Fonds en euros in assurances vie policies.
There has been concern for some time, about how plummeting bond yields may affect the extremely popular ‘fonds en euros’ (by far the most popular choice for French investors in assurances vie policies). The question is how life insurers are going to be able to continue paying an acceptable annual return to their policyholders, while sovereign bonds offer increasingly low (or even negative) returns?
To explain, these ‘fonds en euros’ have to guarantee capital whilst paying a bonus every year. The only way that a fund manager can be sure of meeting this obligation is to put the vast majority of investors’ money into French government bonds. By doing so, they fund government debt to the tune of trillions of euros.
As recently as 2007, they were paying an attractive 5% per annum net. This has now fallen to about 2.5% and are set to fall further, almost certainly to under 2% for 2016. With bond rates at historically low levels, they should now only be paying about 1%, but companies have been dipping into their reserves as they fear that such a low rate would lead to a mass exodus from these policies. This has inevitably caused concerns about the financial stability of the insurance companies.
There have been several recent developments:
1) The state has imposed new reporting requirements on life insurers from 1 January 2016 under which they are obliged to provide details of policies with a value of more than €7,500. This is to assist the fight against money laundering but it could also be used to test the solvency of insurance companies.
2) For the past few years, the French Ministry of Finance and the Governor of the Bank of France have been consistently urging life insurers to lower returns on their ‘fonds en euros’. This has not been sufficiently acted upon and the government has now passed an amendment to Article 21a of the law “Sapin 2”.
Voted in secret on June 23 (with the French population concentrating on their imminent summer holidays and the euphoria of the European Cup!), the new legislation passed virtually unnoticed by the mainstream media.
There were very few immediate reactions, even though some members of parliament were taken aback by this amendment when it was presented to them to vote on by the MP proposing the bill.
The government, as has often happened in the past, conveniently happened to be going on their own summer holiday immediately afterwards. This avoided their having to answer any awkward questions, had this matter happened to come to the attention of the media!
Whether this legislation ever needs to be acted upon depends on government bond and bank interest rates. However, the future certainly looks bleak for investors in ‘fonds en euros’ (probably 90% of all French assurance vie policyholders).
What does this new law actually say and how will it affect you?
It gives the ‘Financial Stability Board’ (‘HCSF’) the power to ‘suspend, delay or limit temporarily, for all or part of the portfolio, withdrawals or the option to switch funds’.
The implications of this are clear: overnight, at the request of Governor of the Bank of France, the HCSF may prohibit you carrying out all normal policy operations, including withdrawals and fund ‘switches’.
In short, some or all of your assets could be frozen for “a period of 6 months, renewable” (i.e. for whatever time is required for the crisis threatening an insurance company to pass). It is not inconceivable that your investment could be reduced in value in order to avoid an insurance company becoming insolvent. Article L.612-33 of the Monetary and Financial Code provides the means for this reduction to be imposed. It is not known how this would affect the official guarantee of €70,000 for every assurance vie policy.
People are becoming increasingly disturbed, and rightly so, that this draconian law will now allow the authorities, in total disregard of contract law, to deprive you of access to your money!
However, on closer inspection, the powers given by this new legislation were already granted to the ACPR (Prudential Control Authority and Resolution) by Article L. 612-33 of the Monetary and Financial Code, as follows:
“If the solvency or liquidity of a person or institution subject to supervision by the Authority or when the interests of its customers, policyholders, members or beneficiaries, are compromised, the Prudential Control Authority shall take the necessary precautionary measures […] it can, as such: […] 7. instruct a person or institution […] to suspend or limit payment of cash values, the option of switching investments, or the granting of policy loans.”
One should remember that similar provisions exist in the banking sector. The directive on the recovery and resolution of banking crises (BRRD) authorizes freezing of clients’ assets and potential loss of money in bank accounts, in case of any difficulty that might lead to insolvability..
The new version of the text is intended to prevent and reverse the effects of a contagion that could affect assurance vie investors in the event of a severe financial crisis, It is designed “to preserve the stability of the financial system or prevent risks seriously threatening insurance companies or a significant number of them.”
Clearly, these measures are intended to protect insurers, especially if investor panic sets in and there were mass surrenders of assurance vie contracts, an event which insurers would be hard pressed to cope with. They are holding bonds with maturity dates of ten or even thirty years from now. To try and offload trillions of euros of bonds would just not be possible.
How to react?
One suspects that this situation is worrying insurers because they are struggling to meet the expectations of their investors. This is eating into their reserves and, regardless of the prospect of an eventual increase in bond yields, some of them could find themselves in a precarious situation in the months and years to come.
The threat is therefore not just a short term one.
Of course, it would be reassuring to think that worried investors would not panic and withdraw their money from these policies, knowing that this would only exacerbate the situation.
Policyholders are all too well aware that if they rush en masse to cash in their contracts, they could actually cause the assets in these policies to be frozen. But is that going to stop them trying to be ‘first in the queue’ and avoid the suspension of withdrawals?
