IFA SOAPBOX

ANNOUNCEMENT

2009-10-21T10:54:00.001+01:00

The Key Benefits Private Client Service demands intensive daily attention to our Clients’ affairs to ensure that their savings, investment, pension and tax planning affairs remain structured to achieve their objectives in accordance with continuously revised strategies.

In addition to regular personal communication all Clients receive fortnightly Bulletins updating them on the thinking behind the general thrust of our advice to them. This Blog was intended to act as an even more regular contact point for those Clients who wanted it.

We have decided that it will act in the mutual best interests of this firm and its clients to concentrate our highly personalised service solely on our existing clients, their families, and those they introduce to us. Otherwise we have closed our doors to folk we cannot qualify in advance and/or who do not possess combined assets (savings, investments, pension funds, trust funds, etc) of viable amounts.

Our Blog has attracted distracting Media attention and enquiries from unqualified potential clients, and we have therefore decided to discontinue it. Hopefully those who come across these pages in future will find an interesting historical blow-by-blow retrospective from the desks of two professional advisers during the most tumultuous period in a lifetime. We certainly stand by everything we have said.

More Corruption Needed

2009-10-09T17:16:00.003+01:00

Today we hear that the UK has been hit so hard by the recession it now sits below developing countries Nigeria and Panama in the financial stability rankings, according to a report by the World Economic Forum. We knew it was bad, but.....

As we have said here many times before investors should avoid bankrupt Britain and seek returns elsewhere. It is, however, true that the fact that we are all but bust will not necessarily translate into poor returns from our stock, property and fixed interest government securities markets.

But why on earth take the risk?

Going by the Nigeria comparison, perhaps we are in so much trouble because our government officials are not corrupt enough. Now there's tongue in cheek for you.

Right Idea - Wrong Country

2009-10-05T15:18:00.003+01:00

A splendid idea for tackling the nation's pension crisis was put forward last week. It suggested that a flat rate 30% income tax relief be allowed on all personal pension contributions, which would encourage low to moderate earners to save. At the same time it was suggested that state retirement age be increased to 80.

Making individuals responsible for their own pension income until 75 or 80 would allow the state pension to be massively increased. There is considerable appeal to making individuals responsible for themselved until a certain age (encouraged by higher tax reliefs) further to which the state benefits would kick in.

Sadly, in an age of nanny state mollycoddling of wastrels the idea is unlikely to gain much traction, and in truth would fall down because those who did not fund themselves until age 75 or 80 would fall back on the state some way or another, and the usual situation of the responsible suffering due to the inaction of the irresponsible would inevitably apply.

So Nanny is unlikely to pass any such law. Shame.

What - A Decent Structured Product?

2009-10-01T13:06:00.003+01:00

The FTSE 100 Index may just have recorded a record quarterly gain, but tell-tale signs of possible disappointments ahead remain. One such is yesterday’s IMF estimate that the global banking system will have to write off £2,800 billion in losses on loans and securities between 2007 and 2010, with £1,500 billion in the next 18 months.

Banks have to take more heavy losses on the chin, and will be in no hurry to lend. Since economic recovery depends upon the availability of credit (not to mention profitable banks) this does not augur well. Add to this the dire state of our own economy, and the fact that unemployment must fall and house prices rise before our economy can truly return to health, and many of the ingredients for a second dip to the current recession are in place.

So our advice remains to avoid investment in the UK, unless with managers whose portfolios are very defensively positioned with high yields, or via a selected few of the Structured Products available (care – most are impenetrable rubbish). One we like will give positive returns linked to the FTSE 100 in either direction. Yes, you read that right – if FTSE gains or falls by 20% over a three year term, you make 20% profit.

Naturally there is a potential snag. If FTSE falls below 3,000 during the term (it stands at 5,100 as I write) the shares revert to acting like any standard FTSE Tracker. But even if the odds on FTSE falling by over 40% from current levels (not impossible) are high this is a cracking opportunity even if, like us, you would otherwise avoid the UK. Certainly current FTSE tracker investors should vote with their feet.

Statistically Irrelevant

2009-09-28T09:08:00.002+01:00

Examination of the annual returns from eight major investment asset classes (UK equities; overseas equities; Chineses equities; gilts; commercial property; commodities; gold; cash) over each of the ten complete years since 1999 is illuminating.

Chinese equities led the 10 year averages by a wide margin, yet were the worst performers of the eight on no less than three years. Commodities scored highest in four years out of ten, yet were bottom twice, and came in second overall. UK equities limped in with a 3% average, but gilts gave nearly twice as much (which of these is supposed to be the leader?).

Gold came in third in the ten year averages and was by far the most stable, delivering positive returns in nine years with a single flat year. Cash beat both UK and overseas equities over ten years, raising questions over whether the latter were really worth the risk (we think not). Overall the aggregate return form the eight asset classes came in at a relatively steady - and quite acceptable - 6.7% pa.

The statistics are a number-cruncher's dream (ask us for a copy if you wish) but what do they actually tell us? In truth, near nothing. Except what sensible investors should already know - they should diversify their assets extremely widely, be patient, and accept they are in the game for the long haul.

Inheritance Tax Week Part Three

2009-09-26T14:10:00.002+01:00

There are very few circumstances these days under which we implement tax and financial planning arrangements for clients outside of our platform-based Private Client Service, the superiority of which over the traditional way of arranging umpteen jumbled products across myriad insurance companies and fund managers is extraordinary. The following is a notable exception to this rule.

There have recently been great improvements to inheritance tax scheme design. Our current favourite harnesses Business Property Relief to deliver total exemption from inheritance tax after just two years instead of the usual seven. Importantly, it addresses the major drawback of most such schemes by very substantially reducing risk to capital.

Unlike most inheritance tax schemes 100% of the capital subscribed is always available to the “donor”. Income can be taken at any level, and is not liable to income tax. The scheme is set to deliver minimum tax-free returns of 3% net pa (equivalent to 3.75% and 5% pa to basic and high rate taxpayers respectively) and the provider backs this with its own capital.

This scheme ushers in a new world of painless "cake and eat it" estate planning. It will in its own right appeal to risk-averse income or growth seekers, who might regard its 40% tax saving to their families after just two years as a purely incidental benefit. For those looking to provide both for themselves and their children in one fell swoop it is certainly well worth a look.

Inheritance Tax Week Part Two

2009-09-24T14:04:00.002+01:00

Last time we discussed some of the knock-on ramifications arising from the recent introduction of transferable nil rate bands. We stressed the vital importance of taking expert advice before revising existing arrangements in the light of the changes, or when considering fresh initiatives such as the creation of new Wills or Trusts.

In certain cases transferable nil rate bands can render historical estate planning (such as certain Trusts) irrelevant. Such cases might arise where, for example, widows who previously enjoyed the benefit of just one nil rate band for inheritance tax purposes (currently £325,000) can now leave up to £650,000 tax-free where their deceased spouse's nil rate band had not previously been utilised.

Most trusts involve major restrictions on the settlor (donor) which may no longer be needed in order to achieve a similar, or better, inheritance tax planning outcome. In certain cases old schemes can be revamped and trust funds re-invested in a far less restrictive and more tax-efficient fashion to the advantage of all family members. We have had considerable experience in this area, and major improvements can be achieved.

Please remember that we cannot cover such complex areas comprehensively on our Blog, and that individuals must always take advice based on their own individual circumstances before considering action. In few other areas is it so easy to make serious errors, and is competent advice in such short supply. Part 3 follows later this week.

Inheritance Tax Week Part One

2009-09-21T10:02:00.003+01:00

Minimising inheritance tax remains a vital integral feature of a well structured Lifetime Financial Plan. This week we cover some “do’s and dont’s”, and summarise some recent developments. Much of today's subject matter arose from Gordon Brown's riposte to the "million pound nil rate band" proposed by David Cameron. This was an ill wind, as the chances of the Tories enacting such a change within the next few parliaments is now almost zero.

An expertly drafted will is, and has always been, the foundation stone of estate planning, and cutting corners can prove disastrous. Always engage a suitably qualified Private Client Lawyer and avoid “cheap” or “free” will offers, which will often tie your heirs into the appointment of executors who will charge umpteen times the going rate.

There are many knock-on ramifications from the recent introduction of transferable nil rate bands. Where both spouses are alive and have existing Discretionary Trust Wills, careful thought is required before changing them. Likewise, spouses yet to make wills may still have many good reasons to consider Trust Wills despite their greater cost and complexity.

Transferable nil rate bands may be of particular moment to those who are widowed and single, who may now enjoy the ability to shelter twice as much of their estates from tax than they could just a few years ago. They can also be of substantial benefit to those who remarry where they themselves, and/or their new spouse, have previously been widowed. Much the same principles apply to civil partners.

Whenever considering fresh wills taking expert advice is essential, as in few other fields can "cheap" advice prove so expensive. More on this important topic later this week.

Hidden Jewels

2009-09-17T10:28:00.000+01:00

Investment Trusts are the hidden jewels of the investment fund industry, and for many good reasons. You need a degree in the subject to understand them, as their structures can defy comprehension. Being listed on stock exchanges no commission is paid on purchases, so they are ignored by anything other than fee-based advisory firms.

But despite considerable complexities their attractions are manifold, and those who invest time getting to grips with them can benefit substantially. Take, for example, an immensely successful UK Equity Income Unit Trust managed by one of the doyens of the funds industry, who also manages an Investment Trust with near precisely the same portfolio.

The Investment Trust has significantly lower management fees, a much higher net dividend yield, and can be bought at a discount of 7% to the net asset value of the underlying portfolio. So which would you buy – the Unit Trust or Investment Trust? To us that is a no-brainer, and similar opportunities often present themselves to those with eagle eyes and an advanced understanding of the subject matter.

We use Investment Trusts extensively and also their distant cousins, Exchange Traded Funds (which we will cover another time). We also use Oeics and Unit Trusts where the cap fits, but with no up-front sales costs and massively discounted annual management fees. Sometimes what you know is every bit as important as who you know.

Goverment Approved Criminals

2009-09-15T09:42:00.003+01:00

The Financial Ombudsman Service (FOS) today "named and shamed" the institutions responsible for high proportions of complaints received by them. Surprise, surprise - the list was dominated by the top five high street banks.

As we have highlighted many times previously, these banks are government-sanctioned criminals who will stop at nothing in their mission to extort money from you. They have no regard whatsoever for either the quality of what they sell, or its suitability to your requirements and circumstances.

Their high pressure sales tactics are now approaching manic status - due, in some cases, to the requirement to repair broken balance sheets further to you bailing them out. And you will receive little protection - it is in the Government's best interests that they sell you the maximum possible amount of high cost rubbish that pays them the maximum possible commissions.

Do not buy anything from a bank. When you get that "you have too much in your current account - you really must speak to one of our (laughably called) financial advisers" tell them to take a hike. Get sucked in, and you will be spat out.

Passing The Buck

2009-09-12T13:48:00.002+01:00

In past posts we have underlined the slings and arrows of outrageous fortune attaching to investment in assets denominated in US Dollars – which accounts for the majority of the world’s stocks, bonds and commodities. To illustrate the point we shall take Mr X, who is keen on the shares of US firm Obama Inc.

Mr X buys shares in June 2001. Disenchanted that the share price has not moved he sells in January 2009, and is delighted to trouser a gain of 51.85%. Being a spot dense Mr X ascribes some form of alchemy to Obama Inc, and hurriedly buys the shares back. Yesterday he noted with glee that the Obama share price had advanced by 20.5% since January, so he sold them again. He made a profit of precisely zero.

We are currently beset by cases where the prices of assets bought for clients in the past year have risen, but they are showing losses. In other cases very considerable asset price rises have translated into moderate ones due to Dollar weakness. It is galling to have made the right calls at the right times, but to fall prey to currency gyrations beyond the wit of any man to predict with any hope of certainty.

But, as illustrated above, currency movements cut both ways, and we are haplessly praying for a period of Dollar strength. The Dollar has severe fundamental problems (as reported last Tuesday) but confidence in Sterling strength against could be misplaced. As ever the message is to own some gold, and ignore the currency merry-go-round.

Gravity Defied - But For How Long?

2009-09-08T09:39:00.003+01:00

For some time it has been apparent to us that the US Dollar should fall hard, despite its status as the world's reserve currency, and the common interests of the US and China to keep its value buoyed. Likewise, future rampant inflation looks to be a given. Statistics we read today add fuel to those fires.

It took the US Central bank over 100 years to build a balance sheet of $1 trillion. Then recently, in a matter of a few months, it doubled it. An immutable law of economics is that when you add units to a currency for nothing, each new unit is worth less than the unit that preceded it.

To our simple minds the Dollar appears to be defying gravity. It may continue to do so. But gravity is hard to defy for very long. And the consensus is that deflation stalks the US (and here, too). But, again, laws of economics point to the inflation of money supply leading to inflation everywhere else.

A falling dollar and rising inflation would have severe impacts on our personal financial health, and to a large degree should dictate how we invest. But neither has happened yet - although the dollar has weakened substantially in recent months, without plunging outright. The fact that economics points to both happening does not necessarily mean they will - but we are preparing our clients nonetheless.

WHICH Ever Way You Look At It

2009-09-07T09:08:00.000+01:00

Consumer champion magazine WHICH last week announced that it is to launch financial services products, all (naturally) in the cause of providing the consumer with lower costs and better value. Like SAGA they are looking to capitalise on a strong and trusted brand name and warm customer base.

But the only way they can do this is to “white label” products that are already available. Folk who believe for one second that providers are going to arrange products for WHICH that undercut their own; or that the products can be better when WHICH will also be seeking to make profits on sales (making two hands in your pocket) are kidding themselves.

Altruism, or crass profiteering? You choose!

I'm Backing (Away From) Britain

2009-09-04T13:34:00.003+01:00

Yesterday the OECD announced that most of the world, and especially the US and eurozone, would receover from the current recession sooner and faster than previously predicted. The OECD says that the UK, however, will continue to suffer, and for much longer than most of the world.

This is no great surprise, since financial services comprises a much greater percentage of UK GDP than elsewhere, and we have taken on considerably more debt than any of our developed counterparts.

Investors should avoid the UK for anything more than a small part of their assets. Threre is simply no point in investing at home with a ball and chain around one's ankles if there are better prospects elsewhere. We have said this many times before in these pages, and shall do so again for as long as it remains the case.

Rest Assured - Take Your Money And Run

2009-09-02T18:51:00.003+01:00

News broke today that the Association of British Insurers (ABI) has warned Chancellor Darling that impending solvency regulations will have dire consequences on insurance companies throughout Europe.

We have said it before, and we say it again. Life insurers are doomed and, with the exception of annuities and life and health insurance, there are always superior alternatives for everything else they do.

Do not leave money with them - nothing good can come of it. Wherever there are better alternatives, take them - there is no point in sticking with mediocrity and waiting for the worst.

Falling Standards

2009-09-01T09:33:00.002+01:00

As you will all have noted we chaps at KB Towers just love history and the lessons we can learn from it, and especially where it can furnish cast iron backing to the long term trends in which we encourage our clients to invest.

