A Quick Update

This is not a text heavy diatribe, just a few charts to give you a sense of how the Clearwater Portfolios have been faring during this period of unprecedented uncertainty. I have shown a range of Portfolios over 6 Months, 1 Year, 5 years and 20 Years.

6 Months to 10th December 2018

1 Year to 10th December 2018

5 Years to 10th December 2018

20 Years to 10th December 2018

The final chart shows our 2 most popular Portfolios, EBIP 40 and EBIP 60 plotted against the FTSE 100 Index over the past 12 months; I have included this to provide a sense of comparative volatility. I think this chart underlines the benefits of global diversification, in terms of reducing volatility.

1 Year to 10th December 2018 – FTSE 100 vs EBIP 40 & EBIP 60

What I hope you will take from this e-mail is a sense that, although we are sailing on choppy seas at present, when set against the longer-term backdrop this type of volatility is quite normal. It’s always something different that causes the volatility but this is quite healthy with efficient markets and we have seen it all before.

It is entirely possible that markets will fall further before they stabilise but this might present buying opportunities for investors holding cash. I don’t believe in market timing of course but if markets are cheaper than they were previously, now must be a better time to buy.

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

UK stocks could surge when Brexit is settled

I spotted this very short piece in the FT yesterday and was drawn to its upbeat message, which is in stark contrast to most of my recent reading material.

“The bounce seen in global equity markets since the end of last week as a result of an improving political environment could be replicated in the UK if the Brexit process comes to a stable conclusion.

This is according to Russ Mould, UK investment director at AJ Bell.

His comments came as Asian and emerging market equities opened strongly this morning (December 3) following progress in the trade dispute between the US and China, with our sister title the Financial Times reporting that US president Donald Trump is to offer a "truce" in the dispute.

Mr Mould said the swiftness of the response by investors to the change in the political rhetoric indicated that if a similar change in the political weather were to happen in the UK, then the UK equity market would also increase sharply.

He said the UK market has underperformed all other developed equity markets in 2018, an outcome that has left it on a valuation multiple of just over 11 times earnings, which is considerably less than the long-term average for the market of 18.

The yield on the UK market of 4.8 per cent is also greater than that offered by other markets, and Mr Mould said this makes those markets "cheap."   

Aninda Mitra, senior analyst at BNY Mellon, said the market is “elated” by the developments in the trade dispute but he added that the reprieve could prove temporary.

Markets have also been boosted by comments from Jerome Powell, chairman of the US Federal Reserve, who stated last week that US interest rates may be approaching the peak level for now, and so not need to rise by as much as the market had previously expected.

Ed Smith, head of asset allocation research at Rathbones, said the move by Mr Powell has boosted markets, but that a change in relations between the US and China would provide an even bigger boost.

Jonathan Davis, Chartered financial planner of Jonathan Davis Wealth Management in Hertford, said there have always been issues in markets but investors should remember that this has not stopped equities rising consistently over the past century.”

david.thorpe@ft.com

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Brexit – What Happens Next?

I thought you might find this helpful article from Karen Ward at J P Morgan interesting; it very much echoes my own thinking.  

“There has been significant progress in the Brexit negotiations in the last 48 hours. A withdrawal deal has been agreed between the UK and European Union (EU). The prime minister (PM), Theresa May, has presented this to her cabinet. Whilst the PM appeared to have the backing of her cabinet last night, Dominic Raab, the Secretary of State for Exiting the EU has just resigned which will create concerns about a leadership challenge and the deal when it reaches Parliament.

We continue to believe that no UK politician can secure a better deal simply because there is no other solution to the Irish Border. Despite posturing, we expect the PM to conclude the negotiation and the deal to pass through Parliament by the end of the year.

What is "the deal"?

The deal constitutes three parts: the divorce bill, a period of transition to December 2020 (or possibly beyond) in which nothing changes so firms have time to adapt, and the broadest heads of terms on the future long-term economic relationship between the UK and the EU.

