Tenet Group - News-views , Provider Partners

Broadening our themes

Mon, 01 Nov 2021 12:13:30 +0000

In 2020, stock market performance was driven by a small number of themes, such as the digital economy. David Jane, Fund Manager for Premier Miton’s macro thematic, multi asset funds, explains why it is essential to broaden thematic exposure into other areas as we move forward into the recovery phase in 2021.

For a single person this would normally be a single life plan on their own life written under trust for the benefit of whoever will inherit your client’s estate. For a couple who are married or in a civil partnership, who are leaving everything to each other on first death, this would be a joint life second death policy, again written under trust for the benefit of who will eventually inherit their joint estates.

In both of these cases you would probably choose a guaranteed premium product so that the clients know how much it’s going to cost them each month no matter how long they live. Although they may also want to have the cover increase with inflation in order to take account of any impact on the value of their estate because of this without having to apply for more cover each year.

You may also have some clients who want to pass on part of their estate whilst they are still alive taking advantage of the exemptions that are available for gifts. Or, they may be looking to change where their investments are held to take advantage of the various reliefs that are available such as business property relief. Both of these strategies or a combination of both can be used to reduce the amount of inheritance tax that is eventually payable. But both of these take time to get the full effect of the reduction in tax, so some cover may still be needed at least until the full benefits are realised. Circumstances may also change and so some flexibility in the amount of cover and how long it lasts should be built in to any arrangement and any arrangement should also be cost effective. A Whole of Life plan with reviewable premiums could be an ideal way for your client to leave a lump sum for loved ones to pay the IHT liability where there are strategies in place to reduce that liability over time. Here’s an example:

Mary is recently widowed and now having been left everything by her husband has an estate of £1.5m. This consists of her house, some investments including an ISA and some cash. Having not made any previous gifts she’s able to take advantage of both her own and her husband’s nil rate band as well as the full amount of both of their residence nil rate bands giving at total nil rate band of £1m. She therefore has a current IHT liability of £200,000.

Mary intends to make gifts to her 2 grandchildren in future when they leave university. She’s also in the process of gradually changing some of her ISA investment to invest in AIM shares in order to diversify the portfolio and hopefully provide a better return. Both of these will reduce her liability to IHT over time but in the meantime she wants a cost effective way of making sure there’s money available to pay this if she dies before this can happen.

Writing a Whole of Life plan on a reviewable premium basis provides the highest benefit amount for the lowest initial premium. Mary’s premium will remain unchanged for the first 10 years, but then will be reviewed every five years thereafter. Premiums will increase significantly at each review, however in the periods between these reviews there may be an opportunity to reduce the sum assured on the plan as her liability changes over time, which would reduce the impact on the premium.

These plans can also be written on a guaranteed premium basis. With a guaranteed premium, the premium is calculated at the start of your client’s plan and won’t change unless the amount of cover changes. This may be more suitable for someone who has no ability or no desire to reduce their liability or just wants the certainty of how much their cover will cost throughout the rest of their life.

It’s also important to make sure the plan is written under trust. Often providers have a tool to help you identify the right trust structure and form for your client. Without a trust the policy would be part of your client’s estate adding to the inheritance tax problem. Your client should also think about who the trustees should be. A trustee should be someone your client trusts to carry out their obligations for example a partner, other family member, or friend. Trustees must carry out certain obligations and duties so the position shouldn’t be taken lightly. Your client should therefore ensure that the trustees are fully aware of their intentions so that they can carry them through.

Understanding the effects of any inheritance tax planning and choosing the right policy and putting it in place in the right way to run alongside those is a key part of giving your client the best chance of their plans coming to fruition.

2/3 Sustainable Development Goals at risk of not being met

Mon, 01 Nov 2021 10:07:28 +0000

M&G Investments’ latest SDG Reckoning report reveals that the world is on track to deliver only six of the 17 United Nations Sustainable Development Goals (UN SDGs).

M&G Investments’ latest SDG Reckoning report reveals that the world is on track to deliver only six of the 17 United Nations Sustainable Development Goals (UN SDGs). Launched in 2015, the UN SDGs are a global call to action to end poverty, protect the planet and ensure all people enjoy peace and prosperity by 2030. M&G analysis shows that progress across nearly 65% of SDGs is lagging, with no time to waste on achieving a more inclusive society, one that protects nature and thrives off a circular, regenerative economy.

M&G’s second SDG Reckoning report has assessed all 17 SDGs - from a general perspective and through an impact investing lens - using a scale of 1 to 10 to assess progress since last year’s inaugural rankings, determining whether the world has started to follow through on its pandemic-related sustainable recovery pledges. While governments have to secure public funding and set a supportive policy agenda, private sector players including investors have a huge role to play in directing the capital required to solve the global sustainable development challenge.