The Gold Standard promoted stability for 136 years until the fateful year of 1913, when the legislation was passed that created the US Federal Reserve, an organisation with the power (which it has abused in full) to create excess money and credit. During the 136 years the value of the US Dollar actually appreciated by 11% - neither here nor there. Since 1913 the purchasing power of the Dollar has plummeted by over 95%.

That any organisation can create paper money at a whim at any time, and for any reason, makes no sense to us. It has come in handy recently, but only to counter the appalling excesses that had been allowed for so long. Money printing would not have happened (or been necessary) if the Gold Standard still existed. There will be tough consequences of the recent printing binge in the future.

Nowadays most people who buy gold are those who instinctively know it is a good idea, or who understand what happens to unsound paper currencies (for which read “all of them”) in the hands of governments that spend insane amounts of money thanks to central banks creating it, and populations who do not understand the ramifications of it.

Whichever category our clients fall under the great majority of them own gold, and for their own protection and profit will continue to do so.

Ghosts Of The 1980s - Part Three

2009-08-28T08:25:00.002+01:00

Equitable Life was the darling of the life and pensions industry. The professional classes entrusted them with their life savings. Even government bodies (including financial services regulators – we kid you not) used Equitable for pensions. High headline payouts, the claim that no commissions were paid to middle men and pronouncements of rock solid financial strength kept the cash flooding in.

All through the 1980s we young IFAs fought a lonely crusade warning folk that the Equitable Life mirage was built on sand, and that they must eventually go down. But policyholders ridiculed us with “well you would say that, wouldn’t you.” Yes we would – because it was not just true, it was downright obvious.

Equitable did not pay commission to middle men, but to its own salesmen – the highest paid in the industry. It attracted new business by paying out too much and not keeping enough in reserve for a rainy day. But one clincher singled out Equitable Life as a life company Titanic certain to hit an iceberg at some point.

Guaranteed Annuity Rates offered conversion of pension funds into income at very high rates. But as soon as interest rates fell below certain levels an Equitable with wafer thin reserves would be unable to meet its liabilities. Any business basing its future on an assumption that interest rates would never fall below a certain level was always destined for trouble.

Is it any wonder that the credit crunch and recession happened, when even the great and the good are suckered into entrusting their life savings to such a transparent scam?

Ghosts Of The 1980s - Part Two

2009-08-24T10:43:00.002+01:00

Even back in the 1980s we young IFAs were warning anyone who would listen that Final Salary Pension Schemes were unsustainable. These children of the 60s and 70s were predicated on folk dying much younger than they do today, and on the assumption that financial markets would forever sail onward and upward.

Our warnings were designed to warn our smaller company clients that they should not build their plans for the future around such schemes, as one day push would come to shove and they would need to be unscrambled and replaced by alternatives with known and predictable costs. Some listened, others did not. But we note that not a single company we advised at the time retained a final salary scheme past the 1990s.

These schemes always were, and now demonstrably are, a fabulous idea that harsh reality would catch up with. We are not blowing our own trumpets. Just like the demise of the life companies as providers of pensions, savings and investments (see last post) the death of final salary schemes was just downright obvious to us and, we thought, to anyone who could see further than the end of their nose.

Such is human nature – we all like to believe that ostensibly cosy situations will endure regardless of the weight of evidence to the contrary, and until reality strikes. Frustratingly, our job often entails shaking clients out of mistaken complacency. An example to beat all others will be the subject of our next post.

Ghosts Of The 1980s - Part One

2009-08-19T08:58:00.000+01:00

In the unregulated financial services market of the 1980s myriad direct sales insurance companies and agencies foisted appalling dross on an unsuspecting and unknowing public. Even the higher quality companies that relied on IFAs to distribute their wares offered products with excruciating costs and lack of flexibility by comparison with contemporary products.

As young IFAs at the time we warned folk who had bought owned rubbish from the Allied Dunbars of this world (and they were one of the better outfits) that there was no future for either their products or their providers. And so it came to pass, as the Financial Services Act cast an ever increasingly harsh spotlight on competitiveness from the late 1980s, and the inevitable and long-overdue contraction of the market began.

As companies merged, with the cowboys being subsumed for pittances, consumers suffered. They still are. Even companies that appeared perfectly strong just a few years ago are going down like ninepins. And the process still has a long way to go. There were over 100 companies selling life and pensions products twenty years ago, and we shall be surprised if five are still standing a few years hence.

The life company model is unsustainable, and only the very strongest will survive into the future. The trouble is, we do not know which ones, and we cannot recall any merger that has ever worked well for the customers of the company taken over. Those who rely on insurance companies for their pensions, savings and investments are playing Russian roulette with their futures. Think hard before taking out new arrangements with them, and consider moving those you already have.

3,000,000% - The New Top Rate Of Tax

2009-08-17T09:48:00.000+01:00

Labour’s recent tinkering with the tax system, in a panic-stricken and spiteful (not to mention self-defeating) attempt to claw in some additional revenue to defray the massive borrowings that will derail the UK economy for decades, have given rise to some astonishing potential anomalies. Rarely can a programme of tax reforms ever have been more ill conceived, with no rational attention to the consequences.

We have seen a worked example of where an individual could pay marginal rates of income tax at an eye-watering 3,000,000%. Yes, we do mean three million percent. We did not believe it could be true, but sitting down and working the figures through with our trusty calculators revealed that the example was quite correct.

The technicalities that gave rise to this abomination are complicated, but we will be happy to explain them to anyone who wants to understand the degree of intelligent thinking being applied to the financial crisis by their government. Extreme examples aside, a significant percentage of the working population have some forward planning to do.

Marginal tax hikes of 60% will be commonplace, and an alarming number will unwittingly suffer at 240%. The above seven figure hike is extreme, but could easily happen. The entire matter is insanely complicated, and the traps not easy to detect. If you earn anything approaching £100,000, take advice.

Oh - THAT Recession

2009-08-13T10:47:00.002+01:00

Bank of England chief Mervin King yesterday announced that the UK recession will be deeper and more protracted than previously thought. This was no news to us, as many previous posts (not least our last) will testify. To even us amateur wannabe economists this was no more than a statement of the bleeding obvious, despite protestations to the contrary by Alistair Darling and his fellow incompetents.

But even though the bleeding obvious has been, well, bleeding obvious to us, the lack of suffering amongst our clients has formed an eerie backdrop to the awful economic situation. It appears that most folk who still have jobs are faring well, with lower borrowing costs and subdued inflation actually leaving many ostensibly better off.

But this aura of wellbeing evaporated yesterday. Two clients called for help with rearranging their finances; one in the light of a three day working week, and the other down to two days with proportionate redundancy. Now we are only one firm, but this “lag effect” on unemployment so late in the current recessionary cycle tells us all we need to confirm our long held convictions, as ratified by Mr King yesterday.

We repeat that for as long as unemployment worsens there is no hope of sustainable recoveries in either house prices or the economy. Anyone basing their investment, business or general financial plans on rapid recovery in either should think again.

Percentages Of The Week

2009-08-08T17:42:00.001+01:00

Nearly ten percent – reduced tax receipts, and increased social security benefits payments, compared with one year ago. With rising unemployment, this is a trend that is unlikely to reverse for some time to come.

Nearly five hundred percent – extra debt to be racked up by Government in 2009/11 according to Alistair Darling in his 2009 budget, compared with that of 2008. And even that grim figure was predicated on laughably over-optimistic economic growth forecasts.

Nearly forty percent - the proportion of payrolls FTSE 100 companies will have to find to plug the £96 billion aggregate deficit in their final salary pension schemes. Members of all such schemes should not count on them.

Nearly zero percent – the hope of a quick and/or sustainable UK economic recovery. The credit crunch is far from over.

Gilts Just Loving QE

2009-08-07T18:12:00.003+01:00

Most noteworthy news of the week was the announcement that the Bank of England is to expand its programme of printing money, catchily known as Quantitative Easing. This indicates that the Bank believes that the accelerating economic recovery everyone appears to be taking for granted is not assured by a long chalk.

The news caught financial markets on the hop. Sterling fell one cent against the US Dollar, and 10 year gilt yields plunged as prices rose, reflecting confidence in future prices now the government will be buying far more gilts than previously thought. The rally was short-lived, however, as traders took profits. There remains to our minds few good reasons to buy or hold gilts, and many to steer clear pending their eventual near inevitable demise.

On the other side of the government debt coin, Index-Linked Gilts surged by over 2% on the news. Again traders took profits, but once the selling pressure had passed prices began to rise again. As all our clients and readers of this blog will know we thoroughly recommend that everyone should place index linked stock at the heart of their asset portfolios. Last week’s action shows that we are not alone in fearing that inflation will come back to haunt us during the coming years.

Elsewhere, the Baltic Dry Index (see Baltic Dry on the Rocks; 17th June) had its worst month in July since last October, at the height of the global financial crisis, as the apparently insatiable Chinese demand for goods dried up. As we said in the above post, despite the Baltic Dry being held up as the ultimate barometer of economic activity, we do not necessarily read too much into its gyrations. However, this does back up the Bank of England’s opinion that we are very far away from being out of the economic woods.

Once Bitten......

2009-08-05T09:13:00.004+01:00

Recent results from the UK’s banks revealed few surprises, with those who lent most recklessly during the “easy credit boom” declaring the worst losses. If anyone had told us Lloyds could lose £4 billion in half a year in the past no one would have believed it. Well, once bitten, twice shy – you saved them with your own money, and we have noted a desperate and concerted effort from Lloyds recently to sell any old rubbish to anyone who will listen in order to make dents in their shortfalls.

The Serious Fraud Office is investigating Icelandic banks, which came to the UK offering unsustainable savings rates and sucked in armies of savers happy to pass their wealth to anyone offering a few dollars more. That so many handed over their money totally disregarding the truism that you cannot get a quart from a pint pot is a sign of bygone times. Surely this will not happen again - until the next time.

Final salary pension schemes of FTSE 100 firms now have a combined deficit of £96 billion. The message remains that all such schemes are doomed to be wound up at best, and to throw themselves on the mercy of the taxpayer at worst. We must steel ourselves to the idea of supporting them, and members should not utterly depend on them to fund their retirements.

Lastly, the Telegraph points out that gold investors have lost money recently due to the stark fall in the value of the dollar. So, even with the gold price now just 3% below its all-time highs, some of our own investors are showing paper losses. But, remember, currency fluctuations can swing both ways and no one should lose heart with their gold bullion, which could very conceivably save your bacon.

The Ides Of 2012

2009-07-31T17:45:00.001+01:00

Deutsche Bank this week painted a grim picture for the future of the UK life assurance sector, claiming firms have not faced such a negative scenario "in living memory". The bank states that consolidation is inevitable but that it will be driven by factors such as the retail distribution review and personal accounts (both due in 2012) solvency and unfavourable tax changes rather than the recession.

The effects of these changes will vary for each insurer depending on its product range, operating scale and distribution mix, says the bank. It places some household names on the critical list, while giving a “least worst” prognosis for others. Even these face declining sales volumes, particularly in savings and individual pensions, which could result in closed books of business being put up for sale.

The bank predicts IFA numbers will plummet by 30-50% (those labouring on with life companies, presumably) and that bank sales will consequently rocket, yet further decimating profits for insurers. So, as usual, advantage banks. It also expects unfavourable tax changes to seriously impact sales of investment bonds (although the banks will continue to pile them high) and pensions.

You have heard all of this from us in previous posts (not least the last one). The message remains crystal clear that folk should not entrust life insurers with their future – because many may not have one. And avoid the banks – who will sell you dross with impunity. Lastly, we at KB Towers will be a spot smug if the IFA sector is decimated, because we have long since been prepared for 2012. Bring it on!

Ghosts Of Credit Past

2009-07-28T08:47:00.001+01:00

The pain suffered by banks (or, rather, we taxpayers) has been severe. Many now believe the unbelievably cosseted darlings are out of the woods, and we are regularly asked if folk should be investing in them again. Of course we do not know the answer. But there is one potential problem that has us reaching for the Prozac

Yesterday’s Financial Times flagged up credit card debt as the next big issue for banks. The International Monetary Fund believes 14% of US consumer debt will go bad. And we Brits owe far more as a proportion of income (currently at a record high of more than 170%) than any other European nation, and 30% worse than in the US.

On top of that, the ghost of securitisation hovers in the wings. It wasn’t just mortgages that were packaged up and sold on to investors and banks across the world; credit card debt was also chopped into morsels of prime (and not-so-prime) debt. Analysts reckon about a third of UK credit card debt was securitised, so pension funds and insurers who bought these ill-conceived securities will suffer too.

The potential impact of further problems in the financial sector are grim, as the government may be forced into remedial measures it (we) cannot afford. So investing in banks (and insurance companies) looks too risky too us. By extension, as the UK is so dependent on financial services, we’ll continue to avoid UK equities. As we have said many times before, there are simply better places to be.

If It Ain't Broke.......

2009-07-24T19:58:00.004+01:00

What do our clients think of us? What do they want and need from us? Strangely, those are questions we chaps at KB Towers cannot answer after a collective fifty years in practise. It is also, you would think, the most important question for any service provider since, if you do not know what folk want, how do you structure what you give them?

We do get clues. An anxious client called last week, and at the end thanked us for “a good therapy session”. Others just want to know that their affairs are being looked after every single day. Others like that they will always get honest opinions and accurate facts, no matter how unpalatable. Others just want to know they can always talk to folk who know their situation in microscopic detail.

On other levels, some just like someone to sound off at. Others we rarely hear from, because they are not engaged by their financial planning and are relieved to pass all responsibility to us. While some are effusive in their gratitude and praise, we have to accept that others may regard a session with us like a trip to the dentist. For those who like to get all their pain over in one trip - we have a dental surgery next door.

There are probably as many answers to our questions as we have clients, so maybe we should stop worrying until they vote with their feet. We are fond of them all (even the moaners) because our lifetime service would not work if we did not genuinely care. It ain't broke, so we won't fix it. It would, however, be good to know what "it" is.

RBS Robberies

2009-07-22T18:13:00.006+01:00

A lady came to see us today. Royal Bank of Scotland had sold her an appalling Aviva with profits bond that was 100% at odds with what she wanted and needed. By the time the lady spotted this the cooling off period had expired, and she is glued into rubbish that has no hope of making her money after deduction of disgracefully high charges that fund the equally disgraceful commission paid to the bank.

If she wants to exit the bond our victim will pay an 11% early surrender charge and a market value adjuster penalty. It will cost her roughly 15% of her subscription (made six months ago) to exit an investment that was not fit for human consumption in the first place, and is entirely unsuited to her personal requirements.

She wanted us to help her claim against the bank. But having scrutinised the ton weight of incomprehensible blurb she had been given it was clear to us that the devil was in the (fine print) detail, and we had to advise her that making a claim would be pointless. Indeed, she would just lose even more money in wasted fees. Cue floods of tears and a hapless yours truly who did not have the heart to charge the lady for her fruitless two hour consultation.

So we taxpayers rescue RBS at massive expense. They continue to give financial advice to the public, despite being unable to run even their own finances. They then bite the hand that fed them by selling folk dross, and coining fat commissions in the process. The government rescued them at our expense, and then gives them a license to rob us all over again. A plague on the banks and their Westminster lackeys.