The sticking point throughout has been how to manage the UK’s ambition of having no border on the island of Ireland nor a border in the Irish Sea, but at the same time separating itself from the European single market and customs union to enable it to set its own rules and trade agreements.

The simple fact is that there is no solution to the Irish border question, except that Great Britain and Northern Ireland stay in the customs agreement for goods. That is the stated ambition for the final relationship. Given the priority in the UK parliament of maintaining the union between Great Britain and Northern Ireland and to respect the Irish peace process, we have always expected the deal to land in this way.

The ambition – and compromise to certain members of the Conservative Party – will be that the UK pursues a technological solution that, at some point in the future, allows for an invisible Irish border and opens up some options for the UK in establishing other trade relationships. There is also enough in the wording to suggest that UK financial services will be able to continue trading in the EU in much the same way today under an equivalence framework. Importantly, these rights cannot be removed in an abrupt or arbitrary manner.

There is a ‘backstop solution’ which would come in to force at the end of the transition period in December 2020 if a broad trade deal encompassing the customs union cannot be achieved. This does see some special arrangements for Northern Ireland. The prime minister will need to reassure the Democratic Unionist Party (DUP) that this is such an extremely remote possibility in order to have their backing.

What’s next?

We believe the PM will win any leadership contest.

There is then likely to be another round of meetings in Brussels to sign off on 25 November and then the bill needs to be put to the UK parliament. This is the bit investors have been most nervous about.

The specifics are that the government will lay a statement in the Houses of Parliament saying that a deal has been reached and then will submit a motion to the House of Commons and schedule a time for a debate and vote. This could be as little as five days after laying the statement.

It may not be voted through first time. It may take a number of amendments to appease backbenchers (such as specifics on the ambition for a technological Irish border solution and how that could alter the deal in the future). So there may still be back and forth as footnotes and finer details are added to appease all sides. This process may still generate considerable market volatility. But it is important to remember that even if members of the Conservative Party do not ‘like’ the deal, voting against the prime minister raises the risk of political deadlock that can only be resolved through either another Brexit referendum (with the options this deal or stay in EU), or a general election. That would be a significant risk for backbenchers to take. We think the bill will pass and most likely in the first week of December.

All 27 remaining EU member states also need to pass legislation (hence the need to get the deal wrapped up well ahead of 29 March) but we see limited reason for concern about that ratification process.

The UK formally leaves the EU on 29 March but during the period of transition (running up to December 2020 or beyond) nothing changes. The transition period was designed to allow businesses time to adapt to the new relationship. Negotiators will continue to work during the period of transition on the full aspects of the final partnership with the ambition of having all the details filled in six months ahead of the transition period ending.

What impact will it have on markets?

Whilst political headlines are likely to generate a lot of volatility in the coming days on passage of the bill, sterling is likely to rally. This may adversely affect the FTSE 100 given the high proportion of FTSE earnings that are repatriated. Going in to next year we expect business investment to experience a relief rally and higher sterling to depress inflation and lift real wages so consumer spending would also accelerate. Given the Bank of England (BoE) believes that the economy is already at capacity, we think it will raise interest rates at a faster pace than the market currently expects (we see at least two 25 basis point increases next year). When the BoE confirms this more hawkish playbook, we expect sterling to rally further.”

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

After October’s turmoil, the great autumn sale begins!

As you are doubtless aware, October has been a difficult month for global stock markets but sometimes corrections such as these can present buying opportunities. The following article by Holly Black is taken from the Money Section of yesterdays’ Sunday Times.

“A worldwide stock market sell-off means you may get more for your money if you buy now

October may have been a monstrous month for the stock market, but that means now may be a great time to put more money into your investments.

The FTSE 100 index suffered its worst month since August 2015 with a 4.7% fall. Markets around the world fared even worse. America’s S&P 500 dropped 6.9% — its worst month since September 2011. In Japan, the Nikkei sank 9.6% and China’s Hang Seng index fell 10%.

The sell-off was driven by a number of concerns, including interest-rate rises in America, the winding down of quantitative easing, Brexit and the trade war between America and China.

