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Which Country? All of them

April 25, 2012

Dear readers,

We are proud to see our blog back online after a period of downtime. Some misbehaving servers over with our web providers seem to finally have been tamed. Apologies if you came by and were greeted with Internal Error 500, hopefully we won’t see it again.

So back to your planning…

Interestingly the topic of exactly which countries to invest in has come up a few times recently, and as usual with investment, there is a myriad of ideas and more than a little ‘market noise.’ As followers of this blog will know, we do not buy into ‘hot tips’ or speculation, and firmly believe diversification and long term planning is the only justifiable approach.

Some actually quite artisitic diagrams will now follow to help explain why.

The first, World Market Capitilisation, is a cartogram depicting the world by the size of each country’s stock market relative to the world’s total market value (free-float adjusted). Please click to enlarge.

Diagram 1

The cartogram brings into sharp relief the investible opportunity of each country relative to the world. It avoids distortions that may be created or implied by attention to economic or fundamental statistics, such as population, consumption, trade balances or GDP.

By focusing on an investment metric rather than on economic reports, the chart further reinforces the need for a disciplined, strategic approach to global asset allocation. Of course, the investment world is in motion, and these proportions will change over time as capital flows to markets offering the most attractive returns.

Viewing the world map by relative market capitalisation illustrates the importance of building a globally diversified portfolio and avoiding a home market bias.

The second and third diagrams below serve to make the point further.

This table in diagram 2 ranks annual stock market performance in US dollar terms for eighteen different global markets (from highest to lowest) over the last twenty-five years. The colours correspond to the countries featured on the next slide, and the patchwork dispersion of colours shows no predictable pattern.

Diagram 2

Investors who follow a structured, diversified strategy are more likely to capture the returns wherever they happen to occur. Investing in securities markets outside the UK helps build more extensive diversification into a portfolio.

The chart in diagram 3 shows annual performance in US dollar terms of eighteen developed-country stock markets for the last twenty-five years, highlighting the top performer in each calendar year. Over this period, the UK market was only the top performer once.

Diagram 3

Although many investors prefer to keep their capital close to home, they may pay a high price in terms of lower diversification and missed opportunity.

Next time you hear geographically related speculation, try to imagine predicting the the next line of colours in diagram 2…

Malcolm Stewart

ISA Allowance – Use it or lose it!

March 2, 2012

With the end of the tax year less than 5 weeks away it’s no surprise there will be an avalanche of ISA applications arriving with Banks and Providers throughout March.

Despite the best of intentions much of the money invested into ISA’s doesn’t happen through the year with good advance planning it tends to go in tax year end.

Whether you complete your allowance early in the year or right up to the wire the key thing is that you make use of the allowance and more importantly that families make use of the full amount they have at their disposal to shelter as much savings and investments as possible from tax.

Are you aware the average family could shelter just over £58,000* from tax immediately if making full use of the back to back ISA allowance for this and the next tax year?

If you’ve already built up some cash in the form of an emergency fund then the next logical step is to invest in your ISA allowance. You should shop around, make sure you look at the best rates, understand the small print and do your homework before choosing what will work best for you.

ISA season is a great time to take stock of your finances and see how you are placed to make tax efficient savings, it’s also a good time to review your money in general and speak to someone about how you want to plan for the future.

There is no time like the present for starting good savings and investment discipline and wouldn’t it be great this time next year when everyone is rushing to do their ISA or wishing they’d looked at it earlier if you could relax and rest assured its already been taken care off as part of your financial planning in the year.

If you’ve always thought investing in an ISA makes sense but never get round to it then make 2012 the year you use that allowance not lose it.

It’s not too late to put something in place and we would be delighted to hear from you if you want to make the most of a great opportunity before the 6^th April 2012.

Dr Claire Armstrong

Client Relationship Manager

Wealth Modelling – Historical Simulation

February 22, 2012

Wealth Modelling – Historic simulation.

Past performance is not indicative of future results. You will notice this disclaimer, albeit with minutely different wording, on every single piece of investment literature available. However we can use the past to see what kind of turbulence investors in times gone by have had to face, and think about how prepared we can be as market volatility continues into the future.

