Industry Insights Series Q3 2020 Gerry Caley, Senior Partner
I recently received one of my regular ‘offer’ emails from Costco, and was quite perturbed to read that anyone can now buy gold bullion direct from their local warehouse.
As a Financial Adviser I find this quite worrying as gold has recently breached the $2,000 dollar per troy ounce figure, a new high in the market. History has shown, all too frequently, that retail (non-professional) investors tend to buy into various assets at (or near) the top of the market. Quite often drawn in by glittering adverts suggesting that they are missing out on a fantastic opportunity to make a quick return.
So, perhaps we should look more closely at gold and its uses:
There is limited use for this particular precious metal, the main one being its ability to be crafted into expensive jewellery, mostly favoured by Asia/Indo Chinese communities. Under the present circumstances and with gold prices at a high it is not surprising to find that jewellery sales are far below normal levels.
Gold is a good hedge against inflation, as we are frequently told, but do you see high inflation in the near term?
Gold will not provide you with an income, something that is at the forefront of many investors’ minds with the recent depletion of dividend yields.
As precious metals go, there are several in existence that have a far greater use in industry and whose values are nowhere near the price of gold. Does this make economic sense? Some of you may remember a certain Prime Minister (he was Chancellor at the time) who decided to sell the UK's stock of gold reserves at prices around $275 per troy ounce during the period 1999-2002. I believe that part of his thinking was that with the Dotcom bubble, inflation would not be seen for some time.
These points all help illustrate the difficulties with valuing gold and finding the right time to buy or sell. A much safer way to hold gold would be as part of a diversified portfolio. Either directly via a physical gold ETF or using a good multi-asset fund where the managers will hold varying amounts of gold depending upon their overall view of the world markets at a particular time. Investing this way also means it is far easier to sell your holdings if needed.
As we consistently say, the key to investing is diversification, good active management and sound advice from your financial adviser.
Industry Insights Series Q3 2020 Alexander Macdonald, Financial Adviser As advisers, we expect the unknown and this has never been more evident since COVID-19 became a global issue earlier this year. Global markets went into a sharp decline once it became obvious that the virus was not merely a Chinese problem and only massive intervention by the major central banks, which collectively pumped in around $7trillion (and still counting) on the 20th March rescued markets from the abyss, together with an improving outlook in terms of controlling the virus. The effect on markets has been to create winners and losers of considerable magnitude, with sectors such as technology and healthcare greatly benefitting, while sectors involved in leisure, entertainment, travel, retailing have had to endure a catastrophic period of lockdown and zero income. Amazon has been the stand-out winner, being the favourite choice of online shoppers and the rocketing share price means that the company’s market capitalisation is now around $1.5 trillion! Other companies that have thrived during the crisis have been PayPal, Tesla, Netflix, Microsoft, Zoom and Apple (all American), while British companies such as Halfords, Reckitt Benckiser, Ocado, Astra Zeneca and Games Workshop have also prospered. As advisers, knowing how the market is influenced is extremely helpful, but this poses the obvious question ‘are we heading for a fall like the technology bubble in 2000/02’? The current economic and political climate is volatile. Countries such as America, Brazil and Mexico still have increasing cases of COVID-19 and have yet to get the virus under control; while the UK has still to conclude a trade deal with the EU following Brexit and the absence of one will be sure to have a detrimental effect on UK mid and small-cap shares. In the USA, on top of the virus worries, President Trump has to decide on his tactics in his dealings with China and whether to apply further sanctions - which could have a knock on effect for global trade. Additionally, the presidential elections are in November and a win for Joe Biden could possibly have a negative effect on markets. The polls have him ahead at the time of writing. Lastly, the possibility of a surge in inflation, absent for many years, should also be factored in. This all points to the need for a fully diversified portfolio of funds, with exposure to gold and bonds to cater for inflation and provide alternative, uncorrelated asset classes to equities. Home > GDA Financial Partners