The ideal scenario would be for investors to stay calm and avoid possible future difficulties by gradually switching out of ‘fonds en euros’ to other assets (unit linked multi-asset funds, property funds, etc). We will see if this is what happens!!!
In spite of all this, assurance vie remains an attractive investment, especially in view of its advantageous tax benefits. Investors therefore have to weigh up the advantages compared to what is obviously an increased element of risk.
Fortunately, there are companies who offer alternative funds to ‘fonds en euros’. There are also policies domiciled outside of France (in Dublin, for example) who should be completely immune to this French legislation.
Timing the markets
Staying the course
Every market cycle has both up days and down days. Often, a few very good days account for a large part of the total return. Staying the course ensures that investments will be “in” the market on the good days. Some people try to time market movements by selling stocks when they think the market is about to decline and by buying stocks when they think the market is about to rise. Resist being a market timer. By trying to time the market, you potentially miss out on market rallies that could substantially improve your overall return and long-term wealth. Thus, what’s most important is not timing the market, but rather time IN the market. Staying the course when confronting difficult markets may prove very rewarding in the long run. Consistently predicting which days will move in which direction, though, is virtually impossible and can be very costly.
Diversifying your portfolio
Diversification may reduce the overall volatility of your entire portfolio, thereby helping you achieve greater long-term returns. It is important to remember, however, that diversification does not protect against loss in broadly declining markets. Like markets in general, different investment styles come in and out of favour in Cycles Rather than trying to predict which investment is likely to be the best performer in the future, investing in a well-diversified portfolio can help you to seek returns whilst managing for volatility. Diversification strategies may be especially important in a volatile market environment, when sector rotations and market fluctuations happen continuously.
Tax-Efficient Savings & Investments in France
Some of you reading this article have just completed your first French income tax return. Well done if you achieved this without difficulty – ce n’est pas facile!
Whether you are new to France or not, the annual tax return is an opportunity to take stock of your financial situation. In particular, if you had to declare interest from bank deposits (including ISAs), dividends from shares (even if these were reinvested), and perhaps also gains from financial assets, then your tax and social charges bill will be higher than necessary. No-one likes paying taxes and so now is a good time to consider alternative tax-efficient savings and investments, if you want to avoid reduce your future tax bills.
For short-term savings, France has a range of tax-free accounts. The Livret A for deposits up to €22,950 and the Livret Développment Durable (LDD) for deposits up to €12,000, both paying interest of 0.75% per annum. For households with taxable income below certain limits, there is also the Livret d’Épargne Populaire (LEP) for deposits up to €7,700, which pays 1.25% per annum. You have full access to your capital in these accounts at any time.
The interest rates for the tax-free accounts are set by the French government, taking into account average short-term interest rates and inflation – both of which are very low at present. Realistically, the current tax-free interest rates could be lower, however, even the French say that it would be political suicide for the government to reduce these rates now! Whatever the tax-free rates are, however, these are better than comparable standard deposit rates for other accounts with instant access. Hence, the tax-free accounts are very useful for depositing cash that you need for an emergency fund, or to meet other short-term capital needs. The accounts do not create any tax issues and earning some interest is better than none at all.
For medium to long-term savings, the most popular type of investment in France is the Assurance Vie (AV). This type of investment is very tax-efficient as there is no income tax or capital gains tax on any income or growth, whilst the monies remain within the AV. Annual deduction of social charges is also avoided, except when investing in fonds en euros, which are offered by French banks and insurance companies.
When you do take a withdrawal from the investment, part of this is considered to be a withdrawal of capital and this part is therefore free from any tax. For the taxable element, you can opt for a fixed withholding tax rate, in which case the insurance company will take care of the necessary deduction, declaration and payment of the tax and social charges. Alternatively, you can opt to declare the gain through your annual income tax return, in which case the company will not make any tax or social charges deductions and will provide you with notification of the amount that you need to declare. The taxable gain will then be added to your other sources of taxable income and taxed at marginal rates.
Over time, AVs become even more tax-efficient and after eight years, the gain in amounts withdrawn can be offset against an annual tax-free allowance of €9,200 for a couple who are subject to joint taxation, or for ‘one-person households’, the allowance is €4,600.
Millions of French people use AV as their standard form of savings and investment and many billions of Euros are invested in this way via French banks and insurance companies, which offer their own branded product. In addition, there is a much smaller group of companies that are not French, but have designed French compliant AV products, aimed specifically at the expatriate market in France. These companies are typically situated in highly regulated financial centres, such as Dublin and Luxembourg. However, before choosing such a company, it is important to establish that the company has complied with all the formal French tax registration procedures, so as to ensure that you will receive the same tax and inheritance advantages as the equivalent French product.
Some of the advantages of the international product, compared to the French product, are:
- It is possible to invest in currencies other than Euro, including Sterling and USD.
- There is a larger range of investment possibilities available, providing both access to leading investment managers, as well as capital guaranteed products and funds.
- Documentation is in English, thus helping you better understand the terms and conditions of the policy.
- The AV policy is usually portable, which is particular benefit if moving around the EU, since in many cases, the policy can be endorsed for tax-efficiency in other EU countries.
