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Ask The Expert - Geoff Birch, Offshore-Rebates
Click here to read an in-depth interview with Geoff in 2008.
13/05/10 - The Truth About Offshore Pensions
My name is Geoff and I have been involved in supplying financial solutions directly to the public for 30 years. Some may already be familiar with my work over the last 10 years on Motley Fool UK’s expat boards or perhaps read other articles I have written. In 1999 I established Offshore-Rebates.com which is an Internet based offshore funds discount brokerage which has clients of many nationalities in about 55 countries at last count.
I have been asked by the owners of this site and agreed to supply the odd article to help you with your financial decisions and I am pleased to do so. One of the most important if not the very most important financial decision for any of us is “what to do about saving for pension purposes?” and here I would like to share an industry insider secret with you. This secret is very valuable and could save you a huge amount of money and possible heartache if you choose to heed it, and very few people will tell you what I am about to tell you below. The secret is that the products you will most commonly be offered offshore as a “pension plan” are no such thing. They are instead just a vehicle in which to accumulate money which may one day be used for income either by drawing down on it, or if you really wanted to buy an annuity with it you could. They will not automatically provide you with future income payments. However before you get to the stage of spending your accumulated money it is important to understand these savings vehicles are really nothing more than a regular premium life assurance policy with a specified premium payment term, and life cover of 1% more than its investment value in order to qualify it as such. When signing for one of these you are agreeing to make every payment due from the date of inception until the specified maturity date. If you do not meet this requirement the terms are full of penalties and conditions which can really hurt you financially.
It is my experience that most people just want to build up their savings in as cost efficient and as flexible method as they can and I can think of no one I know or have met who wants to be chained to an inflexible scheme which penalises them if they can no longer afford to save what they used to. We all live unpredictable lives and the last thing we need at a time when we might have had a change of circumstances thrust upon us is a lack of flexibility in our savings arrangements. After all saving is supposed to be what you do for the proverbial rainy day and by definition we never know when those rainy days may arrive.
There are several variations on a theme depending on the life assurer involved but what I would like to do here is to take a close look at one of these plans because in my own humble opinion anyone who bought one would have to be either naïve or insane, and yet many are sold around the world each and every month to people whom I’d opine either didn’t fully understand them or didn’t do their homework in full. Here we shall do it together.
Can we first agree that
1) Our aim is to save up some money and have as much as possible available to us when we retire?
2) Can we secondly agree that we cannot with any accuracy predict our own future circumstances?
3) Thirdly agree that whatever we are saving is our money and should at all times remain our money with no grey areas?
I am not out to single out any particular company’s product as there are usually variations but not massively so, but we have to choose one so I’d like to look with you into one of the typical pension planning vehicles you are likely to be offered offshore, which is Royal Skandia’s Managed Pension Account. (They also have the same product re-labelled Managed Savings Account). According to the brochure they say this is better than their rival’s product so if that is true you can draw your own conclusions when you have read the rest of this analysis.
Right on the front cover of the brochure I downloaded from their website it says that the brochure is not for use in the UK, Hong Kong and Singapore. I believe I am correct in saying that is because it doesn’t contain enough information to satisfy the regulatory standards in force there. Working from the brochures, even to me as an experienced industry professional the exact way the plan is charged and implications is not very easy to follow so let’s look at it together and whilst I’d gladly retract/correct if indeed proven wrong I believe the below to be entirely accurate and if I have in any way misunderstood it then it is because in my opinion the brochures and product guide lack clarity. Only in the adviser’s guide is there a matrix of early encashment charges and they are savage. The Policy Terms talks about them but doesn’t show clearly it in a matrix………… so here it is direct from the guide.
From the product brochure we can read that the “initial investment period” is 1 month for each year of the term over which you have agreed to invest. We are told that there will be an extra 5% allocated to your investment during this period but we should also remember that every contribution paid in is subject to a bid/offer spread of 7% so you lose part of that extra 5% too, (bid/offer spread just means the difference between what they would sell them to you at and what they would buy them back at), plus an additional 1% annual fee to Skandia and another £5.50 per month “monthly maintenance charge” which is doubled to £11 per month if “the Fixed Account“ is used. I have three of their brochures and they give little detail of the Fixed Account in any of them but seems more to do with if you have stopped paying in but left your money there.(i.e “Paid Up”) In the three product brochures I have there is no clear explanation of this Fixed Account and we have to go right into the Policy Terms to find this. Apparently you can have the smaller of “one half of the value of Allocated Units at their Bid Price: or 90% of the value of the Allocated Units at the Bid Price (ie current value) LESS the early encashment charge (which vary depending on how far into your plan you are but is set out above) .
I’d like to just go back to that annual fee for a moment because that is not 1% on each contribution as it is paid but 1% per annum on the whole investment value, so as the pot grows so does the monetary amount of the 1% pa fee. The effect of 1% pa compounded over many years is huge. See for yourself by playing with this calculator: http://www.1728.org/compint.htm
Additionally to this we have to consider that the insurer is with the exception of a few in-house funds, just a conduit which collects your money, emphasis on the YOUR money, and will pass it to another fund manager chosen from the funds menu. It must be pointed out that the underlying fund or funds also has/have annual management fees of normally between 1 and 2% and a range of 1.5- 2% pa being the most common. So if we add the life assurer’s 1% pa plus the underlying annual fees of 1.5-2% we have 2.5-3% per annum PLUS the bid offer spreads of 7% on each contribution before we can actually begin to make a profit.