Using our wealth modelling system we can bring history into focus and actually use it to model what really would have happened to you if you had been one of these earlier investors. In other words we can answer the following question:

If you first invested with this asset allocation many years ago, how would it have performed?

With historical market data, we project forward how your wealth would fluctuate if the market behaved in the same way.

Take our client Mr Example(i), Chart 1 below shows the normal projection for his net worth from today until mortality. His chosen portfolio grows at an average of 6.85% (ii). The chart has been displayed in real terms to allow us to take the inflation growth out of the equation and see how the actual monetary growth of his assets fluctuated over time.

Mr Example is 41 with a projected mortality of 90 so he potentially has 49 years of investing ahead. Taking the most recent 49 years of market information and using this to be the background market data for the next 49 years we can show his projections modelled on the historical data and this is reflected in Chart 2. Chart 3 displays the historical selection we are making.

In essence the system projects forward as though we are living from 1961 to 2010. It thus includes all the booms and busts in between, and we can see how Mr Example was affected in this period.

So what does this tell us? Firstly from the calculated growth of £1,000 display in Chart 3 and the significantly higher numbers Mr Example hits in Chart 2, this was a fine long term period to be invested.

Secondly, Chart 2 also lets us consider how Mr Example might have felt at age 53, 81 and 88 (the 70s, 2001 and 2008 recessions). Not good I suspect. This is where would be vital for him to have the investment discipline to ignore market noise that is integral to our investment philosophy. He must think about the long term picture, and he is rewarded for doing so: not even the deepest recessions in recent times hold back his growth for long.

This is just one of the many tools we have at our disposal to model potential losses for our clients. It is something we can all relate to, and for that reason it is a particularly interesting exercise.

Past performance doesn’t indicate future performance, but it can let us know the kind of turbulence we will always have to face as investors.

For more information on this or anything else, please get in touch.

Malcolm Stewart

22 Feb 2012

i Mr Example has been kept relatively simple for illustration purposes. He has an income of £75,000, cash savings of £20,000 (unaffected by simulation), and ISA & Portfolio investments of £150,000 in total in a ‘Cautious Growth’ portfolio (40% fixed interest, 60% equities). His total expenses per year is £35,000. He is 41 currently and is going travelling for 5 years in retirement

ii Novia Financial Plc Market Assumptions

Two Free Days

January 12, 2012

I listened to John Humphreys on Radio 4 yesterday quiz a medical expert on the recent pronouncement from MP’s on the idea of having two free days a week from alcohol.

It was clear that Mr Humphreys was desperately trying to justify his non-non-drinking days and it was great radio as the expert refused to sanction his habit without either party being specific!

Anyway, who is right and who is wrong is a matter of balance I guess.

What is evident is that as a nation we could really improve our diet, habits and exercise patterns significantly to deliver better overall health.

I’ve just come back from my local public gym and it was a classic early January visit – a smattering of recognisable regulars who were back doing their thing and about a 70% increase in January resolutionists a puffin’ and a pantin’.

I’m not going to talk them down as any attempt to change habits and improve health is good in my book.

I will say this: shiny silver trainers have no place in the gym.

Also what is it with the comfort blanket that is the sports-cap bottle?

It’s a fascinating item – it would appear to have magical powers that can render you invisible if you drink from it as you enter the gym.

I could go on and say that at least one of the treadmills was trying to understand why a bunch of local citizens had decided to go for a group run on one machine…

So what’s my point?

We’ve had a couple of underwriting decisions surprisingly go against clients and we are taking a much more in depth approach to understanding health and fitness issues as we create appropriate life, critical illness and income protection packages.

I’m encouraged by the likes of PruHealth’s Vitality program and the idea of discounts for improved health and lifestyle.

We still find clients reluctant to take out the full levels of cover that they really need. With our total protection review, we discuss all aspects of their health and fitness to allow us to get the right cover, at the right levels with the right focus on long term health.

Whether its two days off the laughing juice or a total commitment to an improved lifestyle, having the right levels of protection is vital.

