Financial Review, but also re-balance

At Chapters Financial, we have always noted the benefits of clients reviewing their finances on a regular basis to ensure their existing planning meets with their needs and objectives. Individual circumstances change, markets change and the asset allocation of funds can also change. A review may occur once a year or more regularly, dependent on the needs of the client.

The asset allocation of an investment portfolio is informed by the risk profile of a client and the returns that are sought. Over time, market movements can cause one or more asset classes to drift from their initial targets, resulting in the investor holding a portfolio that may not reflect either their attitude to risk or their investment goals. Rebalancing, as one financial planning solution, is about controlling risk and ensuring that your portfolio is not overly exposed to the success or failure of one particular asset class.

Rebalancing can be an important part of financial planning. Simply put, the process involves periodically buying or selling assets in a portfolio to bring it back to its original asset allocation level. However, there is no accepted industry-wide ‘best practice’ on how and when to rebalance a portfolio. Some providers offer an automatic rebalancing model as part of a passive investment approach. There is much data to suggest that this can work, particularly if fairly wide tolerance bands on both the upside and the downside are in place to avoid excessive trades and associated charges which could erode returns. However, automatic rebalancing is just that – automatic – client portfolios are rebalanced once they drift beyond set tolerance bands. If this is set to occur at pre-determined times over the year, e.g. quarterly, it will take place even if market conditions at the time are not optimal.

Chapters Financial prefers to take a more active approach to investment management and review. Our view is that calendar-based rebalancing alone is not the best approach – at each review, it is important to consider the prevailing market conditions, the specific circumstances of the portfolio in question and to tailor the solution to the needs of the client. We are all different and our investments are likely to mirror this.

At a review, we would anticipate examining the performance of the funds, recommending changes where required to improve the potential to meet the client’s investment objectives and also re-allocating fund balances to meet with a client’s attitude to investment risk. Our active approach means that we can take a view on the ongoing performance of each asset class within a portfolio, rather than just following a set of systematic rules for rebalancing. Given the levels of volatility that all financial markets can experience, we believe that this individual and ‘hands-on’ approach offers the best way to work towards our clients’ investment objectives within agreed risk parameters. This does not mean that at a review you would anticipate a wholesale change of your holdings. However, areas of underperformance can be addressed and areas of good performance may see a ‘profit-take’ situation.

As suggested, each of you is individual and your investments are likely to be the same. No individual advice has been provided during the course of this blog. If you would like financial advice on the allocation of your funds/ investment strategy, then please contact the Chapters Financial team in Woking (01483 330800) or Guildford (01483 578800).

Keith Churchouse BA Hons FPFS
Director, Chapters Financial Limited
Chartered Financial Planner
Certified Financial Planner
ISO22222 Personal Financial Planner

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

USA Leading or UK Lagging?

We have all witnessed a degree of increased globalisation over the last 20 years as a result of the information age.  Many large corporations have expanded their global presence and ventured more into overseas markets than ever before. This in turn has led to the major stock markets, and correspondingly the indices, being more closely correlated over time. 

We are all very aware of the Credit Crunch and the following aftermath in the markets, in currencies, cash-flow and economies around the world. However, we are now starting to witness much more positive data regarding the recovery of the UK economy as well as that of the USA. 

Obviously past performance is not a guarantee of future performance. 

This raises the question, are they recovering at the same rate?

USA Leading?

The Dow Jones Industrial Average (DJIA) closed above 16,000 for the first time on Thursday 21 November 2013, finishing at 16,009.99. This has seen the index growing over 22% from 02 January 2013, when the index opened at 13,104.30.

Even looking at the S&P 500 Index, which some believe to be a better ‘yardstick’ of the US stock market than the DJIA, this has risen 25% from opening at 1,426.19 on 02 January 2013 to close at 1,795.85 on 21 November 2013.

UK Lagging?

In comparison, the rise in the FTSE100 (as an example) is somewhat short of this increase, showing a growth of just 13% from an opening of 5,897.19 on 02 January 2013 to close at 6,681.33 on 21 November 2013. Therefore, if we are using the FTSE100 as the measurement of the recovery of the UK equity market, the UK is only recovering at approximately half the rate of the USA. This is an interesting observation, rather than a direct comparison. 