Also the brochure Skandia supplied to me, PDF3461/26-1014, mentions the underlying funds and says:
Discounted initial charges to underlying funds – In many cases to nil.
Now I don’t know how you read that but to me it infers that in more than a few other cases it is not nil, so assuming you had picked funds where it was not discounted to nil, this would mean you were paying Royal Skandia a 7% bid/offer spread, plus 1% annually, plus the underlying fund manager’s annual management fee of typically 1.5% to 2% per annum PLUS an additional fee to get into that underlying fund. All of which has to be covered just to get back to flat on the sum you invested.
If I could then bring your attention to the fact that you may well have 20 years or more to your selected retirement date, let me ask “who of us knows with any degree of certainty what will be our circumstances along the way?” We are at the time of writing in the depths of the global credit crunch aftermath and we can see economic problems galore as the debt which piled up and caused this mess has not gone away. Many of you may have witnessed people close to you who have either lost their jobs or suffered some form of hardship due to this, but even before we had these circumstances it is true to say we never have 100% visibility. For example I have an old endowment plan myself which was originally designed to mature and pay off my mortgage in the UK. However I left UK in 1992 and haven’t had a mortgage now for the last decade. I am told by the insurer that the plan will not produce enough to clear the original loan value, so as an investment it has also been lousy. If I stop it or surrender it I get hit with penalties so I am forced to keep it going even though I don’t want or need it, and I don’t even need the life assurance it carries. Not an ideal scenario is it?
Obviously it makes sense when saving to save as much as one can but commonsense should tell us that just maybe our circumstances will change and we may for whatever reason need to change our plans. Maybe we shall return to the UK or other homeland and if we did, whilst it is not illegal to run an offshore savings plan, with the availability of tax free savings plans in UK in the shape of ISA’s or an onshore pension which will give you tax relief, would we be able to afford to fund both? If we stopped the plan to fund the ISA we will be punished financially for doing so. If we keep the plan going and don’t do the ISA we are financially disadvantaging ourselves the other way in that the ISA proceeds would be tax free when we cash them but in UK the offshore life plan proceeds will be subject to income tax. Maybe we will move from somewhere where we have a tax free income and accommodation supplied to somewhere where we have to pay tax and pay for our own accommodation. Perhaps we shall have a career change with less stress and earn less but be happier?
The possibilities are huge but I guess you get the picture, so let’s just assume you stopped paying in because of a change of circumstances. If you stopped paying in within the preliminary period then your account will lapse with zero value. A bit strong because it’s YOUR money. Imagine for a moment you had paid say £1000 a month for 18 months of a 20 year term and then through no fault of your own lost your job and needed that money back to live on, only to be told “no”. £18,000 wasted.
If you were to stop paying in for more than 3 months the account will become “paid up” and missed contribution charges will apply, although they are kind enough to allow you to make a partial surrender under the penalty free allowances of 1% pa to allow you to fund the premiums you miss. This is apparently called the premium holiday option and will allow you not to pay the missed contribution servicing charge of 8% because you will pay the 8% due on the premiums with money you are paying from your existing pot under the penalty free allowances. So as I read and understand that you are actually taking out money you already paid to get in there and paying again when it goes back in in lieu of missing premiums.
The missed contribution charge is 8% of the missed contributions per year. So if you cannot afford, or do not wish due to a change of circumstances, to keep the plan going for whatever reason you will be charged at penalty rates for not doing so.
What does that actually mean? Assume you wanted or needed to reduce your contributions to the brochure minimum of £350 per month. You can do that but subject to a “missed contribution servicing charge” of 8% pa on the shortfall between what you are now paying and what you were paying. Assume for a moment we came down from £1000 per month to £350 per month. That means you’d be paying close to 10% on the £350 (7% spread +1% annual, + monthly maintenance, + underlying fund annual management charges) plus 8% pa on the £650 pm balance you were no longer paying. Let’s look at what that means for a moment in monetary terms. If you started at £1000pm and through no fault of your own later permanently reduced the plan to £350 per month you would be paying 8% of the balance per month, which is £1000 - £350 = £650 x 8% = £52 X 12 =£624 pa extra charges each year on the money that you were not putting into your plan. In this scenario you’d be still putting in £350pm X 12 = £4200 pa. On that we know you’d pay close to 10% total in charges on the new money going in which is about £400 pa, plus the £624 on money which you were no longer able to pay in. Therefore if we add that together we are up to +/- £1000 pa of the £4200 pa you were putting in lost in charges and plus the 1% annual fee on the pot value which is ongoing as the annual management charge.
How about if you wanted to access the money you put into your savings vehicle? It is after all your money, right? Err well apparently not it seems:
So, would you prefer to be able to have penalty free access to all of it at any time you wished or would you be happy to find there was a hefty penalty for doing so? Assume for a moment you had saved for 4 years of a 20 year term and wanted your money back. According to the matrix above from the adviser copy of the plan brochure the amount of your regular contribution account value you might receive after 4 years would be 50.8% of its market value after 1% annual allowance. So that’s 50.8% of 96% of what you’d put in - less charges. Bear in mind the circa 10% in fees already lost on each contribution and the 1% annual fee on the whole too. How would you feel? Even after 10 years you’d only get back 77%. Imagine you’d saved £1000 a month for 10 years, that’s £120k and then you’d lose 23% of the total as a surrender penalty as well as having paid all the other fees. I know how I would feel and I would not be pleased. I notice that there is no mention of the actual surrender penalty charges expressed as a percentage in the actual client brochure (SK6854/29-1081/October 2009) though there is in the adviser copy (SK3468/26-1016).
