Newsletter

Sum

mer

20

16

In this issue

2. The kids aren't alright. EQ in the media.

3. Brand NEW client portal. EQ Rated Funds.

4. Increased probate fees: a new inheritance ‘stealth tax’.

5. What's hiding in your pension scheme?

6. Post-Brexit investment outlook.

7. P2P lending in China. NEW guide to Enterprise Investment Schemes.

8. EQ Foundation: latest donations.Tax-efficient investing seminar.

All changeWe certainly do live in interesting times! Markets weren’t expecting Brexit and initially reacted pretty violently but equities have, at the time of writing, largely recovered and most EQ client portfolios are actually worth more now than before the vote. Commercial property funds have faced the most disruption. Fortunately, we anticipated this and sold all remaining holdings in our model portfolios on the day after the referendum, thereby avoiding the issues of suspended dealings and lower prices that now prevail. This was a good example of the advantages that discretionary portfolio managers have in being able to move rapidly after a change of circumstances.

I personally voted ‘Remain’, mainly because I doubted that we had the right calibre of leadership to guide us through tricky exit negotiations. I feel a bit more confident about that now. There will be hurdles to overcome but when you’ve lived through periods when electric power was only available 3 days per week with inflation running at 25% these don’t seem too daunting.

We feel that we are in a phase when capital preservation for clients is high on our priority list and we have adjusted our asset allocation accordingly. We are also keenly aware that in a low return environment costs become even more important. We have been steadily reducing the underlying charges in our portfolios, by negotiating better terms with some fund groups and shunning funds with high costs unless we are absolutely convinced of their potential. The result is that our overall charges are now amongst the lowest in the business.

Our mission is to be the best, not the biggest. While some of our competitors appear to be on a relentless acquisition drive, we are working all the time on how we can improve our service to clients. The latest tangible example of that is the new web portal for clients of our Bespoke service, described inside. I am really excited about the functionality of this, including the totally transparent performance charts. We hope to make this available to all clients during the year.

I hope you enjoy reading some of the articles inside and, as always, we welcome your comments on how we can do better.

John SpiersJohn SpiersChief Executive

eqinvestors.co.uk Client Newsletter – Summer 2016

Celebrating exam successWe actively encourage our staff to study for professional qualifications, and congratulations are due to four of them after passing recent exams:

• Dan Atkinson• Victoria Groves• Lindsay John• Hayley Jarvis

2.

eqinvestors.co.uk Client Newsletter – Summer 2016

The kids aren't alrightA perfect financial storm is faced by the children of today as a result of sky-high property prices, the cost of further education, lower employer contributions to pensions and likely lower investment returns than in the past.

Parents and grandparents have been providing a financial boost for their offspring for many generations but the need has never been so great as today.

The ‘Baby Boomer’ generation has enjoyed extraordinary good fortune:

• University tuition fees were nil, or negligible by today’s standards.

• The average property price used to be around 3 times average earnings, now it is over 9 in London.

• Employers used to contribute up to 25% of salaries to provide pensions linked to final salaries and often index linked.

With 10-year bond yields less than 2% in the UK (dipping into negative territory in Germany and a few other countries) it is very unlikely that the investment returns achieved over the last 25 years can be repeated.

To even things up between the generations, grandparents need to be doing their utmost financially. The obvious product is the Junior ISA (JISA) which usually has no charges and cannot be accessed until 18.

Much as we like some aspects of the JISA, we think it could be improved on considerably. Some parents and grandparents might be concerned about offering full access at age 18. We think a provision to restrict access until age 25 if preferred would be desirable. We also think it should be made easy for children to make small contributions themselves and then to be kept informed about performance.

There’s no better way to learn about the ups and downs of the stock market than to see your own savings fluctuate in value.

Finally, we think the Government should look to extend the proposed Lifetime ISA, with 25% top-up, to JISAs opened prior to a child’s 5th birthday and not accessed until 25.

To even things up between the

generations, grandparents

need to be doing their utmost financially.