AV is also highly beneficial for inheritance planning, both as concerns freedom to leave your financial assets to whoever you wish, as well as providing valuable additional inheritance allowances for your beneficiaries and I will cover this in a later article.
Everyone’s situation is different and any decision to invest in assurance vie should only be considered as part of a wider review of your overall financial situation, as well as your plans and objectives for the future. Hence, if you would like to have a confidential discussion with one of our financial advisers, you can contact us by e-mail at email@example.com or by telephone on 04 68 31 14 10. Alternatively, drop-by to our Friday morning clinic at our office at 2 Place du Général Leclerc, 11300 Limoux, for an initial discussion.
The above outline is provided for information purposes only and does not constitute advice or a recommendation from The Spectrum IFA Group to take any particular action on the subject of the investment of financial assets or on the mitigation of taxes.
The Spectrum IFA Group advisers do not charge any fees directly to clients for their time or for advice given, as can be seen from our Client Charter.
Overseas rental property – have you thought about this………?
Financial markets are very quiet at the moment. From my view point the financial world appears to be almost at stand still.
The world appears to be awaiting the UK vote on whether to leave Europe or not!
In the meantime, life goes on and whilst the UK celebrates the Leicester City win of the Premier League with a Roman manager, I continue to get contacted by various people asking my opinion on how they should manage their finances as residents and non residents in Italy. The majority of those people also have rental property in their home country as part of their overall financial arrangements.
A review of taxation on overseas rental property for Italian residents
The most common question I am asked is how income from property held overseas is taxed in Italy. Is it exempt from Italian tax because tax has been paid on it overseas first and is it subject to the same taxes as Italian domestic rental income?
I would like to dispel any myths and confirm that, as a resident in Italy, you do have to pay Italian tax on the profit from any rental income on properties held overseas.
The law for Italian tax residents clearly states that the net profit (after allowable expenses in the country in which the property is located) must be declared in the Italian end of year tax return. The net profit is then assessed as income by adding it to the rest of your income for the year and then tax paid at your highest rate of income tax in Italy (that could be as high as 43% depending on your cumulative income for the year).
Let’s not forget the IVIE tax as well which is 0.76% of the property council/cadastrale/rateable value (or whatever you choose to call it) of the property.
If tax has been applied in the country of origin, this can be reclaimed through your tax return. You are protected through a double taxation treaty as long as your country of origin has signed one with Italy.
To clarify, any rental income from properties held overseas must be declared in Italy. This is the NET income (after allowable expenses) and this net figure is added to your other income to determine at which rate of income tax it is assessed in Italy.
But wait a minute. Have you thought about this?
Now, this is all well and good but as most landlords of properties overseas discover, if they are relying on the income from the property to live on then any income benefit can quickly be diminished by additional tax to be paid in Italy.
Do you have useful relatives?
Do you have trustworthy relatives/family members in the country where the property is located? If so, then you might think about gifting the property to them (effectively signing it over to them) and getting them to send the rental income to you as a gift.
The recipient of a gift is not taxable in Italy and therefore you could have a non taxable income stream
However, before you start looking to sign your properties over to family members you need to think of a number of tax consequences of doing this. Mainly the inheritance tax obligations that it imposes on your estate, any tax considerations and administrative burdens it now places on the holder of the property (they would have to be the sole recipient of the money and the sole named owner of the property). That person would have to receive the money in their accounts and submit their tax returns accordingly. They would have to send the money to you under a word of mouth agreement and you would have to trust the other party implicitly, not to mention a number of other tax questions it may pose.
However, assuming those problems could be overcome you might find that you could have the rental income from your overseas property paid to you in Italy, without detraction of Italian tax but through a gift arrangement.
Cross border financial planning at work!
Dealing with volatility
Market volatility has become a common discussion with all of my clients. Whether they are seasoned investors or new to the investment game, volatility is an area that is now at the forefront of their minds when looking to invest their hard earned savings. To a large percentage of people their only understanding or awareness of a volatile market comes through the media, who we all know love to sensationalise every story at every opportunity.
What is a volatile market? By definition a volatile market is where unpredictable and vigorous changes occur in the price within the stock markets. It is necessary for some movement within the market in order to sell commodities, however a volatile market can represent the most risk to investors.
If you’re not in the “daily trading” game, and are investing for the medium to long term then it’s not always wise to listen to all the hype and speculation in the media. It may be a wiser decision to focus on the fundamentals behind why you invested in the first place, and stick to those fundamentals. Two key areas to focus on are your personal emotions and your attitude to risk.
In volatile times emotions play a significant role in investing decisions. Many investors feel the short term variances in the returns of their investments much more than the average return over the medium term of their investments, even though the decision to invest was a medium term one. Rationally, investors know that markets cannot keep going up indefinitely. Irrationally, we are surprised when markets decline.