However, anxious investors should think again if tempted to stash their cash under the mattress. Experts say this could be the perfect time to stock up on shares.

Ryan Hughes, head of funds at the investment supermarket AJ Bell, said: “Some investors will have checked their investment account balances in October and panicked, but it’s crucial to remember you are investing for the long term and have time to ride out these ups and downs.

“This has been a timely reminder, after a record bull run, that stock markets can go down as well as up.”

Investing money when stock markets are falling may seem counterintuitive. However, provided you believe in their long-term prospects, it is like shoppers getting a bargain in the sales, because the shares you are buying now were more expensive a month ago.

If you quit the market now, you are crystallising losses.

David Coombs, manager of the Rathbone Strategic Growth fund, said: “ ‘Buy low’ is a pretty basic investment philosophy. We look at companies we already invest in and, if we still think they’re just as good as they were a month ago, we just buy more at a cheaper price.” He has been putting more money into American giants such as Amazon, Visa and Mastercard, as well as the British sales and marketing company DCC. Coombs also likes video-game makers, including Electronic Arts, home of the Fifa series and The Sims.

His fund is down 4.4% over the past month but up 22.8% over three years.

Nathan Sweeney, senior investment manager at the funds firm Architas, has taken the opportunity to put more money in US tech giants. The share price of Amazon and Netflix plunged by about 20% last month. Alphabet, the owner of Google, fell 10% and Facebook 8%.

Sweeney said: “You just have to work out the reason for the sell-off and whether there’s anything to actually be concerned about. People will continue to use search engines and social media regardless of the economy, so there’s no reason not to invest in these firms.”

Sweeney likes the Artemis US Extended Alpha fund, which is down 5.3% over the past month but has returned 67.9% over three years. Its big holdings include Microsoft and Apple.

Alex Wright, manager of the Fidelity Special Situations fund, is a contrarian investor, buying the shares that others hate. His current top holdings include Lloyds Banking Group, the oil giant Royal Dutch Shell and the struggling education group Pearson. The fund fell 6.7% over the past month but is up 29% over three years.

Wright said: “I am feeling increasingly positive about the outlook for the UK market, and the reason for that is chiefly how negative everybody else seems to be.” Investors still need to be selective, though. Coombs said the key, during a sell-off, is to add to investments you already hold rather than gambling on risky, new names just because their share price has plunged.

October is historically a rollercoaster ride for investors. Some of the biggest stock-market crashes have occurred during the month, including Black Monday in 1987, when the FTSE 100 plunged more than 20%. In October 2008, when the financial crisis took hold, the index of Britain’s biggest public companies fell by 12% over the month.

Staying invested during such tumultuous periods means you benefit when share prices recover.

Setting up a regular savings plan is a good way to ensure you are in a position to reap the rewards.

Hughes at AJ Bell said: “Even professionals struggle to time the stock market, so investors who think they can predict exactly when it will rise and fall will find it’s nigh on impossible and they will probably miss out on returns by trying.”

Investing every month has the added benefit of pound-cost averaging. You end up getting better value for money from investments over the long term because your money buys more shares when they are cheap and fewer when they are expensive.

Coombs said: “I can’t predict what is going to happen in the stock market but I can ignore all the noise from people saying we’re all doomed.”

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Sunday Times Article – 14th October 2018

The following is taken from an article by Ian Cowie, writing in the Money section of the Sunday Times this weekend, I thought you might find its central message reassuring:

“Short-term stock market shocks are very harmful for day traders or speculators but need not necessarily matter much to medium and long-term investors. At times like these, it may pay to remember that shares reflecting the changing composition of the London Stock Exchange delivered higher returns than cash over three-quarters of all periods of five consecutive years since 1899.

In plain English, that means if investors could hang on for five years, they had a 75% chance of beating bank deposits, according to comprehensive analysis in this year’s Barclays Equity Gilt Study. Despite much worse setbacks than the current crisis — such as the Great Depression and two world wars — shareholders who remained invested for a decade had a 90% probability of beating deposits.”