EQ in the mediaEQ continues to enjoy a strong presence in the national and trade press. Recent mentions include:

• City AM: Why investors shouldn’t fear Brexit• Evening Standard: When investing, beware of bad habits• Good with Money: Unethical investing? THAT should come with

a risk warning• Financial Times: Fossil fuel companies: be part of the low carbon

future• The Times: Making money with an easy conscience

Sally CollinsHead of Simply EQ Download our guide on Investing

for Children from the EQ website:

eqinvestors.co.uk/guides/

You can invest in a JISA through our Simply EQ service:

eqinvestors.co.uk/simply-eq/

It's never been so necessary

Investing for children

3.

eqinvestors.co.uk Client Newsletter – Summer 2016

Reviewing our new client portalOver the course of the last few months we have been developing a new client portal to offer a clear view of all your assets in one place, including both those held with EQ and elsewhere, plus a transparent analysis of performance.

Nothing is more important to us than adding value to clients' investments. We've designed the portal to give clients the high level information they need in a secure, user friendly and accessible format.

The portal is currently available to EQ Bespoke clients and we hope to make it available more widely later in 2016. A preview is accessible from the homepage of our website: eqinvestors.co.uk

View your current valuation and

change since you last logged in

EQ ‘Rated Funds’In the last month we have added a new section to our main website which provides details on the funds that form the core of our model portfolios. The profile of each fund contains information on the fund manager, the management company and an interactive performance chart.

For more information, please visit:

eqinvestors.co.uk/investing/eq-rated-funds/

Michael BornFund Research Analyst

Get a clear picture on

performance

See where your portfolio

is invested

4.

eqinvestors.co.uk Client Newsletter – Summer 2016

New inheritance ‘stealth tax’Figures released by HMRC show that a record £4.6 billion in Inheritance Tax (IHT) was paid in 2015/16, up 31% from £3.8 billion the year before. The cause of this increase is easily identifiable: increasing house prices mean more estates are now liable to pay the tax.

The Government has reacted by introducing the Main Residence Nil Rate Band. Eventually this will allow up to £175,000 of property to be passed on tax free in addition to the standard £325,000 nil rate band. Married couples and civil partners can combine their bands, enabling them to pass on £1 million free from IHT. The new band will be subject to certain restrictions: only direct descendants can benefit, and it will be tapered down on estates worth over £2 million by £1 for every £2 over the threshold. A provision will also be put in place for those downsizing to a smaller home in retirement.

But at the same time as putting this new allowance in place, the Government have quietly been consulting on an increase to probate fees which would see larger estates pay significantly more.

A Grant of Probate gives the people dealing with your estate (the administrators) the authority to deal with your assets. The administrators need to submit an inheritance tax form to HMRC and swear an oath at a solicitor’s office. Once they receive the grant, they can start the process of making payments to the beneficiaries of your Will.

There is currently a flat fee of £215 to receive probate (or £155 if a solicitor is used). This reflects the fact that the work required from HMRC is the same, regardless of the size of the estate. But HMRC has now released a consultation paper proposing to charge based on the size of the estate.

The proposed banding is as followed:

• £300 for estates worth more than £50,000 and up to £300,000

• £1,000 for estates worth more than £300,000 and up to £500,000

• £4,000 for estates worth more than £500,000 and up to £1m

• £8,000 for estates worth more than £1m and up to £1.6m

• £12,000 for estates worth more than £1.6m and up to £2m

• £20,000 for estates worth more than £2m

These changes aren’t law yet, but as they are predicted to raise £250 million a year, it looks pretty likely the government will act.

You might not be aware that IHT needs to be paid before any estate assets can be or sold or passed on to heirs. Where the estate has cash savings, payment can usually be set up directly from a bank account. But in cases where the estate has less liquid investments, the administrators may be forced to take out a loan or use their own assets to pay the tax.

The proposed increase in probate fees means the people dealing with your estate could be faced with a much bigger upfront bill.

