Where it stops, nobody knows!

It's been an interesting few weeks in various investment markets. With much optimism in the lead up to the American election and with President Obama safely re-installed into the White House, the hangover from the party seems to have set in. With various hopes and fears once again emerging from Europe, there seem to be many 'jitters' in a few of the major financial indexes. Overall, the markets have remained relatively constant over the last 6 months, and using the example of the FTSE 100 (not always the best measure) as a reasonable UK local market equity index, we can see the results.

We can see that from 01 May 2012, the index stood at 5,812.20 and by 10 November 2012 this had moved to 5,769.70. For additional past reference, the FTSE 100 stood at:

Date	FTSE 100 Index Value
10 November 2011	5,444.80
10 November 2010	5,816.90
10 November 2009	5,230.50
10 November 2008	4,403.90

Approximate Figures (Source uk.finance.yahoo.com)

You will note from these results that past performance is no guarantee of future performance and that fund values can fall as well as rise.

I am sure that within the next 4-6 weeks we will see the usual seasonal speculation as to where the FTSE 100 index will be at the end of 2013. I have to admit that I think that 'UK Plc' looks in far better condition, with its various austere fiscal policies, to face the significant and continuing challenges that I believe the global economy has to share with its many contributors over 2013 and beyond. Bearing in mind that the highest peak of the FTSE100 (on 30 December 1999/ 6,930.20 points) was now some 13 years ago (although it got close again to this level in late 2007), it does raise the question as to when the current Index 'value' mould that we have become very accustomed too will be broken, if at all.

Only time will tell, however, it is interesting to note (although not a direct comparison) that the American Dow Jones Index's highest point in past years was 14,164.53 points (09 October 2007) and this was nearly reached again in 2012 (13,610.15 points at 13 October 2012). With the fears of a post-election 'Fiscal Cliff' looming (seems to be the latest buzz phrase) I am pleased to see that this past index high milestone has been approached again in such an economic climate.

Is it time for the UK and its various Indices to do the same. As the title suggests, 'Where it stops.........'

Past performance is not a guarantee of future performance. Fund values can fall as well as rise and are not guaranteed. No individual advice or fund recommendation has been provided in the content of this Blog.

Chapters Financial Limited can help you with your savings and investment allocation and planning.

Keith G Churchouse, Director
Chartered Financial Planner
ISO 22222 Certified Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

Active or Passive Funds, which is best?

Investing funds for your future can prove to be a minefield for those who do not take suitable advice. Chapters Financial hope that through our informed processes, we are able to educate enquirers in investment planning and what can be achieved and possibly, more importantly, which investment styles can be used. As an example, some investors are not aware of the difference, or even the existence, of active and passive investment funds. You may have spotted the long list of funds listed in the financial sections of the weekend newspapers and the Broadsheets during the week.

So what are these active and passive funds and what might you want to consider?

• What do they do with your money?
• How do they differ?
• How can their performance be measured?

Active Fund examples

Active funds are, as the name suggests, actively managed by professional fund managers who make decisions on the individual holdings within the overall fund.

Invariably, they will be buying, and selling, different shares / gilts / commodities / etc. based on what they believe to exhibit the most, or least if selling, value at the time within their chosen sector. It could be suggested that you are effectively buying the expertise, skill and experience of fund manager’s team you are investing in, along with the assets of the fund. You are paying for this skill, expertise and experience within the fund’s Annual Management Charge (AMC/ known as On-going Charge in many investments). Investments are usually made for a return and the payback you wish to see for your decision is that your investment return is good (and some ‘benchmark’ their return against a corresponding index for comparison purposes). This benchmarking should demonstrate that the fund, and correspondingly the investment fund manager, is outperforming its peers (or not) within the marketplace.

Passive Fund examples

Conversely, passive funds are not (as you may have already guessed by now) actively managed.

They usually aim to track an chosen index, or benchmark, by being invested in a ‘basket’ of holdings which are designed to closely replicate the index, or benchmark, to varying degrees of accuracy depending on the type of passive fund. This ‘basket of holdings’ (usually unit holdings) is not changed unless the index, or chosen benchmark, is changed. One example of an index is the FTSE100 which is comprised of the top 100 leading companies listed on the London Stock Exchange (LSE). A FTSE100 Tracker Fund will buy shares in the FTSE100 companies and it will be unlikely to amend the basket of FTSE100 company shares unless certain companies fall in and out of the FTSE100 list. Due to less analysis, fewer transactions, minimised administration and reduced manpower required for passive funds the Annual Management Charges (AMC) tend to be lower than the Active funds noted above.