It is a challenge to look beyond the short-term variances and focus on the long-term averages. The greatest challenge may be in deciding to stay invested during a volatile market. History has shown us that it is important to stay invested in good and bad market environments. During periods of high consumer confidence stock prices peak and during periods of low consumer confidence stock prices can come under pressure. Historically, returns trended in the opposite direction of past consumer confidence data. When confidence is low it has been the time to buy or hold. Of course, no one can predict the bottom or guarantee future returns. But as history has shown, the best decision may be to stay invested even during volatile markets.
During these emotional and challenging times it is easy to be fearful and/or negative so let’s turn to the wise advice of one of the world’s best investors, the late Sir John Templeton:
“Don’t be fearful or negative too often. For 100 years optimists have carried the day in U.S. stocks. Even in the dark ’70s, many professional money managers—and many individual investors too—made money in stocks, especially those of smaller companies…There will, of course, be corrections, perhaps even crashes. But, over time, our studies indicate stocks do go up…and up…and up”
So do you invest or watch from the sidelines? When markets become volatile, a lot of people try to guess when stocks will bottom out. In the meantime, they often park their investments in cash. But just as many investors are slow to recognize a retreating stock market, many also fail to see an upward trend in the market until after they have missed opportunities for gains. Missing out on these opportunities can take a big bite out of your returns.
Whilst dealing with the emotional side of investing it would be worth evaluating your risk tolerance. Many clients attitude to risk will change over time, this may be due to age, personal circumstances or just added awareness to how the markets move. Each and every one of us has their own individual risk tolerance that should not be ignored when considering making any type of investment. Your investments should always be aligned to your level of risk even if that means making drastic / strategic changes to your portfolio as times change.
Determining one’s risk tolerance involves several different things, and there are different ways to look at how you should look at the risk you need to take. First, you need to know how much money you have to invest, what your investment and financial goals are and what time horizon is involved. Then you need to consider the actual risk you are prepared to take. One simple question can help determine your attitude to risk, however a more detailed discussion should take place to really ascertain your tolerance level and to compile a suitable portfolio.
The one question….. If you invested in the stock market and you watched the movement of that stock daily and saw that it was dropping slightly, what would you do, sell out or let your money ride?
If you have a low tolerance for risk, you would want to sell out… if you have a high tolerance, you would let your money ride and see what happens. This is not based on what your financial goals are, it is based on how you feel about your money! Your risk tolerance should always be based on what your financial goals are and how you feel about the possibility of losing your money. It’s all tied in together, it’s emotional.
So a few pointers to help you through the volatility.
Review your portfolio. Is it as diversified as you think it is? Is it still a suitable match with your goals and risk tolerance?
Tune out the noise and gain a longer term perspective. Numerous media sources are dedicated to reporting investment news 24 hours a day, seven days a week. Do you really need to be glued to it? While the media provide a valuable service, they typically offer a very short-term outlook. To put your own investment plan in a longer term perspective, and bolster your confidence, you may want to look at how different types of portfolios have performed over time. Interestingly, while stocks may be more volatile, they’ve still outperformed income oriented investments (such as bonds) over longer time periods.
Believe Your Beliefs and Doubt Your Doubts. There are no real secrets to managing volatility. Most investors already know that the best way to navigate a choppy market is to have a good long-term plan and a well-diversified portfolio but sticking to these fundamental beliefs is sometimes easier said than done. When put to the test, you sometimes begin doubting your beliefs and believing your doubts, which can lead to short-term moves that divert you from your long term goals.
Prior to working with any clients I insist on completing a personal detailed risk tolerance questionnaire. This will tell us exactly what your attitude to risk is and a suitable portfolio can be devised to suit you individually. If you are interested in investing or saving for the future, get in touch to discuss the opportunities available and just as importantly the risks associated. If you already have an investment portfolio and feel that it was never risk rated against your own risk tolerance then let me know, I am happy to discuss further and go through the questionnaire to ensure that what you have already done is suitable for your circumstances.
What are the main financial risks as an expat in France?
Age and wealth are often linked. One increases inexorably in a linear fashion, and the other tends also to increase over time, but always in a non-linear way. Following this traditional route, we tend to become more affluent as we get older, barring financial mishaps and accidents of course. This may have something to do with the notion that as we get older we become wiser. That may well also be true up to a point, but then it can occasionally go horribly wrong. Leaving that unfortunate possibility to one side, how can we expats best contribute to our own financial well-being?
All a bit deep that, but here is what I’m getting at. If I were to attempt to present a snapshot of my average client to you, it would be of a couple in their late 50’s to early 60’s who have retired early after successful careers and family building, based either on employment or their own business. Avid Francophiles, they are now ‘living the dream’ funded by the fruits of their former labours. All is well in their world; or at least that is how it appears on the surface. Underneath though, there are concerns, and these concerns are common to all of us. Age and money.
I think very few of us actually like getting older; I certainly don’t. It is becoming more and more difficult to ignore those ‘milestone’ anniversaries. I think of them more as millstones these days. As I suspect is the case with many of us, I tend these days to look my accumulated ‘wealth’ (cough), and wonder if it will last me out. I think it will, and I certainly hope it will, but I’m pragmatic enough to realise that it isn’t a ‘gimme’ (in Solheim cup parlance).
