01 Investment cover - New Statesman · ing two real issues. Investors either need to take on more risk to continue to achieve the higher yields to which they have become ac-customed,

INVESTMENT SPECIALRisks and opportunities in a shifting economy

Pensions Peer-to-peer Interest rates Social investment

01 Investment cover.indd 15 09/09/2014 12:03:55

Since the recovery from the global bank-ing crisis in 2008, and apart from the odd stumble along the path, investors have generally been very well rewarded for taking the risks associated with both equi-ty and bond investment.

However, since the shocks of 2008 and 2011 investors have, quite rightly, been much more wary of returns, particularly from equity growth stocks, and many in-vestors have moved from a pure growth strategy to one more aligned to a mixture of capital growth and income.

This approach to investment is often termed a “real return” strategy. Typically this combines growth shares or funds, shares which have a dividend yield and bonds which provide a yield also. Com-bined, these have provided very decent returns for investors over the last few years and many investors have become used to stable and growing income levels from portfolios positioned in this way.

Over the last three years, the iShare UK Dividend Exchange Traded Fund has delivered over 58 per cent to investors versus around 48 per cent from the FTSE 100 Index of leading UK shares. This ap-proach appears to satisfy investors on sev-eral fronts: stable and growing income, a portfolio which nominally carries less risk than a pure equity-based portfolio, and which offers decent diversification over various asset classes.

Therefore, many investors have be-come reliant on yield, but it is getting harder and harder to find. As share pric-es have risen, dividend yields have fallen. Not just for shares but also for many high-

yield bonds also. As the economy recov-ers, high-yield, corporate and govern-ment bond yields are falling. This is largely because investors are becoming more convinced that interest rate rises are not yet on the cards, and therefore the long dated bonds where capital values have ris-en over ten per cent this year are in very dangerous territory. Other asset classes which produce income, such as property funds, have also become highly crowd-ed as investors seek alternative sources of income.

All in all, a bit of a perfect storm for those approaching or actually in retirement. Particularly for investors seeking to avoid purchasing an annuity under the new in-coming rules, this is now potentially pos-ing two real issues.

Investors either need to take on more risk to continue to achieve the higher yields to which they have become ac-customed, or buy shares which do not deliver the yields required for safety but should do more to protect their portfolio nominal capital value.

As a wealth manager, this is the type of quandary we assist clients with every day. Our advice will always hinge around capital preservation over the longer term, particularly for those moving into retire-ment and who have less time or capability to rebuild capital values in the event of losses. We counsel that it is always better to avoid too much risk and to accept less income today than have to tolerate huge losses tomorrow.

About UsInvestment Quorum is a multi-award win-ning boutique wealth management com-pany and has been assessed as the UK’s Leading Adviser Wealth Adviser Practice for the last five years at the UK Platform Awards. We specialise in the develop-ment and implementation of financial planning, investment management and tax efficient strategies for private clients, chari-ties and trustees. We believe in consistent excellence and have received some of the most sought after awards and recognition available within wealth management, many on a regular and consecutive basis. Our expertise and commitment to clients is well regarded by the financial press and we are regular commentators with the financial, consumer and television press. We firmly believe that we offer an unrivalled wealth management service.Investment involves risk and the value of an investment may fluctuate and you may not receive back the full amount invested.Investment Quorum Limited is authorised and regulated by the Financial Conduct Authority.

The current difficulties and dangers faced by investors seeking income

We invite you to get in touch in order that we can discuss

how we may help you in greater detail.

Investment Quorum38 Lombard Street

LondonEC3V 9BS

0207 337 1390www.investmentquorum.com

Inv Qvorvm.indd 1 09/09/2014 12:08:47

12-18 SEPTEMBER 2014 | NEW STATESMAN | 3

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New StatesmanFarringdon Place20 Farringdon RoadLondon EC1M 3HETel 020 7936 6400Fax 020 7936 6501info@ newstatesman.co.ukSubscription enquiries, reprints and syndication rights: Stephen Brasher sbrasher@ newstatesman.co.uk0800 731 8496

Supplement EditorsBecky SlackCharlotte SimmondsDesign and ProductionLeon Parks

Commercial DirectorPeter Coombs+44 (0)20 3096 2268Head of PartnershipsEleanor Slinger+44 (0)20 3096 2275 Special Projects ManagerPenny Gonshaw+44 (0) 20 3096 2269

CONTENTS

Taking stockThe UK’s most recent downturn has been different from those that came before it.

The Great Recession, as it is now commonly known, has been the longest and deepest since comparable records began. According to the Office for National Statistics, it took between ten and 13 quarters for all the downturns of the 1970s, 1980s and 1990s to recover lost economic output. By contrast, six years after the banking crisis began, the UK’s GDP is only just rebounding to its pre-downturn peak. Though it is anticipated that steady growth will return, the financial outlook today is coloured by the long shadow of recession.

