Planning and management

 
FCA

BLRFC are Authorised and regulated by the Financial Conduct Authority

 

"You need to be comfortable with tying up money for a period of time"

We will be happy to explain the subject of risk in more detail.

Savings and Investments

Why are we encouraged to save money?

From childhood we are told to put away money to save for the future - perhaps for something special? Or perhaps to be sure that when we really need something we have enough to buy it, without taking on debt? Whether you place your money in a bank, or in a multinational investment house, the aim is broadly the same; to provide for future needs, and to meet unexpected causes of expenditure.

When planning your finances, it is important to distinguish the difference between savings and investment. Savings are generally funds that you set aside, but can access relatively quickly. These savings are often for a specific need or purchase, like a holiday or a new car. The most common way of ‘saving’ is into a bank account (‘deposit’ account) where the money can be accessed in an emergency, and for every £1 you put in, you will get £1 back (short of a bank collapse!), and possibly some interest.

Investments are designed to be held for a longer term, usually at least 5 years. You need to be comfortable with tying up this money for a period of time, and should not consider investments unless you have some other savings in place. Most investments are not guaranteed to return your money in full, although they do offer the prospect of higher returns than deposit accounts. Returns, risk and volatility are the factors that will determine a suitable place for your savings.

Savings and Investment products range from a simple current account, which pays a small amount of interest, and allows regular payments and withdrawals without detriment to your savings. At the opposite end of the scale would be company shares, where you invest money in a company, with the prospect that the company will prosper and the shares will increase in value over time. Whilst the benefits are potentially high, the risks are also much greater.

The value of investments can fall as well as rise and you may not get back your original investment.

 
Top

Investing in Funds

All investments carry some risk, and the Investing and Risk page includes some information on how we might manage this risk. We can learn more about the particular risks and rewards of different investment funds by looking at their sector and assets in more detail.

All types of shares have different characteristics and these characteristics are complex and innumerate. Hence we have professional fund managers to assess and measure these features and make investment decisions based on their knowledge and market experience.

At Berkeley La Roche we operate a multi manager approach to Investment management. This is based on the principle that no one manager is good at managing money in all asset classes. Because we are independent, we are not restricted to choosing those funds available to a particular investment company (as is the case with “tied” advisers).

Investment funds will have a particular aim (e.g. growth or income), and often have a specialist sector which allows them to be compared to other funds of a similar make-up and ensures that the actual assets of the fund (the investments made by the fund manager on behalf of individual investors) remain in proportion with the selected aims and specification of the fund.

 
Top

Sectors and Asset Allocation

The fund sector identifies broadly the areas in which the fund will invest. This can be based on geographical terms, or in a particular industry. For example, there are funds that only invest in UK companies, others that invest in European or Japanese companies, just as there are funds that invest purely in 'technology' companies (IT, telecoms etc). In addition to this there are sectors that are a mixture of assets. A typical 'Balanced Managed' fund will have some money invested in shares, some in property and some in fixed interest investments or bonds.

We believe the key to building a successful investment portfolio is sensible asset allocation combined with good fund selection. Asset allocation is concerned with how you spread your investment between different asset types and regions. Fund selection is concerned with the decision of which fund managers and funds to use for each of the different asset sectors.

Although there are no guarantees as to performance or returns from any sector, our knowledge and experience can indicate how we might expect investments to perform over the longer-term.

REMEMBER - the value of investments can fall as well as rise. You may not get back the full value of your investment. Past performance is no indication of future growth or income.

 
Top

Investment Choices

There are many different types of investment, and here we look at just a few key areas:

Bank accounts – current accounts may offer a very low rate of interest (if any) but they are the most flexible in terms of accessing your money. Banks can also offer savings accounts, with higher interest rates, and also notice accounts with very competitive interest rates, but you may have to give a certain amount of notice before making a withdrawal (60 or 90 days perhaps), or you must agree to invest the money for a set period of time.

National Savings – these products are backed by the government and operate like bank accounts to a certain extent. There are some tax-free products available and they are generally considered low risk since they are backed by the government.

Bonds & Gilts - Bond/Gilt Funds are generally considered to be lower risk than direct equity (share) investment although the value can still fall as well as rise. Bond markets can be split into two categories. Corporate bonds are investments based on business loans offered by private companies and are ‘rated’ by based on the ability of the issuer to maintain interest payments and repay the loan. A corporate bond fund will invest in a wide range of these loans. ‘Investment grade’ stock within the fund is rated AAA to BBB, whilst stock rated a BB or below is termed ‘sub-investment grade’ and is sometimes referred to as ‘Junk‘ or ‘High Yield’. Some funds also invest in Government Bonds (known as Gilts in the UK).

The income yield that is available from fixed income investments varies according to the quality of stock. Lower quality (sub-investment grade) stock usually offers a higher yield to attract investors (as they may be otherwise put off by the increased risk/volatility) whilst gilts generally offer lower returns, but they are underwritten by the government and so the risk of default is much reduced. As things stand, in order to achieve a reasonable yield without taking too great a risk an actively managed fund that invests in both gilts and corporate bonds (i.e. investment grade and high yield) represents the most suitable option.

Property - The historic performance of commercial property has very little correlation with the performance of corporate bond or equity based investments. For investors looking to diversify their portfolio property funds offer attractive historical returns with relatively strong defensive characteristics (i.e. low volatility). Income from commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy property. Consequently leases are often arranged over a long period and generally include an ‘upwards only clause’ which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets. Commercial property tends therefore to offer a more stable return than, for example, dividends paid on equities.

Equities (shares) – Over the very long term equities have offered the best returns for investors. Although this is not a guide to the future, it is felt that the increased risk of investing in company shares is rewarded by investment returns in excess of what is available from traditional bank or deposit accounts.