Benchmarking

Some investors prefer to have a measure to judge performance of their fund against the area they are targeting, such as Growth or a Stock Market, such as the FTSE, as examples. For Private Investors, one reasonable tool that can be used is APCIMS (Association of Private Client Investment Managers) FTSE benchmarks. There is a range available and a link to these can be found below:
http://www.ftse.com/Indices/FTSE_APCIMS_Private_Investor_Index_Series/index.jsp

Which to go for?

One question often posed is ‘why not just buy passive funds only to keep costs down you may ask?’
Although the costs of fund management are important and should be considered carefully, the answer is reasonably simple. If you are trying to achieve better returns than a chosen index or benchmark, then passive funds are highly unlikely to ever achieve this index return. Why? Due to the fact that the index, or benchmark, will not be reduced by the Annual Management Charge made to your fund and therefore the index return should always be greater.

It could then be suggested that the higher charges applied by an actively managed fund will require the investment to work harder to achieve the same return achieved in a passive fund/investment. There is some mileage in this argument, but without the constraints of an index to adhere to, this usually gives the manager a greater range and flexibility of investment choices. Some would argue that smaller funds can be more agile than larger funds, but without being tied to a (potentially) restrictive index, the scope of the manager for investment and, most importantly, returns should be increased.

Chapters Financial usually prefers actively managed funds, however a mixture of both active and passive funds can be used to great effect to generate capital growth (or income or both) depending upon the clients risk profile, objectives and timescale. Benchmarking, as noted above, may be a way of way of helping measure the success of this investment planning strategy.

Investment is about clients’ needs and desires for their money and its future. Any financial/investment planning should be based on your objectives and attitude to investment risk. For reference, an Investment Risk Schedule can be found on the Chapters Financial website here.

As you would expect, no individual investment/planning advice has been provided during the content of this Blog. This is because each client’s needs are individual and so is their planning. Chapters Financial Limited would be pleased to help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise. Chapters Financial is not responsible for the content of external Website links.

Simon Hewitt BSc (Hons) DipPFS, Financial Planner
Chapters Financial Limited is authorised and regulated by the Financial Services Authority, number 402899.

If I was starting again, would I start from here? / Asset Allocation

I am often asked when I think that we will come out of recession and return to the ‘good old days’ prior to banking crisis’ and alike. Do I think the economic world is better or worse for the recession? My simple answer is ‘neither, it’s just different!’ I think that the current economy and its somewhat marginal growth will continue for some years to come and that this is ‘as good at it gets’ for the foreseeable future. I hope I am wrong, but if not, managing expectations and working within the confines of what we can influence is always a good place to start.

Noting the above, that does not mean that profit from investments cannot be achieved and we are all very aware that investment markets have changed significantly following the volatility of recent years. This has seen (possibly) differing questions being asked, such as ‘Are Gilts riskier than Equities (Shares)?’

It seems to make sense that there would be shorter-term periods when equity markets are less risky than the long-run would suggest. I also think this is what some commentators are driving at when they ask ‘are gilts riskier than equities?’ I think they are suggesting equity markets are less risky than normal at the same time that gilts are more risky than normal. However, the notion of prospective riskiness is closely tied to notions of current value. If equity markets are over-priced there is an increase in the associated level of prospective risk and vice versa.

Considering this further, it is really very difficult to quantify just how risky equity markets are or when they might be more or less risky than usual. It is this uncertainty that goes right to the heart of ‘riskiness’.

The question gives rise to the notion that investors have a choice, either investing in equities or, alternatively, going for gilts. This is a false choice and one that relies too much on market forecasts. The sensible approach is to maintain holdings of both equity and gilts for diversification. Confidence is high that gilts will go up in value in the event that equities go down in value. In a similar way, there is confidence that equities will go up in value when gilts go down in value. Choosing one area over the other is to put yourself at risk of trying to forecast returns, and this may not be a sensible tactic.

Diversification remains the Key

We have, over the years, advocated asset allocation and diversification of funds (within all investment arenas, such as pensions, ISAs, Investments, Trusts, OEICs & Unit Trusts) to ensure that opportunities for investment growth and income are achieved. We will continue to achieve this with our clients (Individuals/SMEs/Charitable Trust) and enquirer’s needs. Any financial/investment planning should be based on your objectives and attitude to investment risk. An Investment Risk Schedule can be found on the Chapters Financial website here.

No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your investment planning, in all its many formats, into the future, continuing to provide the independent financial advice (IFA) into 2013 and beyond.