Click here to view the interactive summary. The full report can also be found here.

While we support the UN SDGs, we are not associated with the UN and our funds are not endorsed by them. The views expressed in this report should not be taken as a recommendation, advice or forecast.

The views expressed in this document should not be taken as a recommendation, advice or forecast.

Markets conceal a stellar opportunity

Mon, 01 Nov 2021 10:07:15 +0000

If the valuation gaps we see today are to return to something more akin to ‘normal’ in the context of long-term history, the value recovery that began at the end of last year still has a long way to go.

Could value stocks really benefit from the prospect of higher inflation? After the decade value investors have had, you might imagine they - we - would be grateful for any and every market commentator with a supportive word for the discipline but we are nothing if not contrarians. And so, to the growing number of people suggesting value stocks stand to benefit from higher inflation, we ask again - really?

Investing is comparable to applied history, so let’s take a step back and start with the big picture. Any debate around inflation and what it might mean for equities has to be viewed within the context of asset markets that, for the past 10 years or so, have been dominated by declining inflation, falling interest rates and the quantitative easing (QE) policies of governments and central banks.

Courtesy of data from Société Générale encapsulated in the following two charts, we can see that – even with levels of inflation that have been below 2% for pretty much the whole of the last 10 years – the real yield on a traditional global balanced portfolio is already negative. This in turn means markets are particularly vulnerable to higher inflation today.

Source: Société Générale, data to May 2020

If we then split the global equity market into valuation quintiles based on the five-year trailing correlation to US bonds, we can see that - with the onset of QE - a gap begins to open up around 2010/11. Put simply, this gap is between stocks that benefitted from the lower discount rate (quality and growth) and stocks that suffered (cyclicals, financials and value).

You can read more about the discount rate in How interest rates affect stockmarkets, but what these numbers reveal is the reason valuations have become so extreme is actually in part down to ultra-low bond yields. It follows, then, that investors seeking quality or growth in the equity market have significantly re-rated these stocks - and that now leaves them very vulnerable to higher yields.

For the past few years, weak inflation, disappointing GDP growth and falling bond yields occasioned by QE have benefited growth/quality assets, while penalising the more economically-exposed cyclical ones - which, at this point in the cycle, make up much of the value universe. This has pushed relative valuations to never-before-seen extremes.

The green line in the above-right chart is now at risk as it is both very expensive and very negatively sensitive to rising bond yields. On the other hand, the blue line is cheap - and, since that is due to the macroeconomic regime of the last decade, it stands to benefit most from that reversing. This explains how we got here, then, but what can a longer-term history from multiple markets tell us about inflation and equity market returns?

Valuation not inflation

We will now turn to some data from Citi, whose analysts have been collating inflation and equity market data since the 1950s. As the next pair of charts show, there is indeed a relationship between inflation and equity market returns - broadly speaking, equities have been a decent inflation hedge. This makes sense as they are a real asset class, where corporate revenues offer positive exposure to rising consumer prices.

Source: Citi Research, Global Financial Data, MSCI, 07/06/21

Even so, the relationship between inflation and equity market returns is not one you would necessarily hang your hat on. Equity markets struggled in the 1970s when inflation was on the rampage, for example – and they performed poorly in Japan in the 1990s, and in the US in the 2000s, even though both periods saw falling inflation and interest rates.

If inflation is not a reliable guide, though, where does that leave us? The above-right chart plots subsequent decade returns against those markets’ starting cyclically-adjusted price-to-earnings ratios or ‘CAPEs’. If we look for those same poorly performing periods for Japan in the 1990s and the US in the 2000s, we can see the former’s starting valuation was a CAPE of 80x while the latter’s was a CAPE of 50x.

The conclusion here is there is a much better predictor of longer-term equity performance than inflation, and it is starting valuation. So, while it is true inflation matters to an extent - and it is likely modest inflation would benefit many of the cyclical companies to which value investors are exposed today - valuation matters much more. Ultimately, whatever the level of inflation, you see the equity return you pay for.

Valuation dispersion

Still, even if you do see the return you pay for, it would be quite reasonable to point out that, in aggregate, equities are pretty expensive. Most notably, the US, which in total accounts for two-thirds of the global market benchmark, is as expensive as it has ever been on a variety of valuation metrics. And, as we just pointed out, exceptionally high valuations can only indicate exceptionally low returns over the longer term.

If what you pay matters and equities are expensive, then how, here on The Value Perspective, can we be so excited about prospective returns for investors from today? It is because, as our final chart illustrates, valuation dispersion within the market - that is, the gap in fundamental valuation between the most and the least highly rated shares - remains at extreme levels.

