CF Woodford Equity Income Fund Launch

The launch of the (CF) Woodford Equity Income fund has been much anticipated since Neil Woodford declared his intention to resign from Invesco Perpetual in October 2013 and launch his own fund management business. Woodford has been one of the most successful UK equity managers of the last 25 years, accruing over £25bn in his two most popular retail funds, Invesco Perpetual Income and Invesco Perpetual High Income, as a result of consistent top quartile performance and his disciplined approach.

Unsurprisingly, all reports suggest the launch will be well supported with previous investors in the Woodford funds, both retail and institutional, moving money across from the existing Invesco Perpetual funds during the offer period in preparation for the first day of dealing for the new fund on 19 June 2014.

Why did we not follow suit and suggest to all our clients that they do the same?

Firstly, there was no immediate benefit to switching during the ‘offer period’ as there is no discount, £1 now will still be worth £1 when the money is actually invested in the market, and it is unlikely that he would expect to invest all £1.6 billion raised during the offer period.

Secondly, whilst it would be a surprise if Woodford Investment Management, or the fund itself, failed as an enterprise, clearly there are risks (however well planned for) of launching a new business - particularly as the burden of responsibility falls to Woodford as manager of the single strategy on offer, and therefore the sole asset gather.

The immediate switch of assets to Woodford not only also assumes that he will be able to successfully replicate his investment strategy without the infrastructure available to him within Invesco Perpetual but also that the new manager of the Invesco Perpetual Income and High Income funds, Mark Burnett, will disappoint. Even if we accept the

first assumption (and this will only become clear over time), the idea that Burnett will disappoint is not supported by his track record. Burnett has over 20 years investment experience (18 years with Invesco Perpetual) and has managed the Invesco Perpetual UK Strategic Income fund since 2006. Over the period of his tenure the fund is ranked 3rd of 57 funds in the IMA UK Equity Income sector. By comparison Invesco Perpetual Income is ranked 8th of 57 funds.

We may also have recommended a switch if the new launch offered a unique proposition. However, we believe that other established UK Equity Income funds have duplicated the risk/return profile of Invesco Perpetual Income and High Income over

an extended period without the risks associated with a new business. We are very aware of the disappointment experienced by a large number of investors who followed highly respected managers to New Star, when it was established by the man who had built Jupiter as a fund management company, or those who followed another legend, Anthony Bolton, when he returned from retirement to set up a new venture.

We will obviously follow the development of Woodford Investment Management with interest, particularly the outcome for the micro company assets it is believed he has been negotiating to buy from Invesco Perpetual, but can see no compelling reason to switch assets at this time.

J U L Y 2 0 1 4

Don’t delay on auto-enrolment issues, employers urged

Employers struggling to comply with automatic enrolment requirements should notify the Pensions Regulator sooner rather than later, the organisation says.

The alert came as it published its first automatic enrolment report under section 89 of the Pensions Act 2004, designed to help employers avoid non-compliance.

The report, issued on 24 April, set out problems experienced by homewares and soft furnishings giant Dunelm. The company had an automatic enrolment staging date of 1 April 2013 and was due to complete registration, indicating that it had fully complied with its employer duties, by 31 July 2013.

When it failed to complete registration by the deadline, it was contacted by the regulator, with which it fully complied in correcting matters. An inspection found that:

• members of the four weekly payroll were automatically enrolled a month late

• members of the monthly payroll were automatically enrolled three months late

• as a result, the company failed to pay to its pension provider a significant level of contributions.

The Pensions Regulator said lessons to be learned from the case included:

• employers experiencing challenges in meeting automatic enrolment duties should contact the Pensions Regulator to discuss their situation

• payroll systems should be tested well in advance of the staging date to ensure they are able to fulfil the requirements of automatic enrolment.

The regulator’s executive director for automatic enrolment Charles Counsell said: “99.9 per cent of employers who have completed registration have done so without the need for us to use our powers. I would urge all employers to take heed from the lessons learned here so that they avoid the same pitfalls.”

At Birchwood Investment Management, our fully qualified team offers extensive experience in auto-enrolment and other occupational pension issues.

Our pensions experts can provide advice on a one-to-one basis, or through seminars, or we can provide more specialist assistance with reviewing and upgrading pension schemes or implementing new schemes. For more information, please contact us.

Pension changes trigger new guidanceThe Financial Conduct Authority (FCA) has published new guidance for firms following sweeping changes to the way savers can access defined contribution pension pots, announced in the March 2014 Budget.

The guidance, issued on 9 April, is designed to help firms working with customers making a retirement income decision in the coming year and clarify what the FCA expects from firms in the period between the Budget and April 2015, when many of the Budget changes come into force.