Industry Insights Series Q2 2020 Jessica Amodio, Financial Adviser There cannot be a person out there right now who has not worried, even the smallest bit, about COVID-19. Amongst the long list of worries surrounding this pandemic, there is the prospect of falling ill and not being able to provide for your family. For many, this problem has always been at the forefront of their mind, and why they have now opted to take out life insurance. Life insurance pays your family an amount of money if you die while covered. When buying life insurance, the type, length, and cost of cover will depend on your personal circumstances. The cost of the cover will also depend on any current and/or previous health conditions. Previous health conditions disclosed at the time of commencing insurance are likely to result in premium increases and exclusions. Life insurance generally covers death caused by any condition, so there is no life insurance specifically for COVID-19, or any other pandemics like it. Those already holding life insurance would be covered for death caused by COVID-19, as it would not have been an illness previously disclosed on commencement. However, there are some life insurance providers which may include or exclude certain illnesses or diseases. Therefore, it is worth checking what exactly is, and isn’t, covered when getting a quote. Alongside life insurance, many people also have serious illness cover. This pays out a lump sum should the insured suffered from an illness or disease on a specified list. This list may vary depending on provider, with some covering more than others. Regardless of provider, you will probably find that COVID-19 is not on this list. The reason for this is that COVID-19 is not classed as a ‘serious illness’ in terms of their coverage. However, if you go on to develop a serious illness as a result of COVID-19, then this should be considered as a valid claim. Going forward, if you do not already have life insurance then it is possible to take out a new policy to protect yourself. It is likely that along with the extensive health questionnaire you would have needed to complete beforehand, there will also be additional questions. These will be questions such as whether you have already tested positive for COVID-19, whether you have had symptoms or have been told to self-isolate. If you have, then an exclusion may be applied. If you have any questions relating to life or serious illness cover, please do not hesitate to contact us so we can talk through your specific needs and circumstances. Home > GDA Financial Partners
Industry Insights Series Q2 2020 Catherine Alexander, Mortgage Adviser The outlook on the mortgage market has greatly improved throughout May and into June, with mortgage enquiries up 57% compared to April according to figures published by Experian. Levels are now back to those last seen in January which is good news for everyone involved. COVID-19 has caused lots of movement in the market, with lenders initially pulling products in order to protect existing customers as we moved into lockdown. As time has gone on, lenders have come back into the market and have gradually increased their loan to value (LTV) limits which are now generally at 85-90% LTV. Most lending criteria remains unchanged with the majority of lenders accepting furlough payments as income for lending purposes. However, we have not yet seen the return of the higher LTV borrowing at 95% - which is a particularly important product area for first time buyers. Borrowers looking for a high LTV mortgage should expect 95% LTV mortgage products to start returning to the market as there is more economic certainty. At the moment, it seems many providers have not returned to the market with these products because the number of applications has been so great, and with employee levels still low they need to focus their resources on processing current applications. In the meantime, first time buyers may choose to look at alternative options available to them such as new build properties where they can utilise the Help to Buy scheme or consider shared ownership. Another piece of good news from the lenders is the increased use of technology that has been employed to keep their processes flowing. Many lenders have reduced or removed their telephone support services, particularly in terms of their communication with mortgage brokers, instead asking everyone to utilise alternative options which include secure messaging and web chat facilities. This increased digital journey is likely to be more prevalent in the industry moving forward, particularly where everyone has had time to evaluate how they would like to work in the future. This includes lenders carrying out more desktop valuations where possible which would speed up the mortgage application process in many cases. Existing borrowers have also had the option of utilising a mortgage payment holiday which freezes their mortgage payment for 3 months. Although there is no doubt of the benefit to a significant number of borrowers, it is important to carefully consider the impact that this may have have on your current and future plans. Recent market research undertaken by specialist lender, Kensington, reported that around 25% of those who had taken a mortgage payment holiday did not fully understand how it worked and that taking one could impact underwriting decisions in the future. So, what is predicted to be part of the new normal in terms of mortgages?
More people will be reviewing what is important in terms of their homes and where they want to live.
More people will also choose to work from home or work from home more often, reducing current face-to-face communication.
The use of technology will become more widespread as new digital skills are acquired and systems improved to facilitate distance communication.
New products launched to provide more variety in the market and a focus on customer segments e.g., COVID-19 heroes such as nurses, supermarket workers, etc.
An increased awareness of protection products associated with taking out a mortgage e.g., life insurance, critical illness, income protection, etc.
We are happy to see the mortgage market heading in the right direction and look forward to some significant long-term changes, providing more options and opportunities to a greater number of people. If you have any questions regarding mortgages, associated protection products or any aspect of financial planning, please do not hesitate to contact us and we are always happy to talk through your specific needs and circumstances.