Source: Morgan Stanley, data from 31 January 1998 to 8 June 2021

Indeed, on a global basis, the gap is more extreme than at the dotcom peak in 2000. Valuation dispersions mean, even if overall market returns prove to be paltry, returns from the most undervalued parts of the market can be stellar over the coming years. And if the valuation gaps we see today are to return to something more akin to ‘normal’ in the context of long-term history, the value recovery circled in red has a long way to go.

To read our latest value insights, click here or visit our website to find out how Schroders can support you

Hear from the experts - customer engagement

Wed, 27 Oct 2021 15:25:00 +0000

The Covid-19 pandemic has had a profound impact on the way we are working. For many, face to face meetings are a thing of the past and this in turn places more emphasis on comprehensive, efficient, digital processes. The methods that have become engrained during the pandemic are likely to stick going forward, with the digital provision of existing customer details by insurers becoming an integral part of the client/adviser relationship.

On top of the typical life events most likely to trigger a protection conversation; marriage, a new home, first born baby, the Covid-19 crisis is now also being recognised as a prompt for people to consider protection.

We have looked at key life events during a typical protection policy lifecycle that allow customer communication to go beyond product or regulatory communications, enabling a client/adviser relationship to be built and maintained.

In 2020, the average age of an Aviva customer purchasing a decreasing term policy (DT with and without CI included) was 35 years of age. Our customers are therefore likely to experience one or more of the following key life events during their policy term

Marriage (average age 32)
Having a child (average age for first child - mother 29, father 33)
Purchasing home (average age 34)
Moving home
Divorce (average age 45)

The period between the ages of 30-45, therefore, represents a particularly critical period for keeping in touch with our customers and ensuring their protection policy continues to meet their needs. Our products are set up to cope with these life changes through benefits & options like the separation option or the moving house option but the difficulty lies with identifying the event when it happens to ensure timely changes are made.

Annual statements are a common way for protection providers to keep clients up to date with their cover and the benefit it provides. Although the frequency and content differ markedly between insurers. Though the provision of some information is often better than none, perhaps this method is best consigned to savings and investment contracts where the need for defined regular reviews of holdings is necessary best practice.

In the case of protection contracts a flexible approach, reacting to customers changing circumstances by providing prompts and information to advisers, giving them the tools and opportunity to make pro-active contact with customers would be a better way for insurers to provide data. The challenge remains whether insurer systems and processes can cope with this in a truly digital way. But with consumers becoming more aware of their own health and financial wellbeing, it’s crucial we respond to an ever more engaged audience.

Our Digicare+ proposition which is automatically included with Aviva protection policies, supports customers ongoing interaction with their health and wellbeing and provides a platform for ongoing engagement on this topic.

We are carrying out further research via an adviser survey in the coming months, the results of which will potentially drive key changes in our existing business communication strategy and strengthen our desire to create long lasting customer relationships.

Sources: Aviva MI on average age at purchase of decreasing term policy in 2020; Key life events, Office for National Statistics

By Jenny McGivern (Propositions Manager & Matt Usher (Change Delivery Manager) at Aviva

Tatton - Business investment: why we care about capex

Wed, 06 Oct 2021 15:26:00 +0000

Lothar Mentel, CEO and chief investment officer at Tatton, explains why capital expenditure is an important part of any dynamic economy.

Throughout this year’s recovery, consumption and household spending have been key factors to watch. Global growth can only continue if consumers are confident in their prospects – which is why we have been closely monitoring developments in employment and household savings rates. This is particularly important in the face of wavering economic sentiment and the likelihood of a difficult winter ahead.

Equally important is investment in the post-pandemic future. So far, governments have looked like the main architects of that investment drive. President Biden is planning a wave of infrastructure catch-up spending in the US, while British and European politicians are exploring similar measures with a focus on green infrastructure. Fiscal policy taking the initiative here makes sense. The combination of high private savings levels and historically low interest rates put governments in a good position to spark growth through public spending, while the cost of such investment remains low for the foreseeable future.

For a stable and sustained recovery, though, productive investment will need to come from the private sector too. Economic activity needs new technologies and avenues of production (particularly in the face of the daunting environmental challenges) and public spending can only go so far in providing it. When businesses focus on capital expenditure (capex), it is a sign that growth is self-sustaining. This is vital for ensuring a broad-based recovery – avoiding overreliance on consumer confidence or individual sectors.

Capex also indicates that businesses are confident about the future. There is little point investing in new products unless you think people will be able to buy them. So, if we see strong capex spending it follows that corporates are confident about the economic recovery. This is particularly important now, considering how the pandemic experience has altered perceptions of productivity and technology across society – from online infrastructure to the green transition.

Corporate investment will also have a big impact on inflation and the labour market. Capex can sometimes be seen as a proxy for productivity growth – as businesses look for improvements to save on costs. For example, rising wages and a tight labour market might prompt a business to automate its production line and cut jobs – thereby pushing up unemployment while increasing productivity.