Past performance is not a guarantee of future performance. Fund values can fall as well as rise.

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

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

Who said regulation would reduce??

I am not sure that I have ever known a quarters time period (the one coming at the end of 2012) when so much regulation and legislation comes into being in the UK retail financial services world. I have nearly lost track of all of the changes and I have summarised these headlines below for your consideration. Some of these changes may not have a direct impact on your circumstances, but it is always interesting how changes work their way through the various systems and manifest themselves later down the line.

This is not an exhaustive list, but gives an indicative feel of some of the differences we will experience in the near future.

Workplace Pensions / Auto-Enrolment start in October 2012

The first wave of large UK businesses are now enroling for Workplace Pensions (sometimes called Auto-Enrolment), with ‘Staging Dates’ declared for all employers, starting with the largest companies and working through to the smallest over the coming four years or so.

With Workplace Pensions now implemented at the start of October 2012, knowing what is required for your business and planning what resources (both time and contributions) need to be deployed should be a priority in making sure that your business is ready to meet the requirements of this new legislation. The Pensions Regulators website is very helpful in detailing these staging dates as they are known, and there is a link to this detail from our website, www.chaptersfinancial.com.

Equalisation of Annuity/Insurance rates between the sexes in late December 2012

In March 2011, there was much press about a European Law being passed (now called Test-Achats European Court Ruling) about abandoning the differential between male and female rates for insurance (and alike) risks/terms. My understanding is that their ruling (and I am not a lawyer) is based on the argument that the current gender based regime is discriminatory because there is overlap between men and women in the ages at which most people die. Obviously, there are opposing views to this argument and its subsequent studies and the European Court would rule accordingly on 01 March 2011, which has now been confirmed.

The now confirmed ruling is due to take effect in December (21st) of 2012 and the hullabaloo that kicked off all those months ago soon died down because its real effects would not be felt until months later. Time has now passed and those months are now turning into weeks, with I am sure much media ‘verbage’ to commence in the very near future.

End of Commission Sales for Financial Advice from end December 2012

The Financial Services Authority's (FSA) Retail Distribution Review (or RDR for short) has been many months and years in the planning and will be implemented at the very end of 2012.

Consumers need to be aware that these regulation changes and their effects on the delivery of UK retail financial services to the public will be significant. The FSA has started a process of raising the profile of the changes and we have also started to see the press joining in the process. I have no doubt that there will be much page space allocated to the topic over the autumn and winter months of 2012. It is important that those seeking financial advice know what these changes mean for them and the choices they will be provided into the future.

The FSA has produced a consumer information document as a guide to the changes and to start the process of educating those seeking financial advice of what to expect in the future. This can be found at the following web-link here: http://www.fsa.gov.uk/static/pubs/consumer_info/rdr-consumer-guide.pdf

Change of the Financial Services Authority (FSA) to the Financial Conduct Authority (FCA) from January 2013

I am sure we will see a lot more publicity of this change as it gets closer. In June 2010 the Government announced new regulatory arrangements for the future. These include the creation of the Financial Conduct Authority (or FCA for short), which plans to apply a new approach to consumer protection, building on existing changes already instigated, but taking them still further. The changes will see the Financial Policy Committee (FPC), within the Bank of England, being responsible for protecting the stability of the financial system as a whole and macro-prudential regulation. The Prudential Regulation Authority (PRA) as it will become known, will be a subsidiary of the Bank of England, with the responsibility of supervising deposit takers, insurers and a small number of significant investment firms.

The Financial Conduct Authority (FCA) will be responsible for regulating conduct in retail and wholesale markets, supervising the trading infrastructure that supports those markets.

I am sure we will hear much more on this subject in the coming weeks as the changes come to fruition.

Summary

Change usually generates opportunity and I am sure that this will be the case for some of the points and changes noted above. We live in interesting times and we will continue to work with you and changes in legislation to meet our clients and enquirers requirements. No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your financial planning, in all its many formats, into the future, continuing to provide the independent financial advice enjoyed by our clients since 2004.

We look forward to working with you into 2013 and beyond.

Chapters Financial is not responsible for the content of external webpages.

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

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

Half-Time! for the tax year 2012/2013....Using Annual Allowances

The tax year starts on the 06th April each year and this is usually a busy time in UK retail financial services. The last minute pension and Individual Savings Account (ISA/Maximum £11,280 in 2012/2013) deposits are invested in time to use the annual allowance before the opportunity is lost. Many also look at any potential gains that have been made during the year to see if, where applicable, capital gains tax allowances (£10,600) can be used.

