You are here:
Celebrate our 150th anniversary with fantastic savings on a joint magazine and IC Advantage subscription.
Over 800 people attended Investors Chronicle's autmum roadshows in London, Manchester and Edinburgh last week. They heard expert advice on structured products, exchange-traded funds, self-invested personal pensions, preparing for higher taxation and structuring estates to avoid inheritance tax.
Advertising
Below, we present a summary of each speaker's presentation and a facility to download each one in full as a PDF file. Please note that in order to download anything from the IC website, you need to be a registered user. Registration is free, quick and commits you to nothing. You can do it here.
Roadshows are free to attend, but registration is required. The next roadshows will be held in June 2010; for more details, see www.icroadshow.com. And we are running a one-day gold event in London on 23 November; see www.icgoldconference.co.uk.
Listed structured products
Royal Bank of Scotland produces a range of structured products that are all directly listed on the London Stock Exchange, rather than being traded directly between parties. This means they can be traded at any time, just like shares. They're also subject to regulation just as share trading is.
One of the key reasons for investing in structured products is diversification at low cost. For instance, a simple portfolio of five blue-chip stocks - BP, HSBC, Vodafone, Anglo American and GSK - held from October 2006 to October 2009 would have resulted in an 8.5 per cent loss, even though the shares are from very different sectors. Spreading risk further, for instance by investing in commodities or emerging markets, could have avoided that.
At the low-risk end of the listed product spectrum are bonds, like the Royal Bond, which is very similar to a corporate bond, but traded on the stock exchange and dealable in small increments. With a maturity of six years, the Royal Bond is eligible for inclusion in an Isa.
Listed trackers offer direct exposure to indices and commodities, like ETFs, but RBS's currency overlay strategy limits exposure to foreign-exchange risk for products like the Gold Bullion hedged tracker. Accelerated trackers can offer leveraged, but capped exposure to market upside and a degree of capital protection. Covered warrants provide uncapped leveraged exposure - long or short - but at greater risk to your initial capital. Warrants are generally viewed as a trader's tool, but they can be used for hedging and cash extraction too.
Josh Blundell, UK Exchange Traded Products Marketing, RBS.
Preparing for a 50 per cent world
There's a common perception that the higher rate of taxation only really applies to the mega-rich of the City. But 50 per cent taxation applies to income, not just earnings, and income investors need to take pre-emptive action now, ahead of more possible tax changes in 2010.
What sort of action? A common strategy is to defer income. In its simplest form, this can just mean having bank account interest credited at different times of the calendar year so that it doesn't all fall in the same tax year.
More advanced strategies involve realising income later in life, when you might have become a basic-rate, rather than a higher-rate, taxpayer. Simply converting income into capital gains, as many have done, is unlikely to work for long as the 18 per cent capital gains tax rate is likely to rise in future.
Another is to put funds into products that attract tax relief, such as Enterprise Investment Scheme companies and venture capital trusts. These are traditionally thought of as high-risk investments, but capital-protected versions are available. A further advantage of EIS is that historic gains can effectively be put in front of more recent losses.
Life insurance investment bonds can also be used to defer income and gains, while allowing some access to capital. These are tax-efficient wrappers similar to Isas and Sipps. They are not quite as flexible, since you can't own individual shares and bonds within them, but you can withdraw up to five per cent of your initial capital each year on a tax-deferred basis. Initial costs used to be steep, but have fallen sharply in recent years.
Another potential tax shelter is a qualifying life assurance maximum investment plan (MIP). These require regular payments, a minimum ten-year investment and an element of life insurance, but are taxed only at the basic rate. Again, charges are a lot more reasonable than they used to be.
Christine Ross, group head of financial planning, SG Hambros Bank
Inheritance tax and succession planning
The key weapon in the investor's armoury when it comes to succession planning is the trust. This most ancient of structures - trusts date back to the time of the Crusades - separates legal ownership from benefit, with the trustees assuming the former and the beneficiaries the latter.
Many investors are put off trust-based planning because they fear losing control over their assets in life, or forfeiting income from them. However, there are ways around this. One is the normal expenditure out of income exemption. Regular payments are made into a trust. This shelters that money from inheritance tax if you die, and allows you to control how the money is used by beneficiaries if you don't.
Discounted gift trusts allow you to draw an income from a trust while you are still alive. You make a gift into trust, the trust pays you an income, and the value of the trust is reduced (for inheritance tax purposes) by the capitalised value of that income stream.
Trusts can also be used for pension death benefits, sheltering the estate of a surviving spouse or partner from inheritance tax in the event of your death triggering a lump-sum payment to them. Trusts are also the backbone of the St James Place Later Life scheme, which is designed to shelter assets from IHT, but allow for any long-term care requirements.
EIS investments can also be used in succession planning, because if the investor dies, the deferred tax liability on the EIS shares dies too.
