What me worry
by Doug Brodie
In this blog:
/1. Talking about racing cars and autogyros, have you done your LPA?
/2. Open or closed? Differences between investment trusts and unit trusts
/3. The SONG and dance
/4. The tax man speaks – Lifetime Allowance update
What normal looks like, tick all that apply to you:
Average age of Chancery Lane client is 62.
Average pension fund in the UK, excluding people with NO pension fund, £135,000.
Average pension/ISA/wealth funds of a Chancery Lane client £1.2m.
Chancery Lane client wealth range £200k to £10m+.
36% - number of clients approaching Chancery Lane who still have a mortgage.
>97% - clients with children.
>97% of couples are married.
Average monthly living expenses between £3.5 - £4k.
Average support to kids for property deposit <£50k.
Average actual or planned support for kids’ weddings £15k - £25k.
In addition, we have one retired client couple where both still have both their parents alive, all four of them in their nineties (so their kids can forget about an early inheritance!).
There has to be a reference point for normal to be defined – as you and your colleagues are unlikely to have spent the last twenty years comparing bank balances, savings wealth and the wider family money you’ll have little reference to use to establish if you conform to the mean – ‘normal’ is also interestingly defined as ‘not abnormal’, a moniker we’d all like to avoid. Working with folk like you for the past thirty five years gives us a good insight as to the median: we have a client with an autogyro, and a recently deceased client collected 1970s Formula 1 racing cars (6 when he died), we’ve been introduced to Tunisian crochet as a pastime, no clients have disappeared off on boats though several have hit the road in motorhomes. Virtually all travel quite extensively, AND the procedure for all of those is in exploring places unseen, not blowing £$€’000s on luxury travel or hotels – I guess most have already been there and done that.
“Lord, please save me from being normal.”
/1. Talking about racing cars and autogyros, have you done your LPA?
The point about an LPA (Lasting Power of Attorney) is that they are effective when you’re not – that also means that you have to put them in place BEFORE you lose the power of reason, not after, so you definitely have to do it now. The government helpfully facilitates this so you just need to click onto their website and follow the tabs as they guide you – simples.
https://www.gov.uk/power-of-attorney
I won’t outline the ins and outs, however, it’s important to understand that what it does is to allow you to choose who will make decisions on your behalf when you are unable – because if you don’t specify who then complete strangers in the NHS or legal system will simply make those decisions for you.
There are two parts of the LPSA and although both are normally done together you can do just one:
a) health and welfare, and
b) property and financial affairs.
/2. Open or closed? Differences between investment trusts and unit trusts
Investment trusts obviously win hands down because they have been around since nine years before the Battle of Isandlwana in the Zulu War.
An investment trust is a company just like Vodafone, or G Smith & Son Ltd – they are all listed on the London Stock Exchange (except the very few that are not), and to invest in them you buy their shares in exactly the same way you’d buy shares in Vodafone, ie via a stockbroker or similar, and from a shareholder who wants to sell. The investment trust doesn’t trade, it simply buys and holds investments, chiefly the shares of other companies. Like all companies, they publish annual accounts and have balance sheets and Profit & Loss statements, along with boards of directors. The directors appoint the investment manager, these trusts are not owned by investment firms. It is known as a CLOSED ENDED vehicle because the amount of shares is fixed, they have already been issued, making profits and losses wholly depend on the price of those shares going up and down. F&C was the first.
A unit trust is also known these days as an OEIC, and you’ll also see references to offshore versions known as SICAVs and UCITSs. Essentially these are all the same structure – they are not listed on an exchange, they are internally administered by the investment manager/company. The investment firm (think Fidelity or BlackRock) runs an account for the fund on the basis of units (hence the term unitised). It creates and redeems units depending on whether or not investors are putting money in or taking it out.
Fundsmith Equity is a £25 billion unit trust, started in 2010.
Sometimes we see investment managers running the same/similar portfolios in both formats and that allows us to compare the reality of returns. Clients know we prefer trusts because they hold reserves: an investment trust can retain up to 15% of its investment income to build reserves that can be used to provide cash for dividends when times are tough – like 2020 when bank dividends were cancelled in lockdown. Unit trusts cannot do this, they must pay out all the income they receive each year and they do not hold any reserves, which is why in 2020 the income from unit trusts all fell.
Polar Capital is an investment manager that runs a technology unit trust and a technology investment trust. If we look at the return on an annual basis each separate year since 2012, we see the returns are not the same: the red is the investment trust, blue is the unit trust.
We look at this in a different way, picking out the returns in numbers for each discrete year:
These are clearly not the same – it’s the same investment assets underlying both funds however with the unit trust you are getting the bare performance of the underlying assets whilst with the investment trust you’re getting the performance of the share price of the trust and not the net asset value. Which is better? In the above table the investment trust gave higher returns in 5 out of the ten years – so on capital growth nothing differs. It’s on income we see an enormous difference because of the reserves. On tech funds income isn’t a driver or an objective so we don’t generally use them, however, we will include them in portfolios that are not likely to be accessed for some time.
The chart below shows the trust in blue versus the unit trust in green – the investment trust is 26% ahead over the last five years and that’s because of ‘investor sentiment’. As the US tech stars have taken off, investors have piled in and the demand for the investment trust shares (and lack of willingness to sell by current shareholders) has driven the price up quicker than the growth in the underlying investments.
/3. The SONG and dance
SONG is the ticker for the Hipgnosis investment trust which buys the back catalogues of famous artists, alive and dead, and so collects the royalties. 10CC to 50 Cent to Barry Manilow, Blondie, George Benson, Fleetwood Mac, Neil Young…
If you’re interested in the background there’s a lot to read on the old interweb, however, to cut to the quick the founding investment manager fell out with the board (remember it has an independent board of directors) and it has begun to fall apart. The board decided to change the valuers for the portfolio (just as you would have surveyors value a property portfolio) with the result that the new valuation was 26% lower than previously – bang, one hit, and in the valuers’ opinion the trust has ‘lost’ £534,000,000 in value (over half a billion pounds). To address this the board has cancelled the dividends to use the cash to pay down debt – 70% debt of the old £2.05 bn valuation is 94% of the new £1.52 bn valuation. The shares peaked at 129p in 2021, down to 56p this week. (We don’t own any, this is precisely the type of investment we could not consider holding).
This is a very stark reminder of two things – valuation is only ever what the valuer says, be that a surveyor or another investor, and those who do not diversify are simply betting on black. Crypto is the same – value based on someone else’s opinion.
/4. The tax man speaks – Lifetime Allowance update.
If you have the interest and the energy, the latest update is here:
https://www.gov.uk/government/publications/lifetime-allowance-guidance-newsletter-february-2024/lifetime-allowance-guidance-newsletter-february-2024
Technically speaking nothing new – we know the limit has gone, what is left is the transitional finessing of those who have already taken some tax free cash but not all, and those who unfortunately died in this interim period. This is not final though – for us, we have to wait for the HMRC practice notes to be published in final format, and that should be out very, very shortly.