According to the brochure you can access some of your cash though. This is a cumulative total of 1% pa of the bid value of your regular contributions. So yes you could access 10% of what you had accumulated penalty free after 10 years. Who’s money is this again? Excuse me while I say “Whoopeedoo!”
They do say they will give you a 0.2% pa annual loyalty bonus if you reach maturity, with a maximum value of 4% but since you have been charged a minimum of 1% pa for running the plan, plus in excess of 7% on every contribution you paid in, plus the underlying fund charges and monthly account fee I’d consider this is really only giving you back some of your own money rather than a bonus.
Also I get clients approach me all the time and saying things like “I have seen the guy from whatever company and he is offering me this pension from XYZ insurer and they are offering (say) 50% extra allocation for the initial period. Is this a good deal?” To which I have to say well look at it from the point of view that there is no encashment value to the initial units for quite some time but that extra allocation will be subject to the same charges as the rest of the plan. So assume then for a moment we are paying in £1000 a month we are getting allocation of £1500 per month but paying 7% bid/offer spread on that plus the 1% annual fee on that extra allocation as well as your own contribution per annum throughout the term, so to me it looks very much like they give you something on paper, known in the business as notional (or “actuarial”) units (clearly referred to in the paste above as “notional”), and then take what they gave you back again in charges throughout the life of the plan.
Do you see now why I said these are complicated to follow? I hope I haven’t made this “too dry” reading but hopefully now you understand why I said what I did above about anyone actually volunteering to buy one of these if they understood it properly. I believe for all of the regulation that has been imposed on this industry in recent years regulators would do better to regulate the products and not the advisers because if such products were outlawed then they couldn’t be sold. I also almost forgot to mention that the reason expats are normally offered one of these plans and not one like the below is because these plans pay lots and lots of commission, upfront and in a lump sum whereas the below charges a little bit but only as and when something is paid in and which I believe is a better incentive to someone to continue to look after and service you as a client than when someone else was paid the money years ago and is long gone.
So what can we do instead? We do need to save, right?
What we all need is a way to save and invest but we need to be able to do it in a way that it costs us as little as possible to do so and we need it to be such that if we need to stop saving that we can, and without any penalties. Also that if we want to stop adding any, either temporarily or permanently that we can leave the money there without being charged extra just because we stopped adding to it. We want to know that if we ask for our investment fund back, in whole or in part that it is available to us without any penalties and at minimum delay at any time. We want to know that if we start saving extra into it that we can stop doing so with no expectation or obligation that the extra would continue, and if we want to keep saving but save less we can do that without penalty too.
If we could do all that would it not be a lot better? Well the good news is that you can. You just need to cut out the insurance company and save directly into funds.
We can access the same type of investments at much lower cost so there is more there for the investor and we avoid the restrictions and penalties too. We cannot avoid the underlying annual management fees of the fund managers because like any company they cannot collect and administer our money, send statements and pay compliance fees and taxes, staff salaries, utilities and rents nor otherwise run their business on fresh air, but they do at least make us the profits we seek. We can however cut the 7% bid/offer spreads down to 3% and we can avoid the additional annual 1%, and we can also dispense with the monthly account fees. We can dispense with the penalties and restrictions and we can buy award winning funds. These are exactly the same sort of funds that are on the fund menu of the plan above, and in one case I regularly use exactly the same multiple award winning fund, but without all the extra charges and conditions. There are some excellent funds which are ideally suited to regular savers and which have long term track records of excellence and consistently high peer group rankings. Most of the work I do is actually for high net worth individuals who contact me with larger lump sums to invest and we have a variety of solutions available to them, but I hate to see people waste money so for the regular pension saver I have a lot of clients from around the world who simply save regularly straight into funds and I tend to use companies who provide a manager of manager facility because this enables you as the saver to “save and forget it”. This means while you concentrate on doing your job and getting on with life that the managers have a wide mandate and are able to invest your money pretty much anywhere within reason they see opportunity and which means that instead of you worrying how the latest crisis has affected you or whether the investment theme you selected last year is still the best place to be invested, that the managers will take those decisions for you and adjust accordingly. You don’t have to decide whether Europe or the US, equities or bonds, property or commodities etc as they will do that for you and will ensure you have a broad spread of investments. If they feel defensive then they will make the portfolio defensive, and if they feel a bit more bullish they will go for it there too. I have a variety of such funds I use and some would be more suitable for some than others but what they have in common is that they have none of the restrictions or penalties we have discussed above, for a returned UK resident can be more tax efficient as they are subject to 18% CGT after generous tax free allowances rather than income tax, and by discounting the commission I could have taken on these my own clients pay only 3% rather than the retail rate of 5%. I don’t say you have to come to my company to get into such funds but I do think you’ll see this solution as a huge improvement on the alternative above and hope by reading this I might at the very least have saved you from a possible expensive mistake.
A golden rule of my own worth remembering is “insure with an insurer but invest only and directly with a specialist investment company”. In my 30 years of experience I have learned that the two do not usually mix well.
19/02/10 - Diversification
I hope everyone had a fabulous Christmas and New Year and a belated happy New Year to all Expat Focus readers.
