Why do US equities keep rising?

It’s tough to find an asset allocator with an overweight position in US assets. Most agree that the stock market is expensive, the political situation is precarious and the economy may be on the cusp of overheating. Inflation is moving higher and further interest rate rises are imminent. So why does the stock market keep moving higher?

US equities have continued their strong run since the start of the year, fuelled by Donald Trump’s tax increases However, equity market valuations look increasingly precarious and appear to anticipate strength in the next quarter’s earnings In the past few days, there have been signs that US indices are starting to wobble. According to MSCI, North American equities are up 4.57% since the start of the year (data to 17 January). This is more than the Far East, on a par with Japan, and materially ahead of Europe, where – in many cases – economic growth is just as high and stock market valuations far cheaper.

There are a number of possible reasons for this. First is that the US continues to make up a significant proportion of global indices and passive investors continue to be an important influence on markets. While active investors are nervous about valuations, passive investors are less sensitive and continue to push the US indices higher.

It may also be that the Dollar is taking much of the strain. Sterling recently hit post-Brexit highs against the greenback, and US stock market returns look far more lacklustre in sterling terms (2.46% against 7.89% for Europe). There are those who believe that as America’s power and influence on the world stage slowly recedes in favour of China, the Dollar will continue to decline.

It may also be that US equities are in the throws of a ‘last hurrah’. Bull markets tend to run on longer than most people expect and the US economic expansion may be mature, but it is still happening and may be prolonged by US tax cuts. Earnings for US companies are still improving, and – in many cases – justify the valuations.

However, there are signs that investors are finally pausing for thought. Volatility of US markets is increasing; there is increasing nervousness that markets have already anticipated any strong improvement in earnings this quarter.

Either way, there are vastly better opportunities elsewhere. Yes, the US bull market may limp on, but increasingly, the potential downside does not justify the potential upside. Fiscal stimulus may douse a little short-term fuel on the fire, but the petrol can is looking increasingly empty.

Burn Rate – The rate at which you burn through your money.

How does this happen? Tom Wolfe gives a steer in Bonfire of the Vanities. His banker protagonist, Sherman McCoy recalls where he spent last year’s paycheck, and it goes like this

“I’m already going broke on a million dollars a year! The appalling figures came popping up into his brain. Last year his income had been $980,000. But he had to pay out $21,000 a month for the $1.8 million loan he had taken out to buy the apartment. What was $21,000 a month to someone making a million a year? That was the way he had thought of it at the time-and in fact, it was merely a crushing, grinding burden-that was all! It came to $252,000 a year, none of it deductible, because it was a personal loan, not a mortgage. (The cooperative boards in Good Park Avenue Buildings like his didn’t allow you to take out a mortgage on your apartment.) So, considering the taxes, it required $420,000 in income to pay the $252,000. Of the $560,000 remaining of his income last year, $44,400 was required for the apartment’s monthly maintenance fees; $116,000 for the house on Old Drover’s Mooring Lane in Southampton ($84,000 for mortgage payment and interest, $18,000 for heat, utilities, insurance and repairs, $6,000 for lawn and hedge cutting, $8,000 for taxes.[…more expenses I don’t feel like typing out…] The tab for furniture and clothes had come to about $65,000; and there was little hope of reducing that, since Judy was, after all, a decorator and had to keep things up to par. The servants…came to $62,000 a year…the abysmal truth was that he had spent more than $980,000 last year. Well, obviously he could cut down here and there-but not nearly enough-if the worst happened!

Sherman was on the hedonic treadmill. It’s very easy to get on and very difficult to get off.  When you’re on it, you find yourself not just wanting but needing certain things. Things you think you can’t do without. A better house, a better car, holidays on far-flung locations, nights out, new clothes, a second home etc etc

Don't get stuck on the treadmill

Expats selling UK homes must meet CGT reporting deadline

Non-residents selling property in the UK who fail to report their capital gains tax liability to HM Revenue & Customs within 30 days will be hard pressed to plead ignorance, despite precedence, following two recent tax tribunal judgments.

The 30-day requirement was announced in the 2013 Autumn Statement and implemented in April 2015. Sellers have to file a non-resident capital gains tax (NRCGT) return within 30 days of the disposal of a UK residential property. A return still has to be completed even if no CGT is payable.

Failure to notify HMRC within the specified time originally carried:

an initial penalty of £100 ($135, €113) in all cases; plus a 5% charge of the tax due or £300 for returns over six months late; plus a 5% charge of the tax due or £300 for returns over 12 months late; plus a £10 daily penalty for returns filed between three and six months late. According to the Society of Trust and Estate Practitioners (Step), this gave rise to a large number of complaints when HMRC tried to enforce the penalties.

As a result, the daily penalty was withdrawn, along with past penalties issued against late filers.


In mid-December, the First-Tier Tax Tribunal released decisions on two cases that centred on the late submission of NRCGT returns.

Both cited the case of Rachel McGreevy who resides in Australia and successfully overturned a £1,600 penalty for submitting an NRCGT a year after selling her UK property in 2015.