Here is the link to the full article:

https://www.thetimes.co.uk/article/ian-cowie-october-can-hurt-but-ride-out-its-storms-and-things-should-look-up-3ncsmptxs?shareToken=4bcec7d870b5667b3ab1b2d96f1e831d

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

It’s been a wild week for stocks!

In case you hadn’t noticed, stock markets across the world have been experiencing some wild gyrations (Financial Adviser speak for plunging) over the past week or so. The US markets have suddenly woken up to the fact that a trade war with China is probably not a good idea and that the Federal Reserve is intent on increasing interest rates to cool the US economy. President Trump has said he thinks the Fed has ‘gone crazy’, pots and kettles anyone? He did also say that the large falls in markets over the last couple of days have been expected, as markets cannot keep going up unchecked and I wouldn’t disagree with him there.

The UK markets, which are already being constrained by uncertainty over Brexit, are not immune from wider global concerns and inevitably they have headed south in line with the US and Asia. The FTSE 100 has now retreated to where it was in late March at around 7000.  

In view of this continuing turbulence, I thought you might find the following article interesting; it is by Heidi Chung, a reporter at Yahoo Finance:

 “Initially, lower-than-expected Consumer Price Index (CPI) data sent interest rates lower and stocks higher in early trading on Thursday before stocks pared those gains and took another dip lower. 

This comes after a brutal session on Wednesday, when the S&P 500 (^GSPC) tumbled more than 3% — its worst one-day drop since February — and the Dow (^DJI) fell more than 800 points. The S&P 500 is now on pace to close in the red for the sixth consecutive day. 

But one market strategist says not to fear the market volatility in October.

“October should be known for volatility, as no month has seen more 1% changes (up or down) for the S&P 500 Index going back to 1950,” Ryan Detrick, senior market strategist at LPL Financial said in a note on Thursday.

Volatility is normal in October, according to LPL Research (LPL Research, FactSet).

The S&P 500 actually had one of its least volatile third quarters in history, and had gone 74 consecutive days without a 1% move, so some type of volatility was likely, according to Detrick.

These kinds of pullbacks are normal, he says. “Even though stocks tend to average a 7%–8% gain each year, they also tend to have three to four pullbacks each year (5%–10% drops) and at least one 10%–20% correction. We got both earlier this year, but history tells us we may get more,” Detrick said.

He attributes the recent volatility to the upcoming midterm elections and the spike in interest rates but remains optimistic.

“Given the fundamentals, we expect the markets to weather this recent volatility, and we see potential for a year-end rally,” Detrick explained.”

As a reminder, we have recently added some presentations to the website, which I hope you will find helpful in gaining a better understanding of our approach to investing. Please just click on the titles below and you will be taken to the relevant presentation. Hard copies of these are available on request.

Pursuing a Better Investment Experience

UK Bias Portfolios - Performance Report

UK Bias Portfolios - Global Financial Crisis (2007-2009)

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

A gentle reminder of why one should stay focussed on the long-term during periods of uncertainty!

Many of you will have noticed that financial markets having been through some turbulence of late, the FTSE 100 having fallen from 7,776 on 8th August to just 7,282 as I type, on 10th September, a fall of 6.35%. These falls are largely as a result of the strengthening pound, which in turn has been caused by positive news around Brexit, not that you would necessarily have guessed this from the media!

As a result of this volatility, I thought now might be a good time to issue a reminder of how important it is not to be distracted by short-term events.

The following charts show how a selection of the Clearwater Portfolios (constructed by Evidence Based Investments) have performed over the past few months but also over some longer time periods.

3 Months to 7th September 2018

 12 Months to 7th September 2018

5 Years to 7th September 2018

20 Years to 7th September 2018

The thing that stands out is, although there have been dips from time to time and some of them very sharp, there has always been a subsequent recovery. With every portfolio, the graph always ends up going from bottom left to top right, provided one is sufficiently patient. There is always something in the news that is causing the markets to move in one direction or another but over the longer-term these short-term issues fade into the background and appear just as ‘noise’ on the long-term charts.