Speak to us about all your protection needs, and we can even help you get fit!

Death and Taxes

October 27, 2011

Business Protection Revisited

For all business owners when it comes to protecting the business the key considerations are continuity and succession.

On the temporary absence or loss of a key person business owners need to consider for how long (if at all) the business could continue to run efficiently and remain profitable. In addition to this they need to consider what plans are in place to ensure business assets are valued correctly and passed to the right people.

Businesses look to protect themselves against every eventuality, buying cover for their buildings, contents, materials and cars. However, the majority don’t cover their single biggest asset – their employees. According to research carried out by the British Chambers of Commerce in 2009, more than 60% of businesses have at least two key individuals. However, 44% of those surveyed said their businesses wouldn’t survive longer than 12 months if they lost one of these key people.

We touched on this subject in our blog last month and it is a subject we plan to revisit regularly as there continues to be a staggering need for companies to address this issue.

We’ve all heard at one time or other someone quote those famous worlds from Benjamin Franklin “In this world nothing can be said to be certain, except death and taxes”. Ask any business owner what concerns them when it comes to tax and they will most certainly respond that they want to ensure they maximise all available tax advantages and to have the correct accounting procedures in place to do so.

Why then do so many companies remain resistant when it comes to having the correct plans and procedures in place to ensure death or serious illness does not affect the daily running of the business?

Consider the likelihood of at least one partner/director in a firm dying before age 65*

Age	Number of Partners/Directors
	1	2	3	4	5	10
35	7%	13%	19%	25%	30%	51%
40	7%	13%	18%	24%	29%	49%
45	6%	12%	17%	23%	27%	47%
50	6%	11%	16%	21%	25%	44%

Further to that consider the likelihood of at least one partner/director in a firm having a critical illness before age 65**

Age	Number of Partners/Directors
	1	2	3	4	5	10
35	29%	50%	65%	75%	82%	97%
40	29%	49%	64%	74%	81%	97%
45	27%	47%	62%	72%	80%	96%
50	25%	44%	58%	68%	76%	94%

Are the percentages as you expected?

Whether you are a Limited Company, Sole Trader, Partnership or Limited Liability Partnership the threat of death or serious illness of a key person is very real and it doesn’t have to mean the end of a business you have worked hard to create and make profitable.

If you are considering (or know someone who should be considering) continuity or succession planning we can help with calculating the level of cover required, how to set up the arrangement and the tax implications associated with the premiums and benefits payable on these plans.

We have dedicated teams with 5 of the top Business Protection Providers who can help us help you put the right plans in place, allowing you to get on with making your business profitable without the worry of what happens if someone takes seriously ill or dies.

It isn’t as complex or as expensive as you might think, so don’t delay, get in touch with us today and let the Expert Team at Oliver Asset Management ensure your business goes from strength to strength safe in the knowledge your protection needs have been met and will be reviewed regularly.

We look forward to hearing from you.

Dr Claire Armstrong

Source: www.actuaries.org.uk/knowledge/cmi/cmi_tables

*Based on mortality data from TMN00 (temporary assured lives, male non-smokers, 1999-2002) at five or more years’ duration.

**CIBT02. Based on 1971-2003 population data and experience, published in SIAS paper Exploring The Critical Path, 2006. Males, stand-alone extended cover, including own occupation and total and permanent disability.

5th August 2011 – response to market conditions

August 5, 2011

In the uncertainty surrounding North America and Europe lately, and the sharp fall in the markets that has come with it, it is easy to both feel panicked and miss out on the good news in the global markets.

It is fitting to refer you to pages 8 and 9 of our Informed Investor brochure (see the link above) to understand the emotional ride you must take with investment, and why panicking now is the very worst thing you can do.