The relationship between capex, productivity and labour is particularly relevant right now. The financial pages have been filled with talk of ‘stagflation’ this week – the phenomenon of rapid inflation at the same time as slowing growth and rising unemployment. Given that unemployment tends to counteract inflation, and vice versa, this can usually only happen with a significant supply-side shock. The 1970s oil shock was a prime example of this, and newspapers have been quick to draw comparisons between then and Britain’s current heating gas shortage.

We agree with most economists that this comparison is a little far-fetched. Short-term supply issues can bump up prices, but longer-term trends are usually dictated by demand, unless there are structural supply constraints (such as the oil cartel controlled by OPEC). Otherwise, we should expect rising prices to incentivise more capex, eventually pushing up productivity and keeping a lid on spiralling prices.

The positive part of this story is that productivity growth is the main driver of sustained real (inflation-adjusted) economic growth – lifting corporate earnings and (in their wake) investment returns as well as living standards. That is the theory, at least. In practice, displaced labour can cause big problems, as workers’ skillsets effectively become stranded assets, requiring further investment in retraining.

Source: Worldbank, IMF

Still, capex is an important part of any dynamic economy. In fact, capex – or the lack thereof – was one of the main disappointments of the decade after the global financial crisis (GFC). The chart above shows US and global capex as a percentage of GDP. Corporate investment took a big hit following the financial crash, and has been tepid ever since. This has gone hand-in-hand with a post-GFC slowing of productivity, and a relatively stagnant global economy.

Fortunately, last year’s recession has not shown the same capex drop-off. Projected corporate investment for 2020 is broadly in line with the year before, and the expected 2021 figures already show a pick-up. This has been matched by the rapid US recovery earlier this year. Even though other growth indicators have wobbled recently, should investment stay at a decent level, it bodes well for the future.

There is perhaps a worry that capex spending has been quite unbalanced. Most of the capex recovery has gone into information technology (IT), while other sectors have seen their corporate investment levels fall. Optimists would say IT investment is the most needed – particularly for the so-called green revolution ahead. As written before though, new technologies still need more materials and old-fashioned infrastructure to work. Fortunately, governments seem eager to provide on the infrastructure side.

As such, the outlook is mostly positive, even though capex intentions have dropped off recently. Companies flush with cash – like the US mega-tech sector – can fund spending out of their reserves, or have access to raising funds at low yields in capital markets. Others must resort to bank loans. The outlook for those companies is unfortunately less positive, with bank loans not recovering as much since early 2020.

The main risk to the overall picture is what the current supply shock might mean for investment intentions. As noted, the energy crisis and widespread supply bottlenecks this year are mostly one-off affairs, unlikely to cause elevated inflation over the longer-term. Short-term price shocks can still have a big impact on confidence, though. Should price issues eat too much into corporate profit margins, it will make companies less likely to invest – weighing down on future growth prospects. For now, companies seem to be absorbing the costs, but this is something we will be keeping a close eye on.

Looking beyond ‘vanilla’ tax-efficient investments

Wed, 06 Oct 2021 09:10:00 +0000

Jessica Franks, Head of Retail Investment Products at Octopus Investments, explains why having knowledge of a wider range of investments will leave you with a stronger business this year.

Pensions and ISAs are excellent tax-efficient investments, but looking beyond these is an important way to add value to a client’s planning. By failing to consider additional ways to invest tax-efficiently, you may be coming up short.

Indeed, a growing number of clients will need to think outside the box when it comes to their planning as they make full use of their allowances.

Take the lifetime allowance (LTA) on pensions for example. This limit on the amount you can invest in your pension while still benefiting from tax advantages is frozen until at least 2026.

Inheritance tax thresholds could also impact clients – the nil-rate band and residence nil-rate band are also frozen at current levels until at least 2026.

These freezes are set against a backdrop of soaring property prices, rising asset values, recovering stock markets and increased propensity to save during the pandemic.

The need for additional options beyond everyday tax-efficient investments has increased. Those equipped to advise on more specialist investments can build a stronger proposition and generate better outcomes for clients.

Beyond Pensions & ISAs

In a survey commissioned by Octopus Investments, 81% of advisers felt the LTA would impact more of their clients over the next 10 years¹.

Many advisers have already turned to Venture Capital Trusts (VCTs) to complement retirement planning where clients are at risk of breaching their LTA.

VCTs are listed companies that invest in a diversified portfolio of small unquoted companies. These investments involve exciting, progressive young businesses that offer the potential for strong growth. But because early-stage companies carry greater risk for investors, VCTs offer attractive tax reliefs to compensate for some of this additional risk.

Investors can claim up to 30% upfront income tax relief on their investment, provided they hold VCT shares for five years. And dividends paid out by VCTs are free from income tax, meaning they can generate a tax-free income stream.