One way to make sure they have access to cash to pay the IHT and probate fees is to take out a Whole of Life insurance policy. Unlike most life assurance policies, this type of plan doesn’t have a fixed term: provided you keep paying the premiums, the cover will be maintained until your death. You can set up a simple trust so the pay-out doesn’t form part of your estate. This means your loved ones will have a fund available to cover any expenses incurred after your death.

The Government have quietly

been consulting on an increase to probate fees

which would see larger estates

pay significantly more.

Download our guide on Saving Inheritance Tax at:

eqinvestors.co.uk/guides/

To arrange a FREE audit of your protection arrangements please call us on 020 7488 7110.

Jeannie BoyleTechnical Director

5.

eqinvestors.co.uk Client Newsletter – Summer 2016

What’s hiding in your pension fund? Recent news coverage of the Universities Superannuation Scheme (USS) has raised important questions about how much say employees should have in deciding where their pensions are invested.

The problemThe Universities Superannuation Scheme (USS) has substantial investments in tobacco. About £211 million of the fund is invested in top 5 tobacco company British American Tobacco (BAT). Tobacco stocks have provided strong and consistent cash flow – they fit well with Defined Benefit (final salary) schemes like the USS.

Cancer Research UK has identified smoking as the most important, preventable cause of cancer globally. In 2014/15 they made £238 million of grants to scientists working at hospitals and universities. These university scientists understandably felt that the investment in BAT conflicted with their priorities when The Guardian newspaper brought this to their attention.

Solutions from A-ZThere are a number of ways to think about what we put into our investment portfolios, and how this matches up with our clients’ values.

At one end of the spectrum we can simply avoid investing in things we don’t like. It’s relatively easy to analyse a portfolio and identify the underlying holdings from the funds. If we are keen to avoid tobacco we would choose not to invest in BAT and other similar companies.

A slightly more involved approach could be to choose funds that seek to influence the behaviour of the companies they hold. USS engaged with BAT to influence their marketing strategies – particularly regarding e-cigarettes. Lobbying for the adoption of Fairtrade practices to ensure growers are paid a fair price could be another area to work on.

Impact investing in practiceImpact investing aims to go further than this. Rather than avoiding some areas altogether, or trying to improve practices in others, it seeks to make an intentional, measurable improvement to society or the environment. For an impact investor, financial returns are just a part – albeit an important one – of a bigger picture.

Taking an impact investment approach means looking at the root concern – in this case stopping cancer. Some of the most promising advances have come from the biotech sector. Investing in any

biotech company in isolation would be very high risk, but funds investing in biotech could form part of a balanced, diversified portfolio. Chosen carefully, they could provide exposure to companies with good potential for financial returns, which are also directly involved in the hunt for a cancer cure.

The acid testDo impact investments perform as well as traditional ones? Until recently it was assumed that impact investors would have to accept poor performance when compared to their non-ethical peers. But there is now increasing evidence to the contrary: portfolios that focus on positive impact suffer no dent in their performance, and can even outperform their peers.

In some ways this is unsurprising: why shouldn't companies that are tackling real problems with innovative products and services succeed? Similarly, in the long run you would expect well-run firms to outperform poorly managed ones.

What's next?Not all pension schemes will be able to support a rigorous ethical investment strategy. This is often due to a perceived lack of demand. Indeed, not everyone is concerned about the same issues.

On the other hand, motivating investors to ask ‘what’s in my pension?’ could be the spark that engages them to start planning for their financial future. And in today's financial climate, this has never been so important.

EQ's Positive Impact Portfolios are available for

pensions, ISAs and general investment accounts.

Dan AtkinsonSenior Technical Consultant

EQ has been offering the Positive Impact Portfolios since 2012 for clients who care about how and where their money is invested.

Download a brochure at:

eqinvestors.co.uk/positive-impact

Or call us to request one on 020 7488  7110.