We have just added some presentations to the website which I hope you will find helpful in gaining a better understanding of our approach to investing. Please just click on the titles below and you will be taken to the relevant presentation. Hard copies of these are available on request.

Pursuing a Better Investment Experience

UK Bias Portfolios - Performance Report

UK Bias Portfolios - Global Financial Crisis (2007-2009)

As always, if you have any questions on this subject or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

The irresponsible absurdity of new longevity theories

The following is taken from a blog written recently by a friend of mine, Abraham Okusanya, I thought you might find it interesting.

“Ancient scholars would have us believe Methuselah lived to a staggering 969 years, making him the oldest person in history. Little wonder the name became synonymous with longevity.

British gerontologist Aubrey de Grey coined the term “Methuselarity” – a blend of Methuselah and singularity – to describe a future where all medical conditions that cause human death would be eliminated.

Grey is vice president of a US-based biotech firm that applies technology to curing age-related diseases. He believes medical technology will eventually lead to human death only occurring by accident or homicide.

If any of this sounds like science fiction to you, you are not alone. While I do fancy being immortal, the reality of this in my lifetime is rather far-fetched. After all, median life expectancy at birth has increased by about 25 years within the last 100 years.

So, imagine my reaction when it was suggested at a recent event I attended that people in their 60s today should expect to live to 150, and that we should somehow account for this kind of extreme longevity in retirement planning.

This absurd argument is also used as a reason why buying an annuity should be favoured over a sustainable withdrawal framework for drawdown. What the salesperson often fails to mention though, is that, in the event people in their 60s today do live to even 120, annuity providers themselves will be in serious trouble.

An annuity is not a magic money tree. If today’s average annuitants live well beyond their current life expectancy, providers would see their liability grow enormously. So will defined benefit schemes.

Remember, we are not talking about a few years increase here, we are talking 30 to 50 years improvement within a very short period. And presumably, if people start to live that long, they will delay annuity purchases, which makes it harder for life cmpanies to subsidise old rates with new ones.

What is more, since over 90 per cent of annuity purchases are not indexed-linked, inflation will do untold damage to income for people over a 40 or 50 year retirement period. An income of £10,000 per annum in 1977 had the buying power of £1,955 by the end of 2017 – a reduction of 80 per cent using CPI.

The point I am making is that, while there are several good reasons for buying an annuity, sci-fi scaremongering around extreme longevity is not one. Neither annuities nor drawdown would be a failsafe edge against such a risk.

The sustainable withdrawal framework already accounts for the tail-end of longevity risk. This involves planning to an age where the client has only between 10 to 20 per cent probability of surviving, based on the Office for National Statistics mortality projection.

Under the sustainable withdrawal framework, a 65-year-old should be planning to age 95. An inflation-adjusted withdrawal of £3,000 from a £100,000 portfolio of 60 per cent global equity and 40 per cent bonds lasted from age 65 to 100 in 80 per cent of historical scenarios between 1900 and 2017. And, yes, that is after accounting for 1.5 per cent in fees.

In any case, if the medical technology was to become so profound as to improve longevity significantly, is it such a leap to think this will result in longer working lives and retirees, now cured of their ailments, being able to return to the labour market?

What is more, the technology that drives this sort of improvement will presumably deliver handsome returns for those invested in the capital markets, of which a drawdown investor is one.

Good retirement planners already account for reasonable longevity improvements. But obsessing over the likelihood of extreme longevity is unhelpful and does not aid financial planning in any way”.

As always, if you have any questions on this or indeed on any other finance related matter, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Advance Notice – New Secure E-mail System

Following the introduction of the new General Data Protection Regulations (GDPR) we have decided to send all future e-mails which contain personal and/or potentially sensitive data in an encrypted format. This is to ensure greater security of your personal information but the impact on you will be minimal.