McGreevy said her understanding was that the CGT, which was nil, would be payable as part of her annual self-assessment. After discovering this was not the case, she completed the form and submitted it to HMRC, appealing the fine as “she had absolutely no idea” it was a requirement and had “received no previous advice to do this”.

The UK taxman rejected her appeal on the grounds that she had “no reasonable excuse”. It said it was McGreevy’s responsibility to ensure that an NRCGT return was submitted on time, as all the relevant information had been clearly publicised on the UK Government’s website.

McGreevy successfully appealed, with the tribunal judge determining in September 2017 that HMRC had not publicised the 30-day deadline widely enough, relying instead on the chancellor’s Autumn Statement and “an obscure document” on its website.

The judge stated: “I therefore consider that [Greevy] had a reasonable excuse for not filing a NRCGT return on time.”

Her success, however, has not meant that others have been as lucky, as two similar cases from December demonstrate.

Ignorance is not bliss

In one case, Mr Welland, who resides in Thailand, decided to sell three properties in the UK. He did not complete an NRCGT under the belief, like McGreevy, that he was to make the declaration in his annual self-assessment.

He claimed that it was only when he started to complete the self-assessment form that he became aware that the NRCGT had to be submitted within 30 days.

No CGT was due from the sale, as the profit was within his annual allowance.

However, after HMRC stripped out the daily penalties, Welland was left with a penalty of £1,800.

In a similar case, David and Jennifer Hesketh live in Singapore having been non-resident in the UK for many years. They sold a jointly-owned London property in December 2015 but did not file an NRCGT until January 2017.

Again, no CGT was payable on the sale of the property.

In January 2017, HMRC imposed a late filing penalty of £100 on both Heskeths, plus a £300 late filing charge each and £900 of daily penalties. After withdrawing the daily fines, the total penalty the couple faced was £800.

The same judge made both decisions and determined, having consulted the McGreevy ruling, that ignorance of the law was not a reasonable excuse for not complying with it.

The penalties were upheld, although Welland’s was reduced to £700 to reflect the quick succession in which he sold his properties. Had they been spaced apart, the judge said it was likely that he would have learned of his non-compliance and not made the same error with the subsequent sales.

Source: International Adviser

High-flying equities; but for how long?

As we approach the end of another year, the equity bull market shows no sign of abating. Nine years after the financial crisis, equities have been on a stellar run with a seemingly constant move higher with little volatility, in what is becoming known as the most hated bull market in history.

When Quantitative Easing was announced by central banks, many suggested it should be called ‘the Great Financial Experiment’. While the overall aim was to underpin the economy and ensure that credit continued to flow to businesses to promote growth, one of the implications has been the rapid advancement of technology, fuelled by access to very low financing costs and the exceptional performance of growth stocks, particularly in the technology space.

As a result, when looking at investment styles during 2017, growth investing has significantly outperformed value investing, and since the financial crisis growth has outperformed value in seven out of the last nine years*. Unsurprisingly, this has meant that value investing as a style has fallen hugely out of favour, with only the value teams at Schroders, Jupiter and JO Hambro really falling into the true value camp.

Those of you who, like me, remember the technology bubble in 1999/2000, will recall that equity valuations in growth sectors got incredibly stretched and many value managers of the day were being told they had lost the plot and needed to change their investment style to reflect a new world. Well, you may also recall that value went on to outperform growth in each of the following seven years!In those heady days of the technology bubble the mere hint of an internet connection saw a company’s valuation sky rocket. Things are different to today, but growth stocks are once again priced on very high multiples. Interestingly, November saw the elevation of online takeaway company Just Eat into the FTSE 100 Index and it now trades on a PE multiple of 73**. While I have no doubt that Just Eat is a great company that is capitalising on the changing way we are leading our lives, paying 73 times its current earnings to own a slice of it is a very rich price indeed.

The challenge for these highly valued growth stocks is that they must keep on growing at the same phenomenal rate to justify their valuations. With genuine growth seemingly hard to find, it is no surprise that some are prepared to pay these high prices to access such growth. However, it’s important to remember that there is no margin of safety and any disappointment in trading is likely to see their share prices hit hard.

It’s these valuation anomalies that are exciting value managers and giving them hope that the dispersion between value and growth has gone too far. With businesses such as Just Eat – which, remarkably, is now worth more than Marks & Spencer, J Sainsbury and WM Morrisons – priced for perfection, it is the old fashioned industries of mining, oil and gas extraction, insurance and telecoms that are currently the laggards and trading at significant discounts to their history.

While these businesses may not be exceptionally glamourous, and certainly not as exciting as ordering a takeaway on your phone while settling down in front of the Strictly Come Dancing Christmas Special, there comes a point when the valuation anomaly becomes just too great and these businesses get too cheap. When looking at the current dispersion between value and growth, it feels like this has been stretched to extreme levels.