As we approach the halfway point of this tax year (2012/2013), we normally suggest that these annual allowances where unused, are visited to see if now is a good time to use them up? The gain for Chapters Financial is that we are spreading the years’ workload, but the gain for our clients to look for opportunities that may or may not be there when that annual tax year end rush occurs.

An example might be the recent rise in equity values/markets (past performance is not a guarantee of future performance and fund values can fall as well as rise and are not guaranteed) where gains on existing Unit Trust/Open Ended Investment Companies (OEICs) may be available and could efficiently be taken to use up the current capital gains tax allowance of £10,600. If you have capital losses available that could be bought forward, these may be used at the same time, however, we would recommend that you check this addition with your Accountant before proceeding. If you have not used your ISA allowance in this tax year and a gain is taken, you may choose to re-invest some of these proceeds into an ISA, up to the maximum of £11,280 in 2012/2013. If your spouse/partner has not used their allowance, this may provide an additional tax efficient opportunity.

Reviewing pension contributions is always worthwhile (standard limit £50,000 gross contribution pa/ total employer/employee) and it is not uncommon for Director/Managers to make single top-up contributions to pensions at this time of year. This timing may also be a reflection of their business year ends. 

As you can see from the notes above, a mid-year review may well be worthwhile in looking at the opportunities that may present themselves as we start the autumn 2012 season.

No individual advice has been provided during the content of this Blog and Chapters Financial Limited can help you with your tax year annual allowance planning both now and throughout the tax year(s).

We look forward to working with you. 

Keith Churchouse, FPFS, Chartered Financial Planner, ISO22222 Personal Financial Planner

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

Have you prepared for your life-stages?

As we approach the end of what some called summer 2012 (weather excluded) we saw many sporting events with athletes and competitors striving to achieve 'Gold' in their many and varied disciplines. Closer to home, I attended a party to celebrate my parents 50th and Golden Wedding Anniversary. Many congratulations to them on such a great achievement.

In mingling with the fellow well-wishers, I was able to catch up with many faces that I had not seen for many years and to note a few who were no longer with us, along with some tales of wellbeing and, sadly, ill health. It was a diverse group, young and old, and it was interesting to witness the change and development in the lives of each I spoke to. One attendee commented on this very point, noting that he was now, possibly unwillingly, the head of the family and that time was passing so fast that he, like many at the party, have had to step up to the mark as your time comes. Many readers of this blog will already know this experience. However, it is still interesting to see such a 'snapshot' in one evening.

The needs and reliance of each member on each other within each unit was clear and the next morning, as the nights memories came back into view, in made me think about the importance and benefit that insurance protection, in all its forms, really can provide to ensure that financial security can be maintained when life throws a 'spanner in the works'.

For reference, I have listed below what should be considering ensuring both you and your loved ones are protected properly. 

Life Assurance

The first, most obvious protection that those with a dependent family to protect should think about having in place is Life Assurance. In the event of death, I am sure that you would want any mortgage/liabilities repaid, and leave a balance to provide capital/income to the family to see them through into the future after their loss. Don't forget to think about your spouse or partner and ensuring that they are adequately covered. 

Life cover can be provided as a lump sum or in the format of a set 'income' paid each year for a set term (Decreasing Term Assurance). This latter option can sometimes reduce monthly premiums paid. 

You might want to see what cover your employer (if you have one) offers as a Death-in-service benefit (DISB). Some also use this type of cover to protect against the effects of inheritance tax (IHT) on their estate in the event of their death. 

If you take on life cover, you can usually write this in trust to ensure that the proceeds fall outside your estate (for inheritance tax purposes (IHT)) and available without recourse to Probate. This should mean that the proceeds of the policy are available quickly. Most insurance companies will offer a Trust wording free of charge. If you have an existing policy, you can usually still add a Trust to the plan and this is usually worthwhile considering.

Income Protection/Replacement

If you were unable to work due to ill health, do you know how long you could survive financially? Have you thought about it? You may have emergency deposit savings (possibly 3-6 months’ income) to see you through this unexpected (and unwelcome) experience, but thereafter, what happens? Have you checked recently what, if you have one, your employer’s policy on protecting their staff is? It is possible to put in place an Income Protection plan, sometimes known as a PHI (Permanent Health Insurance) policy. This is arranged to pay an agreed level of income in the event of inability to work due to ill health until a fixed age (say 60-65 as examples) after a waiting period (benefit will only be paid after this time). The waiting period (selected at outset) is usually 8-13-26-52 weeks and the longer the waiting period the lower the premium paid per month. You can also build other options into this type of plan, such as protection against the effects of inflation, as one example.