This month I thought we’d take a look at diversification. There was a time when diversification was putting some money in UK equities and some in European equities, and that was later expanded to Emerging Markets equities too but those days are long gone due to the creeping influence of globalisation and the interlinking of most things financial these days. Today we find that a problem with the Greek economy can threaten the stability of the Euro, the whole European banking sector and weigh on equities around the globe. We find that property is not immune to recession nor banking crisis and we find that government bonds from previously supposed safe havens are not now rated as highly as we had thought. So what can we do?
Nowadays we have to build portfolios with real diversity and it is not easy. We have to have assets that work in shifts rather than all at once. This leads to its own problems because as I had to keep reminding some clients last year when they said “most of my funds are flying, but this one/two is not, shall we dump it/them?”, the very reason we bought them was because they wouldn’t perform when all the others do. They are intended to perform when the others stop performing and to act as portfolio insurance.
What sort of assets could these be? Well, for one aspect I use a hedge fund which invests in volatility via options. The idea is if things remain stable we may lose a couple of percent a year but we should cover that on the funds which are performing. However, when we get a dislocation and volatility is high, when we lose or stop making money on other funds the volatility play kicks in. As an example it finished 2009 about 2% down but in 2008 was 73% up. As the managers said to me last week, “We tend to be the ones standing around with a smirk when others are looking glum”.
Gold is another avenue worth having some exposure to and I own some bullion myself. There is a link to the company I use on my website under “links”. There are various ways to have gold exposure though and I also use Ruffer’s Baker Steel Gold Fund for some exposure to gold in client portfolios. The fund is a geared play on gold because it invests in the shares of gold producers and of course they own the mines. When gold rises the price soars but it tends to fall back a bit more too when the gold price falls so we have to be a bit more active then. However if you think gold is going to go up in price then this is a good way to have quite a decent exposure with a modest amount of money.
Other clients use a stockbroker and access gold via ETF’s but I prefer to own the metal myself rather than have exposure to a company which owns it on my behalf so that there is no counterparty risk. I keep mine in a vault in Switzerland too as I don’t trust the UK or US governments and the company I use gives us three storage options. Technically one could go and collect our gold as it is allocated as opposed to unallocated gold but if you do then it is not so easy to trade in the future because the buyer cannot be sure he is not buying a gold painted piece of lead. Better to store it in a specialist facility such as Brinks or Viamat which is better than a bank safety deposit box or bank vault because it will still be accessible if the bank goes bust (I’ve been bitten once that way already!) It is, however, very easy to trade in and can be bought or sold with a couple of mouse clicks at very keen spreads.
We also have some funds available such as MAN AHL which tracks trends in indices and is sometimes known as a CTA or commodity trading adviser. In these strategies there is no fund manager and the process is fully automated. There are a number of similar vehicles to AHL and having observed them myself long term can confirm they work. Though technically highly volatile it has been proven in academic study that some exposure to them, say 10-15% should actually reduce risk in an overall portfolio because they don’t care if the trends are up or down and they have very low correlation with traditional markets due to the trends they track being in anything from currencies to interest rate futures, pork bellies, orange juice or whatever.
I am also a fan of Eclectica fund manager Hugh Hendry whom you may have seen on TV. Last year he made a Channel Four documentary called “Don’t bank on the banks”, is often a guest on CNBC and last week was on Newsnight on the BBC. There is a media centre on the Eclectica website www.eclectica-am.com and you can see for yourself if you think Hugh speaks good sense. I have invested with him myself since 2003 and though I wouldn’t have him as my only holding, once again he makes very good sense to own a bit of as portfolio insurance. In 2008 when most were losing money, he made about 32% and I for one was very pleased to have some of that at the time as I had just been a victim of the KSF IOM bank collapse. Hugh runs a global macro hedge fund but he hates to lose money and knowing him as I have come to do, I trust him with some of my hard earned. He didn’t trust the rebound in 2009 and ended the year -8% but that was okay as we made money on our other funds. Now that the others are suffering some turbulence Eclectica has kicked in as was hoped with +3.7% for January and when I phoned them last week I was told it was somewhere north of another 2% month to date for February. This was basically a bet that interest rates would not rise any time soon, on credit default swaps where Hugh saw the Greek crisis coming and took the other side of the trade, and an investment in US and German govt debt.
As a more “one stop shop” solution there are also some excellent managers of managers who run total return funds and who are very good at “cautious managed”. They don’t set out to track indices or to shoot the lights out but they turn in a decent return when there is one to be made and manage not to scare the investors when things get a bit more difficult. These managers will select the best of breed assets to build a portfolio which suits their view of the world and will constantly adjust them as necessary. The beauty of this is that your money is never stuck in a narrow range of assets and in the wrong place because something changed. These are an “invest and forget it” solution ideal for conservative investors and also for Sterling based regular savers who want to save towards a pension pot. They are not specifically pension plans as you can use them for anything but they will help you accumulate money in a diverse fashion and will allow you to do it without signing up to an expensive or restrictive life assurer’s “pension” plan.
14/10/09 - Geoff comments:
As an investment broker it is true that most of what I do involves dealing with larger sums of money, usually in five, six or seven figure sums, however it is of course necessary for savers to build those lump sums and in many cases I see these people being sold rubbish products to achieve this. I feel this hurts the whole industry as well as their savings prospects so since Expat Focus was kind enough to ask me to help their readers wherever I could I’ll try to assist and educate wherever possible, and with this in mind I hope this month’s offering is useful to you.