For some clients, the Enterprise Investment Scheme (EIS) is another option to explore. EIS investments offer the opportunity to access early-stage businesses through a more concentrated portfolio of shares directly held by the investor.

These investments come with an attractive package of tax reliefs, including 30% upfront income tax relief, tax-free growth, loss relief that can be claimed against income or gains, and the ability to defer capital gains.

But you’ll want to bear in mind that these generous tax benefits reflect the high-risk nature of the investment.

IHT planning

Rising asset values and freezes to the nil-rate bands could also mean clients seek out inheritance tax advice. Indeed, a survey by The Openwork Partnership found 60% of advisers expect demand for IHT planning to rise in the year ahead².

While traditional options like gifting will work for some, many clients have concerns about surviving the seven-years required for the gift to be tax efficient, and retaining access to their wealth in later life. It’s likely these concerns have become more important to clients during the uncertainty of the pandemic.

Investments that qualify Business Property Relief (BPR) can help clients plan for inheritance tax in a shorter time frame, while also keeping wealth in their own name. If a client holds a BPR-qualifying investment for two years, and still holds the shares on death, it is zero-rated for inheritance tax. If circumstances change and the client wants to access their investment, they can request a withdrawal, subject to liquidity. This ability to request withdrawals can give peace of mind and help clients to take action.

The risks of these investments

It’s important to understand that the potential benefits of VCT, EIS and BPR investments come with risks.

The value of an investment, and any income from it, can fall as well as rise, and investors may not get back the full amount they invest. The shares of unquoted companies and VCTs could fall or rise in value more than shares listed on the main market of the London Stock Exchange. They may also be harder to sell.

Tax treatment depends on individual circumstances and tax rules could change in the future. Tax relief depends on portfolio companies or the VCT maintaining their qualifying status.

Growing your business

These kinds of tax-efficient investments won’t suit every client, but without considering a full range of options, you and your clients may be missing an opportunity. Even if a client decides it’s not for them, bringing something new to an annual review shows you are always thinking and adding value.

Discussing and recommending these products can lead to advising on new assets. A survey we commissioned suggests 40% of advisers have found recommending these investments has led to advising on client assets they hadn’t previously. It also helps with client retention, as 39% of advisers feel that recommending specialist tax-efficient investments has ensured they haven’t lost clients to other wealth managers³.

In some cases, discussing IHT planning with clients can lead to engagement with the next generation, paving the way for a client’s beneficiaries to become future clients.

Gaining the right knowledge will help you recommend effective tax planning strategies and grow your business. Octopus can help you do this.

Watch the Octopus Online Show on demand to learn more about tax-efficient investing and key planning opportunities that might exist in your client bank. Register here.

These investments are not suitable for everyone. Any recommendation should be based on a holistic review of your client's financial situation, objectives and needs. Issued by Octopus Investments Limited, which is authorised and regulated by the Financial Conduct Authority. Registered office: 33 Holborn, London, EC1N 2HT. Registered in England and Wales No. 03942880.

1 VouchedFor survey of 700 financial advisers, January 2021
2 www.theopenworkpartnership.com/news/iht-advice-boom-as-advisers-forecast-strong-growth
3 VouchedFor survey of 700 financial advisers, January 2021

For professional advisers and paraplanners only. Not to be relied upon by retail investors.

Network members would need specialist approval with references to VCTs, EISs and Business Relief schemes.

Later Life Lending

Mon, 04 Oct 2021 13:12:00 +0000

Craig Kerrigan, National Account Manager at Key Group highlights how the later life industry is bouncing back after a challenging 2020, becoming stronger than before.

While 2020 may be a year that is remembered for being personally and professionally challenging, it’s great to see that the later life industry is already bouncing back, becoming stronger than before.

As we look back at the first half of the year it’s been clear to see that market confidence remains high with over-55s releasing £1.94 billion in new equity release in H1 2021* which is a rise of 32% on 2020, with the average customer taking £94,982 an increase of 28%. And with over 750 products now on the market (figures quoted using Air Sourcing), there are more flexible options than ever before to suit the individual needs of the client.

Lockdown has also given clients time to reflect on priorities and immediate concerns with spending leaning towards more needs-based rather than aspirational areas, such as paying off their existing mortgages and debts. Although helping loved one on to the property ladder while taking advantage of the stamp duty holiday has remained popular.

Pension gender gap continues to widen

Research by CEBR (Centre for Economics and Business Research) commissioned through equity release lender more2life revealed that the gender pension gap is widening for women over 55 compared to men.