Industry Insights Series Q2 2020 Joseph Middleton, Adviser
For many years ethical and sustainable investing was considered niche and high risk by the industry. Thus, many investors discounted this kind of investing for fear of losing their hard-earned savings. However nowadays there is a much larger choice of ethical and sustainable investment options and the risk is much lower. Indeed, sustainable funds in general performed much better than their relevant benchmarks during the recent COVID19 related market correction. So what has changed? In recent years, people have become more and more aware of global warming and some of the unethical practices happening around the world. Due to this change in mood and evidence that the world needs to adapt, companies are starting to realise that in order to remain relevant and profitable they must take notice. What many fund managers are noticing, even when their fund is not strictly marketed as sustainable or ethical, is that companies that take these issues seriously generally perform better in the long term. This can be linked to what we saw during the recent drop in asset prices due to the coronavirus. One of the only bright spots in markets was the resilience of sustainable funds generally. This can in part be attributed to the nature of the crisis – sustainable funds would not have exposure to oil, airlines and other areas of the market that have been hard hit due to lockdowns around the world. However, it is also because many ethical and sustainable companies have proactive managements. Having a good management team and systems in place has always been something fund managers look for when investing, as it is a key indication of a well-run business. Of course, this does not mean that ethical and sustainable funds will always outperform, but this style of investing will continue to grow. At GDA we create bespoke portfolios designed for your personal circumstances and this includes if you are interested in sustainable and ethical investing. More generally speaking it is clear that many companies and investors are taking more and more notice of wider issues and their impact on the world around us. This can only be positive news and the coronavirus crisis could be a further catalyst for change.
Industry Insights Series Q2 2020 Gerry Caley, Senior Partner In recent blogs we have highlighted the importance of having financially strong companies in our fund portfolios. These are companies with good reserves and adequate dividend cover. We also discussed the importance of portfolio diversification.But what happens when the markets are affected by a global event such as Covid-19? How do we help to safeguard a regular income stream for clients who rely on it? One of the ways we achieve this is to ensure that a portfolio is not wholly reliant on UK Equity Income funds to provide the dividend distribution (yield). UK stocks tend to generate higher returns than countries such as the US, however there are other areas of the world that also generate high yields in comparison. For example, companies in the Asia Pacific region are well positioned to take up some of the shortfall we may suffer in the UK.
Back in the late 90’s several booming economies in Southeast Asia, known as ‘tiger economies’, suffered badly and market recovery was slow. There was little formal legislation around dividends at the time, but afterwards we witnessed a gradual culture change across the regions. Many CEO’s and boards began to adopt a more proactive approach to paying dividends. There was improved governance over business processes in the interest of the external shareholders, and over time this resulted in increased trust of these Asian companies with the outcome being increased investment from external shareholders – many being UK based fund managers.
Today, the Asia Pacific region is home to roughly two thirds of the world’s population. Although the trend is towards an ageing population in some parts, a large working-age population underpins the growing economies. This also brings rapidly increasing wealth, and today this region probably has more high net worth individuals than any other. All of this helps to maintain good GDP growth, which outstrips the western countries.
Whilst the Asia Pacific region was the first to be affected by Covid-19, it is not by luck that they emerged first or more quickly than other countries or regions. They were generally quick to contain the virus and quicker to reopen their economies, therefore suffering less economic damage. Although their dividends will be affected, it appears likely that they will be reduced to a lesser degree – approximately 25% compared to 50% in the UK, or in the case of banks, no reduction at all.
In terms of our portfolios, we always have a percentage of good growth funds - even if we are building an income stream. Some of these funds will probably pay a small dividend of around 1-3% which is helpful, but we would mainly be looking for capital growth.Thisallows us to maintain the necessary capital and provide the extra income. Additionally, by running our client portfolios on a suitable platform, we can shave profits off better performing growth funds to top up the cash account, thereby funding the distribution.
And so, by combining our knowledge of building flexible portfolios with the strong relationships we build and maintain with a wide range of investment houses and fund managers, we are better able to service the needs of our clients.
Industry Insights Series Q2 2020 Alex Macdonald, Financial Adviser
Here at GDA Financial Partners, we are big believers in active fund management, as opposed to passive fund management and this blog sets why we hold these views.