So then I start to look at the variables. What can possibly go wrong? What can I do to defend myself against the risks? What are the risks? I am after all a financial adviser; all this should come naturally to me. To an extent it does, but knowing what is out there doesn’t mean that you necessarily know how to beat it. It does help though. Here is my top three on my list of risks to worry about:
Institutional Risk – Basically this means that you put all of your money under the floorboards in the attic, but next year your house burns down, floorboards and all.
Market Risk – How could putting all your money into VW shares possibly go wrong?
Exchange Rate Risk – This is where Murphy’s Law comes into play. Whatever the rate is; whatever you do will be wrong. Otherwise known as Sod’s Law.
Obviously, it is a good idea to work on avoiding these risks wherever possible. I thought long and hard before listing them in this order, but I do think that Institutional Risk stands out. After all, it can wipe you out completely. It can also be avoided completely. The other two cannot be eradicated, although some would argue about F/X risk.
Indeed there was a time when I would have argued that F/X risk can be avoided. In a former life (I’ve told you this before I know), I used to be a foreign exchange dealer in the world of international banking, before it became unfashionable. One of my jobs was to explain to corporate and private clients that F/X risk was the enemy, to be identified and eliminated at all costs; unless of course your job was to make money trading (gambling) in it.
Ten years ago I brought this dogma into my new career as an IFA in France. How long do you intend to stay in France? (forever). Where are your savings? (in the UK, in sterling)… Over the years, the subtleties started to emerge. The collapse of sterling against the Euro; the resulting exodus of thousands of UK ‘snow birds’ from Spain because their UK pensions wouldn’t support them anymore, and the growing realisation that our old enemy ‘age’ was always going to play its trump card; they all contributed to the much changed conversations that have with my clients these days. Strangely though, it is another banking term that now dominates my thinking, namely hedging. ‘Hedge your bets’. To be honest, I tend to question anyone these days who says that they will never return to the UK. Statistics show otherwise. We tend to base our current view on our current circumstances, preferring not to think about what will happen if we end up on our own. How many UK expats are there, I wonder, in French care homes?
Since the Euro came into existence the £/€ exchange rate has been as high as 1.7510 and as low as 1.0219. In anyone’s language that is an enormous range. Coincidentally we currently sit at almost exactly the half way point between those two extremes, but I don’t see that as any reason for complacency. We need to take this risk very seriously, especially if we accept the possibility that we will one day have no more use for Euros. I have a firm view on the best way to manage this risk, but I’ve run out of space in this edition. If you want to discuss it, you know where to find me.
What holds you back from investing?
Investing for some can be a very difficult task and yet for others it is both easy and immensely satisfying. Those in the former group would just love to be in the latter. So what is the problem? Why are they so different?
The underlying problem is fear but there are ways to reduce these anxieties.
The most fearful are the beginners and yet it is surprising how many “mature” investors go through a similar experience. There is no doubt that that without that leap of faith, you will not achieve the return you so much seek. If your overriding desire is to obtain real growth on your capital, however big or small, you must rethink your approach. For “from small acorns, grow great trees”.
Probably the best antidote is to look back through history – look at what our forebears were faced with when they were poised to put their capital at risk. I should add at this point that without risking your capital to some degree or other you will never experience real wealth creation. “There is no gain without pain”. Here at The Spectrum IFA Group, we look to do this in a controlled and disciplined fashion to insulate the client as much as possible from the stress and concerns of investing.
But we should go back to the basic instincts which create these fears and are the barriers to wealth creation. Someone once said that “The brain is a massive sabotage machine” which interferes in a negative fashion with every important decision we make. I could go into all the reasons for not making an investment decision but I would like to zero in on just one of the many. If you look for reasons for not making the decision to invest then you need to remain in your “comfort zone”. The older we get, the more we want to be in that place because the alternative is too stressful.
Probably the greatest excuse we come up with is the current situation: the Greek debacle, the threat to the Euro, Putin’s bellicose posturing, the state of the EU and its future, whether the UK will stay in, the collapse of the Chinese stockmarket, increasing terrorism, our old favourite secure backstop the Bond Market in total disarray, bank interest rates at all time lows, global warming, global overcrowding, shortage of food and water – need I go on? In fact these are all the excuses for not investing. The fact of the matter is that the only way to beat inflation and actually create wealth is to invest in capital markets, whatever they are, whenever. There is no good or bad time to invest. In fact, if you are a contrarian like the all time most successful fund manager, Anthony Bolton, you invest when everyone else is selling. And to put it another way, fund managers wait with anticipated glee for markets to fall, so that they can get back in at a lower level. Using people like us is the least stressful way to invest as we have already done the research on your behalf as to who are the best managers and for which investment houses they work!