The research provided in more2life’s Borrowing in Later Life** report suggests that women would have to work an average of 14.5 years longer to accrue the same as their male counterparts, compounded by the gender pay gap. With lower income, women will work longer to support their day to day costs, with less to put in their pension pots. The research also reports that women are missing out on an additional £180,986 in their retirements, despite being better pension savers. This figure is up by £26,673 compared to last year, suggesting that the Covid-19 pandemic has had an effect on both the amount of equity over-55s currently have in their retirement savings and the amount they anticipate to receive after they retire.

How has equity released changed over the past two decades

Key, the UK’s leading equity release adviser, has released a ground-breaking new study detailing its research into how equity release has changed perceptions and improved the quality of life of their customers. The report Equity Release Revolution*** is the first of its kind.

Over the years, equity release has helped clients unlock housing wealth as part of their retirement planning strategy, with the data showing more than £32.6 billion of property wealth has been released with 557,000 customers, and their families, benefitting from the money.

Within the 20 year period, the average age of which people choose to take out equity release has fluctuated, ranging from 68 to 71 years old. Clients have also expressed a positive response to their experience with 67% of customers saying that the funds released from their home have made a significant difference of their quality of life and 90% saying they would recommend equity release to family and friends.

As the market continues to evolve with a wider range of products to cater to the individual needs of the client, and service continuing to expand and grow more sophisticated, it will be exciting to see what the next 20 years bring and Key Group will be here to support yourselves and your clients with that.

*Key’s Market Monitor H1 2021 - Equity Release Market Monitor | Full Reports | Key (keyadvice.co.uk)
**more2life Borrowing in Later Life Report 2021 - Borrowing in later life report | more2life
***Equity Release Revolution - We are Key Group - 90% of Customers Have or Would Recommend Equity Release to Family and Friends

How current times are being reflected in client propositions

Tue, 21 Sep 2021 13:32:00 +0000

Client propositions are slowly being reshaped to meet sustainability preferences, reflecting the times we’re living in, as Alastair Black, abrdn’s Head of Industry Change, explains.

The Covid-19 pandemic has affected all of us in many different ways. It has also heightened other, more profound, social and environmental issues not least the damage we were doing to the planet before the pandemic hit.

These concerns about the future, and the future for their children and grandchildren, mean clients at retirement are just as behind the push for sustainability as the younger generations are.

This, along with the ongoing impact of the pandemic, means it’s natural for clients to want to talk about it in their conversations with advisers. They want to help make a difference where they can and to do the right thing. And they care as much about social and governance issues as they do about the environment.

Driven by this ever-growing awareness of Environmental, Social and Governance (ESG) issues, client propositions are slowly being reshaped to meet their sustainable investment preferences. And, due in part to the coronavirus crisis, we expect client demand to continue to grow in this area.

Giving clients a greater sense of wellbeing

I’ve always believed that the biggest value of advice is the sense of wellbeing it gives clients. For clients, knowing they’re ‘doing good’ with their investment choices is a natural extension of that sense of wellbeing.

Understanding clients’ hopes and fears, and the goals they want to achieve, is what advisers do really well. So having the opportunity to discuss ethical issues and sustainability preferences in client conversations can help advisers to engage even more with clients on an emotional level and develop a stronger bond.

Understanding how much sustainability issues are important to each client means advisers can, with fairly limited changes to individual suitability reports, tailor advice to deliver a plan to meet clients’ needs for good outcomes.

Advisers don’t need to be experts in sustainability and ESG to hold a conversation with clients about it, they just need to be knowledgeable about what ESG is; what it stands for and if clients are concerned about sustainability issues, to ask about the areas they’re particularly worried about.

Most advisers will be aware that EU regulation is in place which requires advisers, as part of the advice process, to ask clients about their ESG preferences. The UK hasn’t yet adopted the regulation, but the FCA will be looking at it.

Many advisers are already asking clients about their sustainability preferences during suitability reviews, with most having done so for a while now. It was one of the findings revealed in a recent survey we carried out among advisers and means advisers are pulling out more granular details around clients’ concerns to understand their goals better and to deliver more personalised investment solutions for them.

Supporting advisers to deliver on ESG

A key insight that was also revealed in our survey highlighted how most advisers would appreciate additional platform functionality to help with delivering sustainable solutions for their clients. Around half of the advisers we asked would like to be able to search for ESG funds easily, compare different ESG solutions across sustainable themes and see the ESG impact of a selected investment solution to illustrate to clients. Advisers recognise there are inconsistencies with how the asset management industry currently measure ESG, but this problem will improve over time.

Platforms will continue to evolve to cater more for the needs of clients in those areas of ESG they are concerned about. The important point here is that by continuing to capture clients’ sustainability preferences now, advisers are in the best position to take full advantage of the capabilities and platform developments around ESG as they happen and as the market evolves.

Continuing to deliver better outcomes for clients

The Covid-19 pandemic and protecting our planet mean clients will continue to want to talk about the coronavirus crisis and wider Environmental, Social and Governance issues in their conversations with advisers so they can help make a difference where they can.