As we enter 2018, the economic environment is changing, with inflation running high, the prospect of higher interest rates and a potential slowdown in the UK as the headwinds of Brexit begin to bite. If this spills over into the investment world, it will be interesting to see if it is those businesses priced on high PEs that provide the protection or whether it is cheap stocks that weather the storm the best. A look back at both 2000 and 2008 gives a clear pointer that if we do hit a period of turbulence in the economy and stock market, then value investing could well be the place to shelter.

Ryan Hughes Head of Fund Selection, AJ Bell InvestCentre


Will we see a Santa Rally this Christmas?

After 11 months of decent returns from UK stocks*, you may think the market will wind down for the festive month of December. But this is unlikely—historically, investors have joined in the Christmas cheer.

The so-called “Santa Rally” has been observed throughout December in many previous years, but is typically most generous in the last week of trading. Analysis from J.P. Morgan Securities suggests that the Santa Rally has a 76% hit rate in the UK equity market (based on the FTSE 100) and has provided an average return of 2.8% over the month of December1.

There are a number of suggested reasons for the Santa Rally, many of which may well be spurious. For example, some may believe it is caused by investors buying stocks in anticipation of gains at the beginning of the New Year caused by another seasonal anomaly called the “January Effect”.

Others suggest that the Santa Rally may be driven by tax considerations, or even a feel good factor from investors due to the festive atmosphere.

These sort of anomalies are by no means guaranteed, but let’s cross our fingers that Santa brings a little extra return this Christmas to the UK stock market.

How to transfer a UK pension to Australia – The Australian Financial Review

Moving a United Kingdom pension to Australian superannuation is complicated enough after big changes over the past few years. But a further worry for those wanting to transfer their UK entitlements is how much it can cost to do this.

A reader has less than £100,000 ($177,000) in a UK pension plan managed by the Friends Life group since 2012 that he wants to add to his Australian super savings.

Originally a top-up plan for the UK basic state pension, he is concerned about the likely transfer costs. He’s also worried about what might happen to its value in the lead-up to the UK leaving the European Community – Brexit – in 2019.

His concerns are quite valid, says Brian Bendzulla, managing director of financial consultant Net Actuary. On top of potentially further changes to UK pension transfer rules, he will have to deal with the interaction between UK rules and Australia’s super reforms, including changes to Australian contribution entitlements.

Governments in both the UK and Australia have made major changes to retirement savings arrangements – especially at the retirement income end. They are changes that anyone planning to transfer UK pension savings to Australia must become familiar with.

When a UK pension amount is transferred, it is treated as a non-concessional (or after-tax) contribution to super.

Age restriction

As far as the UK is concerned, the most important of these changes is a restriction imposed from April 2015 on allowing transfers before a member has reached the UK minimum pension age (currently 55).

This is the most immediate condition the reader must satisfy.

If he can’t, says Sydney super adviser Liam Shorte of Verante Financial Planning, he will have to wait until he is 55.

Shorte says he has a list of about 10 people in their early 50s with UK pension savings they want to bring to Australia. They have an arrangement to come back to him when they turn 55.

Until then, he has advised them to ensure their UK super is managed properly. They should concentrate in particular, he says, on ensuring they don’t pay too much in fees and charges which can be a trap for many.

His additional advice is to build up their Australian super.

If the reader satisfies the age condition and wishes to transfer the UK pension, he will not be able to transfer this to his Australian super fund if it’s a retail or industry fund.

Red light

Another key change to UK pension transfer rules in 2015 was a host of big Australian super funds losing their right to accept UK pension amounts because they couldn’t unconditionally satisfy the age 55 restriction. That’s because their rules can allow early access to super on hardship and compassionate grounds.

To be able to accept a UK pension transfer, an Australian super fund must be registered with the UK pension regulator, Her Majesty’s Revenue and Customs (HMRC), as a Qualifying Recognised Overseas Pension Scheme (QROPS).

Self-managed super funds (SMSFs) can accept a UK pension transfer.

If the reader satisfies the age 55 condition and has an established SMSF, says Brisbane barrister Jeremy Gordon, the fund’s trust deed can be amended so that it complies with the QROPS rules.

Gordon offers a legal documents service DirectDocs.com.au that includes an online QROPS conversion kit for a cost of $145.

Using an SMSF is not a simple process, cautions Olivia Long, chief executive of Adelaide-based SMSF administrator SuperGuardian.

Get the deed right

To start with, she says, you must ensure the SMSF trust deed is worded appropriately to comply with UK pension regulations. In particular, there must be no access prior to the age of 55.

The next step is to lodge a request to HMRC to be registered as a QROPS. This application can be done online and includes providing SMSF details, information on SMSF legislation and the SMSF’s trust deed.

Applying for QROPS status requires patience, says Long, as this can take four to eight weeks to be acknowledged.

A key consideration for anyone contemplating the SMSF route is the likely cost, especially if specialist advisory services become involved. This makes researching the costs of any exercise a very important part of the UK transfer process. Some specialist services charge a per cent of the transfer amount plus the cost of establishing an SMSF.