Tories Announce SFA FSA

2009-07-20T20:24:00.004+01:00

The Conservatives have announced that, if elected, they will scrap the Financial Services Authority. The FSA played a huge part in the dismal incompetence that led to the current financial crises, and double up as regulators of financial businesses such as ours - minting millions of pages of rules that have demonstrably been of no use to man or beast.

With no FSA the unholy trinity will reduce to two - just the Government and the banks. Countering these malign influences (at last) will be the Bank of England, which will enjoy far greater powers than before. This leaves our financial futures more in the hands of the sole institution that really does know what it is talking about, and which has no financial or political axes to grind.

Praise be - common sense from politicians! Now - which way shall I vote come the next election?

Bail Out Of Bonds

2009-07-18T13:36:00.003+01:00

Do you have an investment bond? These are lump sum investments concocted under life assurance rules, which the adviser and bank communities have sold in huge volumes these past thirty years. They were also the vehicle for with profits bonds (if you own one, you should almost certainly get rid of it!)

The Bonds had good points. They benefited from a number of tax breaks and attractive financial planning features. They were very useful investments for Trusts. The smoke and mirrors brigade (aka life assurance companies) hooked investors in with "free gifts" known as “bonus allocations” - which merely masked the payment of unsupportably high sales commissions.

In recent years all comparative tax advantages of Bonds have been peeled away, and the changes to capital gains tax last year were the last straw. There are now almost no reasons why the vast majority of investors would want to own one – with the exceptions of some trustees and investors in specialist inheritance tax schemes.

If you do own such a Bond you should investigate whether there is any good reason why you should continue to do so. But be careful who you ask – as bank salesmen and the lower echelons of the financial services sales industry will tell you that the ideal replacement for your Bond is – another Bond.

Hope Springs Infernal

2009-07-16T10:10:00.001+01:00

Spring is late this year. Every man and his dog is raking through the ashes of Brown’s economy looking for the green shoots, and every statistic that is anything north of cataclysmic is dubbed as proof of fledgling recovery. It is true that some new statistics will appear to give grounds for optimism – but only by comparison with the nightmare headline figures of the previous year.

We are not economic gurus (but, then, who is?). But our GCE passes in the Spotting the Bleedin’ Obvious examination tells us this. As long as house prices are falling, jobs are declining, and consumers are inclined to save rather than spend, real sustained economic recovery is impossible. End of story.

There will be a myriad of false dawns, and financial markets will gyrate wildly with successive waves of investor euphoria and deflation, as we bump along the bottom for however long it takes for reality to play out. But those who hold widely diversified investment assets while avoiding the more obvious lame ducks, and patiently allow the waves to wash over them, will be the ultimate winners.

Sadly the Spotting the Bleedin’ Obvious GCE has always been overshadowed by its more sexy counterparts – Economics, Journalism, and Politics – the “three R’s” of the apocalypse.

Don't Go Against The Grain

2009-07-15T08:53:00.004+01:00

Some clients are concerned that their investments in grains (wheat, corn and soybeans) have suffered this past month. Have folk stopped eating? Has the trend toward higher protein diets in emerging economies gone into reverse? Is the world population shrinking? Have they created more land on which to grow crops? Have they stopped using grains in fuels?

The answer is - none of the above. The facts are that the US planting season went without a hitch this year, and that the weather and growing conditions have been perfect. So a bumper harvest is anticipated, meaning that the annual concerns regarding food shortages (which keep grain prices buoyed) have eased.

But the growing season is in its early stages, and there is an awful lot of weather between now and harvest. “It’s not what you sow – it’s what you reap” goes an old farming expression. At the first sign of a dry spell or full-blown drought prices could soar. And low prices beget higher demand – which will push prices back up. Prices are unlikely to reduce far from here, but there is substantial upside potential.

But what happens this year is irrelevant. All the long term trends outlined in the first paragraph remain intact. We suspect that anyone who believes food prices will reduce through the coming years is deluding themselves. Few investments boast quite so many plus points, and around now looks to us a first class long term buying opportunity.

Safe As The Bank Of England

2009-07-11T12:50:00.000+01:00

“Did you see the current crises coming?” we are sometimes asked. We did not, as we are investment advisers, not “experts”. There is no such thing as an investment "expert" - so we always find the answer to such questions easy. But it nonetheless still hurts that we did not, as such prescience would have saved our cherished clients – and us - a lot of pain.

This is why we rail impotently at the guilty parties. The only bodies that could, or should, have seen the mayhem coming are those who caused it (the banks) and the tripartite quasi quango from hell who colluded with them to allow the nightmare to happen, namely Brown and his Treasury cohorts (personal ambition) the FSA (incompetence) and the Bank of England (helpless silence).

Brown & Co are unqualified, and wished to maintain an impression that nothing was awry. The FSA is staffed by failed traffic wardens who would not spot an impending crisis if it jumped up and bit them. Only the Bank of England knows what it is talking about, but was cowed into silence by dint of its subservient role to career politicians and ineffectual enforcers.

As reported in a previous post the Bank’s management of its pension fund illustrates almost beyond doubt that it saw what was coming. But such inside knowledge was not, and will never be, available to anyone other than those whose sole purpose in life is to plunder those who elect them from positions of bullet-proof immunity. Heaven help us until all responsibility for financial management of UK plc is passed to the Bank of England.

Deception By Illustration

2009-07-09T07:48:00.003+01:00

Whenever folk make any form of “retail” investment they must by law be issued with illustrations of potential benefits. These are the bane of our lives, as they give people totally misleading impressions – at the express insistence of government. They compare apples with pears, and give comforting forecasts of the unpredictable in black and white. If we had our way they would be banned.

The illustrations are produced by feeding a string of arbitrary “what ifs” into a computer, thereby compounding fiction on fiction several times over. To make matters worse different growth rates are assumed for different investments and tax wrappers. The proscribed calculation methods give impenetrable results that are gobbledegook at best, and sheer fiction at worst.

All you can be sure of is that the “potential returns” illustrated will transpire to be wildly inaccurate. This problem is exacerbated by the natural desires of folk to have an idea as to how their investment might perform, and to believe what they see written on paper. However, like wars and football matches, future investment returns are not determined on pieces of paper.

Our regulators are misleading the folk they are charged to protect. We believe these flights of fancy should be replaced by mandatory statements to the effect that no one has the remotest idea what returns will be, accompanied by a detailed schedule of features and costs. People need facts, and should not be fed false expectations. But that is the way Government routinely deals with us, and financial services is no exception.

1492 Reasons To Own Gold

2009-07-04T12:57:00.000+01:00

Not long after Christopher Columbus discovered the new world the Spanish wasted little time in helping themselves to tens of thousands of tons of Aztec and Inca gold and silver. These precious metals quickly inflated the money supply first in Spain, and then across Europe. The cost of living in England (where inflation was a near-unknown phenomenon) rose 700% between the 1540s and 1640s.

This “free money” from the colonies financed about 40% of the Spanish Government’s budget, but despite the gold and silver still bucketing in from Spanish ships they still ran out of money. The Spanish Crown defaulted nine times between 1557 and 1662. If this scenario rings a bell, it is because it is similar in many respects to what is happening today. But there is a major difference.

The Spanish gold was real money, which did not have to be paid back. It was “monetised” from the moment it arrived. The same does not apply to British Government borrowings. The same economic principles apply now as have always done – if you artificially inflate the money supply, you run the danger of sparking inflation. And if that applies where you use real money, it is only likely to make matters worse if you merely create it out of thin air.

Gold did not cause the Spanish problems. Gold does not cause inflation, but is rather the best known hedge against it. Folk should buy gold when governments are acting irresponsibly or taking extreme risks - like now. Own gold, and do not be concerned about where prices go in the short term. In the long run this is the only way you can rely on government to increase your wealth.

Bernie For PM!

2009-07-01T09:05:00.002+01:00

Yesterday Bernard Madoff was jailed for his ponzi scheme. His crime was to take an alleged £40 billion or so from investors without discernible means of paying them back, and fobbing them off with illusory returns from fictitious investments.

Your Government has taken many times that amount from you and I without discernible means of paying us back, and fobs us off with illusory returns from fictitious growth targets. In addition, however, at the same time it misleads us on tax increases and cutting public spending to punish us further for its crimes.

Madoff got 150 years. Government lackeys get high salaries; can lie, cheat and put their hands in our pockets with impunity, and retire on guaranteed blue chip pensions. I draw two conclusions. The first is that something is not quite right somewhere. The second is that Bernie would have made an excellent Prime Minister.

Recession - The Fat Lady Hasn't Sung Yet

2009-06-30T15:25:00.001+01:00

We learned today that GDP declined by 2.4% in the first three months of 2009. This was even worse than expected, and the largest quarterly decline in 51 years. The service sector is largely to blame, showing the sharpest quarterly decline in output on record. The mountain of data out today shows the economy has been growing slower than thought for most of the past two years, and that the recession also started earlier than believed.

The green shoots merchants point to the UK consumer having been remarkably resilient in this recession, yet today we learned that consumer spending in the first quarter suffered the sharpest fall in decades. That no one truly knows anything whatsoever is illustrated by the fact that one of the UK’s most respected investment houses today espoused the view that the UK might be the first developed economy to come out of recession.

We may indeed yet get a positive surprise when the first estimate for the second quarter comes out in July, because the sheer scale of the decline in the first three months must make a relative sharp improvement likely. However, if the underlying weaknesses persist, it is quite possible that any nascent recovery will peter out later this year, as it did in 1981.

Whatever the true prognosis for the UK economy our views on investment here remain unchanged. Whoever, and whatever, turns out to be correct we Brits will remain dug into a deep hole for a long time to come. There will, quite simply, always be better places to be.

MPs' Pensions - Will Turkeys Vote For Christmas?

2009-06-27T12:03:00.003+01:00

We must be psychic. Since this post was penned some days ago its subject has exploded across the national media – and quite right, too. As more and more major employers shut their final salary schemes (few of the largest hundred companies in the UK still offer one) the spotlight has at last begun to fall on MPs pensions.

While these pampered worthies are still reeling from the expenses scandal now is surely the time to demand the end to their ludicrously generous pension benefits. MPs accrue pensions at the rate of one 40th of their final salaries for every year their backsides adorn the plush green and red leather seating in Parliament. The estimated annual cost of providing these benefits is 23.1% of payroll, or £15,000 per MP each year.

In addition the taxpayer (yes, us again) is also saddled with making good the £51 million deficit in the scheme, which adds an additional 8.5% to make a total contribution from us of 31.6% of salaries, equivalent to £20,467 per MP. So on top of their generous salaries and famously excessive personal expenses (not to mention their additional office management expenses) these guys and gals benefit from one of the most generous pension schemes in the country.

Even as our outrage has been focussed on their expenses the fact that an additional £20,000 plus per MP is being drained from our pockets and into theirs appears to have sneaked under the radar until now. Even as our own pensions have been progressively trashed by Brown & Co theirs accrue at obscene rates, all paid for by their victims. Now, at last, there appears to be some appetite for addressing this anomaly. It will be interesting to see if reductions are proposed – and how the voting will go.

Life Insurers - A Crisis In Waiting

2009-06-24T19:55:00.002+01:00

Why, we are asked, are we cautious regarding the financial health of life insurance companies? Why do we for the most part encourage our clients to bypass them and to take ownership and control over their own assets? After the banking crises surely any secondary insurance sector crisis has now been averted, hasn’t it? We think not.

Problems affecting the banks have been identified (albeit frighteningly late) and need not reoccur. The systemic risk affecting insurance companies, however, is bubbling beneath the surface, and will only intensify. Banks provide a bridge between lenders and borrowers, whereas insurance companies provide a bridge between two sets of promises. But there is a growing mismatch between the two, namely their assets and their long term liabilities.

Traditionally the life insurers had flexibility in terms of the discretionary nature of payments before policy maturity dates (e.g. penal early surrender penalties and transfer penalties) which acted as buffers in terms of their capital adequacy. Regulation, and the move toward transparent products, has turned off this discretionary tap and with it the ability to fleece their customers, thereby increasing systemic risk. A vicious, if ostensibly virtuous, circle.

Combine this risk with the current strains the life insurers are suffering due to plunging fund management fees and new business, the reduced values of many of the assets backing their product guarantees, and the fact that the professional adviser community is turning away from them in droves, and you have a recipe for extinction. Business models that can only thrive at the expense of their customers are ultimately doomed, and this is no exception.

Simply Complicated Pensions

2009-06-20T15:24:00.003+01:00

Three years ago our government introduced Pensions Simplification (the much-vaunted “A Day”) claiming it would sweep up eight old disparate pensions regimes, and replace them with a single set of rules from April 2006 onward. While the new regime introduced many new complexities in itself, the intent behind this initiative was in many respects admirable.

However, the A Day rules overlooked one key point. This was that the new rules must inescapably be applied in close association with the old in respect of all pre-A Day arrangements. So eight conflicting and complex regimes became nine. Some “simplification”. Good news for we who advise on pensions planning – but otherwise missing its mark by a country mile.

Lo and behold, Government recently introduced new rules for higher earners which, make no mistake, can have profound knock-on implications on the planning of those currently earning considerably less than the stated target earnings levels. These pointless measures simply boost the disparate regimes we have to factor into pension planning up to double figures, and make the exercise even more complicated.

During its reign this Government has attacked the pensions of ordinary folk in turn first by way of a disgraceful stealth tax, then "simplification" that complicated matters, then massive reductions in pension scheme values brought about by economic incompetence, and latterly by a measure designed to recoup some of its losses at our expense. What a shower.

Baltic Dry On The Rocks

2009-06-17T18:33:00.003+01:00

As financial market soothsayers cast around for compelling indications to back the popular green shoots recovery theory, one major indicator is pointing to lower prices ahead. This is the Baltic Dry Index (BDI) published by London’s Baltic Exchange, the global marketplace for buying and selling shipping contracts.

The BDI measures the demand for space on ships which carry cargoes such as coal, grain, timber, steel and iron ore, making it a historically reliable economic indicator. Manufacturers must buy in supplies of raw materials before they can turn out finished products. So a pick-up in industrial activity will show up in the BDI before it appears in official production statistics.

As the supply of shipping capacity tends to stay relatively unchanged over the short-term (it takes up to two years to build a new ship) just a small increase in demand for transport space can push the BDI higher. But in early June it lost 20% in a week. In a nutshell the BDI points to a continuing global recession and, by extension, to the probability that share prices around the world may be hit, because the Index has been a good forward indicator of stock markets too.

Remember, however, that markets have soared recently due only to the fact that matters have become “less bad” – not good. So the BDI may not necessarily be any better a predictive tool for stock prices than any other, as market direction is clearly not necessarily driven by economic facts. Which only double underlines in red ink our mantra that financial market forecasting benefits only the the folk who make money doing it, and not the fools who take any notice.

Ban (Call Centres) Galore

2009-06-13T15:28:00.004+01:00

A weekend rant from your IFA respondents. We need access to technical and plan-specific information from financial product providers with whom we have placed business in the past, or where we have taken over responsibility for plan servicing on behalf of clients. These days, most roads to securing such information lead to Mumbai or Bangalore.