For providers, it’s about supporting advisers to deliver better outcomes for clients. And platforms will have a significant role to play in helping advisers meet clients’ individual needs around ESG through delivering more personalised and tailored client investment solutions.

For our part, we’re actively exploring opportunities to further strengthen our proposition with innovation in this increasingly important area which has been underlined by the impact of the coronavirus crisis on all our lives.

The value of investments can go down as well as up and your clients could get back less than they paid in.

The views expressed in this blog should not be regarded as financial advice.

Issued by a member of abrdn group, which comprises abrdn plc and its subsidiaries. Standard Life Savings Limited is registered in Scotland (SC180203) at 1 George Street, Edinburgh, United Kingdom, EH2 2LL. Standard Life Savings Limited is authorised and regulated by the Financial Conduct Authority.

Value is for life, not just a few quarters

Tue, 21 Sep 2021 13:07:00 +0000

Why does value investing work? Because, ultimately, it is a common-sense philosophy rooted in human behaviour – in effect, looking to buy pound coins when they are temporarily on sale for 50p.

While the current level of valuation dispersion in global equity markets is a perfectly valid reason to think now might be a good time to consider building value exposure, we believe it is more important to focus on value as a long-term strategy for stock market success. Indeed, at Schroders, we see value as an area to which investors should always be exposed so they can reap the long-term compounding benefits.

To illustrate why, in effect, value should be for life and not just for a few quarters, let’s take a look at some very long-term data. Imagine that, back in the middle of the ‘Roaring 20s’, your great-grandparents came into some money and decided to invest $10,000 in stocks. If they had invested that in a Fama-French ‘growth factor’ portfolio of US equities in 1926, it would be worth over $80m today.

Staggering difference

Kudos, then, to dear old ‘Grandma and Grandpa Growth’ for their portfolio management skills? To an extent, perhaps. Still, not to be ungrateful, if they had invested the same $10,000 in the counterpart Fama-French ‘value factor’ strategy, as the following chart illustrates, it would have grown to be worth a staggering $780m-odd. The difference is so stark, we have to use a logarithmic scale to plot the two lines on the same graph.

When people talk about the perennial stock market war between value and growth then, it has not really – at least from a long-term perspective – been a contest. Undeniably, the last 10 years have been more difficult on a relative basis for value – yet, just as undeniably, the long-term track record of value’s compounding outperformance is incredibly strong.

That said, we appreciate showing very long-term charts of value outperformance is not a wholly convincing argument. For one thing, the last decade or so has hardly resembled that long-term history. And for another, while that chart does a good job of illustrating what value has done historically, it conveys little about why it has done so – or indeed about why you should believe in value investing as a strategy for the future.

Crucial question

For us, that is the crucial question. And to understand why value works, you have to go right back to basics – to Benjamin Graham. When Graham was writing about investing in the 1930s, there was no such thing as a value factor. His faith in the approach was not based on a historical back-test. He did not have the luxury of computers to crunch the data and generate reassuring charts.

No – Graham’s belief in value was based on common sense, intuition and, above all, astute observation of human behaviour. If you want to make money in the stock market consistently, Graham stressed, you must not fall into the trap of playing the same game as everyone else and speculating on future growth. Instead, seek out the companies the market has knocked down to an irrationally low price.

Ultimately, this boils down to swimming against short-term sentiment to identify the best deals and avoid the rip-offs. It is the same common-sense approach we all take when we are out shopping for groceries or clothes or anything else. Value investing is just contrarian bargain-hunting applied to the stock market – in effect, looking to buy pound coins when they are temporarily on sale for 50p.

Enduring appeal

Why is this contrarian approach so enduring? Because it exploits the one thing that never really changes in stock markets – human beings. When the outlook is dark and cloudy, people grow fearful and despondent and some companies just grow too cheap. Whereas, when all we can see on the horizon is sunshine, lollipops and rainbows, people grow euphoric and greedy and then lots of companies grow too expensive.

Value investing is designed to exploit those persistent patterns of human behaviour. Time and time again, the frailties of human psychology, combined with the irrationality of crowd behaviour, create these pricing inefficiencies that patient investors are able to exploit – and, here at Schroders, we do not think that dynamic will ever really change.

Graham actually put it very neatly himself when, towards the end of his career, he was asked in an interview to sum up what he had learned from his decades of investing in the stock market. Given the current environment, his response strikes us as very prescient – he simply replied: “The more it changes, the more it is the same thing.”

Truer than ever

That feels truer than ever today, when we are constantly being told we are living in an age of unprecedented disruption when technology, society, the climate, everything is changing. There are plenty of people out there, too, who will say the stock market has fundamentally changed since Graham’s day – whether that be as a result of ultra-low interest rates, technological disruption or whatever.

