Industry Insights: Active Fund Management

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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:

1. Is the current dividend well covered by reserves?
2. 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)?
3. Are debt levels too high (such companies fare badly in recessions or downturns)?
4. Is company news flow positive or negative?
5. 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 gamble.

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! 

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Industry Insights: Pension contributions for furloughed workers

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Industry Insights Series Q2 2020

Jessica Amodio, Financial Adviser

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. 

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Industry Insights: COVID-19 and your mortgage

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Industry Insights Series Q2 2020

Catherine Alexander, Mortgage Adviser

Recent events have generated many questions around how COVID-19 will impact the mortgage market. With this in mind, we have prepared a Q&A on COVID-19 and your mortgage which covers the main areas that we think would be most helpful. If you have any additional questions or would like to talk to us about any of your concerns, please do contact us.

Can I still apply for a new mortgage or re-mortgage?

Yes you can. Banks and lenders are still taking applications for new mortgages and there is still a great deal of competition in the mortgage market. Understandably, people will worry that we are going to face the same problems as we did during the 2008 financial crisis, however the difference here is that there is no issue with the liquidity for banks and building societies. Rates remain low with the Bank of England Base Rate at its lowest for years, so now could be a prudent time to fix your mortgage rate. There is some variation however in how each lender is responding to the current situation, with some lenders being impacted more than others in terms of servicing their customers. Initially, we did see lenders having to withdraw some mortgage products or cap loan to values, this was to limit the amount of business they received so that they could ensure they could service their current customers and put a plan in place moving forwards. However, many lenders are now starting to reverse these restrictions.

Should I be worried about the housing market?

No-one can say exactly what impact the outbreak will have on the property market, but it is likely to mirror the rest of the economy. In the short-term, house price growth will stagnate, and price data may be volatile and unreliable due to reduced transactions going through (as in-person viewings cannot currently go ahead). It is possible that people will hold off putting their houses on the market until there is greater confidence around the financial situation. However, there will always be some people who still need to move for various reasons. The UK property market is very robust, so it is highly unlikely that prices will crash.

Will my mortgage application take longer than usual?

At the moment, mortgages are being processed at the usual speed in most cases. That being said, due to staff shortages there will be inevitable points at which lenders may go over their stated processing times. It may also be the case, depending on the property, that delays will be unavoidable if a physical valuation is required (in cases where a desktop or automated valuation is not possible). Therefore, if you are planning to make an application, we would recommend starting the process slightly earlier than you might have previously. Because we are in constant contact with the lenders, we are able to advise which ones have reduced timescales compared to others and we can therefore help do everything we can to help ensure your mortgage is completed within your timescales.

Would it be advisable to take out Income Protection or Accident, Sickness and Unemployment Cover (ASU) now?

At times like this the value of protection becomes evident. If you do not already have insurance to protect you should you be unable to work, it may be that taking out insurance now might be too late for the current situation. But it is worth thinking about insurance now while it is at the forefront of your mind so that it’s in place for the future. We highly recommend that you speak to an adviser to discuss the options available to you, you want insurance that fits your circumstances and to make sure that you are not paying for something you do not need or won't protect you for what you want it to - quite often people wrongly believe that ASU cover will protect them if they are made redundant for example. It is particularly important to look at any benefits that would be available to you, and if you are employed, to find out what insurances you may already have in place.

Can I take a mortgage payment holiday?

If you find that you are financially impacted by COVID-19 you can apply for a mortgage payment holiday with your lender. People who qualify will be eligible for a three-month mortgage payment holiday, for both residential and buy-to-let mortgages. It is important to remember that it is a deferral of interest rather than an option not to pay your mortgage, so if you can afford to pay your mortgage without the payment holiday you should do so. You do not want to use the payment holiday and then find that the facility is not available when you really need it. Additionally, the FCA have made it clear to lenders that they should ensure that taking a payment holiday will not have a negative impact on customer’s credit files, but please do check with your lender. As financial advisers we are always happy to speak to our clients about their options if you are considering taking a payment holiday.

What happens to my mortgage offer if it expires due to delays in completion?

Some lenders are extending the length of mortgage offers that have already been issued by a further three months. This allows extra time for completion to take place while moving home is difficult and follows government advice that moving home should be delayed where possible. This should be done automatically by the lender who will issue an updated mortgage offer document.

Are mortgage valuations still able to be carried out?

Physical valuations have been put on hold during this period of self-isolation. This means that where a physical valuation is required, they have been deferred until valuers are able to access properties again. However, wherever possible, lenders are using desktop or automated valuations which allows many mortgage applications to proceed to offer. Even if you do have to wait for a physical valuation, you will have locked in a low interest rate and completed most of the paperwork required so that only the valuation will be outstanding when you can proceed.

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Industry Insights: The importance of a long-term view

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Industry Insights Series Q2 2020
Joseph Middleton, Financial Adviser

If you had asked me last year what I was hoping for in 2020 that would help provide some certainty for the economy (particularly the UK), it would have been for some clarity on how the Brexit deadlock would be resolved. Time swiftly moves on and I am sure Brexit is well down the list of worries many of us have now. The coronavirus pandemic has shut down large swathes of the global economy and understandably this has resulted in a big correction in asset values. In the next few years, I suspect the world will start to return to normal and there will be a new concern in markets, although I hope nothing quite as frightening to people’s health as COVID-19. As financial advisers it is our job to help navigate these uncertain times, whilst trying to give you clarity and reassurance with your finances. 