Passive fund management
This centres around reducing the cost of investing and on
the face of it appears to be appealing, but this is achieved by eliminating
fund managers, investment research professionals and having no contact with the
companies in which you invest!
A passive fund will be ‘benchmarked’ to an index, with
stocks selected according to their size relative to the index (e.g. if BP’s
market capitalisation is 6% of the FTSE100, then the passive fund will hold 6%
of BP, irrespective of quality or the attractiveness of the share price).
This approach can be likened to investing in ‘the good, the
bad and the ugly’, as there is no attempt to differentiate each stock by taking
factors such as value (is the share over-priced), sales growth, debt, dividend
growth and recurring income streams, to mention only a few.
The FTSE100 Index is particularly vulnerable to passive fund
under-performance, having six major banks, two huge oil companies, four utility
companies and eight mining stocks, to name but a few of the sectors which the
prudent investor would currently wish to avoid.
A passive fund can only attempt to match the performance of
the index, never beat it and after the paying the fund annual management
charge, always under-performs the index!
Active fund management
This involves employing a fund manager (sometimes a pair or
team) who look at each stock on its merits within the given area the fund
invests (e.g. Europe or UK large cap stocks), assessing the share’s growth
prospects, whether it can be purchased at an attractive price and taking into
account the following factors:
Is the current dividend well covered by reserves?
How likely is it that the dividend will be cut (this would depress the share price and reduce future dividend income, a double whammy and is a big concern at present with companies’ finances under severe pressure due to Covid 19)?
Are debt levels too high (such companies fare badly in recessions or downturns)?
Is company news flow positive or negative?
Are there taxation policies or impending legislation which would affect the future share price (e.g. a profits tax, mis-selling fines or compensation)?
As you can see from these points, investing
in a company without researching any of the above matters can only be deemed a
Obviously there are good, mediocre and bad
active fund managers and our job as advisers is to recommend managers whose
track record speaks for itself and we look for consistent out-performance of
the sector average over the medium term, as this demonstrates that the stock
selection process used is effective.
Preventing loss of capital by using active fund managers is important, as the following example shows: Say a fund has a value of £1000 and the market falls by 25%, it is now worth £750. To get back to £1000 requires a gain of 33% (£250/£750 x 100) and this may take several years! Far better not to lose 25% in the first place!
As an employee, your employer may have had to furlough you as part of the business response to the coronavirus crisis. Being furloughed means that your employer keeps you on the payroll while they are unable to operate or have no work for you to do because of coronavirus.This allows your employer to access funding from the Government via the Job Retention Scheme which covers 80% of an employee’s regular month wage or £2,500 (whichever is lower). The funding also covers both the employer National Insurance Contributions and minimum automatic enrolment contributions.
What being furloughed means for auto enrolment pensions
From 6 April 2019 the minimum total contribution is 8% of qualifying earnings. The employer must pay 3%, the employee must pay 5%, and the government adds tax relief of 1%.As part of the Job Retention Scheme, the government will pay the auto enrolment minimum employer pension contribution which is 3%. This is based on the 80% adjusted furloughed salary or £2,500 per month if lower. You will need to continue paying your 5% contribution to get the Government’s addition. Your own pension contributions and your employer’s pension contributions will continue as normal unless told otherwise.
If you are struggling with cashflow then there may be the option to reduce contributions, suspend contributions, or opt out of the plan altogether. Any of these options require careful consideration as they could have a massive impact on the value of your pension savings when you come to retire.
It is worth noting that if your employer pays above the statutory minimum pension contribution, the Government will not cover anything over the standard 3%. If your employer wishes to continue paying an increased contribution, then the difference will need to be funded by themselves.
In addition, some people have an arrangement with the employer that they will continue paying 100% of normal salary, rather than 80% from the Government. In these cases, the pension contribution which is claimed from the Government will be calculated using the furloughed salary rather than the normal salary.
What being furloughed means for defined benefit pensions
Defined benefit pensions provide a guaranteed income for life after retirement and are therefore regarded as the safest and most generous pensions available. In the private sector they are virtually all closed to new contributions, and those in the public sector are backed by the taxpayer. The government has not specifically mentioned defined benefit schemes, so it is unclear what impact furloughing will have on them. It is anticipated that they will follow the same rules as above, and contributions will remain unchanged unless otherwise stated.
If you have any questions regarding your pension, please do contact your adviser who will be happy to speak to you and go through any options that may be available.