Obi Nnochiri, Head of Tax and Technical support, St James Place
Why you cannot ignore ETFs
Like listed structured products, exchange-traded funds can be used to access a vast array of indices and commodities. ETFs are traded on-exchange, giving them transparent pricing and liquidity, but are structured and regulated like index funds.
There are now over 200 ETFs listed on the London Stock Exchange, covering assets from equities and bonds to private equity, hedge funds and commodities. Private investors can trade and own these instruments in just the same way as big investors. Management fees are typically very low, bid-offer spreads are narrow, there are no entry or exit fees, and they are free of stamp duty. You can put ETFs into an Isa or a Sipp.
ETFs are constructed either by 'direct replication', where the fund buys most or all of the underlying assets, or 'outsourced replication', where a basket of securities are held alongside index swaps. Outsourced replication should result in perfect tracking before fees.
Investors typically use ETFs either as a short-term trading tool, or for long-term asset allocation, often combining it with active funds using a 'core-satellite' strategy. For instance, for the core element, ETFs could replicate the FTSE Apcims income index at an annual cost of just 0.31 per cent.
You can also go short with certain ETFs, but the compounding of daily returns means that short ETFs are unsuitable for buy-and-hold investors, as their performance does not track the underlying index accurately for periods greater than one day.
Manooj Mistry, head of equity ETF structuring, db-x trackers
Sipps: your pension, your way
Pensions are quite simply one of the most tax-efficient wrappers available to the investor. You get tax relief on contributions, your investments grow free of income or capital gains tax, you can encash 25 per cent of the resulting 'pot' free of tax from the age of 55, and if you die before the age of 75, they are exempt from inheritance tax too.
By contrast, holding cash is woefully inefficient, and investing in a portfolio of shares and other instruments does not attract any tax relief on creation, income and profits are taxed and the portfolio may be subject to inheritance tax, depending on the size of your estate.
Many believe that pensions are inflexible because you are forced to buy an annuity. This is not strictly true. You can draw an 'alternatively secured pension' after the age of 75, but few do because of the very high charges. However, by the time you reach age 75, annuities can make sense anyway since your lower life expectancy will result in a much better rate. Guaranteed annuities in particular offer good value.
You can put all sorts of assets in a Sipp, including shares, bonds, funds, ETFs, investment trusts, warrants, even 'alternative assets' like wine (although you can't drink it!). Modern Sipp platforms such as Barclays' PensionMaster allow you to view and control all your holdings through a single interface.
John Turton, director of financial planning solutions, Barclays Wealth; John Cotter, vice president, Barclays Stockbrokers.
How to survive and prosper in 2010
Some would have you believe that, following some monetary smoke and mirrors, it's back to business as usual in the City. I don't believe that for a moment. In fact, I think the worst is almost certainly still to come.
There are several reasons. One is that the debt which fuelled the bubble is undiminished, although it's been shifted around from companies to countries. Another is that all this monetary stimulus is merely inflating new bubbles, rather than reaching businesses who need it. There is lots of unused capacity in the economic system, as illustrated by the ghost fleet of cargo ships currently lying at anchor off the coast of Singapore.
On this basis, and using technical analysis principles such as Elliott Wave theory, it's easy to arrive at a target for the FTSE100 of below 3,000 or even as low as 2,000. As for the property market, which is even more over-valued, house prices could fall as much as two-thirds from peak to trough. If you think that's impossible in a developed market, just look at Hong Kong and Tokyo. It happened in both those places within the past ten years.
What should the investor do? If the market does fall, it'll be a great opportunity to load up on defensive shares, since these are very cheap versus cyclicals. Government bonds are also likely to make a good investment. I'm also a huge bull of the US dollar. Once the dollar carry trade - borrowing dollars at negative real interest rates to buy risky assets - unwinds, then stock and commodity markets will slump and the dollar will soar.
Oil prices will fall before they rise, but once they do rise, they could hit $250 a barrel within the next decade. As for sterling - it's doomed. We'll see it sink to at least parity with the euro, and possibly as low as $1.10 against the dollar.
Dominic Picarda, associate editor, Investors Chronicle
Spaces are filling up fast at our one-day gold seminar set for Monday, 23 November 2009. It's being held at the London Stock Exchange building on Paternoster Square. As with the roadshows, attendance is free, but pre-registration is required. See www.icgoldconference.co.uk for more details.
Free access to financial data, charts, portfolio tools and more - registration is quick, secure and free!
Profit from IC share tips; discover the benefits of IC Advantage and sign up for a free trial.
© The Financial Times Limited 2010. All rights reserved. "Investors Chronicle", "FT" and "Financial Times" are trademarks of The Financial Times Limited. No part of these web pages may be reproduced or transmitted to or stored in any other website or other form of electronic retrieval system, without prior permission in writing from the editor.
Warning: Do remember, particularly if you are new to stock market investment that the prices of shares and other investments can fall sharply. You may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. This site is aimed at UK residents only. To read more please see our Important Warning
v6.2.10.5 running on www.investorschronicle.co.uk