Ethical Investing for the 21st Century

Positive Impact Portfolios

6.

eqinvestors.co.uk Client Newsletter – Summer 2016

Sophie Muller grabs top 30 slotSenior Investment Analyst Sophie Muller has been named as one of the rising stars of wealth management in Citywire’s annual ‘Top 30 Under 30’.

Now in its sixth year, the top 30 saw a record number of entries. The final list is based on a combination of professional qualifications, academic achievements and the scope of the responsibilities they hold at their companies.

Investment OutlookFinancial markets have been volatile since the Brexit vote. Once again this highlights the importance of portfolios being globally-diversified across multiple asset classes. We have been clear in recent communications that we see a number of challenges to the global economy – the scale of the Chinese credit bubble, negative interest rates and stagnant productivity are just three.

It is these wider risks as well as the challenges arising from Brexit that have led us to position portfolios more defensively. We have increased our cash holdings, diversified our currency exposure outside the UK, while also reducing our equity and property exposure.

EquitiesConcerns about the outlook for the UK and European domestic economies have led us to increase our exposure to larger companies which should be better positioned to weather any downturn.

Within emerging markets we are starting to view certain valuations more favourably, despite the general malaise affecting the sector. This is particularly true in Latin America where it is hoped that political reform and developing domestic economies could lead to improved conditions for investors.

Fixed IncomeOur position remains unchanged on bonds – we see little value but recognise their defensive qualities. We now hold a more positive view on UK gilts with the Bank of England expected to maintain a loose monetary policy.

Against a backdrop of lacklustre global demand, we believe corporate earnings growth will be muted. However, balance sheets and cash remain healthy and we are benefiting from our exposure to corporate bonds.

Property & Alternatives Following the EU referendum result, we sold all our holdings in UK property funds due to concerns

about downward pressure in the UK commercial property market. The suspensions of the Standard Life, M&G and Aviva property funds the following week validated this decision. We are waiting for the dust to settle, before seeking a re-entry point when returns look more attractive.

A lack of value in traditional equity and fixed income markets continues to keep us overweight absolute return strategies. We have returned to a neutral view on commodities as prices appear to be stabilising.

Wider risks as well as the challenges

arising from Brexit have led us to position

portfolios more defensively.

Kasim ZafarPortfolio Manager

Negative Positive

Equities North America UK Europe Japan Emerging Markets

Fixed income Commodities Property Absolute return Cash

Current outlook: Q3 2016Previous outlook (Q2, if different)

Sophie MullerSenior Investment Analyst

7.

eqinvestors.co.uk Client Newsletter – Summer 2016

Guide to Enterprise Investment SchemesWe’ve recently launched a new guide to Enterprise Investment Schemes (EIS). The EIS was initiated by the UK Government in 1993 in an attempt to promote funding for small private companies.

EIS offers a host of attractive tax incentives, including 30% upfront Income Tax relief and the ability to defer tax on a capital gain. While it is not a suitable option for everyone, but can be appropriate for experienced investors who are willing to take on a degree of risk within a diversified portfolio.

It can be particularly attractive for those who:

• Are looking to reduce Inheritance Tax (IHT) liabilities, or

• Have a large Capital Gains Tax (CGT) liability.

You can also download the guide from our website, or contact us and we can send a hard-copy.

A shortlist of EIS opportunities is also published on our website as part of our holistic financial advice service.

EIS has been a popular success

– raising well over £1 billion in

2014/15.

Innovation in Chinese peer-to-peer lendingLet’s hope the UK's growing peer-to-peer (P2P) sector doesn’t imitate any of the unfortunate, or downright unscrupulous, practices emerging in China.

I’ve made a number of comments about peer-to-peer (P2P) lending over the last few years which might suggest that I am fundamentally opposed to this type of activity. However, that’s not correct – I am delighted that people are trying to fill the gap left by the banks who seem supremely uninterested in supporting British businesses.