While an SMSF is one option, there is an alternative in the form of a boutique public offer retail superannuation fund, the Australian Expatriate Super Fund (AESF).

Established just over 12 months ago with South Australian based Tidswell Financial Services Ltd as the trustee, managing director Dannie Fox says the AESF is the only public offer retail superannuation fund in Australia able to receive UK pension transfers.

Keep costs down

Judging by the reader’s balance, says Fox, it will likely be more cost-effective to transfer directly into a retail fund than to establish an SMSF for this purpose. The AESF has more than 100 members. For a pension transfer it initially charges $880 (including GST) to contact the UK pension scheme, obtain, assist and lodge the discharge paperwork and then receive the money.

Once it is in the fund, says Fox, the UK pension amount is treated like normal Australian superannuation for access purposes, although there is an annual $264 charged for QROPS reporting.

While some of those who transfer their UK pension to an SMSF run it as an additional super account, says SuperGuardian’s Long, others use this as a “means to an end”.

Many roll out the funds to a retail or industry fund at the first opportunity, or cash it out if they have met a condition that allows them to withdraw their super.

They use the SMSF, she says, as a vehicle to bring the pension funds across but don’t want to deal with the ongoing administration requirements of being SMSF trustees.

AFR Contributor, John Wasiliev, Fairfax Media


What is a death in service benefit?

Many Expats often make the mistake of believing that death in service benefits they have with their company and life insurance are the same thing, This however, is not the case. Death in service is an insurance offered through your employer, while life insurance is available through an insurer. Often the two types of cover differ significantly in terms of the benefits they can offer.

The major problem with the death in service benefits is that in essence its just a personal accident insurance. If we look at the scenarios that a life company will pay in the event of a claim, the majority of the cases likely to be after a period of illness. But if you look at the cover that death in service offers then you are unlikely to be employed as the firm has no obligation to keep you on after the a period of illness.

The expat employee contract will generally have a clause that entitles the employer to stop employing you after 3 months if you're too ill to work. If after this period you die then the death in service benefits cease to exist.

With death in service, if you were to move or lose your job, through redundancy or dismissal for example, any death in service benefits will be lost. Replacing this level of cover may not be easy, particularly if you were in poorer health, which could then leave your family at risk should anything happen to you. For this very reason, you should be aware that death in service insurance may not be sufficient to cover all of your needs, so it may be worthwhile to consider additional cover in the form of life insurance.

What is death in service?

Death in service insurance pays out a lump sum to your family, usually around three or four times your annual salary if you die while working for the company offering the insurance policy. Many employees are provided with death in service benefits through an insurance scheme set up by their employer. The cover is normally offered free of charge as part of a benefits package and goes some way towards protecting your loved ones financially should you die whilst employed. However, if you leave your job, get made redundant or are dismissed, the cover ends, which could then leave your family at risk financially if you were to die.

What is life insurance?

Life insurance pays out either a lump sum or an income if you die. You might want it to provide your family with an income to live on or to cover a specific regular expense. Or you might want them to receive a lump sum which they can then invest/use for income or to pay for something specific such as an outstanding mortgage or inheritance tax bill

For a quote for life and critical illness insurance

Structured notes; What are they?

We define a structured product as, ‘An investment backed by a significant counterparty (or counterparties) where the returns are defined by reference to a defined underlying measurement (such as the FTSE 100) and delivered at a defined date (or dates)’

A ‘capital-at-risk’ structured product might for example offer a return of 65% on the investment if the FTSE 100 is at the same level or higher on the day the product matures in 5 years’ time. If the FTSE 100 is below that level, it will return the invested capital, unless it is more than a specified amount below, say 50%, whereupon capital would be reduced by the equivalent fall in the FTSE 100.

Most structured products may be sold during the term but they are designed to be held until their maturity. If sold early, the investor may get back less than they invested, even if the underlying asset has performed well. These investments should therefore only be considered if the intention is to hold them for the full investment term

Structured products offer many attractive features which can be used to satisfy a variety of investor needs. However, we do not believe they should be seen as a replacement but as a complement to traditional investments such as funds.

Source: Lowes

Inheritance tax & Joint Insurance Policies

Most holders of life insurance policies don't put their policies in trust. For most UK expats (and other nationalities) putting the policy in trust is a common sense tax saving opportunity.

By putting it in trust it has two benefits:

  • Firstly it ensures that the insurance payout is not included in your estate for UK inheritance tax purposes
  • Secondly, it ensures that your beneficiaries can access the cash quickly as it will be paid directly to them rather than having to be classed as part of the estate and subject to probate, etc

The reason why people usually choose to have their life insurance policy written in trust is that the money can go directly to where it's needed, for example to the mortgage provider to pay off the remortgage, or to family members so they can use the tax-free money immediately.

The procedure for putting the policy in trust is usually very straightforward, and most insurance companies will offer this for free. The documentation from the insurance policy usually includes a box to tick if you want to put it into trust. You'd then need to provide the name(s)of the beneficiary under the policy (i.e., who you want to benefit). Joint life insurance policies

Certainly, for individual insurance policies, it's pretty straightforward. What's the position with a joint insurance policy though?