It is also fitting to mention these lesser headlines that you may well not have been exposed to, but your well diversified portfolio will have: –

Robust Growth in Germany Pushes Prices—Analysts see a strong chance that German inflation will head towards 3 per cent by the end of the year against a backdrop of robust growth in Europe’s biggest economy. (Reuters, July, 27, 2011)
Brazil Domestic Demand Still Strong—The Economist Intelligence Unit says economic growth in Brazil surprisingly picked up speed in the first quarter, challenging the government’s efforts to cool the expansion. (EIU, July 6, 2011)
Japan Retail Sales Top Estimates—Japan’s retail sales rose 1.1 per cent in June, exceeding all economists’ forecasts and adding to signs the economy is bouncing back from an initial post-disaster plunge. (Bloomberg, July 28, 2011)
No Fear in China—Traders betting on gains in China’s biggest companies are pushing options prices to the most bullish level in two years. The Chinese economy is projected to grow by 9.4 per cent in 2011. (Bloomberg, July 28, 2011)
Southeast Asia Booms—Southeast Asian markets are the world’s top performers in 2011 thanks to strong economic and corporate fundamentals. Thailand’s index hit a 15-year high in July and Indonesia’s a record high. (Reuters, July 22, 2011)
Australian Boom Keeps Rate Rise on the Agenda—The Australian dollar hit its highest level in 30 years in late July as traders looked to the prospect of another rise in interest rates on the back of a resource investment boom. (WSJ, July 27, 2011)
NZ Bounces Back—The New Zealand economy has grown more strongly than expected after the Christchurch earthquake, helped by improving terms of trade. The Reserve Bank signals it may raise interest rates soon. (Bloomberg, July 28, 2011)

Roland Oliver

Offshore bonds for university fee provision?

May 26, 2011

As my 16 year daughter gaily announced that she’s found another University near London that she might like to try, it did strike a chord that the financial burden for children goes way beyond standard school fees.

You could argue that the cost of children never diminishes or goes away completely, but that’s another argument for another day.

Whatever the eventual cost and in whichever location, having funds available to help ease the pain is the thing to do.

There are a number of ways to plan for further education fees; using the maximum ISA allowance each year, savings accounts, collectives and even using tax free cash from pension can all play a part.

I’d like to focus on how an Offshore Bond could be a vital addition to your further education fund armoury.

As I touched upon in a previous blog, the tax regime in the UK is punitive and using the tax free growth status of an Offshore Bond to provide fees by way of assignment to a non-UK taxpayer (like a Student) is worthy of consideration.

The Offshore Bond also has further advantages over other forms of saving in as much as there are no upper contribution limits (like an ISA or pension), access at anytime and a wide range of investment options which can include our Dimensional run passive portfolios.

A higher rate tax payer can take advantage of tax free growth offshore and potentially could provide annual University fee help to their children by then assigning policy segments to them. Providing the recipient is a non-taxpayer, there will be no tax to pay.

Care needs to be taken when accessing benefits from an Offshore Bond if you are a higher-rate taxpayer and I would discuss this in more detail in individual cases.

Add the ability to take tax deferred income for 20 years and a range of Trust options, then the Offshore Bond is a very handy addition when considering funding for further education fees.

This is a very brief introduction to the concept of Offshore Bonds and I would be happy to discuss this subject or any other of your financial planning needs at any time.

Roland Oliver

Taking the active vs passive debate a stage further

May 20, 2011

When I explain to clients and other industry professionals that our investment philosophy is passive, I usually get the response “So you just use index tracking funds and don’t bother changing things if market conditions alter?”

This usually has the initial effective of getting my blood pressure up then once I’ve calmed down, I try to give my more measured, rational explanation.

So, I’ve laid out my thinking behind the philosophy that drives our passive investment strategies and why we use Dimensional Fund Advisers to create our risk-based portfolios.

Market efficiency and its offspring, passive investing, are counterintuitive for many investors. It is human nature to believe that you can beat the market (or identify someone who can) through intelligence, insight, and hard work. This belief is constantly reinforced by the City and most of the mainstream media. Yet even when you are able to firmly plant the seeds of information to overcome those beliefs and intuition, a passive investment approach may carry the negative connotation of inactivity if not properly explained.

Although Dimensional Fund Advisors are characterised by some as passive, it is only passive with respect to activities that don’t add value—mainly stock picking and market timing. You could argue that Dimensional is very active, however, in managing important considerations such as costs and consistent exposure to targeted risks or asset classes. With this in mind, I don’t think the categorisation of “passive” or “active” investing is as black and white as some suggest.