A pet hate I am always banging on about is the folly of using life assurance plans in which to invest because I cannot see the point of using them - they are expensive, inflexible, and in most but the rarest of cases wholly unnecessary. The single premium bonds which allow you to hold almost any fund of your choosing in them can be useful for estate planning or sheltering assets when the sums are really large, but for Joe Average they are not a good deal at all. Note also I say “of your choosing” because I wouldn’t buy any of the products which only offer a menu of their own fund choices. These are just a good way to give your money to a life assurer and pay for the dubious privilege of having them invest it in a fund of the same name from the original manager and charging you dearly for doing so. Useless in my own humble opinion and pointless too.
If using such a bond it has to be the ones where you can choose the assets but even these are more limited than they would have us believe. I’ll explain. I have a particular client with 7 figures in one and only last week I asked the life company to buy a particular fund for us to hold in it, a fund which invests to take advantage of volatility and would not be correlated with other more conventional investments. All in the interests of diversification. I was really annoyed to be told that they wouldn’t accept the order because the fund in question is launched in a series and they would have to update the particular fund price on their system manually each month. The fund in question provides excellent and regular monthly statements, which I know because I already use it for some direct investors, but to be declined because basically it was “too much hassle” annoys me intensely. This was not the first time this had happened and I said so, to which I was told ”but we have 20,000 funds on our system and you could use any of those” and my response was “and they are all duplicating each other”. That fell on deaf ears though. So I’d ask what is the point of having a product that is held up as an admin service for you to hold your assets in, only to be told you can’t because its too much hassle when you choose something very good (made 73% in 2008 and is low risk to boot) to put in it?
Having said this about the portfolio bonds, I would reiterate my oft said advice to steer very clear of the regular savings plans that the nice salesman who comes to see you will almost certainly offer you. This is because they tend to be the default position for almost all “advisers” offshore and on, because they pay such huge commissions upfront and in one go. I have explained this at some length on the excellent Motley Fool UK website where I have contributed now for 10 years. You may read this if interested here - http://boards.fool.co.uk/Message.asp?mid=11117102 - and I’d suggest it is worthwhile as it might save you a lot of money and angst if considering such a vehicle.
If you do really want to save regularly it is my own default position that it must be as flexible as possible and if your circumstances change then you can change your plans without any question or penalty. If you lose your job or return to pensionable employment, who needs to be told their plan is “in arrears” and subject to some sort of penalty because it is not now suitable? Even those plans that tell you that you can stop contributing after the “initial period” will keep on charging you as if you were still paying in. What we all need in these circumstances is a system where each month’s contribution is treated as a single contribution and all obligation to have to do anything more than send it ceases once it is sent. The following month’s if sent is simply added to the pile and the next contribution is also treated as free of further obligation. Should you need to stop or withdraw then you may. No question and no penalty - just as it should be.
When contacted by regular savers I’d always recommend setting up a direct debit into a decent straightforward funds provider. There are a good few around that are excellent and I always preferred to work with managers who focus as hard on not losing money as they do on growing it. One thing 30 years in this business has taught me is that you don’t need to take chances and try to capture all upside if you can only avoid taking big losses. It’s taking those big losses which really do the damage so hence my preference is to avoid as many of these as possible. As fund managers Ruffer say “we find our investors are very happy to make 25% but they are very unhappy to lose 25%”. It’s true and also when you lose 25% you have to put back on 33% to break even again. If you lose 50% you have to put back on 100%. Difficult to do. If we buy trackers which track the market you do take all of the upside but you also take all of the downside and the main western indices even now are way below where they were 10 years ago.
With this in mind I have long offered access to the multiple award winning Miton Special Situations Fund, which is technically a middle of the road fund in the sense it is grouped into the Global Balanced Managed sector, a peer group over which it has been top over all periods since launch more than 10 years ago, with the exception of the year to date. The fund can in actual fact be aggressive or it can be defensive too, depending on how its manager Martin Gray views the outlook. The fund has lagged a bit in 2009 in that it is “only” up 9% over the 12 months to the end of August 2009, but the important part is that he remains defensive and is not “playing catch-up” as he made 7% during 2008, a year in which many funds lost 30-70%. As I said above, the main indices such as the FTSE are about 20% below their all time peaks of about 10 years ago, whereas Miton Special Sits is up 248.9% in Sterling terms since its launch in December 1997. Martin Gray is a “manager of managers” and as such provides a service where an investor never has to worry about whether his or her money is in the right place because Martin makes those decisions for us. He takes a view of the whole economy and considers which vehicles he thinks will do best out of his view, and then he invests the fund in those assets. When his view changes so does the portfolio. Obvious, maybe, but important to stress that none of the funds here are too wedded to any one particular narrow idea or asset class (except the Ruffer Baker Steel Gold Fund below).
As I've mentioned, fund managers Ruffer say “we find our investors are very happy to make 25% but they are very unhappy to lose 25%”. I find that true too. I get very annoyed when I lose money and I prefer to invest with managers that do too. Ruffer is a good case in point and so I also use them for regular savings plans as well as for some lump sum investors. Ruffer Total Return Fund Accumulation shares are up 278% since the fund’s launch in Sept 2000. The fund is grouped into the Cautious Managed sector and tops that over 1, 3 and 5 years.