In this case, the policy pays out on the death of (usually) the first to die. Using a joint life insurance policy makes the position potentially complex, and the tax treatment would depend on the specific wording of the policy. Ignoring the trust issue if you and your partner are joint policyholders there are three possibilities:

Firstly you are both beneficial tenants in common and the interest of the first to die passes under his/her will. In this case the share of the first to die forms part of their estate and, subject to exemptions, UK Inheritance Tax is payable on the value of that share.

Secondly, you are both beneficial joint tenants and the interest of the first to die passes to the survivor. In this case, the same consequences will follow, and the receipt would be potentially subject to inheritance tax.

Note that in either of these cases if you were married the spouse exemption would be available to avoid IHT on the death of the first spouse.

What about putting a joint policy in trust?

You could put a joint policy into trust. As we've seen, the benefit of a trust is that it could avoid IHT on the death of the first partner.

However, writing a joint policy in trust is likely to be more complex than a single policy. There are standard forms available from the insurance company that can allow the trust to be set up.

It is usually a very straightforward process. In many cases, single life policies are preferred to a joint life policy. The costs involved are not significantly more, but it is simpler to write into a trust and offers added protection & flexibility.

Home or Overseas UK university fees?

Publicly funded educational institutions normally charge two levels of fee: a lower 'home' fee and a higher 'overseas' fee. Private sector institutions often have only one level of tuition fee, which all students must pay. Whether you pay a 'home' or 'overseas' fee depends on whether you meet certain criteria.

The fee status criteria is provided in regulations, and guidance, published by the governments of the four countries of the UK. Different criteria will be applied depending on which country you are studying in, and whether you are studying a course at higher education (HE) or further education (FE) level.

How to build a retirement fund as an expat

As an expat you are likely to be subject to much uncertainty, you may need to move country at a moments notice. Many overseas employers will not offer the conventional pension schemes that you would receive in your home country. You may not be eligible for the local retirement fund as well. You also need to look at how you’re going to build your retirement income if you can’t continue to pay into your pension back home.

The earlier you start, the less onerous saving for your retirement is likely to be. You may also be able to afford to take greater risk with investments the further away you are from retirement, as temporary shortfalls caused by fluctuations in the market can be smoothed out over time.

There is a great saying. ‘The best time to plant a tree is 20 years ago. The second best time is today’

When thinking about saving and investing for retirement, it's important to consider where you plan to retire to, along with how income from your retirement savings will be taxed in retirement.

Look into the cost of living in your new country and tax implications in both your home country and adoptive country. You might be in the situation where you have moved to various countries throughout your working life, holding retirement savings in each.

When you're planning for retirement, there are some key issues you need to consider:

Where do you want to live when you retire? - If you're thinking of retiring abroad, it's worth checking how the cost of living compares with other countries. When do you want to retire? – The day you want to move into retirement whether it is early or later. Costs that you may not considered? – Your children may have moved out but they may also live in different parts of the world. Travelling to see them will be a big expense. The cost of health care is likely to be higher in retirement While some expats choose to return home in retirement, their experiences of life abroad may convince them to remain overseas. This could be either in the country in which they've been residing, or a different country that might offer an improved quality of life, a better climate or allow them to be closer to family.

Many are now looking for flexibility in retirement, which could include more extensive travelling and homes in different countries. It could involve more adventurous activities that they were unable to pursue when working, due to time constraints or having young children in tow. So how does an expat create a retirement fund? Create Multiple streams of income.

Once you have calculated how much you need, where you are likely to be and what expenses there are going to be. The creation of the retirement fund will come from different sources of income accumulated such as:

• Conventional occupational pension scheme • Buy to let property portfolio • Cash in the bank • Share portfolio • Social security or government pension • Consultancy work or part-time work in retirement • Small business

Case Study

Mr. and Mrs. Brown live in Singapore and wish to retire to Malaysia. They have calculated that they need 50,000 GBP per year. Their daughter is in Australia after remaining there after university and their son is in Italy working. They expect to travel to both countries to see them. They still need to maintain their health insurance and the cost of flights each year.

They receive 8,000 GBP each from the UK basic state pensions and Mr Brown receives 12,000 GBP from an occupational pension scheme. They have a buy to let property in the UK that provides them with 12,000 GBP per year. They have a portfolio of 500,000 GBP they need to generate 10,000 from this, even though it could produce a lot more.

Behavioural finance

Investors are strange creatures: they wait until the market has risen before they put money in and then sell out when the market has plunged - or worse, hold on to a floundering stock, waiting for it to get back to the value they paid for it.

Why do we behave irrationally? We would not wait for the price of our morning coffee to go up 20% before buying it, so why do we do this with investments? Why do we panic when markets drop, even though we knew it would happen? And why do we become attached to lame ducks whensellingthemandmovingonwouldgetourmoneybackquicker? Manytheoriesabound:gobackasfarasthe18thcenturyandeconomists such as Adam Smith were seeking an explanation of why markets behave as they do. One that has gathered force of late is behavioural finance.