Critical Illness Protection

The thought of contracting a critical illness can always be a concern and this type of cover should be seen as a compliment to Permanent Health Insurance rather than an alternative because they work in different ways. If you decide only to take one type of cover then speak to your Independent Financial Adviser (IFA) or Chapters Financial Limited about the differences and your requirements.

A Critical Illness policy (CIP) pays a lump sum (usually after a period of 28 days from diagnosis) on diagnosis of a critical illness. The 'devil can be in the detail' in this type of plan on the conditions that are covered. In our experience, the existing older plans see broader definitions and this can make these types of plan valuable. You will usually set an end date for the cover (again this maybe 60-65) and a sum assured, the lump sum you would like to receive, in the event of diagnosis of a critical illness.

Private Medical Insurance (PMI)

This type of cover, as the name suggests, provides financial protection for medical costs in the event that medical care is needed. Some employers offer this to their staff part of their benefits package and this is a taxable benefit in kind if received. The plans usually have an 'excess' level, an amount that you have to pay before the policy will, and this can vary. The higher the excess will usually see the lower initial premium paid.

Summary

You can see that there are various options (and combinations of cover) available to those who are at a life-stage where protection is needed, both for their own financial security and that of their family/loved ones. 

No individual advice has been provided during the course of this blog and when you are considering your needs or reviewing your existing arrangements then please seek professional independent financial advice (IFA) for your needs and requirements. Chapters Financial Limited would be pleased to help you assess your needs, the cover you need and make appropriate recommendations.

We look forward to working with you. 

Keith G Churchouse, Chartered Financial Planner
Director, Chapters Financial Limited
Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899

The Financial Services Authority does not regulate Trust documentation.

Changing Market Conditions & Corporate Bonds

In this modern age of information, it is easy to become ambivalent of the ever growing numbers of financial headlines and articles that skip across your computer and iPod every day. As an example, we have all lived and breathed the recession and financial crisis’s that have affected the very core of our financial understanding and acumen over the last 5 years. It is this last point that made me stop and think. The BBC headlined ‘Reflecting on the credit crunch five years on’ on the 09th August 2012, confirming the start of the Credit Crunch on the same day in summer 2007 and some were advising that ‘a correction in the markets was expected, not “a total meltdown”’.
Was this a correct statement to make? Looking back over what has been a highly turbulent economic period, and reading some of the headlines from the media, you would think it was wrong. However, to challenge this, I would ask the following question:
Is the world and its economic areas/opportunities better or worse for this 5 year crisis/recession?
I think the answer is neither. It is just different.
Most individual investment areas have seen significant changes in fortune over the last 5 years. Examples could range from deposit/cash fund returns seeing now increasing returns against a backdrop of falling Bank of England Base Rates. The Commercial Property sector seeing a negative (and very rapid) capital value correction at the end of 2008 and recently, questions in the press over the continued liquidity in the Corporate Bond market.
Looking at the Corporate Bond market further, I am not overly concerned about increased liquidity problems in the corporate bond market. That is because I am conscious that liquidity comes and goes – it is a feature of the capital markets and it is especially a feature of the corporate bond market – and I factor these roving liquidity conditions into my expectations.
Of course there are debt instruments that are associated with high levels of liquidity, even in the very worst of financial markets. Those are the sovereign bonds of the major nations, including gilts. If you’ve reduced your exposure heavily here in favour of corporate bonds then, in these circumstances, I would have some concerns. I must stress though, I am not forecasting any imminent problems with the corporate bond market in isolation.
When reviewing an individual’s asset allocation of their investments and pensions, it is important to understand that Investors should hold risky assets only in the proportions that they would be comfortable to hold for the duration of a significant downturn. We can help you understand this process to allow you to invest to a risk level that suits you. Clients should not be holding risky assets in the hope that they’re not going to be risky while they hold them. If the aggregated risk and return characteristics of an investor’s portfolio are suitable for the individual investor, then Corporate Bonds could continue to remain a suitable investment vehicle.
Past performance is not a guarantee of future performance
At Chapters Financial, we have been successfully offering a fee-based model for over 5 years now and plan to continue to offer high quality independent financial advice into the future for both our existing clients and our new enquirers. Because each consumer is different, as is their financial planning needs, no individual advice has been provided in this Blog.
Keith G Churchouse, Chartered Financial Planner
Director, Chapters Financial Limited

Chapters Financial Limited is Authorised and Regulated by the Financial Services Authority. Number 402899