Investment ‘Funds’ (collectives) – Specialist investment managers will often manage a fund (a pool of investments) that invests in one or more of the above categories, the aim being to diversify the risk across a spread of shares, or bonds, or both. There are hundreds of investment funds available, each with their own specific aims and objectives. Investment funds can also specialize in one particular sector, such as only investing in companies that are listed on the FTSE100 index, or only investing in construction and mining companies. There are also funds that invest geographically, perhaps only buying shares in Japanese or American companies. Each sector has its own unique characteristics, and we will be happy to explain more about this.

We may be able to arrange your investment within a tax-efficient product such as an Investment Bond, ISA (Individual Savings Account), unit trusts or even a pension.

Investment Trusts - these are publicly listed companies that invest in financial assets or the shares of other companies on behalf of their investors. When you invest you are buying shares in an investment trust, the value of which fluctuates based on. When you purchase shares in an investment trust your money is pooled with other investors and used to purchase a diverse range of shares and assets. In simple terms:

1. You buy shares in an investment trust
2. The money from your shares is put into one big pot, with the money from other shareholders - this is called the fund
3. The fund is then used to buy shares and assets by the fund manager
4. The value of these shares and assets fluctuate and are bought and sold over time
5.You sell your shares for the market price

Investment trusts tend to be more stable than buying shares in a single company because your money is invested across a variety of companies. This does not eliminate the risk to your money but means that the performance of a single share has less impact because there are many others to counteract it.

IMPORTANT – the value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to the future. Contact us before making any decisions.

There is a vast array of products available, and choosing the right one can be difficult, so why not let Berkeley La Roche help you to decide which is most suitable for you?

 
Top

Investing and Risk

This page includes some of the good reasons for making investments into specialist 'funds' run by 'fund managers' on behalf of the investors.

Whether you are looking at investing in a pension, a bond or perhaps using an ISA you might consider using investment funds. Put simply a fund is a collection of many different peoples money in one place. Buying large numbers of shares or achieving a portfolio of investments may well be beyond most average investors so they effectively club together to increase their purchasing power.

Typically these pools of money are run and managed by a specialist. He is paid to make the day to day decisions of where the pooled money is invested. Rather than individuals (who have no interest in markets and shares, or who don’t have the knowledge or time to study market information) choosing which shares to buy, to hold and to sell and at what time, the fund manager uses his expertise to make suitable investments in order for the value of the pooled fund to hopefully grow over time.

Another advantage of pooled investment is being able to diversify.


Diversification and Risk

All investments carry some element of risk. To enable funds to be able to manage the risks the manager will usually practice some level of 'diversification.' This works on the premise that holding 2 different shares is better than 2 of the same shares. This is because all shares react differently to investment conditions and changes.

For example, imagine that there are only 2 companies, one company making t-shirts and one making woolly jumpers. If the weather forecast is for sunshine, then investors would be wise to buy shares in the t-shirt company as they expect demand for t-shirts to increase and sales to rise, increasing the company share price. However, we know that it is not always sunny and therefore a good manager would buy shares in both companies, so when one share price is static or even falling the other is able to support and perhaps offset the falls, meaning that the investor doesn’t suffer a loss.

All investments carry some risk. The value of investments can fall as well as rise and you may not get back the full value of your original investment.

 
Top

Property funds and REITS funds

Property - the historic performance of property has very little correlation with the performance of corporate bond or equity based investments. For investors looking to diversify their portfolio property funds offer attractive historical returns with relatively strong 'defensive' qualities (i.e. low volatility).

Income into commercial property funds is often derived from contractually binding contracts of rent paid by business tenants to occupy properties held within the fund. Commercial leases are often arranged over a long period and often include an ‘upwards only clause’ which ensures that rents are not negotiated downwards during the lease period, even in times of falling markets. Commercial property tends therefore to offer a more stable return than, for example, dividends paid on equities.

Added to the rental incomes, property has the added attraction of appreciating in value over time, and although property values do fall, the 'bricks and mortar' assets of a fund remain.

However, returns from a property fund are not guaranteed and the value of any investment can fall as well as rise.

Furthermore, because of the nature of property as an asset it may not always be possible to immediately switch or cash-in your investment, because the property in the fund may not always be readily saleable. If this is the case then a fund manager may defer your request to cash in for a period of time. You should bear in mind that the valuation of property is a matter of the valuer’s opinion, rather than a matter of fact.


REITS funds

Since January 2007, investors have been able to choose a new type of tax-efficient property fund. Real-Estate Investment Trusts (Reits) invest in commercial and residential property and have certain tax advantages over some existing schemes. Reits have already proved popular in America, Europe and Japan.

Reits pool investors’ assets to buy a portfolio of properties, which are let to companies or individuals. Reit shares are listed on the stock market and bought and sold like any other shares. What makes them different is that whilst property companies pay corporation tax on their rent and any profits when their properties are sold, Reits are free from corporation tax as long as they distribute 90% of their profits to investors.

There are other benefits for investors. Dividends from shares in property firms are treated as though they have had basic-rate tax deducted. This cannot be reclaimed, even if you hold shares in an Isa or pension. Dividends on Reits is treated differently. Basic-rate income tax of 20% will be deducted at source and higher-rate taxpayers will have to pay a further 20%, but investors will be able to reclaim the tax if they invest via a pension or an Isa.

However, the performance of Reits is likely to be closer to shares than to direct property, so investors who are not prepared to accept that level of volatility should consider a direct property unit trust instead — despite the tax advantages of Reits.

It is important to understand the risks of any investment. We will be happy to assist you in choosing a suitable investment.

 

Why not contact us and review your investment planning?