What can be done to protect yourself from these economic shocks and short-term uncertainty?  

One of the most important ways you can do this is taking a long-term view on your investments and financial planning. This is the key attitude we take when building portfolios for our clients. The first step to a long-term view is to understand your main financial goals. This could be something such as, saving for you retirement or securing an inheritance for you children (there are of course many others). After this you should be speaking to your financial adviser in order to set a plan in motion. Once this is the case, you and your adviser will have a strategy in place that will be tailored especially to your financial needs and goals. During times of ‘crisis’ it can be tempting to diverge from your objectives but doing this will often cause more harm than good. Of course, as part of your long term plan there should be provisions for the short term, that’s why we always encourage our clients to have an ‘emergency fund’ available to them that helps protect them over the short term if necessary.  

Economic uncertainty can come in many forms be it at a worldwide, national or personal level. The coronavirus pandemic hits hard because it covers all three. However, clients should take comfort in their long-term financial strategies because no matter how bad it seems at the time, the economy and the world will always move forwards. 

If you have any questions for us or to discuss any aspect of your financial planning, please do not hesitate to contact  the GDA Team.


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Industry Insights: Investing in Challenging Times

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Industry Insights Series Q2 2020
Gerry Caley, Senior Partner

Over the years I have listened to numerous economists, investment experts, research analysts and world-renowned authors discussing everything that has affected the markets over the last 300 years or so. Until recently however, not one of them had mentioned a little-known place called Wuhan in China. Our latest enemy, Covid-19, has not just attacked a particular country or people, but spread around the world in what could easily have been the plot to a science fiction story.

On this occasion, I would say that the jury is still out on whether we have collectively done enough to combat this outbreak, a topic that will certainly be debated on Question Time for the foreseeable future.  Meanwhile, as financial advisers we have an important job to do – advising and guiding our clients through this latest mire with our knowledge of the financial services industry and expertise. Saying that,  I must admit that I have never wished to be an 'expert' on anything, having been told by a learned colleague many years ago that an 'ex' is a 'has been' and a 'spurt' is a drip under pressure!

Many clients ask us what they should do when something catastrophic affects the markets and consequently negatively affects their portfolio fund values. Generally, I would say to do nothing initially. I know that this runs contrary to the instinctive response to cut any further losses, but by waiting until the dust settles you are able to make informed decisions that will benefit your investments’ performance over the longer term. Of course, it may be that your particular circumstances mean that a different approach is needed, and I would always recommend giving your financial adviser a call to talk through all the options available.

It is important to remember that whatever your portfolio value is showing (especially at times like this), it is only a paper loss or gain until something is sold. If you panic and sell prematurely, you will most likely create a real loss. You should keep in mind that investments are real asset backed securities – investing is not like betting on a horse, whereby if the horse falls or fails to make the winning post you will definitely lose your money. Markets do recover, whatever the cause of their distortion, be it short or long term.

If you have any questions for us or to discuss any aspect of your financial planning, please do not hesitate to contact the GDA Team.

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COVID-19 Challenges: Help with Financial Commitments

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Everyone goes through challenging times in their lives and sometimes you can be overwhelmed by your financial commitments. There is the potential for this to be the case for some people in light of the recent outbreak of Coronavirus (COVID-19), but this also applies for any unexpected life event such as illness, unemployment and bereavement - to name a few examples.

If you do find yourself in financial difficulty for any reason, there are steps you can take to ease the pressure in the short to medium term.

In terms of mortgage payments please contact your mortgage lender and explain your situation. The majority of lenders have excellent processes in place that will allow you to freeze your mortgage payments for a specific period (payment holidays), this avoids defaults being registered on your credit report and further potential action. Please do take advantage of this help that is available to ease the pressure on yourself and avoid debt problems further down the line which will be more difficult to resolve.

This advice also stands for any loans or credit cards that you may be paying (as well as household bills), just give your creditor a call and speak to one of their support staff who will be able to direct you to the appropriate team. You can often freeze or reduce payments and therefore give yourself the extra bit of breathing space you need.

As financial advisers we are always available to talk through the needs and circumstances of our clients. We offer practical advice to ensure that your money is working in the best way for you, and you have the right products to protect you and your family.

Additional Information 

Coronavirus (COVID-19) - Offical NHS Guidance:
https://www.nhs.uk/conditions/coronavirus-covid-19/


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A Battle of Wills - Don't leave it too late to makes yours

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It is easy to assume that our property and possessions will automatically go to loved ones when we die, but unfortunately this is not always the case. Many of us are unaware of the unintended consequences for our families by not having a valid Will in place.

If you die without having a valid Will in place this is also known as dying intestate, and there are strict inheritance rules which will be applied in this eventuality called the Laws of Intestacy. In these cases the court will appoint administrators who will be in charge of gathering your assets and paying any debts before distributing the remaining estate according to the rules.

The laws of intestacy vary greatly depending on whether you were single or married, or had children. In most cases, your property is distributed in split shares to your heirs, which could include your surviving spouse, siblings, aunts and uncles, nieces, nephews, and distant relatives. However, issues can arise for example in unmarried couples or families with step children as the rules do not recognise them as relatives of the deceased. Also, when no relatives can be found, the entire estate goes to the state. The only way to make it absolutely clear who should inherit your property and possessions after you pass away is by making a Will.

Since estate planning can be quite complicated, it may be wise to speak with an estate planning professional who can help you draft a valid Will and give you some peace of mind. If you have any questions or would like to speak to us further about making a Will, please do contact us and we will be happy to help.

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