Some might argue that the difference could be due to the Sterling to Dollar exchange rate at these dates, which is an important consideration. However, the currency exchange rates on these dates were £1 = $1.6249 (02 January 2013) and £1 = $1.6199 (21 November 2013), therefore the impact of the exchange rate is less than 0.5% between these dates.

Which market / economy will correct and when?

The soon to retire Mr Bernanke, Chairman of the Federal Reserve, has already indicated that he may taper or slow down the fiscal stimulus into the US economy. Many economists believe that the markets have already factored in his statement in this regard, but if they have not, the impact may not occur until March 2014. 

The Bank of England has provided its own stimulus to the economy in the form of Quantitative Easing (QE) to the tune of £375BN. In comparison with the USA, it has not increased this QE programme since July 2012.

It is believed that Mr Bernanke will continue to signal the reduction in the stimulus as the US data on production, employment and other economic factors improve. This could mean that the indices in the US stock markets (DJIA / S&P 500) will not rise when compared with the UK index (FTSE 100) as the fiscal stimulus package in the USA is reduced and eventually stopped. How long will this take? I believe it will be at least 12 months before we see a significant correction between the correlation of the USA and UK equity markets, possibly even longer.

No individual advice has been given in the course of this blog. Past performance is no guarantee of future performance. Investment values can fall as well as rise and are not guaranteed.

If you would like to discuss the investment opportunities with regards to your own individual situation and circumstances or any aspects of financial planning, both personal and business (SME), then please contact the team, either in Guildford or Woking.

Simon Hewitt BSc (Hons) DipPFS

Financial Planner

Chapters Financial Limited

Chapters Financial Limited is authorised and regulated by the Financial Conduct Authority, number 402899.

Where did 2013 go?

Our busiest months of the trading year are April/May and November. This has always been the case throughout my nearly 30 years in financial services. Many can understand the April/May date because of the end of the tax year (05^th April) and all this involves, including pension and ISA contributions. The November uplift is usually a surprise and this is because many finalise their financial planning at the end of the year before the festive season starts. Almost a final catch up before the year closes. From an economic viewpoint, it has been a significant year.

With the FTSE100 starting the year at 5,897 points (approx.), my open year prediction was that we would end the year with a starting digit of 7,XXX?. It looks like I might have to temper this prediction. (Past performance is not a guarantee of future performance). The FTSE100 is not an indicator of the health of the economy though and there are many other important and relevant economic factors to consider, examples of which might be: 

•  Foreign investment money stoking a possibly overheating London Property market is filtering through to the rest of the UK.
• The Government’s funding initiative of the 'HomeBuy' scheme, generating greater flexibility for usually First Time Buyers (FTB) to enter the property market. With recent reports that the average FTB was entering the property market in their 30's, action had to be taken.
• Cash deposit yields falling ever further with now confirmed low rates (through ‘Forward Guidance’) from the dynamic Canadian Banker that heads the Bank of England (BoE). Bank Base Rate has remained at 0.5% pa throughout the year to date. 
• Some banks and lenders being more approachable for SME/ Small Business finance.
• Growing Building/ construction starts ups helping with the stubbornly high unemployment data (October 2013 2.47M), which is starting to show falls (possibly quicker than Mr Carney thought).
• Largest number of Initial Public Offerings (IPO’s) since the start of the recession on London.
• Inflation (Consumer Prices Index/CPI) remaining above the current BoE target of 2.00% pa, at 2.20% (October 2013)   

Be under no illusion, our economic market has changed and I believe is in the final throws of shaking off the shackles of recession. This is a changed beast and is going to move forward, I think quicker than many of us expect. As you have seen in our previous November Blog, we have also seen the implementation of the Retail Distribution Review (RDR) in 2013 which, for some, has been a welcome change to the delivery of financial advice to the public in the UK. 

I hope, like Chapters Financial Limited, that you found 2013 a positive year for your financial planning. The flow of economics points to 2014 being a positive year, although I am sure there will be volatility along the way, and a positive outcome is not guaranteed. However, taking high quality financial planning advice throughout the year is worthwhile to ensure that you make the best of the economic climate, whatever it transpires to be. 

If you would like to receive further information with regards to your own individual situation and circumstances, then please contact the team, either in Guildford or Woking.

Keith Churchouse FPFS
Director
ISO22222 Personal Financial Planner
Chartered Financial Planner