More volatile but of interest at present could be Ruffer Baker Steel Gold Fund. Of interest now because although I think we are in a deflationary environment just now, I think the only way out of the present mess is for governments to try and inflate all the debt away and in which case gold will absolutely soar. It is near its all time high as I write, at $1066 an oz. This is largely due to uncertainty and because others fear inflation too. However if deflation gets a grip it might fall again a bit because gold is a hedge against inflation and uncertainty but it is not really a hedge against deflation. However, and particularly if deflation starts to take a grip, they will print more and more money in order to cause inflation and as I say I’d expect gold then to soar.
Ruffer Baker Steel Gold Fund (named after its managers) invests in gold shares which are a geared play on gold. Volatile yes but if I am right it will be very rewarding too over the next decade and may be worth putting a small part of your overall pot into as “insurance” against inflation. As of Sept 09 the fund is up 193% since launch in Oct 2003.
Another fund we are able to save regularly into and from another house which hates losing money is Odey UK Absolute Return Fund. Crispin Odey is a hedge fund manager of note and listed in Motley Fool’s “20 Great Investors” list. I invest personally in his offshore hedge funds, as do many of my clients (Odey OEI 50% ytd as I write) and we are very happy with its performance. It is rare for Odey to have a losing year and if they do historically it’s not usually been by much, but they have since May this year launched a daily trading UCITS 3 compliant version which loosely translated into English means they have brought all their hedge fund ideas and skills to a wider audience. This fund will be more aggressive than the above but I think its an excellent choice of savings vehicle for someone who can take a forward view over a few years
On the lower risk end of things we can also offer IFDS Apollo Cautious or Balanced funds. These are also not fashion followers but aim solely to grow money modestly but with a high degree of security. Cautious aims to beat cash deposits by about 3% pa on average and Balanced by about 5% pa on average over an investment cycle.
These funds are available to regular savers from £100 per month or from £1000 singles, and as a discount broker I discount the entry fees for clients to only £3 per 100. The costs alone are a compelling reason to go this route rather than a life product but add in the flexibility too and you’ll see why I used that word “folly” earlier in this piece.
22/08/09 - Andika asks:
"I am a Brit living abroad in a non-European country and thus not affected by the European Directive. I have about two hundred and thirty thousand pounds in a UK offshore Bank Account from which I only require - at least for a time - to take the INTEREST annually. The present interest rate has dropped to 2.75% Is there somewhere I could do better? I notice there are various banks and financial institutions offering a higher yield but these seem to be open only to UK residents."
Thank you for your question.
This could be quite a big question really because we could simply look at the interest rates on cash at www.interest-rates.org.uk and see that offshore about the best rates you can get on £230k for 365 days currently is 3.75% with Griffon Bank or 3.5% with Abbey. Since Abbey is owned by Banco Santander, which is the second largest bank in the world, it would be easy to just say that’s better than what you have, question answered and leave it at that. Onshore the best rates are from the Post Office or Chelsea Building Society at 3.85%. However I think having asked me maybe you wanted a more expansive answer and I’d be pleased to offer some thoughts as this would also be more interesting for other readers.
As a victim of an Isle of Man bank failure myself, and a year later still trying to get what I can back, when despite the so called compensation scheme (which is nothing of the sort but merely an advance of your own money) there is all sorts of bureaucracy to overcome, I would strongly suggest to you that putting money in the bank is not as safe as it once was and that to put more than the £50k general personal compensation limit in one place is not as sensible as it once was. Of the onshore banks the safest bet would be Northern Rock if you could get them to take you, because they are at least owned by and underwritten by the UK taxpayer. I believe the Post Office accounts are actually with Anglo Irish and outside the UK regulated compensation system. Look hard now at the compensation limits applicable where you put your money, and if those schemes are actually funded. Parental guarantees by the onshore entity also proved to be worthless in the case of my failed bank so I’d point that fact out too.
Interest rates are dreadful for savers just now as we all know and many who previously lived off their interest are now eating into their capital with no chance to replace this from further earned income so the problem gets worse as capital erodes. The UK interest rate is now 0.5% which is the official “risk free rate of return” but as we know now, there is virtually no such thing as a “risk free” rate of return. The nearest to that in Sterling is actual Gilts, being the UK government’s own debt but rates on those on short term are worse than you are getting in the bank. Personally I don’t keep too much cash and most of what was tied up in the bank failure was my company money I hadn’t yet had a chance to do anything with at the time the bank failed, but thank God I had most invested and that my funds did pretty well for me. There is a lot of sense in that old saying about eggs and baskets and personally my view is to keep sufficient cash around for immediate needs or to feel comfortable with and then invest the rest.
I realise you may be shy of equity markets in the present climate but there are other options available which shouldn’t expose you to very great risk and which having a bit in may boost your overall returns. My own assets are spread over a number of funds including global macro hedge funds, managed futures, global credit, bullion and my largest percentage is still in government bonds via Thames River Capital’s standard and Poors AA rated Global Bond Fund which holds only the AAA rated sovereign debt of UK, France, Germany and the US, with a further 0.1% in the Netherlands. You’ll note that despite being in the Eurozone the debt of countries like Spain, Portugal, Ireland, Italy and Greece is avoided.
The managers take a currency position in the fund as well and currently think that the Euro is overvalued and will fall against both the Pound and the US Dollar in particular over the course of probably the next nine months or so. I know the fund managers well and personally feel very comfortable they are not going to drop the eggs in any major way. They have a great deal of their own money in the fund too and they don’t want to lose either.