Here are some of the philosophies we share with Dimensional that may better explain the subtle differences.

Don’t speculate. Invest.

Rather than relying on speculation, blind faith, or anecdotal evidence, our philosophy rests on a solid foundation of core principles from the science of investing.

With capitalism there is always a positive expected return on capital.

Capital markets are very competitive due to voluntary exchange between buyers and sellers. There is a buyer for every seller; for markets to clear, prices will adjust to new information and reach a level where there is always a positive expected return to providers of capital. Investors would not risk their capital without the expectation of a positive return. We believe in Dimensional’s approach because they invest in a way that strives to capture a fair share of the capital market return based on the risk assumed.

It is difficult to identify superior investment managers in advance.

Capitalism breeds competition, and that makes markets difficult to beat. With millions of participants competing in capital markets, it is hard to identify in advance anyone who can systematically beat the market since past winners may have just been lucky and won’t necessarily win in the future. We believe in Dimensional’s approach because it eliminates the risk of choosing the wrong manager by following a broadly diversified approach that does not rely on stock picking or market timing.

Diversification is the only antidote for uncertainty.

Although diversification neither assures a profit nor guarantees against loss in a declining market, a properly constructed and well-diversified portfolio is a key component of a successful investment experience. Again, we believe in the Dimensional approach as they design portfolios that attempt to capture certain risks and eliminate others, depending on your preference and capacity for various types of risk.

There is no free lunch. Risk and return are related.

Higher expected returns only come from bearing more risk that cannot be diversified away. Much like a racing driver who chooses to drive without a helmet, you should not expect to be paid more for taking risks that can easily be avoided. Our approach at Oliver Asset Management focuses on eliminating risks that you should not expect a reward for taking, such as concentrating your portfolio in just a few stocks.

Control what you can.

If speculation is futile, and trying to choose winners is more often a loser’s game, what can an investor do? The answer is to concentrate on what can be controlled: managing the transactional costs of investing, reducing the impact of taxes, and taking a long-term view. Above all we approve of Dimensional’s approach because they implement portfolios in a way that is cost effective, tax efficient, and above all, disciplined.

Market efficiency and the active or passive decisions are loaded with misconceptions that can lead to debate and confusion rather than constructive dialogue and understanding. More importantly, it can distract our attention from the most crucial element of all: discipline!

It is this discipline that is one of the key advantages to having a good Wealth Manager. If part of the recipe for a successful investment experience is to stay the course, we can provide that key ingredient of educating you in these philosophies and keeping you disciplined through good times and not so good times.

The whole approach described above is our fundament investment belief at Oliver Asset Management and it’s a subject that I will continue to bring more information to you on in the coming weeks and months.

Roland Oliver

Working for the Government?

May 18, 2011

I had a friend that years ago had worked out that with his given rate of tax and National Insurance, he was effectively working for the Government until mid afternoon on a Tuesday before he made any money for himself.

Given our current levels of tax, I wonder what he’d make of things now?

He could well be working until late Thursday with top rates of tax being 50%.

We know that reducing the tax burden is one of the 5 key concerns of our clients and that this has never been more acute. I hear from people on a daily basis that they are looking for ways to pay less tax.

Interestingly, they always want to look to the esoteric methods rather than the tried and tested.

So please speak to your adviser and make sure you’re maximising your ISA allowance, pension contributions, CGT annual exemptions, IHT allowances – use a relevant life policy through your limited company if your able and save corporation tax on your life cover premiums.

If you want more, then certainly look at the improved tax breaks Venture Capital Trusts & Enterprise Investment Schemes offer since the last budget (be well aware of the higher levels of risk that might be involved here.)

In short, pay your tax but make sure you take full advantage of the ways you can pay less.

I’ll be discussing the ways you can use financial planning tools to save tax in more detail in the coming weeks.

Call me anytime to discuss this further or any other aspect of your financial planning needs.

Roland Oliver