Behavioural finance suggests people often make decisions based on so-called rules of thumb, rather than after rational analysis. Technically referred to as heuristics, it involves understanding that the way a problem is presented can affect the outcome (a process called framing). Therefore, market inefficiencies are not the only way to explain outcomes that go against rational expectation.

Two of the most influential psychologists in the field are Daniel Kahneman and Amos Tversky who, in 1979, published a paper comparing models of rational economic behaviour with decision-making during times of risk and uncertainty. Their theories sought to explain anomalies in the way investors and financial markets react.

These theories help explain how we all got pulled into phenomena such as the technology boom (mostly too late to make any real money), despite the irrational theories that tend to support them. They also help explain why we sell out of a falling market, just when our loss is at its greatest, and why we hold on to ‘loved’ investments long after they have started to go wrong. And it is why we shy away from markets that have underperformed, despite indications of great potential.

Increasingly, asset managers are using pricing models to take behavioural biases into account, as they believe it gives them an advantage. If you understand these theories, you could have that advantage too.


What you need to know

If you are looking to invest in shares or bonds, you may think about putting your money into one or more managed funds. Managed funds are pooled investments that contain different securities, so you reduce the risk of holding just a few individual shares or bonds.

You can invest in funds which provide access to a variety of different markets and sectors. But wherever you invest, you will be faced with one of the most basic questions: do you want to put our money in ‘actively’ or ‘passively’ managed funds?


Deciding if you would prefer your investment ‘actively’ or ‘passively’ managed is an important consideration and a useful step towards narrowing your choice of funds to invest in. Your first consideration is deciding how you want your investments managed. Are you looking for a fund that will be impacted by an individual fund manager’s choice of investments? Or are you more interested in keeping charges lower and prefer one that simply reflects the performance of a major index, such as the FTSE 100?


Active funds typically have higher annual management charges than passive funds. This reflects the investment managers’ potential to outperform the market, and they are managed with the aim of generating returns greater than the relevant markets, as measured by an index – known as its ‘benchmark’. The index contains the companies whose shares are being bought and sold daily by the fund. All equities belong to at least one index depending on the location of the company and the type of business.


Professional fund managers or investment research teams run active funds, and they make all the investment decisions – like which companies to invest in or when to buy and sell different assets – on your behalf. The manager will pick stocks to buy and then compare the returns that they make against the benchmark. Good stock selection is designed to pick the companies that the fund manager thinks will outperform others within the index.


The manager does not have to buy all the index stocks, only the ones they believe will increase the most in value or, in some cases, pay the best dividends to give the best overall returns. They have extensive access to research in different markets and sectors and often meet with companies to analyse and assess their prospects before making a decision to invest. Typically, active fund managers base their stock buying and selling decisions on several factors including market conditions and the political climate, the state of the economy, and company-specific factors (for example, profitability and market share).


Depending on the fund’s objective, an active fund manager may have little or no constraint on their investment choice. Where this is the case, they can select what they consider the most promising opportunities, regardless of industry sector or company size, and aim to maximise gains in rising markets and limit the effects when markets are falling.


The passive management style of investing is called ‘passive investing’, also known as ‘tracking’. A passive, or index-tracking, fund is managed with the aim of replicating the performance of a specific index. Passive investment funds track a market and charge less in comparison to an active fund. To track the FTSE 100, for example, an investment manager will aim to invest in the same shares, in the same proportions, as this index.

“Professional fund managers or investment research teams run active funds, and they make all the investment decisions – like which companies to invest in or when to buy and sell different assets – on your behalf.”

Passive fund managers won’t make any ’active’ decisions, as they’re only trying to match the index. The fund will generally rise and fall with the index. Typically, the fund will buy all the stocks in, for example, the FTSE 100 in the same proportion they represent in the index. So if Vodafone accounts for 6% of the FTSE 100 Index by value and a smaller company such as Tate & Lyle accounts for 1%, some 6% of fund by value will be in Vodafone shares and 1% by value in Tate & Lyle, and rebalancing will occur to ensure the fund is consistent with the index.


Passively managed funds perform well when markets rise and poorly when they fall, and they can be less diversified than active funds, as the relevant index may be dominated by just a few large companies. A change in the investment manager should have no impact on its performance, and they generally offer lower annual management charges, with a lower turnover of shares leading to lower transactional costs.


It’s important to remember that a degree of risk is inherent with any investment, and the potential for greater returns comes with a higher degree of investment risk. While

a passive fund is considered to have less investment risk associated with it than an actively managed fund, there are still risks (such as stock market risk) involved.


It’s important to understand the difference between ‘actively’ or ‘passively’ managed funds before you embark on choosing a fund or combination of funds, and we always recommend you obtain professional financial advice. That way, you can build an investment portfolio which truly reflects your individual investment objectives.