There we speak with Philip, Peter or Joyce (we await a chat with Percival and Phoebe) with curiously Indian accents, who know all about the weather in London, but absolutely nothing about the technicalities of the information we require. Give them a key word and they read from scripts that tell you anything other than what you need to know.

Last week I called a local rate number filled with dread regarding the prospects of securing the technical information I required further to transfer to somewhere in the sub continent. I was greeted by Fiona, boasting a Scots accent. “What a relief” (I exclaimed) “to be talking to a local person with local knowledge who can give me a local answer to a local problem. Are you based in Bristol?” “No” she replied “Bangalore”.

What insurance companies think they will gain from this cost-cutting I cannot imagine, as we advisers will shun them if they do not provide us with a vaguely decent service for our clients. In fact further to the advent of the technology powering our Private Client Service we do not use them anyway, and the dinosaurs will become extinct. But for them to hasten their own end is plain daft.

The Global Debt Threat

2009-06-11T09:46:00.004+01:00

As bond guru Bill gross pointed out last week, the US annual deficit of nearly $1.5 trillion is 10% of GDP alone, a number never approached since the 1930s depression. Mr Gross points out that five more years of 10% deficits will quickly raise debt to GDP levels above 100%, the point of no return for the credit rating agencies, who would downgrade the US, with disastrous consequences for both the country’s economy and its currency.

Gross issuance of Treasuries are set to hit $3 trillion this year – four times last year’s figure. Just who will buy all of this debt? The Chinese and other surplus nations simply do not have the wherewithal to write the £1.5 trillion of cheques required even if they wanted to – which they do not. China has become extremely jittery about the future value of its existing US Treasuries, and is buying up commodities and alternative currencies instead.

Upward pressure on US bond yields are threatening economic recovery in the short term, as this places pressure on mortgage and corporate lending rates. So those green shots are looking fragile. Longer term the currency and ratings issues mentioned above will threaten, as will inflation. The message is clear. The US dollar is under threat, and its time as world reserve currency is nearly up.

How do you play this? If the Chinese Yuan succeeds the US dollar, buying Chinese equity funds will give a currency booster to long term returns. Buying commodities looks a good move – after all, if that is where Chinese money is going, we would be wise to follow them. And, at the risk of playing our scratched old record yet again, own gold bullion. Always.

Green Shoots - Or Scorched Earth?

2009-06-06T12:02:00.006+01:00

Veteran guru Fund Manager Anthony Bolton called the end of the bear market in UK stocks last year. He got it wrong that time. But recently he has trumpeted green shoots again, and when the great man gives an opinion the country sits up and takes notice. His opinion alone can have a significant impact on investor sentiment, and is often tantamount to a self-fulfilling prophecy.

But enter Neil Woodford, the most revered and successful working fund manager, who manages the largest unit trusts in the country. Mr Woodford states that “the economic downturn has a hell of a lot further to go.” He goes on to say “the problems that led to this recession have not been corrected at all.” He is maintaining his portfolios in “defensive” mode, and has no intention whatsoever of buying into the current rally.

So there you are. The two most admired fund managers in the country have 100% opposing viewss on market prospects. So who is one supposed to believe? All this shows is that no one really knows. Were we to take sides (we don’t) we might side with Woodford, because his opinions are based more on facts, whereas Mr Bolton’s are based more on gut feel.

How facts or feel feed into stock market prices in the short term is anyone’s guess. But over the long run fundamentals always ultimately prevail - and they are not good. So either expert's view may be correct - but only for a while. Seeking upsides now in the face of likely major downsides later does not interest us. Avoid the UK, and you don’t have to worry in the first place. Simple.

Keeping It Real Wins Investment Game

2009-06-03T18:54:00.007+01:00

The fun and frolics at KB Towers just never end. Here's yet another investment game that you can play at home. A pesky client put us on the spot with a question to which we had no pat answer (damn – caught short again). The question was "if you could buy and hold just three investments for an unspecified period, what would they be?"

The thinking required shone intense spotlights on our existing asset allocation process. Do we concentrate on assets that will benefit from the success of mankind - or on those that will profit and protect from its folly? Our standard strategy anticipates both, thereby hedging clients' bets and providing them with the ability to make money in most conceivable environments.

Narrowing the process down, our belief that capitalism will continue to flourish in some form pointed strongly to our favoured China and Emerging Markets equity funds. But global storm clouds loom. Latent inflation. Ballooning money supply. The debasement of FIAT currencies. Developed economies drowning in debt. Chronic economic imbalances. The list is scary.

Our conclusion was that only gold and silver (bracketed together – we cheated) crude oil and grains make complete sense. Consensus thinking allows for 0-5% of portfolios to be held in these, but our own recommended aggregate allocation has crept up toward 25% in the light of recent events, and is trending steadily higher. So the exercise in fact merely made us rationalise our pre-existing policy in a different light.

As Bruce Forsyth famously quipped, "Good game. Good game."

The Long And Short Of Absolute Returns

2009-06-01T20:49:00.002+01:00

We will consider Absolute Return Funds for a proportion of certain portfolios. They are a means for investors to benefit from the long term growth prospects of equities, while securing protection from the worst effects of severe market falls. The Fund Manager will buy stocks he thinks will rise ("going long") and sell stocks he thinks will fall ("selling short").

This has been a highly effective strategy recently, as there has been plenty of opportunity to identify shares likely to fall in value and profit from such positions. This has helped more adept Fund Managers to generate positive returns for investors during one of the worst bear matkets since the Great Depression of the 1930s. But, of course, there are potential snags, as follows.

In bear markets positive returns canot be guaranteed, and in bull markets they are likely to be constrained by the "short" side of the portfolio; ie when a rising tide is floating all boats. Also, the investor is as ever dependent on the skills of the Fund Manager to be able to identify stocks headed in both directions. Absolute return Funds are the pushmepullyous of the investment world, demanding counter-intuitive bi-directional thinking.

But the best funds are doing what they say on the tin. Some of the best value to be found in the Absolute Return space lies in Hedge Funds, which have been slated as the black sheep of the investment world during the recent crises. When they have cast off their poor image (unlikely for a while yet) there are some excellent Funds selling at massive discounts to their underlying values, presenting some bargains to those in the know.

Consensus Psychology In Song

2009-05-30T13:34:00.003+01:00

The words of a famous song came to mind this week as I absorbed the rising consensus among "experts" that the worst of the recession is now behind us, and that its all sunny uplands for equity investors from now on. The following is by Tim Hardin (who also wrote If I Were A Carpenter) and was recorded by many artists, not least by Rod Stewart (it was actually the "A" side of Maggie Mae): -

If I listened long enough to you
I'd find a reason to believe that its all true

Our take on matters clashes with the consensus, either because we have no axe to grind - or because we are fools. Our view is that investors who position themselves for the new world will be huge winners, and that the gulf between them and those who carry on as before will never be greater. Which brought to mind Bob Dylan's classic song Forever Young: -

May your hands always be busy
May your feet always be swift
May you have a strong foundation
When the winds of change shift

Investment Is Child's Play

2009-05-29T20:20:00.002+01:00

Here's a simple (and, potentially, life-changing) game you can play at home that we play every day. It reduces investment selection to a facile level, but you may be surprised how its Jack and Jill approach will help you arrange your affairs to better effect. The game is called what do I think will increase in value over the next five years?. When you have formed answers, putting it into practise may be the area in which you might seek expert help. But let's play the game.

Will food prices be higher in 5 years time? Highly likely? If so, are you invested in foodstuffs? Will oil prices be higher? Again, probably? So are you invested in oil? Gold is more subjective – but we at KB Towers give this very high odds. Will interest rates be higher? Very likely? So, if you are invested in gilts – get out! Will inflation be higher? If "yes", do you hold all the classic hedges, including index-linked gilts? If not, why not?

Now, to equities. We would not be surprised to see prices lower than today, as we suspect today's rallies may be just a temporary leg-ups in a long term bear market. But no one knows that for sure, and balanced portfolio construction demands exposure to equities, which may actually remain favourably starred for some time to come. But if you are going to hold equities, relative selection will be key.

The game will at least make you ponder on what you hold, and why. And no, we are not doing ourselves out of a job. Not being fortune tellers, we cannot help folk with the whens of good investment – we specialise in the wheres, the whys, the hows and the whos. We then tie everything together in the middle, and do our damnedest 24/7 to make it work.

Indian Summer In Store

2009-05-27T17:48:00.003+01:00

We’ve heard a lot about trading being stopped on various stock exchanges over the past year, usually as markets fell through the floor. Last week trading on India’s benchmark stock index was stopped for the first time in its history. But in this case, it was because stocks went too high – it leaped 17% as the ruling Congress Party won a resounding victory in the national elections.

Manmohan Singh's victory sent markets and optimism rocketing, as his Congress Party won the most seats since 1991. India has great strengths, including its low average age of workforce, and a lower reliance on exports than most emerging markets. And the election should be good for India’s economic prospects, helping to break many of the logjams that have hindered business and investors.

In theory India could rival China in terms of global GDP leadership among larger nations. But it still faces a lot of problems. The energy and transport infrastructure are unreliable and congested. Absolute poverty is far higher than in China, with 40% of Indians living on less than $1.25 a day. The country also has a hefty deficit, at 10% of GDP. India’s weak credit rating will have to be tackled, and limits any big government spending plans.

The Indian market could take another pounding come the next global scare. But for those prepared to think long term, now may be an excellent time to get in. The ride will be rocky, but the rewards could be enormous. For those seeking just a little exposure, carefully selected Emerging Markets Funds are the best way to avoid undue whitening of the knuckles.

Get Real To Mitigate Currency Lottery

2009-05-25T10:53:00.004+01:00

Ouch. Ongoing weakening in the US dollar is impacting heavily on the returns for UK investors from most investments abroad, a majority of which will be pegged, either directly or indirectly, to the greenback. The direct impact of this is that if your US investment fund gains 1% in a day during which the dollar loses 2% against sterling, your investment will be worth 1% less tomorrow regardless of the fact share prices have risen.

Thankfully, investors in commodities (including our staples of gold, silver, grains and crude oil) do not necessarily suffer in the same way. All are internationally priced in US dollars. But when the dollar falls their prices tend to rise, reflecting the fact that they are now cheaper for international buyers to acquire. So very often commodity investors are largely insulated from damaging currency fluctuations.

This is just one of many factors behind our advice that clients hold a proportion of their pension, ISA, bond and direct portfolios in "real" assets. Quite apart from the protection that these provide against inflation (not least because some anticipate it, and others are significant root causes of it) the cushioning of severe currency fluctuations is a boon. This is a central tenet behind the importance of matching non-correlated assets in portfolios in order to achieve diversification and reduced aggregate volatility.

As stated in a previous post we do wonder if sterling necessarily holds any long term attractions against the US dollar. Both are blighted, but that goes for all paper currencies. We therefore take it that the dollar and sterling are both lame ducks in the global currency "race to the bottom" without making bets either way. But whichever way you look at it, holding some of your portfolio in real assets really makes real sense.

Yet Another Reason To Avoid Gilts

2009-05-22T12:35:00.002+01:00

Yesterday credit ratings agency Standard & Poors downgraded the UK's outlook from "stable" to "negative". The odds on this country losing its AAA credit rating are about one in three, albeit this will not happen in the short term. There are many potential ramifications that could attach to the loss of our rating, not least in terms of damaging impacts on public finances. But there is one course of action we can all take to protect ourselves from the fall-out to a degree.

The yield on gilts would be forced up as investors demanded higher returns to compensate them for their credit risk. This would force prices sharply downward. Recent events have made it all but certain that gilt investors will lose heavily during the coming years, and this latest development darkens the prospects still further. The gilt market may appear healthy for a while yet, but the risks of severe losses are becoming overwhelming.

The message is clear. If you hold gilts, sell. If you don't, stay well clear. Find out what percentages of your pension funds, managed funds and other investments are in gilts, and act accordingly. Quickly.

BRIC Layer Needed

2009-05-20T14:13:00.004+01:00

Readers will be aware of our mantra that equity investors should be shunning developed markets and backing economies with much higher economic growth prospects and minimal or no debt. A recent post outlines our Empire Theory, which makes a point proven repeatedly throughout the annals of history – that it is always wise to back empires in the ascendancy, rather than those in decline.

With equities rallying around the world, the BRIC markets (Brazil, Russia, India, and China) have way outperformed the major developed market indices. Since the start of the year the Shanghai Composite has gained 46%, the Indian Sensex is up 42%, the Brazilian Bovespa is 28% higher and the Russian RTS Index has risen 55% in dollar terms. To put their performances into context, the main UK and US indices are either flat or down in 2009.

The theory went last year that emerging economies could withstand the pressures bringing their developed peers down ("de-coupling") but this was trashed by events. Is "de-coupling" about to assert itself? We think not. Yet. It is probable that the rally in emerging markets is largely a result of a return of risk appetites and a general optimistic air in the markets. If western markets were to retrace recent gains, emerging markets are likely to follow.

But this does not concern us. For the equity components of portfolios investors must think long term. Presumption that "de-coupling" will now ensue are likely premature, but it appears certain to become a creeping reality through the coming decades. But one has to travel in order to arrive, and the journey should transpire to be a profitable one by comparison with those facing developed markets, as they travel in the opposite direction.

The Fudge-Free Financial Product Diet

2009-05-18T18:32:00.005+01:00

We were today approached by a newspaper for a comment on the marketing spiel used by a major insurance company to promote its Self Invested Personal Pension ("SIPP"). The background is that company xyz (with much deeper pockets than ours!) has been promoting an improvement in its SIPP charging structure. But on closer inspection the improvements in most cases turned out to be nowhere near as generous as claimed at best, and a mirage at worst.

For decades the insurance companies were under no obligation to declare product costs at all, and as a result the public were sold investments that struggled to surface above a sheer weight of closet expenses. Disclosure regimes introduced in recent years have served to improve matters, but the life insurance industry has innovated to bring in swirls of smoke and mirrors to obfuscate matters. And, in the absence of choice, they have been very successful at doing so.

But their efforts will ultimately prove to be self-defeating. At KB Towers we will only utilise systems under which all costs are identifiable and disclosed down to the very last penny. And we are not alone – while there are still advisers out there who foist highly charged rubbish on their "customers" (banks to the fore again) rewarded by outrageous sales commissions, a new breed of advisers is emerging armed with technology enabling them to bypass the fudge-encrusted monopoly of the old financial services dinosaurs.

A new era of transparency is already with us, and it will flourish. The dinosaurs will inevitably die out. Were they to be in any doubt as to the public's view on the issue, they need look no further than the current row raging over MPs' expenses. The fact that such practices are "within the rules" will no longer wash. Everyone can now benefit from a fudge-free diet.

X-Files Inflation Special

2009-05-16T13:54:00.003+01:00

While not notable conspiracy theorists, Mulder and Scully here at KB Towers have been advising all our clients regarding an increasingly credible notion that the US government has been manipulating the gold price. It is easily done, as the gold market is dwarfed in size by most others, and it therefore takes less dollars to "fix it". But why would they do so?