E-mails you receive from us, that we consider contain personal and/or sensitive data, will now initially look like this in your Inbox:

In order to read our message and to access any attachments, you will need to:

1. Click on Read my message in the e-mail you will have received.
2. You will then have the option to view in Web Browser or download the Mailock App.
3. You will need to complete a very simple sign-in procedure – You will only need to do this once!
4. You will then be asked a security question which has been set by us to identify that you are the intended recipient – You will also only need to do this periodically.
5. You will then be able to read and reply as normal.
6. You will also have the option to compose and send secure e-mails to us, if you wish.

We do appreciate this is an extra step in what is normally a very straightforward process, however, we believe the security of your personal information is of paramount importance.

If you experience any difficulties in opening our e-mails using this new process, please do contact us immediately.

For your information, I will be away on a family holiday now until 27th July, however, Adam and Denise will be here should you have any urgent queries and I will be reading my e-mails (encrypted or otherwise) whilst away!

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner

Where has £17.5bn of pension freedoms money gone?

This is a follow up to an e-mail on Pension Freedoms I sent to you all around about 10 days ago. In that communication I was highlighting the results of a study which showed that retirees were not recklessly spending their pension funds, just because they now had unfettered access them. The following tells us where the money that has been withdrawn has been spent (or in some cases not spent), I found this interesting:

About £3bn that has been flexibly withdrawn from UK pensions is currently sitting in low yield bank accounts, with investors facing the “double jeopardy” of tax on withdrawals and low returns, according to research by AJ Bell.

Research conducted by FWD on behalf of AJ Bell has shed light on what has happened to the £17.5bn that has been flexibly withdrawn since pension freedoms began in April 2015.

The research, released on 26 June, surveyed 370 people who have accessed their pension flexibility since April 2015.

Bizarre and surprising

One of the research’s key findings was that despite pensions being designed to fund life in later years, only a quarter (£4.7bn) of withdrawals had been used to fund day-to-day living.

AJ Bell said one the most “surprising” results was that £3bn is “languishing in low yield bank accounts”.

A further, £1.6bn has “rather bizarrely” been withdrawn from pensions to invest in other products such as ISAs.

A whopping £2.3bn has been spent on luxury items such as holidays, cars and home improvements.

‘Sensible’ spending

On the more positive side, £2.9bn had been used to pay off debts and reduce interest payments.

Despite stories of boozing and gambling, only £245m had been spent on entertainment such as eating out, season tickets or gambling, AJ Bell said.

Politics over practicality

Tom Selby, a senior analyst at AJ Bell, said regulators and policymakers have been playing catch-up since chancellor George Osborne first introduced pension freedoms.

“The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. Because the reforms were almost entirely untested, it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible market remedies.”

He said while the FCA’s interim report concluded most people are not squandering their hard-earned pensions, there is evidence some people are making poor retirement decisions.

“For example, 17% or £3bn of withdrawn pension money has been shoved straight into a bank account.

This might not be a problem in the short-term – indeed it makes sense to have some ready-cash available in most cases – but it almost certainly isn’t an advisable long-term investment strategy, particularly with interest rates at record lows and inflation returning to the UK economy,” he said.

One solution being proposed, Selby says, is for people to be given help through a ‘mid-life MOT’ in order to assess their retirement income strategy, “although this will require buy-in from both politicians and the regulators”.

This is me again! One major issue that is not mentioned above, is the fact that in most cases pension assets remain outside of one’s estate for Inheritance Tax (IHT) purposes, whereas, once moved into an ISA or a Bank A/C these funds become potentially liable to IHT at 40% on death!!! By all means withdraw money from your pension if it is your intention to spend it and you have no other source of funds, otherwise it is usually better to leave as much money within one’s pension wrapper as possible, for as long as possible. In your pension, the funds grow free of income tax, free of capital gains tax and they remain outside of your estate for IHT!

There are some potential income tax considerations for beneficiaries, if death occurs after age 75.

As always, if you are unclear on this or if you have any concerns about your financial arrangements and whether you are truly making the most of your money, please do not hesitate to call me.

With kind regards,

Yours sincerely

Graham Ponting CFP Chartered MCSI

Managing Partner