The FCA said it wanted to ensure that customers were making informed decisions about their retirement in light of the Budget changes. Its guidance highlights issues firms should consider in communicating with different customer groups, including customers currently considering retirement options and those approaching retirement.

In the Budget, Chancellor George Osborne announced that from April 2015, savers would be

able to access defined contribution pension savings as they wish from the point of retirement, with no obligation to buy an annuity. He said: “Pensioners will have complete freedom to draw down as much, or as little, of their pension pot as they want, anytime they want.”

Tax rules will also be changed to reflect the new flexibility. Under the current tax system, after withdrawing 25 per cent of their pension fund taxfree, savers are charged 55 per cent if they choose to withdraw the rest of their defined contribution pension savings at the point of retirement. This makes the purchase of an annuity, providing a guaranteed income over the course of retirement, still the usual choice.

Mr Osborne said: “It will still be possible to take a quarter of your pension pot tax-free on retirement, as today. But instead of the punitive 55 per cent tax that exists now if you try to take the rest, anything else you take out of your pension will simply be taxed at normal marginal rates, as with any other income” – in other

words, 20 per cent, 40 per cent or 45 per cent.

Alongside the changes next year, new rules were introduced that mean from 27 March 2014:

• the amount someone can take of their total pension savings as a lump sum will rise from £18,000 to £30,000

• the size of a small pension pot that can be taken as a lump sum, regardless of total pension wealth, will increase from £2,000 to £10,000

• the number of personal pension pots that can be taken as a lump sum, under the small pot rules, will rise from two to three

• under capped drawdown, the maximum amount that can be withdrawn from a pension each year has been capped at 120 per cent of an equivalent annuity. This figure will rise to 150 per cent

• with flexible drawdown, there’s no limit on the amount that can be withdrawn from a pension pot each year, but the saver must have a guaranteed annual income in retirement of £20,000. This will be reduced to £12,000 per year.

MARKET REPORT

Global equity markets made solid gains in the second quarter buoyed by a flow of positive economic news and the easing of tensions in the Ukraine. Better than expected employment figures in the US and a seven month high in Chinese manufacturing activity lifted stock markets close to all-time highs. The FTSE 100, an index of the UK’s largest companies, rose by 3.2% over the quarter to stand just short of the record level achieved in 2000.

Despite the civil war in Iraq, developing world equities have led the way as sentiment has improved with the agreement of a ceasefire in the Ukraine, surprise strength in the Chinese economy and the subdued impact of a sales tax rise introduced in Japan. Investors have also taken comfort in dovish statements from the world’s central banks that have promised a continuation of accommodative monetary policy and the possibility of further quantitative easing.

The governor of the Bank of England, Mark Carney, continues to keep investors guessing on the timing of interest rate rises. Having declared only in May that a hike in rates was still some way off, Carney subsequently told the UK to prepare for a potential rise this year before backtracking on this suggestion during an appearance before the Treasury Select Committee. However, the governor has been more consistent in his message that interest rate rises will need to be slow and steady with a target of around 2.5% by 2017.

With both economic output and unemployment now close to pre-recession levels the Bank of England are focusing on spare capacity within the economy as a measure for timing interest rates rises. This is a conveniently ambiguous measure and therefore difficult to contradict. The governor is also conscious of the impact that interest rate hikes will have on the housing market and has openly warned of the dangers of a housing bubble. The Bank of England’s Monetary Policy Committee voted unanimously to keep the base rate at 0.5% in June.

The US Federal Reserve remains on course to end its programme of quantitative easing by the end of the year following a decision to further reduce monthly injections by $10bn in June. The decision was made despite the shock contraction of the economy by an annualised 2.9% in the first quarter due to extreme weather conditions. Early indications suggest that economic output is set to rebound strongly and this has been endorsed by the latest unemployment statistics that put the jobless rate at 6.1%, its lowest level since 2008.

The surge in job creation provided extra impetus to stock markets allowing equity indices to breach all-time highs with the Dow Jones Industrial Average closing above 17,000 for the first time. It also supported the case for the continued tapering of stimulus measures and an earlier than anticipated rise in interest rates. However, despite the falls in unemployment, there has been no significant pick-up in wage growth suggesting that again there is still spare capacity in the economy and with inflation at target levels there is little pressure for the Fed to act on rates.

Inflation in the eurozone has been declared as dangerously low by the European Central Bank with the latest figures confirming prices have risen by just 0.5% over the year to June. The Bank had already announced a number of measures to boost the economy but remain under pressure to act further as the region slips toward outright deflation. The green light for additional stimulus came after German inflation unexpectedly slumped to 0.6% despite economic growth of 0.8% in the first quarter, the country’s strongest performance for three years.