The US government (and our own) needs to convince the world that we are entering a period of deflation. This is because fixed interest gilts are attractive in deflationary environments, and the US (and UK) needs to sell hundreds of billions of dollars worth to fund their debt programmes. Inflation kills fixed interest securities, so the slightest sniff of it would deter buyers. Ultimately governments will welcome inflation so as to inflate away their debts. But not yet.

Gold is the ultimate predictor of inflation. When the danger of inflation looms, investors flock to gold. The gold price has been strangely buoyant in the face of rocketing global stock markets (when no one needs "safety" any more, the gold price would usually fall). The penny is dropping that rapidly accelerating money printing exercises will spark nasty inflation in the medium term. But in the face of heavy recent buying of gold, huge sell orders have intervened to suppress price rises.

When governments tell you one thing, but markets tell you another, we always side with the latter. And it is not just the gold price that is warning of inflation. Crude oil, metals, grains and other commodities are also waving red flags, as is the logic of what happens if you flood financial systems with money created out of thin air. So whether or not the gold-fixing theory is true, inflation is the real enemy we should focus on. No amount of interference can keep a lid on the gold price in the medium term. Don't sell your reserves.

Snouts In The Trough - Pigs With Previous

2009-05-14T13:51:00.003+01:00

The following is resurrected verbatim from our post dated Sunday 15th March. Frankly, we have no deep and meaningful comment to add on what it says about society in general, or politicians in particular. Except this one. What a bloody mess.

Question - Name an organisation with 635 members, of which: -
- 29 have been accused of spouse abuse
- 7 have been arrested for fraud
- 9 have been accused of writing bad cheques
- 17 have directly or indirectly bankrupted at least 2 businesses
- 3 have done time for assault
- 71 cannot get a credit card
- 14 have been arrested on drug-related charges
- 8 have been arrested for shop-lifting
- 21 are currently defendants in lawsuits
- 84 have been arrested for drink driving in the last year

Answer - The House of Commons.

Nothing To Get Stressed About

2009-05-13T18:43:00.002+01:00

You may recall the recent "stress tests" conducted on 19 US banks, designed (a) to see if they can withstand further turmoil, and (b) to imbue the public with essential confidence in the strength of their banking system. Of course the results were questionable to say the least, as the valuations placed on the highly complex and illiquid assets weighing down bank balance sheets are real finger-in-the-wind jobs.

The resulting black hole to be filled amounted to a mere $100 billion – just another of those figures it is impossible to get one's head around. But the US government has the funds set aside, and the exercise did restore much needed confidence. The transparency of the results is another matter, but the end justified the means. The UK authorities have stress tested our own banks, albeit in a more low key fashion, and without publishing the results.

But this brings the question of transparency to the fore. After all, they are not about to tell us that there is a huge black hole in UK bank balance sheets, and that they do not have the resources to fill it. Bank earnings have rebounded recently, which will allow banks to rebuild capital, and make further write-downs in a more orderly and gradual fashion. If asset prices continue to stabilise, no more massive losses will build up.

So everyone is happy and, if official policy is not to be transparent, it is genuinely in a good cause. So (unlike the case of MPs' expenses) maybe we should demand transparency, but only when the economy recovers – because to do so now might cause mayhem, and there is no real need to frighten the horses. Sometimes honesty is not the best policy, and the truth can hurt.

Interest Rates Going Nowhere

2009-05-11T20:32:00.003+01:00

Last week's announcement that interest rates are to be held at 0.5% came as no surprise. After all, there is little further for them to fall (and very good reasons not to lower them further) and it would be suicide to increase them at this point. Hobson's choice, then. Get used to low returns on interest bearing savings, and do not count on that changing for a long time to come.

The big deal about the announcement was the news that a further £50 billion is to be added to the £75 billion already committed to the quantitative easing programme. What this says about the state of the UK economy aside, the most important ramification is the heightened danger of downstream inflation that supersizing QE creates. This raises the stakes for investors when it comes to determining future strategy.

Those with faith that green shoots are sprouting everywhere, and that the current exuberance in equity markets will be maintained, will take a view on the short term prognosis for equities. Our own jury at KB towers is out on that one, because we do not know - and what we do not know, we do not pronounce on. There are some high probablility events, however, that we are prepared to suggest folk should prepare themselves for.

One is the near inevitable collapse of the fixed income gilts market. Anyone who remains in them is staring down the barrel of a gun that could go off anytime. Another is the eventual resurgence of inflation pointing to index-linked, not fixed interest, gilts as a portfolio diversifier of choice. The world sleepwalked into the current crises, the scale of which could not easily have been foreseen. Now the foes are more visible, it is easier to avoid them.

Bull In The China Shop

2009-05-09T18:59:00.002+01:00

The World Bank said last week that China is the "bright spot in the global economy". Chinese car sales jumped 30% last month. House prices leapt 9%. The Purchasing Managers' Index rose for the fifth successive month. Loan growth is running at 25% annually. Economic growth is forecast to "slow" to 6.8%.

Compare and contrast that picture with our own slow motion train wreck of an economy. And then with that of the Eurozone, superbly described by one economist last week as "the epicentre of leverage, and denial". Look at the US, showing signs of meaningful economic recovery, but weighed down by colossal problems and debt. And at Japan, restrained by the tightest of long term economic straitjackets.

As we forever maintain, economic, financial and just about every other form of power is transferring from West to East, and investors should free themselves from the shackles of old thinking and follow the money. No matter how well they might (or might not) do following developed market equities, all the odds favour at least considerable outperformance by backing incontrovertible trends rather than historical hope.

Of Tax-Free Porn And Bath Plugs

2009-05-08T18:45:00.003+01:00

A last word for now on the ramifications of the recent Budget. We have devoted much space to Alice in Blunderland's daft assault on higher earners, but have so far resisted donning our cynical boots and pointing out that there is one high earning sector that will be untouched by Alice's attack. Need you ask which? Yes – it is MPs, of course.

The average MP's expenses exceed £135,000 - more than double their salaries. Because expenses are payable tax-free, the average MP avoids tax of £54,000 pa that anyone else receiving similar total remuneration would have to pay. After the top rate of income tax rises to 50% in April next year, they will avoid even more.

And our representatives at Whitehall will also avoid the proposed curbing of higher rate income tax relief on pension contributions for those earning over £150,000 pa. This is because while each costs the taxpayer a little shy of £200,000 pa (excellent value at half the price) headline salaries average less than half the new threshold. This being the case, our elected champions will likewise avoid the marginal tax trap to apply to those earning in excess of £100,000 pa.

It is not hard to see why Alice's blitz on high earners did not encounter howls of protest in Parliament. While public ire remains focussed on the MP gravy train Alice at least ensured that porn and bath plugs will continue to be tax exempt for its passengers. You and I have to buy such essentials (and our second/third homes) out of taxed income. No wonder we are all finding it increasingly difficult to take our political system seriously.

Inflation? What Inflation?

2009-05-05T20:20:00.002+01:00

A postscript to our post a few weeks ago pointing out that the Bank of England has switched most of its staff pension fund into Index Linked Gilts. You may recall us musing that the Bank knows more about our economy than just about anyone, and pointed out that this clear expectaion of future inflation clashed hugely with the government line that we face prolonged deflationary pressures.

An eagle-eyed economist has found a statement buried deep in the forest of documents issued to accompany the recent Budget that the Treasury proposes to reduce the relative future issuance of Index Linked Gilts by half. When every penny it can lay its hands on from gilt issuance will be critical to fund its massive debt mountain, why would the Treasury turn its back on this avenue of fundraising?

There is only one rational explanation, which is that the government proposes to fool the market by issuing as much fixed interest debt as posible, and then inflate away its value. Whichever way you cut either the Bank of England's pension fund investments or the government's reduction in Index Linked Gilt issuance, there is only one conclusion that can be drawn – those at the helm of the economy expect the resurgence of inflation.

As we have said before, however unlikely the prospect of inflation may currently appear it is baked in the economic cake, and all the clues coming from high places point the same way. Get some Index Linked Gilts under your belt, and do not be dismayed if they go nowhere for some little time. Eventually they will have their day in the sun, when the proposed reduction in supply will only add to their attractions.

Rats Love Sinking Ship

2009-05-03T16:03:00.001+01:00

In bad times there are always some folk and market sectors that flourish. Currently these include fast food chains and pawnbrokers. But by way of offbeat and stark observation on the state of the UK we read of a sector of the UK population that is positively thriving.

Rats. Closed and shuttered offices and uncollected food rubbish are giving rise to an explosion in their numbers, and in the rate of callouts to pest control agencies. Councils are overwhelmed due to reduced income, and weekly collections at 12.5 million homes fell by over 7% year on year in the last quarter of 2008.

The Rentokils of this world are doing brisk business. Rats can spread 35 diseases, and their population has soared by over 13% in the past year. There are now more rats in the UK than humans. Cockroaches are also flourishing. Never mind swine flu - this is a clear public health hazard in the making, and there is a paucity of resources to deal with it.

Buy shares in rats and cockroaches, and sell councils and the NHS. There. You can always look to us to provide you with a different spin on financial planning issues.

Currencies - Heads Or Tails?

2009-05-02T14:15:00.003+01:00

Predicting currency movements is famously tantamount to flipping a coin. This is a frustration, as anyone investing outside our shores will be exposed to the fluctuations of other currencies against sterling. Much the most significant of these is the US dollar, the world's reserve currency. The entire world is in thrall to the dollar to some extent. The future of the greenback is therefore of supreme importance to most seeking returns from abroad.

In the current race to the bottom of devaluing currencies it is impossible to get one's head around the concept of which are strong, and which are weak. Ultimately we believe that strength is a misnomer as all will be weak - but that some will be less weak than others. This is a prime reason why we recommend our clients should hold gold and silver bullion, which are the strongest hedges against currency debasement. Crude oil is another. In an increasingly unreal world, it pays to own real assets.

But despite the potentially adverse long term impact of quantitative easing on the dollar it still appears the best-looking horse in the glue factory. It remains the ultimate “safe haven” currency and, if the US indeed leads the world out of depression, should retain its long term edge. Basically, unless and until a new currency stakes a claim to replace the dollar as world reserve currency, it is hard to see what will topple it. Gold is the last word in alternative currencies, but revival of the gold standard does not look likely.

Many of our favoured investment asset classes are denominated directly, or indirectly, in US dollars, in respect of which we assume exchange rate neutrality. However, if push came to shove we would back the US dollar to appreciate against sterling in the long run, barring disasters the other side of the pond - or miracles this side of it. To our minds this imbues our clients' fortunes with the strong likelihood of windfall currency returns. When flipping that coin, probably best to make it a dollar rather than a pound.

Beware The Earnings Traps

2009-05-01T21:52:00.006+01:00

More on the impact on savers and investors of last week's Budget. The emphasis for many folk will now shift away from the traditional and well understood paths of maximising tax reliefs toward remuneration planning, and the conversion of income and assets subject to increasing rates of income tax into forms benefiting from capital gains tax at a uniform rate of 18%, and with the benefit of annual exemptions of £10,100 per person.

Earn over £100,000, and you will lose your personal allowance until it disappears altogether at around £113,000. Those caught in this trap will effectively bear marginal income tax rates of 60%. This aside, earn up to £149,999 and you will still be subject to the current 40% top rate of income tax - albeit on more earnings than previously due to the "personal allowance trap" outlined above.

But at least you can still secure 40% higher rate income tax relief on pension contributions if you earn up to £149,999. Stray over £150,000, and you fall over a massive tax cliff edge. That is where you begin to suffer the new 50% rate of income tax, and your ability to secure pensions tax relief will begin to taper down to 20%. So you will receive up to 20% less tax relief, all thanks to that extra slice of income on which you will be taxed at 50%. I think that is what is technically known a double whammy.

The government will not achieve much by this draconian assault on high earners. Many wealth and job creators will leave the country, and others will use folk like us to help them mitigate the heavy impact on their income and assets. In a way we should be delighted with these naiive new rules, as the more complex the tax system becomes, the higher the demand for our services. But - at the risk of sounding ungrateful - we still do not see the point.

Budget Hit On Pensions - Stupidity Or Spite?

2009-04-29T20:40:00.001+01:00

Now we have analysed last week's Budget there is indeed some devil in the detail, as we speculated in our post of 22nd April. Quite apart from the ill-judged income tax assault on higher earners, who are hit twice over due to the convoluted system to be introduced to curb their entitlements to higher rate income tax relief on pension contributions, there is another measure that will hit certain folk like a ten ton truck.

A daft consequence of the Budget is that anyone earning £149,999 pa will be almost unaffected by the Budget, but all hell descends on those who earn a pound more. This arbitrary nonsense aside, those who command earnings in excess of £150,000 pa, and who are members of final salary pension schemes, will not only be subject to the new 50% income tax band and lose the 40% income tax relief they secure on their own pension contributions, but will also have to pay tax on their employers' contributions.

Every time affected members' salaries increase, their pension benefits "promises" increase proportionately. Members will have to pay tax on the nominal value of this increased "contribution" from their employers. The resulting tax bill could be several times the amount of the actual salary increase. Many employees will be hit by a series of truly enormous tax bills in the years leading up to their retirements.

What on earth is the point of that? All the government will succeed in doing is hammering a few more nails in the coffin of final salary schemes which, as we have said many times in recent posts, are already on their last legs. Apparently the Treasury "will consult". We do pray that they come to their senses, as this measure has all the appearance of being either spiteful – or just plain stupid. Or, possibly, both.

Contracting Out - A New Twist

2009-04-27T19:16:00.003+01:00

Whether or not to contract-out of the State Second Pension ("S2P" – formally SERPS) has forever been a tortuous calculation if which approach may produce the highest actual pension income at state retirement age were to be the only consideration. The rules have changed continuously, as have the calculations of the rebates payable to personal pension schemes.

We have long since ceased to advise our clients definitively either way due to a plethora of bewildering and constantly changing permutations and unknowns. We have always based our advice solely on the known knowns; namely comparative death benefit and tax-free cash outcomes, and also on musings as to whether any future government can be trusted to pay what past ones said they would. Scientific it ain't.

The choice always came down to getting one's money under one's own control versus relying on future governments to meet the pledges of past ones. But changes effective from 6th April 2009 have muddied the waters a little more. New calculation rules make it clear that those earning in excess of £40,000 pa (or who may do in the future) will more likely derive better pension income by being contracted in to S2P.

So our ability to advise with clarity is further diminished. Personal preference and crystal ball gazing will remain the order of the day, as the maths defy scientific rationalisation. "Non pension" criteria will remain important to some, but all could be nullified by the issue of faith in governments. Every case is different and, sadly, for most there is no "correct answer".

Realism Trumps Optimism

2009-04-25T14:12:00.002+01:00

A reader has asked us why we appear to be purveyors of doom and gloom. Why do we not balance our posts out with some good news, like concentrating on the green shoots of recovery that the consensus appears to see sprouting everywhere? This got us thinking. On balance our reader was right – the general tenor of our posts is indeed gloomy.