We continue to believe Graham’s words will hold true and that, in the end, the one constant in stock markets is the human behaviour that drives it. The more people say ‘This time it’s different’, the more their behaviour starts to resemble every other market bubble in history – in other words, the more people think it changes, the more it is the same thing.

As investors, we can wheel out statistical back-tests of the value factor all we like but what really gives us confidence to stick with the strategy for the long run, through thick and thin, is our belief in this ‘why’ factor. Why does value work? Because, ultimately, it is a common-sense philosophy rooted in human behaviour. That does not stop it falling out of favour at times – as we have seen in recent years – but it should mean value continues to be a powerful long-term strategy for those with the patience and fortitude to stick with it.

To read our latest value insights, click here or visit our website to find out how Schroders can support you.

Important information: Marketing material for professional clients only. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Schroders has expressed its own views and opinions which may change.

Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. This information is not an offer, solicitation or recommendation to buy or sell any financial instrument or to adopt any investment strategy. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. Nothing in this material should be construed as advice or a recommendation to buy or sell. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. No responsibility can be accepted for error of fact or opinion. Issued in September 2021 by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU, registered No. 1893220, who is authorised and regulated by the Financial Conduct Authority. UK003346.

In favour/ out of favour

Tue, 14 Sep 2021 13:37:00 +0000

Neil Birrell, Premier Miton’s Chief Investment Officer and manager of the Premier Miton Diversified Growth Fund, looks at why active management doesn’t mean you always have to be active.

In favour; if it ain’t broken…

There is always something going on in markets to talk or write about, but it isn’t always that interesting. Therefore, when sitting down to write a market update I try and find subjects that are interesting or particular changes we have made in the Premier Miton Diversified Growth Fund. This update has been a bit of a challenge, we have not been very active in the fund and nothing dramatic has happened in markets.

Then it struck me; in all our literature that describes the fund and when I talk to investors, the phrase we constantly use is “active management” and we haven’t been doing so. You should not take that to mean a lack of interest or attention to the asset allocation or the holdings within each asset class; it is, in fact, the exact opposite. It has been a busy time; the macro-economic backdrop is very interesting, with plenty of data points to consider and we have been going through the corporate results season.

We have been concerned about the outlook for global growth following the sharp recovery we are experiencing. Those concerns were driven by the spread of COVID variants, the scarring in the economy left from last year and supply chain issues, all of which are coming to fruition. We are seeing data points such as retail sales and employment signalling that the recovery rate is slowing and forward looking indicators such as the Purchasing Managers Indices come off the boil. We have the fund broadly set up for this outcome, however, never being able to actually know what will happen meant that we had positions that would benefit if the opposite happened. But our core approach, particularly in the key asset class of equities, is to focus on companies that should do well through different economic and market conditions, which has borne fruit through the results season.

We adopt a similar approach in property shares, but have been adding to more cyclically sensitive companies at attractive valuations, and exposure to alternative investments plays a key part in the diversification and growth potential of the fund.

So, overall, given the backdrop and market conditions, it has been relatively inactive. However, we haven’t forgotten that we are active managers; the investment team meet regularly to discuss asset allocation and we have agreed to be inactive, keeping weightings the same. The fund managers for each individual asset class have not been trading much, but do so as required.

Having written this, something will surprise us and activity will pick up; but that is what active management is all about.

Out of favour; if it is broken, sell it

“Sell discipline” is a much used phrase in the fund management industry and it is often used to describe a discipline that is more of a review. In other words, if something goes wrong with an investment such as a bad set of corporate results, a strange price movement or an issue with a covenant on a bond, a review of the investment is initiated.

That is an appropriate course of action, but you don’t want to take too long over it. There is always someone who knows more than you and always someone who will act faster than you. The managers of the different asset classes in the Premier Miton Diversified Growth Fund are charged with knowing their investments very well, and they do. So when something does go wrong, they can analyse the issue quickly and knowledgably.

If it is broken, the best decision is nearly always to sell, rather than wait for it to get fixed or buy more at a lower price. You can always buy it back in due course. Just more active management.

IMPORTANT INFORMATION: For information purposes and only to be issued to investment professionals. It is not for circulation to retail clients. It expresses the opinion of the author and does not constitute advice. Persons who do not have professional experience in matters relating to investments should always speak with a financial adviser before making an investment decision. For your protection, calls may be monitored and recorded for training and quality assurance purposes.

Financial Promotion issued by Premier Miton Investors. Premier Portfolio Managers Limited is registered in England no. 01235867. Premier Fund Managers Limited is registered in England no. 02274227. Both companies are authorised and regulated by the Financial Conduct Authority and are members of the ‘Premier Miton Investors’ marketing group and subsidiaries of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.