Financial markets reacted positively to the planned stimulus measures with investors seemingly convinced that the Bank was committed to supporting the economy. Expectation is also growing that the Bank will embark on quantitative easing in the coming months. Equity markets had been struggling after the success of Eurosceptic parties in the European elections, thereby jeopardising any co-ordinated efforts to tackle the current economic problems, and the ongoing conflict in the Ukraine.

Japanese equity markets have also enjoyed recent strength with inflation now rising at its fastest pace for over 20 years on the back of government stimulus totalling $180 billion. First quarter GDP was also strong although the slight upgrade to 1.6% was driven by increased spending ahead of a sales tax hike introduced on 1st April. With the Bank of Japan confident the

2% inflation target will be reached in 2015 and positive momentum in the economy there is no immediate pressure for the Bank to extend stimulus measures.

However, the long-term success of the government’s current strategy labelled ‘Abenomics’ after Prime Minister Shinzo Abe hinges on the third phase. After implementing expansionary monetary and fiscal policies, the ‘third arrow’ targets economic reforms in a bid to reduce barriers for growth. In addition to an expected cut in corporation tax, currently one of the highest rates in the world, the government is expected to introduce sweeping labour market reforms and the easing of regulatory barriers to bolster the private sector.

Chinese manufacturing hit a seven month high in June after the government announced a raft of new measures designed to boost economic prosperity in under-developed inland regions. Infrastructure projects covering roads, railways and airports along the Yangtze River are planned to stimulate activity in a region with a population of 600 million. The People’s Bank of China is also providing additional funds for lending to agriculture and small businesses as well as the development of low-income housing to boost economic growth.

There are also hopes of sweeping reforms in India following the BJP’s landslide victory in the Indian election. The strength of the result was surprising given that no party has held a simple majority for 30 years and has raised hopes of immediate and unopposed action to combat rising inflation and falling economic growth. Both equity markets and the rupee reacted positively to the result with the former hitting an all-time high.

7 July 2014

GLOBAL REVIEW EUROPE

ASIA

JAPAN

UK

US

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Birchwood Investment Management Limited is Authorised & Regulated by the Financial Conduct Authority.

Annuities ‘still have part of play in retirement planning’

Pensions experts have given their backing to the greater pensions flexibility introduced in the 2014 Budget.

A survey by asset management specialists Schroders of defined contribution pension scheme trustees and consultants, revealed that 81 per cent thought the new pensions regime to be introduced in April 2015 was a positive step.

Respondents were also asked whether annuities would still have a part of play in retirement planning for defined contribution pension scheme members.

A total of 93 per cent said yes, with almost half

of those (46 per cent) commenting that annuities would play a bigger part at a different, or later stage.

Participants cited annuities as a safe and predictable way to secure income and that some pensioners would think that security of income was worth paying for.

Commenting on the research results, issued on 28 May, Stephen Bowles, head of defined contribution at Schroders, said: “This is the first snapshot survey we have undertaken since the significant changes announced earlier this year. “We are pleased that increased flexibility has been seen as a positive move.”

New figures from the body that represents the UK’s insurance industry have highlighted the importance of cover in helping individuals and families cope with the financial difficulties arising as a result of a death, serious illness or injury.

The Association of British Insurers (ABI) published figures on 27 May showing that in 2013, £3.1 billion was paid to 99,000 customers or families – an average of 270 a day – in life, critical illness and income protection insurance.

Helen White, the ABI’s head of protection, said: “The insurance industry pays out £8.4 million every day in individual life, critical illness and income protection insurance claims, making a real difference to people’s lives at some of the most difficult of times, with 97 per cent of all claims paid in 2013.”

The ABI data also revealed:

• the average claim paid in 2013 for individual income protection policies was £11,500, paying out on average for 230 weeks – more than four years – to help those unable to work

• the average pay-out on a term life insurance policy was £51,500 with 98.4 per cent of claims paid. Total claim payments were £1.3 billion

• for whole of life insurance, the average claim payment was £10,300 with 99.9 per cent of claims paid. In total £449 million was paid out

• the average pay-out on a critical illness insurance policy was £60,400, with 91.8 per cent of claims paid.

In May, Scottish Widows revealed that it paid out an average of £4 million a week in life and critical illness claims in 2013.

It revealed that life claims paid totalled over £129 million or an average of almost £2.5 million each week in 2013. Critical illness claims paid over the same period totalled over £83 million, an average of almost £1.6 million each week.

Nearly half of life cover claims (46 per cent) in 2013 were as a result of cancer, followed by heart-related conditions (20 per cent).

For critical illness, the main three reasons for making a claim remained cancer (66 per cent), heart-related illness (15 per cent) and stroke (seven per cent).

Insurance payouts add up to £3bn