believe.

Any protracted deal making phase may well be a negative effect for sterling and after any initial bounce on the back of some certainty, you might see sterling enter a volatile period once again, certainly as the unravelling from the EU also takes effect. I don’t buy into Project Fear and think that the UK will find its way in the world outside the EU, but like any divorce it will get messy for some time. The question is for how long and what impact will this have on the currency.

MY ADVICE
In summary, if you have money in sterling and ask me for advice, I will say that you should not convert it into euro right now. I will caveat that with the fact that neither I nor the best currency expert in the world can tell you what will happen, but it is a reasonable assumption that sterling will rise when the next steps of Brexit are resolved one way or the other. What happens after that is anyone’s guess. If you need to convert to euro then I would suggest doing so in tranches, or holding on until after Dec 12th to see what happens. Then pick your time, keep an eye on the rate and convert on the peaks.

(I am adding this note after having completed this E-zine. Our rep from Currencies Direct, our preferred currency exchange partner, called me about 5 minutes after completing this text and we had a chat about GBP expected movements in relation to the elections. She said that they are thinking that GBP v EUR could bounce to the mid 1.20’s if Boris Johnson wins the election with a majority. This is not a prediction, merely a hypothesis!)

The attack on cash in Italy

By Gareth Horsfall
This article is published on: 8th October 2019

08.10.19

There are 17 different regulations for the use of cash in Italy, from the €15000 limit on shopping for foreign tourists to a €1000 limit on money transfers. 20 years of regulations of cash in a country where it is estimated that 86% of transactions are completed with the use of cash.

But changes may be afoot if this coalition gets its way.

THE PROPOSED CHANGES
The M5S and PD government are, like any good Italian government, looking at ways to rebuild this country’s coffers and balance the books. I say this with a modicum of tongue in cheek, because although that is all they ever seem to talk about, whether they ever get the chance to do anything about it before the coalition falls apart and another set of politicians comes in and changes the proposals yet again is anyone’s guess. But let’s give them the benefit of the doubt this time round.

The following proposals are ones which might seriously affect the way you do business or conduct your life in Italy.

The Italian coalition government are looking at how they can incentivise the use of traceable means of payment, i.e. bancomat, credit cards and bonifico, and increase their usage in line with other Northern European countries. To do this they are looking at monetary incentives in the way of a discount in the rate of IVA (VAT) on products and services or imposing penalties on high levels of cash withdrawals at the ATM.

Under the proposals, if you pay by electronic means instead of paying by cash then you could be eligible for a discount of 2% on IVA. However, if you pay by cash then the IVA will increase by 1%.

Using the example of paying cash in a restaurant, you would get an IVA discount of 2% on the 10% normally charged if you paid by card i.e. 8%, or alternatively an IVA rate of 11% if you paid in cash. A nifty move, if it ever comes into force, and one which could certainly catch many people out. If these proposals are implemented by this government or any other, then it might be time to review how you make and/or receive payments to think about benefitting from this discount.

ATM WITHDRAWALS
The second way that they propose to fight the black market of cash payments is to apply a tax on monthly cash withdrawals from ATM’s, or the sportello, where withdrawals exceed €1500 per month. A 2% tax would be applied if you superseded this limit. Equally, the proposal seeks to reward those who use electronic means of payment with a 2% tax credit directly into their account. How they will calculate this is still being disputed.

It remains to be seen how the proposals with be implemented, but both are currently being considered seriously with a view to adding an amendment to the recently approved raft of measures in the Legge di Bilancio 2019. Don’t get caught out if they come into force!

These proposals and rules are changing almost daily at the moment and just this morning I have seen another, which should come into force, and which will allow deductions for income tax purposes, e.g. scontrini at the farmacia or the Ecobonuses for house renovations, ONLY if they are paid by bancomat, credit card or bonifico.

In short, they are trying to disincentivise the use of cash as much as possible. This comes with a promise that if sufficient revenue is generated for the state, then the rate of IVA will not increase in 2020 and 2021 (as is proposed) and they will also look at tax deductions for individuals and families. The mind boggles.