That is because we are wary about the global economy and the prospects for certain investment assets. We have to be unrelentingly objective and tell things as we see them. Even though our short term interests ostensibly lie in convincing folk all is well, we cannot peddle false optimism. Our clients want strategic coherence and structure, and know instant miracles are mirages. They do not retain us to tell them what they want to hear.

Why we are gloomy will be clear from past posts. It is human nature to be optimistic, and optimists will seize on any half good reason to be so. But when all good news is good news and all bad news is ignored, our warning sirens wail. Usually such ebullience is seen at the top of bull markets, but currently we see more scorched earth than green shoots. The time for optimism may return, but no amount of wishful thinking will bring it forward.

We would point out that some posts will reveal we are extremely optimistic about the prospects for certain assets over the medium to long term. Trouble is, we see these triumphing to much greater degrees than, or at the expense of, those about which we are pessimistic. Never will the contrast between investment success and failure be so stark. If we are just half right our clients will prosper, and the optimistic short termists will suffer badly.

Pensions In Peril Chapter 2

2009-04-23T21:15:00.005+01:00

Hard on the heels of our citing twin pensions perils last Friday comes news of a third. The Pension Protection Fund ("PPF") announced last week that the deficit in defined benefit pension schemes rose from £205 billion in February to £242 billion in March. The potential ramifications of this are dire for employers, scheme members, trustees, shareholders and bondholders alike.

This is because, in simple terms, there is a near quarter trillion pound black hole in large company pension schemes. To the extent that deficits are not made up by future investment returns (the main influence - but there are others) employers themselves are in the frame. This can be expected to be a significant drag on corporate profitability in the future.

The trouble is, the PPF is currently funded by levies on defined benefit pension schemes. This will see increasing liabilities being met from a dwindling pool of employers, which is surely destined to result in an insoluble downward spiral. To the extent that employers cannot make up the deficits there will clearly be a cloud hanging over future employee pension benefits, and the PPF will be required to cover any shortfalls.

If the PPF's source of levies dries up, who will pay? There is currently a conspiracy of silence regarding this matter – maybe because government has more than enough deficits on its plate right now. There can be no happy ending to this problem as, ultimately, the music must stop.

Yes - A "Fudge It" Budget!

2009-04-22T19:11:00.003+01:00

In today's Budget Chancellor Alice Blair-Sweetheart at a stroke gave up all the middle ground that new Labour had wrested from the Tories in the past fifteen years and returned to the old Labour of the 1970s. In reeling back the years he reversed election manifesto pledges and generally came up with a Budget that amounted to much ado about not much; akin to purporting to rebuild the Titanic while actually just rearranging a few deckchairs.

Of main concern to most of our readers will be the increases in ISA allowances, phasing out of higher rate income tax relief on pensions contributions for high earners, and the introduction of a new 50% top rate of income tax. Pending more detailed study of the devils in the detail our early conclusions are that these are poorly thought through; give rise to some anomalous interractions, and will allow plenty of room for folk to sidestep the stings and max on the advantages with a little planning in association with the likes of ourselves.

But the real attention-grabbers were the dismal picture painted of the prospects for the UK economy, and the eye-watering levels of debt to be taken on. There are some big potential snags attaching to the latter. If the world doubts the UK's creditworthiness, Sweetypie may not sell all the gilts he proposes – in which case we are in dead trouble, and a cap-in-hand call on the IMF for a bailout is a very real prospect. Ditto if his optimistic economic growth forecasts (starting by the end of 2009, no less) are not achieved.

Predictably, both sterling and gilts dived after the Budget speech. Neither, we fear, is there any good reason to see a bright future for either in the short to medium term. The stock market took all in its stride – remaining every bit as untouched by reality as it has been for some weeks. As readers will have seen us say again and again the economic prospects for the UK are bleak, and equity and bond investors should look elsewhere.

IMF Tells Us How It Is

2009-04-21T17:49:00.004+01:00

The International Monetary Fund (IMF) is to our minds the most knowledgeable and reliable oracle on the financial crises. It now warns that potential losses could reach $4 trillion, and damage the financial system for years to come. This is four times its estimate one year ago. A major part of the cost will be required to cleanse bank balance sheets, with $250 billion for the UK alone.

The report states that there will be no end to the depression until this issue has been attended to, and that even then the process will take several years and make the depression longer and deeper than usual. It warns that failure to act decisively on repairing bank balance sheets will prolong the downturn, and that the costs in terms of economic activity and taxpayer money will be even greater. The IMF also states that insurance companies and pension funds are now also coming under strain.

Trouble is, there appears to be no appetite for fessing up to the quantum of bank debt. After all, governments are in no hurry to publish figures that dent public confidence at this fragile point, or which clearly exceed their ability to make good, or which cause taxpayer outrage. Likewise, no one wants to force insurance companies to reveal their liabilities when to do so could cause mayhem, and company actuaries are so adept at hiding bodies. What we do not know will not hurt us. Same old, same old.

None of the above problems will be new to our readers, as we have highlighted all of them separately in previous posts. This is not because we are clever, but rather because we are dab hands with electronic calulators. It is these factors that are behind our bemusement at current stock market ebullience, and our suggestion that folk will best avoid bank and life assurance products, and get as much as possible of their assets under their own control.

The Long And Short Of Market Rises

2009-04-20T15:20:00.003+01:00

The fact that Tweedledum and Twedledee here at KB Towers know no more than anyone else regarding the short term prognoses for stock markets is exemplified by our bemusement at the continuing ebullience of (in particular) the FTSE 100 Index. The UK depression is set to deepen, yet the fear gripping markets just a short time ago has been replaced by an eery sense of optimism. A spot premature, we wonder?

True, a large part of the euphoria is down to rocketing banks as US counterparts report first quarter profits (how could any bank make losses?). We still have no clarity regarding the quantum of toxic liabilities on their balance sheets – but no one seems to care any more. It may also be true that stock prices had been weighed down by undue levels of pessimism, and that they are now adjusting to "fair value".

Whether we are seeing the beginning of a new bull market, or if FTSE may be due one further massive fall, again we have no idea. Neither are we unduly concerned, because we are avoiding blighty in favour of more sustainably profitable possibilities elsewhere. At times of high anxiety and volatility investors tend not to look past the end of next week, requiring them to possess the gift of prescient market timing. If this were so easy, they would all be fabulously rich.

Experience over the past decade has taught us always to look through the vagaries of the immediate future at the shape of things to come. If something looks attractive short term but dubious for the long run, we avoid it. Only assets with sustainable medium to long term profit credentials get a look-in. Short term is speculation, long term is strategy.

Another "Fudge It" Budget?

2009-04-19T16:13:00.004+01:00

I loathe budgets. I find myself gasping repeatedly "how can he say that?" The announcement of the abolition of the 10p starting rate of income tax, to the cheers of the labour benches, will live in my memory as a stupefying piece of political hubris. And oh - the lies. By the end of every budget speech none of us feels much worse off, yet labour has stealth-taxed the average UK family's liability up by over 10% since 1997.

It's called spin, a metaphor for lying to your electorate in "acceptable" fashion. I recall in a late 1990s documentary Tony Blair was asked about his policy of "spinning". "That's modern government" he said with a shrug. And then came Iraq. And then we voted him back in. In the world of politics, honesty clearly does not pay. But I digress - back to budgets.

This Wednesday's promises to be a cracker. Nothing to give away. Stealth tax rises surely not on the agenda. Government borrowing up to £175 billion in 2009/10, up from last year's forecast of £38 billion. Yes, that's a near five-fold increase on last year's forecast, and that figure does not even take into account the telephone numbers being spent on bailing out our friends the banks.

Spin your way out of that, Mr Sweetheart. Of course he will try. It's the red faces on the labour benches, and howls of derision from the others, that will make this budget bearable. If anyone feels no worse off after this week's speech Sweetypie clearly richly deserves to keep his job.

The Song remains The Same

2009-04-18T18:19:00.003+01:00

Our Service Proposition at KB Towers is to combine financial life planning advice, technical tax and law planning knowhow and investment advice and management, and to pull all these strands together to help folk manage their affairs in a coherent, structured and profitable fashion.

But however well we might meet these objectives perception of our success will forever be hostage to financial markets. Like it or not (we don't!) that is the yardstick by which we will ultimately be measured. After all, appreciation of our efforts from those whom we have protected from the worst of the current crises will still tend to be muted when they are nonetheless losing money.

But populism aside the following remains our uncompromising message. The global depression may get worse before it gets better. Protect yourselves. Own index linked gilts; gold, silver, grains and crude oil securities; emerging markets and Chinese equity funds; funds whose performance do not hang on financial markets, and cash. Steer clear of developed economy equities, gilts and (for now) property.

Holding financial products with providers under potential business strain is asking for poor service and performance at best, and is largely avoidable. Sit tight, do what history and markets tell you, look through extreme short term market convolutions to the realities of the new world beyond, and do not be suckered by the rallies equity markets will repeatedly stage to convince you all is well.

We are painfully aware that we won't win many plaudits by disclaiming magical powers and advising keeping a steely eye on the future rather than trying to break the bank during the current extreme conditions. Sadly, as ever, only the yardstick of 20:20 hindsight will prove us correct. Better late than never.

Double Bubble Pensions Peril

2009-04-17T19:36:00.002+01:00

UK Pension Consultants Aon last week announced it is slashing contributions to its pension scheme by up to half in a bid to cut costs. The company is very much a prime mover in UK pensions evolution, having closed its final salary pension scheme to new entrants in 1999 – a move much copied since. In fact Aon very much pre-empts mainstream employer pension policy, as its foremost mouthpiece.

It is difficult to see how Aon can now advise large company clients to maintain pension scheme contributions while itself clearly losing faith in pensions over other cost-cutting methods. This is the thin end of a very significant wedge, and looks very much the start of the next phase of employer withdrawals from pension provision. This trend will not go away, and we all need to adjust our forward thinking accordingly.

Staying with pensions, rumours are circulating that higher rate income tax relief on pension contributions may be withdrawn in the coming budget. Such rumours have done the rounds before (I recall one particular panic as far back as 1984!) but never has there been so much justification for abolishing what is, in effect, a perk for the better off. Mr Brown has to start clawing back the wherewithal to fund his (our!) huge and growing debt mountain, and spurious tax reliefs do appear sitting duck targets.

As we said in a recent post, folk should salt as much of their cash away as possible in mainstream tax shelters while the going remains good. While it would appear unlikely that any withdrawal of higher rate relief could be implemented prior to next tax year (if it happens at all) to maximise relief as early as possible always has to be best advice under any circumstances regardless.

Have A Turkey On Us

2009-04-16T19:19:00.002+01:00

Being in whinge mode today Mr Angry of Carshalton notes the FSA spent £214,159.50 on its Christmas parties last year. We regulated individuals and firms probably funded the starters, main course and drinks, while taxpayers (uh-oh, that'll be us again) maybe stumped up for the Christmas pud and the karaoke.

No wonder our regulatory fees keep going up. But we would not for one second, of course, begrudge the regulators a good shindig at our expense.

Bank On Poor Advice

2009-04-16T17:50:00.002+01:00

We return to the subject of the banks selling the public financial products (see don't bank on the banks on 6th March). The banks are cold blooded profiteers with not the slightest regard for their customers. They sell poor quality products for eye-watering commissions and leave their victims stranded without any semblance of after sales service. This outrage has persisted for decades, and still nothing is done to curb these excesses.

In one of our IFA journals this week we read about Barclays persuading customers all round the country to ditch relatively secure investments in favour of placing all proceeds in a single high risk unit trust which, unsurprisingly, pays above normal market rates of commission. Some folk, many of whom were relying on their investment to see them through their retirements, have lost up to 45% in the past year.

Banks are responsible for the vast majority of complaints to the Ombudsman, yet their cosy three-way love-in with the regulators and government continues unabated. With just the merest hint of self interest we urge anyone who receives one of those oh-so-helpful "you really ought to do something with all that cash in your current account" calls to reply with a resolute "you must be bloody joking."

But at least Barclays can meet mis-selling claims out of shareholders' funds and victims' deposits. Customers of the RBS and HBOS families will additionally find themselves indirectly funding their own compensation from their own taxes. Now that, even by the standards of the unholy trinity of government, regulators and bankers, is really taking the p*ss.

Corporate Bonds - Market Forecasters

2009-04-15T19:12:00.004+01:00

We stay on the topic of corporate bonds, placing a fresh slant on the anomalies highlighted yesterday. We refer today to the fact that time and time again in past bear markets corporate bonds have bottomed out a month or two in advance of stock market recoveries. There are a number of technical reasons why this should be the case, so maybe this is no major surprise. But here comes yet another apparent anomaly.

Credit market weakness has continued, and there is no sign of recovery. Stock markets, however, have surged. So has history been turned completely on its head, or is something awry? We plump for the latter. As reported yesterday, it is near impossible for stock markets to rally sustainably without an upturn in the credit market. That indicates to us that the current stock market rally may be built on sand.

Maybe the credit market has indeed bottomed out, in which case a further stock rally may be in prospect. Whether or not the markets can hang on to current levels before this factor eventually kicks in is of course another matter. But it could be a case that the credit markets improve soon, and that equity markets will follow suit shortly thereafter.

But our history studies tell us there is a high possibility that the FTSE 100 and S&P 500 indices will be much lower than they are now sometime during the next five years. We lousy market timers do not fancy our chances of exiting at precisely the right juncture in the future, so there seems to us little point to entering in the first place. So we shall sit back and watch the angels rush in where we fools fear to tread. Knock 20% off FTSE, and we might think again.

Equities Or Bonds? The Credit Conumdrum

2009-04-14T17:29:00.004+01:00

A postscript to yesterday's blog on the subject of corporate bonds. The corporate credit market remains becalmed at levels implying defaults not seen since the 1930s. So you would think that credit looks a better bet than equities. The market, however, tells you different – credit spreads have widened to almost their worst levels of the depression, whereas equities have surged.

But recovery in the credit market is a precondition for sustainable stock market recovery, and it is difficult to see how the latter can occur without the former. But recent stock market action appears to be telling us that the credit market has got it wrong which, if correct, makes corporate bonds look exceptionally good value at current levels. Conversely, if the credit market is right the current stock market rally will falter, as did all last year's.

Both markets cannot be right, and we thickos do not know which of them is. So how do we advise our clients as to the best way of playing this anomaly? We go with corporate bonds as a pretty compelling each-way bet. If the stock market is wrong then credit is already appropriately priced, whereas stocks are overblown. If, however, the stock market is right corporate bonds are actually even better value than they appear. Heads you win, tails you don't lose as much.

This underlies a key element of our strategic asset allocation thinking. Corporate bonds appear to us to comprise a potentially limited risk and profitable play on UK Plc in the medium term, whereas on balance UK equities do not appear set to play any sustainably profitable part in the new world order.

Corporate Bonds - Beyond The Hype

2009-04-13T15:41:00.005+01:00

The massive recent flows into Corporate Bond Funds from an investing public starved of income has raised fears of an impending bubble. It is quite true that stampedes by investors hooked in to the latest marketing-fuelled craze usually presages impending collapse – but two other classic bubble warning signs are currently completely absent.