Transfer your UK Pension to New Zealand

Retirement Planning for most New Zealand residents consists predominantly of the State Pension, known as New Zealand Superannuation. As it is often not sufficient for a basic standard of living in retirement, many residents make their own retirement provision using KiwiSaver and personal Superannuation.

KiwiSaver only offers tax incentives for New Zealand residents and these are at low levels resulting in most New Zealand residents turning to alternative structures for their retirement savings. Also, KiwiSavers do not qualify as ROPS and therefore should not accept UK pension transfers.

In New Zealand, the earnings and growth within a Superannuation Fund are generally subject to tax if you are a New Zealand resident. When you start to drawn benefits from the Super however, these payments are not subject to tax as the member has paid ongoing taxation within the Super scheme. This is great for non-NZ residents as they have a Prescribed Investor Rate (PIR) of 0% – so earnings are free of NZ taxation and future payments out of the scheme are free of NZ taxation.

Pensions in some countries, particularly the UK, Malta, Gibraltar and South Africa, can usually be easily transferred to New Zealand.

If a New Zealand resident holds an overseas pension, in most cases it’ll be subject to New Zealand income tax. Tax on overseas pensions is complex but there is information available on this from the Inland Revenue department. You may also have to pay tax on gains made by the overseas fund which provides the pension, as well as tax on the income you receive


Buying an investment fund may incur a sales charge (although today this should not be the case). Depending on your route to the purchase: platform or direct.

A back-end load/charge fund structure gives the appearance of a “no sales load” fund, but it is actually a full sales load fund in disguise, with financial advisers paid a sales fee of 5% too 8% by the fund up front.

This disguise is supported by a lack of transparency which enables the sales process for back-end load funds to be based on a client proposition of “no subscription charge and a redemption/exit charge which reduces annually and disappears altogether after five years”.

This can be positioned as an immediate up-front saving of 5% on the published subscription fee, with 100% of the investor’s money buying shares in the fund. It also holds out the appealing prospect of combining that discount with no exit fee if the fund is held for over five years.

This is a proposition which offshore financial advisers find relatively easy to sell and which is supported by the literature produced by these funds.

These ‘loads’ are effectively sales fees which are used to remunerate offshore financial advisers selling funds to retail investors.

Research show that, in virtually every instance, a front-end load share class will outperform the equivalent back-end load share class by at least 10% over three years. It is clear that the longer the back-end load share class is held, the bigger the gap between front-end and back-end performance. While the impact on a financial adviser’s remuneration is neutral.

It will seldom be in the best interests of the investor to place their money into the back-end load share class rather than the front-end load share class

A quantitative comparison of the front and back-end load share classes of prominent funds in the offshore (which have both share classes) confirms that back-end load funds generally produce poorer returns for investors.

This is most pronounced when the fund classes have been established for three years or more, as this gives a fairer indication of the compounding effect if higher annual charges over time.

Spoting a back end charge

If there is a term or period of time that the fund needs to be held then there is back-end load/charge.

Black Monday thirty years on

Black Monday is still etched on the collective consciousness of the investment industry, a reminder of the caprices of markets and how quickly they can turn. This volatility remains a key deterrent for investors, and a reason why many are woefully under-exposed to the stock market.

The losses seen on Black Monday remain the largest single intra-day falls of the last thirty years It has helped teach investors a few salutary lessons: the importance of diversification, regular savings and the need to stay invested It should be a reminder to be a little cautious when things are going well The losses seen on 19 October 1987 remain the biggest daily falls in the level of the S&P 500 and FTSE 100 over the last 30 years. The S&P 500 index plunged 20.5% and the FTSE 100 dropped 10.8% in a single day. The losses seen in the wake of the Lehmans bankruptcy come close, with declines of around 9% in October 2008.

Nevertheless, Black Monday should remind us of some investment truisms. The first is that when it works, diversification is really effective. Data from Seven Investment Management, shows that while the FTSE 100 and S&P 500 were down 33% and 28% respectively in October and November 1987, gold was up 8%. Justin Urquhart Stewart, co-founder and head of corporate development said: “A well designed portfolio, like a well-made yacht, can help ride out the storms and sail through troubles to the calmer seas beyond.

It should remind investors to be a little bit cautious when things are going very well. Black Monday came after a lengthy period of sustained stock market gains, with stock markets growing at a pace of up to 30% per year in the preceding five years. Valuations were at record highs.

It also shows that it pays to wait out a crash. Figures from Hargreaves Lansdown show that in 1987 a £10,000 investment was reduced to £6,610 in a matter of weeks, but by 1997 that investment would be worth £32,690, and today it would be worth £104,340.

Finally, of course, it is the best argument for regular savings. It demonstrates the destructive forces of fear and greed and how they combine to create volatility. Investors have a few weapons to deal with this and regular savings is one.

The anniversary has prompted talk of whether the circumstances are ripe for another ‘Black Monday’ and there are some similarities: valuations are high and the bull run has been in place for some time. However, there is a notable lack of complacency. This has been a distinctly unpopular bull market and for that reason alone, the next Black Monday may be some way off.