Let us now look back in history and see all the reasons why we shouldn’t have invested at that time. And yet, those who ignored these doomsday factors went on to achieve amazing growth on their capital – not through some rocket science wizard scheme but by just investing in the top stocks in their respective stock markets. An internationally renowned global investment house has produced figures over decades to show that if you had ignored the gloom merchants and just invested * when you had the capability, you would be a wealthy person now. For example, if you had invested just £1,000 in 1934, it would today be worth today over £4,000,000; just £4,000 invested in 1960, would have grown to £1,000,000. If you had invested £10,000 in 1989, it would have grown to over £90,000 today. How could this have happened with all the appalling crisis’s which have occurred in the meantime? Simple, global capital does not just disappear in times of crisis, it has to have a home, it cannot evaporate and like seasons and the rise and setting of the sun every day, capital markets just continue on, regardless of war and pestilence.
(*invested in a portfolio of investment funds or top stocks actively managed by a competent regulated investment house with good past performance.)
Ah, but that was then, there is too much going on the world to de-stabilise the markets. Oh yes? What has changed in the last 80 years? NOTHING!
Let me show you:
1935 Spanish Civil War
1936 Economies still Struggling
1938 War Clouds Gather
1939 War in Europe
1940 France Falls & Britain is blitzed
1941 Pearl Harbour & Global War
1942 British Defeat in North Africa
1943 Heavy defeats continue in the Far East
1944 Consumer Goods Shortages in the U.S.
1945 Post-War Recession Predicted
1946 Dow Tops 20 and London market too high
1947 Cold War begins
1948 Berlin Blockade
1949 Russia Explodes A-Bomb
1950 Korean War begins
1951 U.S.Excess Profits Tax
1952 U.S. Seizes Steel Mills
1953 Russia Explodes H-Bomb
1954 Dow tops 300 – Market Too High
1955 Eisenhower illness
1956 Suez Crisis
1957 Russia Launches Sputnik
1959 Castro seizes power in Cuba
1960 Russia downs U-2 Spy Plane
1961 Berlin Wall Erected
1962 Cuban Missile Crisis
1963 Kennedy Assassinated
1964 Gulf of Tonkin incident
1965 Civil Rights marches
1966 Vietnam War Escalates
1967 Newark Race Riots
1968 USS Pueblo seized by North Korea – fear of renewed war.
1969 Money Tightens – Markets Fall
1970 Cambodia invaded – Vietnam War Spreads
1971 Clouded Economic Prospects
1972 Economic Recovery Slows
1973 Energy crisis & Market Slumps
1974 lnterest Rates Rise & steepest markets falls in 4 decades
1975 Oil Prices Skyrocket
1976 lnterest Rates at All-Time High
1977 Steep Recession Begins.
1978 Worst recession in 40 Years
1979 Oil prices sky rocket
1980 Record Federal Deficits & Interest rates at all time highs
1981 Economic Growth Slows
1982 Worst recession in 40 years
1983 Largest U.S. Trade Deficit Ever
1984 Energy Crisis
1985 Economic growth slows
1986 Dow Nears 2000
1987 Record-Setting Market Decline. Black Monday and UK Hurricane
1988 U.S. Election Year
1989 October “Mini Crash”
1990 Persian Gulf Crisis &1st Gulf War
1991 Communism Tumbles with the Berlin Wall
1992 Global Recession
1993 U.S.Health Care Reform
1994 Fed Raises lnterest Rates Six Times
1995 Dow Tops 5,000
1996 Dow Tops 6,400
1997 Hong Kong Reverts to China
1998 Asian Flu sweeps the Globe
1999 Y2K Millennium Bug Scare
2000 Tech Bubble Burst
2001 9/11 Terrorist Attacks
2003 War in lraq
2004 Rising lnterest Rates
2005 Hurricane Katrina & destruction of New Orleans. London bombings.
2006 U.S. Real Estate Peaks
2007 Liquidity Crisis & Subprime Lending crisis spreads to Europe
2008 Credit crisis /Financial Institution failures globally
2009 U.S. Double Digit Unemployment Numbers
2010 European Sovereign Debt Crisis
2011 U.S. Credit Downgrade
2012 Fiscal Cliff Issues-/European Recession
2013 U.S. Government Shutdown/Sequester
2014 Oil Prices plunge 50% & Malaysian Airliner shot down in Ukraine
2015 Greece, Terrorist attacks, ISIS rampaging all over Middle East, etc.,etc.
So against this seemingly grim litany of disasters and cyclical market falls, the global financial wealth continued to increase at a remarkable pace over the last 80 years and before that. It will continue to do so into the future. The only thing to stop it would the total annihilation of the Human Race where wealth & money would be useless anyway!
I hope I have illustrated that fear of exposing capital to a perceived risk has no foundation! For those who are still not convinced, they should leave their money in the bank where it will continue to earn nothing, its real value will erode with inflation and possibly disappear with the collapse of the bank they have so carefully chosen to safeguard it!
Reflecting on Gains
The funny thing is that what we read in the papers, online and listen to from so called experts can literally be taken with a piece of salt. It really doesn’t have a lot of value for the man in the street and it all just goes to prove that no one really knows what is going on. That includes Janet Yellen of the FED and Mario Draghi of the ECB. They seem to be playing a game of ‘trial and error’ to achieve the best short term outcome in the race to make consumers consume again and for economic growth to start apace once again. The indiscriminate use of quantitative easing has only served to push up the cost of asset prices (property, shares, Bonds). In fact it has taken all these 3 asset prices to new highs in recent months and so now might be time to look at reviewing your investments once again.