One is that performance has to be good for a prolonged period - but corporate bonds have given poor returns for several years. The other is that bonds should look about as expensive as they have ever done – but they currently look cheaper than ever. We are therefore satisfied that client portfolios have measured weightings in corporate bond funds (but with extreme emphasis on selection).

Corporate bond funds are a conceptual "twist" on UK equity investment. They are a bet that record numbers of larger UK companies will not go bust, whereas equities are a punt on the future health of the wider economy. Bets on the former are to us on balance acceptable, as prices currently appear reasonable and investors are compensated for their risks by fat income yields. We have no such level of confidence, however, in the future of UK Plc.

But, as ever, caution and vigilance should be exercised. Corporate bonds are not "perennial" holdings like many of the trend-backed investments we favour. They have been dogs for years, and after the dogs have (hopefully) had their day over the medium term they will need to be put down in timely fashion in order to prevent unnecessary renewed suffering by their owners.

Britain In QE(er) Street

2009-04-12T16:29:00.004+01:00

"Buy!" cry the fund managers. "Buy!" or "Sell!" howl the journalists. Economists (who know nothing more than the aforementioned) sit on the fence but with a negative bias, because negative economists will only lose investors opportunities, whereas positive ones can lose them money. I guess everyone has opinions. Even us – but we suppress them.

We'll stick with our studies of historical precedents, years of intensive market watching, and study of investor (ie human) psychology. Ok, at gunpoint we would venture that the current stock market rallies are premature, and that markets are due one more really heavy fall before the green shoots jockeys are on firmer ground. But at KB Towers we would claim that out strength is that we know we don't know, and know not to profess otherwise.

But we do have one over-arching unanswered question, concerning Quantitative Easing – Golden Brown's last roll of the dice. Japan tried it in 2001, gave it up as a bad job in 2006, and is now refusing to try it again. QE in Japan served to inflate global asset bubbles (which kicked off in earnest a year after it started, and collapsed a year after it ended) and only recapitalisation of the banks and the passage of time truly had any marked effect.

Now QE might work here. We are not Japan (thank heaven – trains running on time and all that raw fish could drive you nuts) but the possibility that the Japanese experience may be yet another lesson from history adds to our scepticism of current equity market exuberance. We have a vested interest in rising markets - so hope to hell we are totally wrong.

Safe As The Bank Of England

2009-04-11T14:42:00.002+01:00

Yesterday we blind horses here at KB Towers considered the portents for future inflation in the light of the Bank of England having switched 70% of its pension fund into Index Linked Gilts, and concluded that as nods and winks go these are significant. We believe this adds a little fuel to our contention that our clients should be building up their exposure to Index Linked stock.

Well, hear this. During 2006 the Bank reduced its exposure to equities from 70% down to 0.7%, and maintained exposure to (ordinary) gilts. The pension fund returned over 12% last year, in what proved to be a uniquely beneficial economic backdrop for fixed interest government securities. Pure luck, outrageous coincidence, or unbridled genius? Whichever applies, we humble financial advisers would die for such foresight.

One could infer that the Bank was acting on its unique insight into the economic future of our country. We do not, however, recall any whispers from Merv and his mates about impending economic tsunamis at the time? But however you perceive the pension fund trustees' views on future inflation, it is 100% at odds with strident government warnings about deflation - one of the driving forces behind the justification for Quantitative Easing. Hmmmm...

We contend that the most accurate strategic investment forecasting comes from heeding what past market history and recent market trends tell you, and acting accordingly when both give you the same message. In future we may now also keep half an eye on the Bank of England pension fund on a "do as they do - not what they tell you" basis. If this corroborates the other two indicators, we reckon we are on an even stronger footing.

Catch-22 For Investors

2009-04-10T14:22:00.003+01:00

As mentioned in previous posts (in particular see Inflated Expectations on 5th March) we have for some time been advising our clients to build up their exposure to Index Linked Gilts in pension funds, ISAs, bonds and direct portfolios, as we envisage they will become increasingly important as core holdings over the foreseeable future.

Linkers will be a good investment if inflation averages more than around 2% pa over the next ten years, and a poor one if it comes in at less. Starting from a current low point (which could, of course, go lower in the short term) and with Quantitative Easing ("QE") likely to spark inflation in the medium term, the "fulcrum point" for Linkers looks attractive to us.

Inflation has averaged close to 3% pa over the past decade, so even in the context of a similarly low-inflation future Linkers appear a sound investment. But the potential medium term impact of QE turns a sound investment into a compelling one. Futile inflation forecasts aside, it can never be a bad idea to achieve a "real" return in excess of ongoing inflation, no matter how low the latter transpires to be.

But the absolute last word on the matter for us came with last week's revelation that the Bank of England has switched fully 70% of its own pension fund into Index Linked Gilts. This, as the Daily telegraph pointed out, is as near to legal insider trading as you can get. If the custodians of inflation think it will rise to make Linkers attractive then, as Yossarian famously quipped in Catch-22, "I'd be a damn fool to think any different."

A Crude Investment Alternative

2009-04-09T19:22:00.003+01:00

Our post of 30th March ("Empire Theory – Follow growth; Avoid Decline") prompted questions as to how we justified slashing equity weightings in portfolios by more than half by comparison with consensus thinking. "Where" we have been asked "will the long term growth come from?"

The answer is that we use "proxies" to replace some equity exposure, mostly "real" assets. One such proxy is crude oil. Like equities, crude should respond favourably to economic recovery. Like equities, crude has suffered a massive fall in price, and has a lot further to go in reverse before it gets anywhere near previous highs. Like equities, access can be secured via securities traded on recognised stock exchanges. But that is where the similarities end.

Crude oil is a real tangible asset, not a vapid promise on a piece of paper. The world cannot function without it (name a single stock of which the same can be said). It cannot be debased or devalued by idiot governments or central bankers. It protects against inflation – largely because oil is a major root cause of it. It actually has more going for it than equities in many respects.

It is just one of several "proxies" we use, and I am sure we shall discuss others in future posts. It should not replace equities, which have their own place and unique characteristics. But owning some crude as part of a broadly diversified portfolio, and as a running mate for equities, gives enhanced non-correlated growth prospects, and a foot in two key camps for the price of one.

Structured Products - Structurally Sound?

2009-04-08T20:36:00.003+01:00

One temptation we at KB Towers have always been able to resist is that of recommending structured products to our clients. You know the kind of thing – 7.5% pa guaranteed income provided that the FTSE 100 Index does not reduce by X% during the next five years, that Big Brother is not won by a blind ventriloquist, and that Neptune is not eclipsed by Mars.

Such offers abound, and against a backdrop of meagre pickings for income investors they will appear increasingly attractive to many. But be careful. The formulae on which the best outcomes depend are often so complex that a degree in applied mathematics may get you nowhere. The "what ifs" on which success depend can appear highly undemanding, but the events of the past year would have sunk many such plans. Anything is possible in financial markets.

And always ask who the counterparty is who "guarantees" the "guarantees". Lehman Brothers were a major player in this area, and their guarantees ultimately did not count for much. Frankly, even if the counterparty looks plenty strong going by their accounts none of us will really be much the wiser. AIG, RBS, and others looked good for such guarantees going by public record just days before they revealed technical bankruptcy.

The risks inherent in all these plans are, to our minds, just not worth it. If something is so complex we do not understand it pretty quickly, and where the chances of success hang on too many unknowns and third parties, we leave well alone. The fact that structured products are an "easy sale" is, to us, the last word on why we should never touch them.

This Time It's (Not) Different

2009-04-07T19:16:00.002+01:00

Famed investor Sir John Templeteon said that the four most dangerous words in the lexicon of investment are "this time its different". He meant that history does repeat itself – and that no one should think different. Tweedledum and Twedledee, filled with angst at their inability to forecast depressions, have recently dedicated hundreds of hours to studying the history of all stock market crashes and economic downturns over the past century.

We found that while there is no foolproof means of accurately predicting impending crashes, the subsequent sequences of events have repeated themselves time and time again. In a way perhaps we should not be surprised, because human nature has not changed through the ages, and financial markets are all about man-made calamities colliding with the fundamental human emotions of fear and greed.

What history is telling us about the immediate future is in truth only what financial markets have been telling us for the past decade. Developed economies in irreversible decline. Emerging economies destined to rule the roost. Commodities in a long term uptrend. A seismic shift in economic and political power. The certainty of future rising inflation. The degradation of paper assets. The debasement and decline of major currencies. And so on.

"The markets are always right" goes the saying, and this has been forever true. Short term trends are founded on emotions, but long term trends accurately affect true fundamentals. Compare charts of medium term market movements over the past decade, cross-refer with what history tells you, and you will find by far the most accurate predictions of how matters will unfold. The degree of accuracy is quite extraordinary.

To us the message is crystal clear. Listen to what the markets are telling you. Listen to what history is telling you. If both are telling you the same thing, follow whatever trend they are indicating, and sit tight. At the same time do not ignore the bits that you do not want to hear, and do not try to be smart with your timing. Easy, this investment lark, eh?

Paper Musical Chairs

2009-04-06T19:06:00.003+01:00

Cash has been flowing from asset to asset in phenomenal volumes and great speed this past year as investors seek safe shelters from the raging storms, and all the usual ports have been visited. This process has not been so much about making money, as preserving it.

The big money is playing paper musical chairs, a game in which when the music stops folk run from one chair to the next seeking safety. But they are not finding it, because the paper system as we’ve known it is unraveling, and paper safety now scarcely exists – if it ever did. After all, a paper promise is ultimately worth approximately what it was printed on.

The paper musical chairs game will continue for a while yet. But in a world of acute uncertainties, paper safety is illusory. A chilling example of this is the growing (and very credible) groundswell of opinion that the US Dollar's days as the world's reserve currency are numbered. This would have profound ramifications, and the odds are rising. How does anyone plan "safety" against such a tumultuous backdrop?

It does appear likely that the paper world could literally fold, and that when the music ultimately stops folk will not run to another chair - but for the exits. When that happens, only gold bullion will tick all the necessary boxes with any great certainty. As we have said before, everyone should hold at least a small proportion of their wealth in gold.

Still Useless After All These Years

2009-04-04T14:25:00.005+01:00

The great majority of our new clients come to us by way of referrals from existing clients, or from professionals such as private client lawyers and accountants seeking technical-based tax, investment and financial advice for their own clients. We do, however, receive occasional telephone enquiries, and the following is an abridged transcript of one from this week.

"So what will make me the most money over the next year?"

"Sorry, we don't know. "

"You don't know? I thought you were qualified investment advisers?"

"Yes, we are. But we do structure, strategy, tax efficiency, common sense, balance, diversification, selection, and generally helping clients to run their lives. We do reasoned probabilities, but not certainties."

"So if your tips are no better than mine, you are completely useless!"

"Absolutely. There is gypsy camp down the road. Slip Rose Lee a tenner and all your problems will be over."

There are some clients you do not want, and this chap was one of them. But I confess he hit a raw nerve and exposed our one Achilles heel, in chastened response to which we propose to adorn all our stationery with the following statement: - "Messrs Useless and Useless of KB Towers would like to make it clear that we are not fortune tellers." Ouch.

Are Guarantees Guaranteed?

2009-04-03T19:55:00.002+01:00

We at KB Towers would like to propose not the addition of a word to the English language, but the removal of one that no longer has any meaning – if it ever actually did.

We refer to the word guarantee. During our over-long careers we have seen "guarantee" after "guarantee" prove to be worthless. At the end of the day no guarantee is worth a penny more than the continuing ability of the guarantor to meet it. If anyone knows of any institution or corporation of which that can be said with cast iron certainty please let us know.

Possibly the only exception to this would be guarantees issued by sovereign governments but, again, even those will forever depend on the ability of governments to meet their promises – but even that might be considered a contradiction in terms. At least governments have their taxpayers to fall back on (and don't we know it!). But even that source must be limited?

Talking of guarantees, the Pension Protection Fund ("PPF") recently took on its 100th scheme, and there are umpteen more in the wings representing the benefits of members that run well into six figures. There must also be a limit to how much further this lifeline will stretch – look out, taxpayers!

So we suggest that anyone coming across any financial product that is "guaranteed" should actually regard it with greater suspicion than one that makes no such claim. Likewise, anyone banking on cast iron "guaranteed" pension benefits should always be prepared to think the unthinkable.

Golden Gordon's G20 Triumph

2009-04-02T18:42:00.002+01:00

Hooray – Gordon has saved the world! The G20 Summit (my most lasting memory of which will remain the sight of a bunny rabbit being arrested) today ended in preordained triumph. Shares soared but the gold price sank, at one stage briefly falling below $900. This is because on the day gold fell between all of the following cracks.

Deflation is presumably no longer a threat. Inflation is clearly now just a dim and distant prospect, from which genius central bankers will save us. The dollar may have sunk like a stone today, but that is obviously a temporary phenomenon. Now the depression is over, stocks will evidently continue to soar. No countries will be in dispute from now on and protectionism has been averted, as the whole world is now cooperating in touchy-feely harmony.

So gold could not find many friends on a day its status as a safe haven appeared suddenly irrelevant. But it still resisted all attempts to push it decisively below the $900 barrier. If the economic crises are now over, you might have expected far worse. The gold bug fraternity is clearly not entirely convinced by the G20 charade.

Those who concur with all the statements in my second paragraph might consider selling their gold bullion and shares. Those, however, who are not entirely confident about one or more of the happy outcomes described, and who are prepared to take a medium term view, may literally be gifted a golden opportunity on days such as these.

Sales Or Service? Customer Or Client?

2009-04-01T19:27:00.003+01:00

A client (bless him) asked an interesting question today. "Why" he asked "do you refer to me as your client, whereas my bank – which handles the balance of my finances – calls me a customer?" The difference between the two is actually stark, and although we had never considered the matter in this particular light, the answer was not difficult.

In the context of financial services (and in many others, come to think of it) a customer is someone who buys something from a seller with whom he or she has no particular continuing relationship, whereas a client is someone who contracts for a service and then has an ongoing relationship with the provider of that service. In the final analysis, this sums up in a nutshell the polarised state of financial services in this country.

Banks sell (usually downright poor) products, coin a commission from the source, and then run away. The concept of providing after sales service is anathema to them. We, however, are only interested in providing hands-on services to our clients under which we develop long term relationships, that often widen out to embrace entire family dynasties. And we do not accept commissions of any description from anyone, as the perceivable taint is crystal clear.

So our client actually crystallised our ability to better express and contrast the advantages of the service we provide - to those who need it, that is. So we learned a valuable lesson, which is that if you want to know whether your service addresses its desired audience to best effect, ask the folk who already use it. Obvious, eh? Thanks, Bob.

The Importance Of Self Control

2009-03-31T12:24:00.003+01:00

Retail financial products have for the most part been very poor for decades. The near monopoly positions of the dominant financial institutions allowed them to foist expensive, ineffectual, inflexible and poorly administered wares on the saving and investing public, all masked by a smokescreen of rising asset values in the bounteous 1980s and 1990s.

But the wheels fell off the gravy train this millennium, exposing product shortcomings as financial asset values tanked. As Independent Financial Advisers we had always sought to find the best available products for clients, but whether or not the selections worked for them in the long term transpired to be down to factors beyond the control of the client or ourselves. The system was the system, but we recognised it was in dire need of change.