My concerns are that this is still a young sector which has yet to be tested in a serious recession. I suspect that many lenders will be disappointed with the returns they receive in that scenario. It will become clear that some of the P2P platforms have done little more than cursory due diligence on the borrowers and the misalignment of interest between platforms, motivated mainly by transaction fees, and lenders, who rely on the return of their capital, will come to the fore. That’s why I still feel that conferring

the respectability of ISA status on these loans now is inviting trouble.

However, even in my worst nightmares I can’t see things getting as bad as they are in China. Earlier this year it turned out that Ezubao, one of the largest operators was just a Ponzi scheme. It looks as if lenders have lost billions.

More recently Jiedaibao, a less prominent lender, has adopted a novel technique for encouraging its female borrowers to keep up their repayments: it requires them to post nude photos via WeChat. Jiedaibao threatens to publish these if the borrower falls into arrears. With interest rates of around 30% that seems quite likely.

I admire the lateral thinking adopted by another lender, Chinatou.com. They seem to be facing some cash flow difficulties in meeting redemption requests. Fortunately the owners have a sister company that produces baijiu, the popular Chinese liquor, and have been offering bottles of this in lieu of cash. Maybe they are hoping that lenders will forget about their losses after a skinful.

So if you see any of the UK P2P platforms engaging in merger activity in the drinks or media sectors, that could be an early warning signal.

John SpiersCEO

Download the guide or view our shortlist of EIS opportunities at:eqinvestors.co.uk/

investing/eis

Enterprise Investment Schemes

Tax efficient investing in private companies

8.

eqinvestors.co.uk Client Newsletter – Summer 2016

EQ Investors, Centennium House, 100 Lower Thames Street, London EC3R 6DLEQ Wealth, EQ Bespoke and Simply EQ are trading names of EQ Investors Limited ('EQ') which is authorised and regulated by the Financial Conduct Authority. Company number 07223330. Registered address: 6th Floor, 60 Gracechurch Street, London EC3V 0HR.

020 7488 7110 enquiries@eqinvestors.co.uk @eqinvestors EQ Investors

The EQ Foundation

supports organisations

which focus on achieving

positive social, economic and environmental

outcomes.

EQ/0716/234

Recent EQ Foundation grantsThe EQ Foundation, our grant-making charitable arm, makes a small number of multi-year grants each year. We are pleased to announce our latest donations to UK charities Panathlon Challenge and The Sutton Trust.

Panathlon Challenge seeks to inspire young disabled people to use competitive sport and fair play as a means of social and personal development. For most of the primary and secondary school children they work with, they offer the only chance to compete at sports and represent their schools. The Foundation’s donation will pay for two members of Panathlon staff who will help create 150 sports competitions for 8,000 young disabled people across the country this year.

You can find out more about Panathlon Challenge at: www.panathlon.com

The Sutton Trust works to combat educational inequality and prevent the subsequent waste of talent. Sadly, this has become a more acute problem over the last four decades. Their work is particularly concerned with breaking the link between educational opportunities and family background, and in realising a system in which young people are given the chance to prosper, regardless of their family background, school or neighbourhood.

You can find out more about The Sutton Trust's work at: www.suttontrust.com

Important informationThis newsletter does not constitute advice or a personal recommendation. It does not take account of the specific circumstances of individual investors. If you wish to establish if any of the products or services described herein may be suitable for you, then you should contact us for advice. Specifically, Enterprise Investment Schemes are complex products. If you are at all uncertain about their suitability for your circumstances please seek our advice. Remember that the value of your investments can do down as well as up and that you could get back less than you invest. The levels and bases of taxation can change at any time.

Autumn seminar: tax-efficient investingWednesday 21st September 2016

18:00 – 19:30After the summer break we’ll be running a quick-fire seminar focusing on the opportunities presented by Venture Capital Trusts (VCTs), Enterprise Investment Schemes (EIS) and Social Investment Tax Relief (SITR). These products are designed for experienced investors so a good level of understanding is essential. If you would like to attend this complimentary event, please contact Amy Luff:

Email: amy.luff@eqinvestors.co.uk | Tel: 020 7488 7183