Stress Testing?

If you are planning your finances through a cash flow model - trying to predict the future - you should be able to understand how your finances shape up in a downturn. This can be termed stress testing – could you cope if your capital ran out completely or could manage on a lower income during the downturn to ensure that the capital is not depleted by too much? It is important to bring potential changes in inflation into the ‘stress test’ and to build in a sufficient buffer to cover unexpected expenditure.

There could be a number of scenarios that will be considered as part of a stress test.

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Sell In May and come back again on St Leger Day?

Any investors who followed the old market maxim “Sell In May” won’t feel too sore, as the FTSE 100 made awfully hard work of scratching out a 2% capital gain during the summer months.

But a gain is a gain and the index’s ability to make any progress at all in the face of the ongoing Brexit negotiations, heated rhetoric between North Korea and the USA and a spotty summer reporting period from UK stocks may further embolden those clients who are bullish of UK stocks.

They may be adhering to another adage, namely that “markets climb a wall of worry,” but they may also be looking forward to seeing the results of the second half of the “Sell in May” message, which is “Come back again on St. Leger day.”

Saturday 16 September was St. Leger day this year, as Doncaster’s Town Moor track hosts the final ‘Classic’ horse race of the Flat season, so invetors may now feel this is the time to assess their strategy as we prepare for the run-in to the year end.

Common mistakes UK expats make about tax

Research from Old Mutual International has uncovered some crucial misunderstandings among British expats when it comes to their domicile status and tax position. These misunderstandings could leave them and their loved ones financially exposed, and could even land them in trouble with HMRC if they are not paying the correct UK taxes.

1.British expats mistakenly believe they are no longer UK domiciled British expats are likely to have a UK domicile of origin, acquired at birth. They can try to acquire a new domicile (a domicile of choice) by settling in a new country with the intention of living there permanently. However, it is very difficult for someone to lose their UK domiciled status and acquire a new one. There are no fixed rules as to what is required to do this and the burden falls on the individual to prove they have acquired a new domicile, and often this isn’t finally decided by HMRC until someone passes away.

Living in another country for a long time, although an important factor does not prove a new domicile has been acquired. Among the many conditions that HMRC list, it states that all links with the UK must be severed and they must have no intention of returning to the UK.

Research shows 74% of UK expats who consider themselves no longer UK domiciled still hold assets in the UK, and 81% have not ruled out returning to the UK in the future. This means HMRC is likely to still consider them to be deemed UK domiciled.

2.British expats mistakenly believe they are only liable to UK inheritance tax (IHT) on their UK assets As most British expats will still be deemed UK domiciled on death, it is important that they understand that this means their worldwide assets will become subject to UK IHT. A common misconception is that just UK assets are caught. This lack of knowledge could have a profound impact on beneficiaries.

Before probate can be granted, the probate fee and any inheritance tax due on an estate must be paid. With UK IHT currently set at 40%, there could be a significant bill for beneficiaries to pay before they can access their inheritance. Setting up a life insurance policy could help ensure beneficiaries have access to cash to pay the required fees. Advisers setting up policies specifically for this purpose must ensure they place the policy in trust to enable funds to be paid out instantly without the need for probate.

Research shows a staggering 82% of UK expats do not realise that both their UK and world-wide assets could be subject to UK IHT.

3.British expats mistakenly believe they are no longer subject to UK taxes when they leave the UK All income and gains generated from UK assets or property continue to be subject to UK taxes. Some expats seem to think that just because they no longer live in the UK they don’t need to declare their income or capital gains from savings and investments or property held in the UK. By not declaring the correct taxes people can find they end up being investigated by HMRC, and the sanctions for non-disclosure are getting tougher.

Research* shows 11% of UK expats with UK property did not know that UK income tax may need to be paid if their property is rented out, and 27% were unaware that Capital Gains Tax may need to be paid if the property is sold.

4.British expats mistakenly believe that their spouse can sign documents on their behalf should anything happen to them The misconception that a spouse or child or a professional will be able to manage their affairs should they become mentally incapacitated is leading people to think they don’t need a Power of Attorney (POA) in place. This could result in families being left in a vulnerable position as their loved ones will not automatically be able to step in and act on their behalf. Instead, there will be a delay whilst they apply to the Court of Protection to obtain the necessary authority. This extra complication is all avoidable by completing a lasting POA form and registering it with the Court of Protection.

Research* shows 44% of UK expats wrongly believe their spouse will be able to sign on their behalf should they become mentally incapacitated.

5.British expats unsure if their will is automatically recognised in the country they have moved to It is wrong to assume a will or POA document is automatically recognised in the country in which they move to. Often overseas law is driven by where the person is habitually resident, and the laws of that country will apply. Therefore, people may require a UK will and POA for their UK assets and a separate one covering their assets in the country they live. The wills also need to acknowledge each other so as not to supersede each other.

Research* shows 50% of UK expats do not know if a will or POA is legally recognised in the country they have moved to.