We, at The Spectrum IFA Group, have been, for some time, looking at the investment fund space, given that stock markets have been moving upwards for the last couple of years. This often signifies that volatile times are ahead.
We are now starting to look at the markets with a more negative stance and believe that it might be the right time to start taking profits from your funds that have made good capital gains during this time and secure those in a less volatile investment.
(For our clients who are using Rathbones Investment Managers and Tilney Best Invest Discretionary fund management services, profit taking and reinvestment will be being taken care of at a micro managed level on a day to day basis).
We, The Spectrum Group, have identified a range of Absolute return funds which are designed to protect capital in volatile markets. And in addition, we believe that cash and Gold will have great value in the next market meltdown.
Absolute return funds, whilst not perfect, aim to protect against market falls and can allow for reinvestment back into undervalued assets at the right time, such as equities, which may be valued considerably less in a crisis. We have to accept that despite Greece and other world worries, the markets could keep on advancing for some time to come (at least while quantitative easing continues from the ECB) and therefore to remain largely un-invested due to fear, could be to lose out on further capital protection opportunities. Absolute return funds offer the option to stay invested with reduced risk.
(A word of warning. Not all are made equal, and absolute return funds need to be carefully assessed to their exposure to underlying assets which may not serve to protect capital so well in volatile markets)
If you would like to know more about these funds, protected capital investments or other low volatility investments then you can contact me on firstname.lastname@example.org or on my cell 0039 3336492356.
And so onto the musings of a London based Fund Manager. This makes for interesting reading.
- There is approximately $3.6 TRILLION of government debt, in other words nearly a fifth of all global government debt that is now trading with a negative yield (basically you pay the Bond holder for the right to hold the Bond as an investment, rather than them paying you an interest payment to hold it) and yet money is still being invested in Bonds to the tune of roughly $16 BILLION – the highest investment in Bond funds on record going back to at least 2008.
- €1.5trn of euro area government bonds over one-year maturity have negative yields, and yet Mario Draghi thinks if he can just get interest rates down a bit further, he can turn the European economy around.
- The fact that the American stock market closed on highs recently would tell you the US economy is firing on all cylinders, and yet the Federal Reserve seems frightened to raise interest rates seven years in to the recovery.
- In 2007, global debt of $142 TRILLION was enough to nearly blow the financial system to smithereens but, seven years later, global debt stands at $199 TRILLION, and nobody seems to believe this is such an issue.
- This year British Telecom issued shares to buy EE for £12.5bn, a firm it previously owned before it spun it off in 2002 (a year in which it also issued shares).
- You can now see another coffee shop from the window of nearly every coffee shop in London, and yet Costa Coffee owner Whitbread is valued at 25x earnings.
- In 2009, General Motors emerged from government backed Chapter 11 with a final cost of the GM bailout to the US taxpayers of $12bn. A group of hedge funds have recently taken a stake in the company and have come up with the brilliant idea of GM gearing itself up again.
- If there is any value left in the UK stock market it is certainly in the large-company part of the index and yet many fund managers have little exposure to this area.
- As two thirds of the world might be close to deflation, oil demand has naturally dropped causing a fall in the price. However, most investment bank economists seem to think this fall in the oil price will lead to an increase in demand.
- While bond yields, commodity prices, the Baltic Dry Index, and inflation expectations are all collapsing and suggest deflation could be an issue, equities continue to rise, suggesting it is not. Inflation on the way?
- As the yield on corporate bonds of companies such as Nestlé and Royal Dutch Shell goes negative, money continues to flow in to corporate bond funds.
It is always good to have a contrarian opinion about markets. I hate reading the usual financial press which leads you to believe that which is probably in the interests of some large corporation/person and not our own (the conspiracy theorist in me).
Whilst we are on this topic, my own personal experience (and which could be of no merit whatsoever) is that when I first started out in this business I attended many seminars which were frequently attended by big fund managers, one of which was the then respected HSBC Bank. I have to admit that there were 3 occasions when they were marketing very specific investment funds in specific sectors which, very shortly afterwards, seemed to be the assets which were in crisis. Whether it was HSBC pushing something they wanted to dump at the top of a market or whether it was purely them following the crowd we will never know. What this has taught me is to never never follow the crowd!
All this is why at The Spectrum IFA group we have a fund selection committee who are constantly in touch with fund managers from the big investment houses that we work with (including HSBC). If you would like to read more about our selection criteria for our clients then you can do so Here.
Self Managed Investment Solutions
CIFA Forum – Monaco April 2015
Peter Brooke, one of our Investment Team Strategists and senior Financial Advisers attended the 13th International CIFA Forum in Monaco at the end of April 2015. The forum allows for presentations, discussion and debate about many aspects of financial regulation, advice and management all with far reaching opinion and outcomes for the future of financial advice across Europe and the world.