There is a further fund I’d mention and about to be launched in October by Thames River Capital’s highly rated global credit team which is called Super High Grade Bond Fund. Most, by which I mean around 90% of this fund will be invested in A rated corporate bonds and quasi-sovereigns which are public companies which have been privatised and tend to be infrastructural in nature, such as the public telephone companies or national oil and gas companies etc, and which tend to be very secure. This is a low risk strategy but one step up the ladder from the Global Bond Fund mentioned above which invests only in AAA rated sovereign debt. At present the managers of the global credit team see a lot of opportunity because companies need credit and as you will be aware the banks are not rushing to lend out money, preferring instead to strengthen their own internal balance sheets which is why we have a credit crunch. As a result companies are less able to secure or roll over their own credit needs and this presents opportunities for alternative lenders. The companies are having to pay more for credit and the specialist lenders are able to pick and choose carefully who they lend to and under what terms. The stated aim of the new fund is to achieve 7-8% per annum return with approximately 4-5% of that return coming from the income yield on the portfolio and the rest from capital gain. Volatility should be kept low.
There are of course other options and I have no idea of your circumstances so I don’t know what level of volatility you can afford to take on so it is difficult to be specific in such a forum as this, but I would further make the point that risk and volatility are NOT the same thing although they are generally lumped together as one. My view at present is that we are in a deflationary environment but that there will be a massive further reflation by the central banks in order to get out of the deflation spiral and inflation is the enemy of savers particularly those who hold cash. Few tend to actually do well out of inflation as it rewards the profligate and punishes the saver but there are different degrees of losing and those holding hard assets are likely to do best if and when that happens.
I hope that was of some help and interest.
22/08/09 - D. Jackson in the UK asks:
"Absolute returns v relative returns. What is the difference and why should I care?"
A very good question because what most people don’t realise is that the majority of traditional funds don’t actually even attempt to simply make money come what may, but in fact seek only to beat their chosen benchmark index by 1% or so a year. The managers hug the index for fear of being unpopular with their institutional investor clients (pension funds etc) if they underperform the index. However this works both ways, down as well as up, so whilst in a good year they will show themselves in a favourable light if the index makes 10% and they make 11-12% returns, they will also slap themselves on the back and consider they did a good job if they "only" lost 13 or 14% if their benchmark index lost 15%.
This is the safe bet for them and most such funds will impose no limit on their own size, and will take as much money under management as they can regardless of consideration to optimum size. If then it goes up and the beats the index by 1% they are happy and so are their clients and if it goes down, as long as they don’t lose quite as much then they feel its not their fault. These are what is known as a relative return because it is "relative to the index", but in my view we cant eat relative returns and so personally I prefer to invest with managers who seek to make money whatever the conditions or to at least be as concerned about preserving capital as they are with growing it. 30 years experience has taught me that if you can avoid losing large amounts of capital you don’t have to make up losses and you don’t need to chase all upside to do well over a reasonable period of a few years.
Most traditional funds are known as "long only" strategies in that they are only able to be "long the market" meaning that they buy what they consider may rise in value and hope that it does. Under recent UCITS laws there are a new breed of funds known as 130/30 funds which allow fund managers to short stocks too, usually by way of a index derivative in most cases, where the manager is permitted to sell an asset he doesn’t actually own on the basis that he expects it to fall in value and that by the time he needs to buy it again to replace the stock loaned, he will pay less for it than he sold it for, and keeping the difference as profit for the fund. He is allowed under European UCITS rules to short up to 30% of the fund's value.
It is always a waste of time to reinvent the wheel and write what others have already covered well, but this is interesting for investors so a very good explanation of this is to be found here: www.thelawyer.com/short-stories/130962.article
25/06/09 Expat Financial Services - An Insider's View
This is the first of a series of occasional articles I have agreed to write for Expat Focus and I hope I can bring you some interesting and useful information as time progresses. Hopefully we can discuss issues that are important and interesting to you so please write in with suggested topics. I cannot guarantee to answer them all but I’ll pick those I can best answer or those which are likely to be of most interest to a wider audience. I am not a tax expert nor any longer an expert on the full gamut of UK pensions as I have been away too long and things have changed, but I do know more than a little about an awful lot of subjects and if I can help or offer an opinion I am pleased to do so.
I had better introduce myself. My name is Geoff Birch and I have been involved in offering retail financial services advice to the public now for 30 years. Just over twelve of those in the UK and nearly 18 to expatriates around the world. For the last 10 years I have run my own business which is an online funds discount brokerage and my forte is investment. “So what?” you might say and indeed it would be a good question as no doubt you are pestered by a stream of “financial advisers” telephoning you at work with a promise to sort out all your savings and pension needs. The difference is that my services and that of those you might normally encounter in your expat lives are fundamentally different. Firstly I don’t contact people looking for business, fortunately I don’t have to, but my approach to this business is not typical. Please allow me to explain.
Some of you may have read my posts over the last ten years on The Motley Fool expat boards where I have on many occasions tried to prevent people making some very costly and poorly conceived decisions to invest in long term regular savings products from insurers that are dressed up as pension schemes. Let me tell you clearly here and now that these schemes are a very poor value way to save your money. They are very restrictive and very expensive and the only ones guaranteed to make a profit on them are the people promoting them. Let’s be clear here that these schemes obligate you to pay a sum of money in for a fixed period of years. If you stop paying in or ask for YOUR money back there are usually very substantial penalties involved. In some cases almost a total loss of your money in “penalties”. How can that be fair?
