Geoff Birch

Geoff Birch has 28 years of experience in financial services and established the online brokerage Offshore-Rebates.com in 1999.

Click here to read an in-depth interview with Geoff or click here to submit a question for Geoff to answer publicly next month (please note that Geoff is only able to answer a selection of questions received but all questions are read and considered.)

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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.

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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."

Geoff's reply:

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.

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22/08/09 - D. Jackson in the UK asks:

"Absolute returns v relative returns. What is the difference and why should I care?"

Geoff's reply:

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

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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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Click here to read an in-depth interview with Geoff or click here to submit a question for Geoff to answer publicly next month (please note that Geoff is only able to answer a selection of questions received but all questions are read and considered.)

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