Peter was invited to sit on an expert panel in order to provide some of his own insight as an adviser to European based clients on how they choose between self-managed investment solutions as opposed to going through an IFA and secondly, how we, as an advisory industry, can best fulfil this role and what is the fairest way for clients to pay for it.
The main points were:
Should the payment for investment management services be separated from the costs for financial advice?
YES… Financial advisers, as opposed to ‘investment advisers’, should have a more fiduciary role and should look after all matters of client finances; how the investment part (which is really just one of the “tools in the box”) is then paid for is a separate discussion.
What is a reasonable cost for investment management services?
This answer wasn’t reached… some believed a flat fee should be appropriate as the same process is used if you are managing €1000 or €100 000; but this would then dissuade people without significant assets from accessing investment advice.
If we have a percentage basis approach then one could argue that the people with more assets under management would be paying significantly more for the same service… the debate ended with the idea that IFA firms need to decide what their core capabilities are and therefore who their core clients are and should focus on pricing their service to attract only those clients.
The amount of client involvement also needs to be considered when pricing the advised solution. This discussion will continue to run and run as different regulation affects how different jurisdictions provide investment management services.
What are other things that clients need to consider when buying investment services?
Peter very much banged the drum on client engagement and education. In his opinion trust between the client and the adviser is built through spending one-on-one time together and also being completely transparent with costs, legal structures and the processes being employed to select and advise upon investment solutions.
For example Peter pointed out that some retail clients in Europe are still being sold Sophisticated Investor Funds which are completely inappropriate; with better awareness of these sorts of issues problems like this will be avoided in the future.
A lot of this change can be lead by IFA firms helping clients self-educate to question, review, challenge and scrutinise the advice they are given and the firms who are giving it. Clients should be encouraged to do their own due diligence and self-educate wherever possible.
The more transparent this industry is with the people who are asking for our guidance and advice, the better the relationship between the finance industry and the general public will be; this in turn will help close savings gaps around the world, reduce poverty in later life and reduce reliance on states for retirement benefits. It all starts with our daily behaviour towards our clients and we can truly make a difference as an important industry.
A brief interview with Peter following his panel session can be found below:
Living in France with assets in Sterling
Last month I ended my article with the following paragraph: Clients who have Sterling assets do not need to convert them to Euro to make use of the products available to them outside the UK. Those clients who have transferred their assets in Sterling are most probably quite pleased that they did not convert, but what about now? What if we hit 1.40, or 1.45? For my money the only way is down from there, back to my preferred levels. If we do get to 1.40, I will certainly be looking long and hard at my Sterling funds, with my finger hovering over the deal button.
Well, it did indeed happen, and as I write this sterling is worth over 1.40 Euro. Did my finger hover over the ‘deal’ button? Yes it did. Did I press that button? No I didn’t. I need to make two things perfectly clear here. Firstly, what I’m about to type must not be regarded as advice. I’m just telling you what thought process I went through. Secondly, we’re not talking mega bucks (or pounds) here, certainly not for the meagre amount that is lurking in our one and only UK bank account anyway.
It’s quite difficult to express the reason for not changing that sterling into Euro, but I’ll give it a go, at the risk of sounding somewhat deranged. Every one of my pounds somehow feels to me to be worth more than €1.40. That is of course irrational. Anyone who thinks the true rate should be in the region of 1.25 should bite the hand off anyone who offers him 1.40 or better. Yet I didn’t want to do it; I just couldn’t bring myself to sell my shiny £1 coins in exchange for what looks like a bunch of supermarket trolley tokens. Immediate apologies to ‘le Tresorie’ at this point. I suspect that part of me is being a bit greedy looking for a Euro collapse, but would that necessarily persuade me? Potentially not. The weaker a currency becomes, the less inclined I might be to buy it. In essence, I think I’m more likely to buy Euros at 1.40 when the rate is on its way down than when it’s on the way up. I did tell you that I used to be a foreign exchange dealer; funny bunch they are.
The other hot topic at the moment is of course pensions. I know that there is a risk that you might be getting fed up of hearing this, but I am largely opposed to the ‘pension freedom’ that is just around the corner for the UK pension market. I am opposed to virtually all kinds of tax grabs, and I see this as just another example, albeit dressed up as a fabulous opportunity for the over 55’s Or maybe that opportunity is for anyone who can take advantage of the over 55’s, including conmen; salesmen, and taxmen.
For me, the writing is on the wall regarding UK based pensions. They are ‘in play’. Shedding all access restrictions is designed to provide a huge tax income boost for the UK coffers. If it doesn’t work, they will look for another way to get their hands on our savings. Even if it does work, there will come a time when more cash is needed to bale out the UK economy. Pensions will then come under more fire, and more ways will be found to raid the coffers.
I will not be a part of either process. My pension funds are safely housed away from the UK jurisdiction. They will be used as pension funds should be used; to provide an income when I retire, whenever that might be. Hopefully that won’t be any time too soon as I’m enjoying myself too much to stop, but when the time comes I won’t be relying on a UK state pension alone. That would not be an attractive proposition.
QROPS is an extremely welcome result of the European freedom of movement of capital. We should all grasp the concept and use it to ring-fence our future incomes.