Not all of the plans have these penalties but in my experience Joe Expat isn’t usually shown those options. He is instead given the fixed term plan with the big penalties and high charges and you are then between a rock and a hard place. If you continue to save into the plan it is a very expensive way to save and if you stop there are penalties. You are also told most often that after a qualifying period of 18-24 months you may reduce the amount you contribute but what they don’t tell you is that it keeps charging you like you were still making the sum originally agreed. If you simply stop they write telling you that you are “in arrears”, but hey isn’t this supposed to be you saving your money? Where did we cross the line that allowed these people to treat your money as their money and entitle them to large percentages of it? Doesn’t this strike you as somewhat ridiculous? It does me and so I don’t use these.
I’d also tell you that I have just today received in my inbox some more “special offers” from one issuer of this type of plan. One offers “up to 162.5% allocation on the full 18 months initial period”. Sounds good doesn’t it that say you saved £1000 pm that you would be credited £1625 per month into your long term savings plan? However let’s just look under the bonnet of that a moment. The initial period is 18 months and the charges on the initial period are 1.5% per quarter on those initial contributions throughout the term. What this translates to is that 18 months is 6 quarters and we have 1.5% x 6 = 9%. So they will take back 9% per annum throughout the term of your plan on everything you contributed over the 18 month initial period. So if you paid in £1000 pm for 18 months without the “Special offer” you would pay 9% pa of £18k = £1620 pa. However with the “special offer” your valuation may look good at the end of 18 months (but you can't have that out due to the surrender penalties), but you would have paid in £18000, been credited with an extra 62.5% being £11250 so we now have a total of £18000 + £11250 = £29250 and you’ll be paying 9% of that throughout the term, this being = £2632.50. Let’s call that £1000 pa difference between having the offer and not but based on your same £1000 pm contribution. Over a 25 year term even if that sum remained flat, and it has to make 9% pa just to stand still, that’s £1000 x 25 = £25k. Correct me if I am wrong but doesn’t that make it more expensive to have the special offer than not? By the way you also have monthly policy fees, mirror fund charges and an annual management charge to contend with from the product and then you have the underlying fund’s annual management charges on top of that. In this low growth world we have now, if you can make a profit from that I’d be very surprised if it’s very much of one. Marketing or smoke and mirrors? It may be legal but do you think it is honest? What is the point of all these regulators when one can legally sell rubbish to unsuspecting people trying to provide for their own long term financial security? Could it be anything to do with the taxes the insurers pay, the political contributions they make and the number of jobs they provide? No one I know who promotes these plans actually invests in one themselves and I have several clients whose job it is or until quite recently was to promote these to IFA’s.
My view is that a saver doesn’t need to have an obligation to save. We are all adults and if you can’t take responsibility for your own future financial security you shouldn’t be allowed out on your own. So assuming you are prepared to take that self responsibility on then doesn’t it make much more sense to invest in funds that only charge you for so long as you are satisfied with them and if you wish to come out of them or never add another penny but leave the money there then that’s just fine and no problem with no penalties? A kind of pay as you go system where you are always in control of your own money, and if you change your mind you are free to do so. Doesn’t that make much more sense? I’ll let you into a little secret too, this is also a much cheaper way to save because no one is receiving huge upfront commission payments which have to be clawed back from your savings over the coming years, or in one go if you opt out. Also you have the option to invest in the whole investment universe and not just the menu of funds offered by such schemes. I was offered payment this week by an expat to take on and try to improve a couple of long held plans he had but I didn’t like any of the funds I would have had to use so I politely declined to take on the job. I would have been judged on those results and I didn’t feel I had the tools within the constraints of the products which would enable me to get the result he would have liked. So if you can see commonsense in what I say don’t sign on the dotted line with any of these offshore pensions vehicles as they will not provide a pension, they are only a savings vehicle and there are better and cheaper ways to approach the problem. You can have much more freedom of choice and because it costs less you get a better end result. More savings!
Changing the subject now I would add that settling into a new home is always an adventure but it is also a time of discovery and occasional frustration. Having moved several times between countries myself over the last couple of decades I take it much in my stride now but I have certainly learned a lot from my experiences.
One problem that keeps coming up in these days of ever tighter anti money laundering laws is that when you move and advise your bank or other financial institution that you have moved is that they will ask you for new proofs of address, usually two – these normally being a bank statement and utility bill for each named investor. However what I find now is that many men take the responsibility for the household bills etc and the bills show only one name. I have done that myself and now because the rules keep changing it has come back and bitten me as well as many clients in the same position so here is your opportunity to learn from our experiences. Because there is little or nothing in your wife’s name when you then need to prove where your better half lives this causes no end of hassles, so my advice to anyone moving now is to put all utility bills, house contents insurance and bank accounts in joint names. Also never close a bank account these days. It is so much hassle to open a new one and you never quite know when you may need one again so I’d say even if you keep a minimum balance to keep it open it’s probably worth keeping. Last year I was personally unfortunately a victim of the collapse of Kaupthing Singer and Friedlander Bank in the Isle of Man. Singers was actually the best bank I have ever dealt with and I miss then dearly so it was sad that Kaupthing came along at all and spoiled everything. However at the time of the collapse it was very difficult indeed for me to move or redirect money because it was so difficult to open a new account in the company name and I am presently substantially out of pocket because of it. Fortunately my investments covered my losses but never again will I put myself in the position of trusting a bank too much or a compensation scheme that is full of holes, and I would tell everyone who’ll listen to bank in more than one bank and one jurisdiction.
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