Innovation ahoy! In recent years new systems have become available to us that enable folk to access the entire investment universe within any and all desired tax wrappers, and to centrally manage and coordinate their entire financial planning affairs in close liaiason with us. Clients have 24/7 access to their Accounts, and the ability to design, implement and maintain a single coherent strategy across all of a client's financial planning arrangements is invaluable.

No more throwing money into a black hole lined with impenetrable layers of fudge and hoping for the best. No more unjustifiable sales commissions. All the services required to operate the entire system are heavily discounted. Essentially investors totally sidestep the financial product providers, whose margins they capture entirely for themselves. Investors appoint advisers to coordinate everything for them, but entirely on their own terms.

Never has the revolutionary ability for folk to take control of their own assets had greater resonance than it does now, with owners of financial products exposed not just to investment risk, but also to their providers' business risk. As many financial product dinosaurs die out, hastened by the current crises, the dream replacement already exists. Power to the people!

Empire Theory - Follow Growth; Avoid Decline

2009-03-30T09:52:00.003+01:00

Today we expound on our Empire Theory that is embedded in our client investment asset allocation strategies. It is so obvious to us that we hesitate to even label it a "theory". We have not seen it propounded elsewhere, but then it is far removed from the asset planning consensus that has let folk down so badly this millennium and which will, as ever, persist until long after its sell-by date has passed – which it did long ago.

Share price growth follows earnings growth follows economic growth. Revolutionary, huh? That points you toward growing economies with less (or no) debt, surpluses not deficits, and many of the other attributes that have underpinned empires in the ascendancy throughout history. That points you away from the UK, US, Western Europe and Japan, and toward China, India, Brazil, Russia and a number of smaller contenders.

Purists will cry "volatility!" and "currency risk!". But longer term investors can ride out volatilty provided their holdings are better starred to outperform. Shorter term investors expecting twice the volatility can just cut their planned developed economy exposure by half, and still benefit on the upside. Currency risk is ever present, but the odds on the future relative strength of emerging market currencies against sterling look pretty favourable from where we sit.

So why, we ask, have any developed economy equity exposure at all, if even just rudimentary analysis points to higher and more sustainable growth elsewhere? You can build emerging markets exposure into even cautious portfolios, replacing developed economy exposure with smaller emerging markets weightings, and getting more bang for your buck by filling the balance with more lower-volatility and/or non-correlated asset classes.

Whatever your views on "appropriate" equity weightings for portfolios we believe that consensus thinking sets them way too high. The typical "50% + in UK equities plus maybe 10 to 20% more in US, Europe and Japan" is to us the road to hell. We often go with just 10 to 20% emerging markets equities, and diversify risk away with a scientifically designed balance of non-correlated and alternative assets. Logical, or deluded? Your call!

21st Century Asset Planning - New Thinking Required

2009-03-28T15:02:00.005Z

As mentioned in yesterday's post UK equities directly and indirectly dominate the British savings scene, and the 1990s cult of the equity persists. Except here at KB Towers. In the past we bought the "hold stocks for the long term and you'll be fine" story with everyone else, as the ladders on the board appeared longer than the snakes throughout the 80s and 90s. But then came the 2000 crash, followed by 9/11. Stocks came back between 2003 and 2007 – and then the current crises sent us sliding down a veritable python.

Recently the FTSE 100 plumbed depths of less than 50% of it's inflation-adjusted level a decade ago. Historically US stocks took three decades to recapture their 1929 highs, and since then there has been another two-decade wilderness period. As setback piled on setback this past decade, we increasingly asked ourselves precisely how "long term" is "long term", and we now reject UK equities as a plausible savings medium.

Those entering the market now could do well over the next decade, as they will probably be entering near a periodic low. So equity cultists may have yet another honeymoon period (or false dawn) to perpetuate the myth. We believe, however, that however well the UK market perfoms in the medium term, others will ourperform it by significant margins. With consistent high returns (a mirage in our book) those who have already been in the UK market ten years may actually one day be back to where they started. What kind of savings medium is that?

We patriotic Brits at KB Towers hate to say it, but the UK is an economic basket case, and faces mountains of debt and other obstacles and that will dog the fortunes of its equity investors. The same applies to all "developed" economies, and neither are the US and Western Europe on our shopping list. Japan may possibly have a little more going for it, albeit against a background of equities now being lower than they were all of three decades ago.

There are richer pickings elsewhere, and it will behove folk to invest in the future of the world, not in its past. While equities should certainly continue to play a part in most long term asset strategies, their innate volatility dictates that portfolio weightings should be way lower than is propounded by the financial services industry, and selection will be critical. We must face up to the fact that time-honoured asset planning models have long been well and truly broken, and are now beyond repair. More on this tomorrow.

Stock Market Indices Don't Lie

2009-03-27T19:43:00.002Z

Would you willingly fund for your future via an asset class that has not on one single day ever regained its value of exactly ten years ago? Or in something that is worth less than it was twelve years ago today? Or that over periods of complete years to today has registered a profit in just one in the last twelve - and then only 8.6% over six years? Is this a betting syndicate, or a passage from the memoirs of a loser in the casino from hell?

Well if you are British, odds are that you are up to your neck in this asset class, either directly or indirectly, via your pension funds, ISAs, endowment policies and manifold other retail financial products. It is the FTSE 100 index. It will not reflect the experience of all, but is self-evidently a measure of the fortunes of the average punter. We use the latter term advisedly, because it is becoming ever clearer that UK equity investors are quite literally – and, in most cases, unwittingly - gambling with their futures.

Day-to-day stock market levels represent little more than the sum of the current hopes and fears of all investors. In the short term they will be tossed on the waves of economic and geo-political events. But over the longer term they accurately reflect the aggregate corporate and economic health of entire nations. The stories they tell become the clearer with hindsight, and should not be ignored.

We true blue Brits here at KB Towers do not like facing up to the reality of what FTSE is telling us, but in truth we do not need an index to confirm what we already know. No, it's no good, I just cannot bring myself to type the words right now. Damn it all – we had an empire once, you know. I'll try to regain my stiff upper lip, take tea on the veranda, pull myself together, and put it into words tomorrow.

And neither should our Johnny Foreigner readers smirk (other than the mass of them who have every justification) or we'll send a GB. That's a Gun Boat or, if you are really insolent, our prime minister. I'll get to you blighters tomorrow.

Gilts - Going...Going...Not Gone Yet

2009-03-26T19:25:00.003Z

The failure of yesterday's UK Gilt Auction may not transpire to be too significant, as it is possible that the market was simply not clamouring for the long-dated securities on offer. On the other hand it could be critical, since the government's quantitative easing ("QE") measures depend on the market having a voracious appetite for Gilts for as long as it needs to mint fresh new pounds to feed its economic stimulus programme.

The market may be deterred by decreasing gilt yields, or be hanging back awaiting auctions of shorter term stock. Whatever the reason behind yesterday's lacklustre demand, all the portents for gilt investors over the medium term are steadily worsening, and the period until their day of reckoning may be shortening. For our take on the outlook for gilts see our previous post entitled Gilts – A Bloodbath In Waiting.

Investors should check their exposure to gilts via their various savings and investment media (not always obvious until the bonnet is lifted on many of them) and take a view as to whether the result is suited to their requirements, and whether alternative investments might not be better equipped to work for them during the uncertain period that lies ahead of us.

After the battering most investors have taken during the current crises it would be tragic to be hit a second time - just as the green shoots of recovery put in an appearance.

Shelter It While You Can

2009-03-25T19:02:00.002Z

The tax year end is approaching, and the usual last minute tax planning considerations are more worthy of attention than ever this year.

Maximum ISA contributions might be considered. In many cases precedence will best be given to housing higher income producing investments (rare as they are becoming) within ISAs to build up tax advantaged returns, although in the case of larger portfolios sheltering from potential capital gains may also feature.

Thanks to poor markets for many folk this year's capital gains tax planning itself is likely to be largely focussed on crystallising losses to carry forward, but this galling exercise may reap rewards in future years.

Pension contributions can make good sense, especially as these can now be equivalent to earned income. The ability to gross up payments by 25% or 66.67% (basic and higher rate taxpayers respectively) is a safe means of increasing net worth.

Under-75s can take advantage, as even those with no earned income can subscribe up to £3,600 pa gross. While annual free gifts of £720 or £1,440 could be considered chicken feed, every little helps. The inheritance tax treatment and tax-free cash entitlements available from pensions "wrappers" can also beneficially feature in planning.

Government of whichever colour will likely need to pile taxes on us to fund UK Plc's enormous and rapidly swelling debt mountain further to signs the depression is bottoming out. We and our children will consequently pay for the excesses of others twice over (as ever) without respite. As we will probably suffer increased taxes on whatever wealth we have left it behoves us to get as much of it as possible out of harm's way while the going is good.

Public Private Partnership Investment Programme

2009-03-24T21:12:00.005Z

With time for reflection and analysis, yesterday's US toxic assets purchase scheme still looks to your humble correspondents Tweedledum and Tweedledee us as good a sticking plaster for a gaping wound as you can get. But our reservations regarding the euphoric rises in equity markets remain. How, we ask, can a given remedy do the trick when the severity of the malady remains entirely unknown? It may be the right medicine – but is it the right dosage?

But it is possible that the facts of the matter (whatever they may be) do not actually count. Two clients called today exulting in the sudden surge in their investment balances, and announcing their rising confidence that the world is on the mend. What a difference, as the song goes, a day makes. But what has really happened? A few trillion dollars thrown at a problem that is near certainly umpteen times the size might appear unlikely to fix a depression.

But who cares? If folk regain their confidence, a virtuous upward spiral in asset prices could ensue, and an end to our problems truly could be in sight. However, if this delirious surge is stopped in its tracks before recovery is complete by revelations that it was built on sand the reaction could be dramatic, and the lows we have seen recentlty in asset prices could very quickly be revisited. As Dirty Harry asked, "are you feeling lucky, punk?".

We punks at KB Towers are not, and our asset allocation models remain entirely unchanged and focussed 100% on high probability – not speculative – outcomes. Governments know that perception is more important than fact, so they manipulate both. Whether the toxic asset purchase scheme is good is irrelevant as long as it feels good. Well it doesn't feel good to us, and we may remain a couple of old party poopers until some maths begin to stack up.

Stocks Go Obarmy

2009-03-23T20:26:00.003Z

Joy and jubilation! Stocks soared worldwide today further to announcement of the new US Toxic Asset Plan. While we do not have the remotest idea as to how effective this will be, at first sight it certainly appears to be the first win-win-win solution that any government has yet come up with to combat the global crises.

Our own market rocketed in harmony, as US initiatives have knock-on effects (good and bad) all around the world. We need the US to be our cheerleader, because it at least has the financial firepower to influence matters, whereas Mr B has blown ours getting himself into No 10.

But we cannot dispel a sense of unease regarding the legs attaching to any sustained UK stock market rally, despite the fact that history has shown again and again that stocks can rocket even when economic news is getting worse. The darkest hour is very often indeed just before dawn.

It just seems to us that in general the current crises are barely past three in the morning, and that in the UK we may not yet be approaching midnight. Singing along with the dawn chorus might transpire to be a spot premature.

The Story Of The Moral

2009-03-23T18:15:00.002Z

"Do you follow me?" asked last Saturday's new client, pausing in the middle of expounding upon an impenetrable economic theory about international capital flows. Well I did not – he had lost me at the white cliffs of Dover. But I am supposed to be the all-knowing professional adviser, so I wrestled briefly with my response.

I could do a Darling, and try to sound knowledgeable while understanding nothing. Or a Brown, and obfuscate in the pursuit of personal gain. Or a Cameron, and attempt to sound authoritative safe in the knowledge that no one is really listening. I resisted the Cable, because I would have had to at least known something I was talking about.

I kept to my habitual tack of never exceeding the boundaries of my own competence. "Sorry", said I "but I don't get it". "No" he replied "neither did I". So honesty really is the best policy, then. Unless, of course, you are a politician. Old moral, old story. Same old twist.

The Final Salary Pension Scheme Countdown

2009-03-22T11:30:00.002Z

Yet another mine bobbing unseen yet deadly just beneath the surface of the depression is the private sector final salary pension scheme. As rising liabilities have been outstripped by falling scheme asset values this past decade 91% of such schemes are now in deficit, to the tune of £218.7 billion as at the end of February. As sponsoring employers go bankrupt during the depression the shortfall is highly likely to get worse.

Enter the Pension Protection Fund ("PPF") funded by levies on surviving schemes and ultimately underwritten by the government (aka the taxpayer). The PPF runs the risks of being overwhelmed by bankrupt schemes, and even at this early stage of the depression has a deficit of £500 million. We cannot see how, where, or even if this growing liability is being budgeted for within current fiscal stimulus measures, and fear it is yet another one of those "global" or "unforeseeable" crises waiting in the wings glossed over by government, yet clearly visible to anyone who knows the PPF exists and can read a newspaper.

Then there's the public sector schemes. No visible funding problem with these, as pensions are payable from taxation at national and local levels. But they too are suffering from spiralling liabilities, the wherewithal to meet which is contracting fast. For a vision of their future cast your mind forward to the end of the current depression, when Government will be forced to cut back on public spending. The safest jobs in the current crisis may become the most endangered after it is over – a kind of "secondary depression".

There has been much anger about "cosy" public sector schemes, which might present sitting duck targets when government finds itself having to make huge cutbacks in public spending. In the future it is difficult to envisage final salary schemes, both private and public, surviving in anything like their current form – if at all. No one should bask in the comfort of counting on those "guaranteed" pensions, which may prove to be a mirage.

Max Your Tax Allowances While You Can

2009-03-21T17:02:00.005Z

The tax year end is approaching, and the usual wisdom attaching to maximising investment tax allowances has greater resonance than ever this year. ISA contributions should always be considered. While it is always sensible to housing higher income producing investments within ISAs to enhance tax-fuelled returns, the future portents for income tax make this the more attractive from now on.

For many folk pension contributions will make excellent sense, especially as these can now be equivalent to annual earned income. To be able to increase net worth by 25% or 66.67% (basic and higher rate taxpayers respectively) can be highly attractive, and is a safe pain-free means of generating returns in the current environment. And its not just about tax relief - the tax-free cash sum and exemptions from inheritance tax and capital gains tax amplify the attractions.

Even those (under 75) without earned income might consider their ability to pay £3,600 pa gross. In a wider context the advantages could be considered chicken feed, but free gifts of £720 or £1,440 pa are not to be sniffed at. For those with direct-held investment portfolios this year's capital gains tax planning may largely be a teeth-gnashing affair focussed on crystallising losses to carry forward. As depressing as this exercise might be, it should be considered nevertheless.

Government of whichever colour will eventually heap taxes on us to fund Mr B's enormous and rapidly swelling debt mountain. We and our children will consequently pay for the excesses of others twice over, and without respite. They will be after taxing all of our wealth that Brown & Co have not already destroyed, so it behoves us to get as much of it as possible out of their reach while the going is good.