However, as the economist Bill Robinson notes (page four), perceptions of a “global crisis” risk disguising the complexities of recovery. Many economies have bounced back, particularly in the developing world. Our financial planet may be interconnected, but its life is hardly uniform.

What does this mean for today’s investors? The financially savvy would do well to note how future trends such as rising interest rates (page 11) and changes to pensions (page eight) will affect their portfolios. With the traditional vehicles of capitalism (such as banks) under scrutiny, others may take an interest in the alternative borrowing,

4 Bill RobinsonGlobal shockwaves, and what came nextOn the worldwide recession and the UK’s recovery

8 Steve WebbInvesting for the futureWorking people need pensions that pay off

11 Greg OpieThe impact of the “new normal”What will happen when interest rates rise?

14 Christopher PolkWhat the financial crash can teach usRules for investing wisely in the stock market

17 Richard GillSpread betting: what the devil is it?Behind the hype, it’s quite straightforward

18 Rodney SchwartzA beginner’s guide to social investmentConsciously adapting capitalism for the community

22 Peter RentonPeer-to-peer lending: what’s all the fuss?The internet is changing the way we lend and borrow

24 Jargon busterInvestment speak for dummiesDo you know your commodities from currencies?

The global economic outlook Learning lessons from the crash How to speak like an investor

lending and speculating strategies explored by our contributors, such as peer-to-peer lending, spread betting and social investment. And at a time when millions of Britons lack secure retirement strategies, as the pensions minister, Steve Webb, writes, it is never too early to start thinking ahead.

For investors, only the lessons of the past six years offer firm guidance on the inevitable risks and opportunities of exploring the markets. lArticles express the views of the writers and are not intended to be advice. The writers may or may not have an interest in all or any of the investments mentioned

The paper in this magazine originates from timber that is sourced from sustainable forests, responsibly managed to strict environmental, social and economic standards. The manufacturing mills have both FSC and PEFC certification and also ISO9001 and ISO14001 accreditation.

First published as a supplement to the New Statesman of 12-18 September 2014. © New Statesman Ltd. All rights reserved. Registered as a newspaper in the UK and USA.

This supplement, and other policy reports, can be downloaded from the NS website at newstatesman.com/supplements

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4 | NEW STATESMAN | 12-18 SEPTEMBER 2014

ECONOMIC OUTLOOK

The UK has been enjoying a steady recovery for a year and a half and output is now back, at long last, to

its pre-crisis peak. Output is expected to grow by 3.5 per cent this year and then return to its postwar trend of around 2-2.5 per cent.

Is that a good outcome? Certainly, it makes a welcome change from the recent past. Output fell by nearly 7 per cent in 2008, and then averaged less than 1 per cent growth for the next four years – long enough to make some economic histo-rians speculate that the UK could return to the 1 per cent trend rate of growth that prevailed between 1870 and the Second World War. Against that background, a return to the postwar trend of growth is good news.

However, we might reasonably have

expected something much better. The 7 per cent of output that was lost in 2008 left the UK’s GDP some 10 per cent below its previous trend. After most recessions, the economy typically enjoys a spell of above-trend growth, as this spare capacity is slowly reabsorbed. Simple arithmetic

suggests that with spare capacity of 10 per cent, growth at 2 per cent above trend for five years – ie, output growth of 4 to 4.5 per cent – might have been possible.

However, nobody thinks that remotely likely. Around half the output lost in 2008

represented economic activity mainly in the banking and real-estate sectors (eg, securitising mortgages, creating deriva-tives, selling overpriced properties) that will never return. The exceptionally low levels of investment over the next few years further eroded Britain’s capacity to produce. So official estimates of the amount of spare capacity is little more than 2 per cent, and the official forecasts assume that this slack is used up by 2018.

The truth is that the banking crisis, and the Great Recession that followed it, have wrought huge damage to the UK econo-my. The cumulative loss of output, com-pared with trend, will by the end of 2014 be of the order of a whole year’s output. That is unlikely to be recovered, while the damage to confidence, and the resulting loss of investment, mean that long-term

How can we sum up the outlook for today? Financial shocks, coupled with a eurozone crisis, spell a slow recovery for the UK, but developing economies are bouncing back

By Bill Robinson

Global shockwaves, and what came next

The Great Recession was the first time in history

world output fell and fell

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growth prospects, normally better than average at this point in a recovery, are actually worse than before.

Ongoing consequences of the banking crisisThe immediate reason why output plunged in 2008 was the banking crisis. An important cause of the slow recovery since then is the measures since put in place to make banks safer. Six years after the crisis struck, banks’ equity capital is still being eroded by non-performing loans. At the same time, the regula-tors are insisting they hold more capital against the loans they make. This double whammy has meant that bank lending has barely grown since recession struck. Small businesses, which are particularly dependent on banks to finance growth,

have been the main sufferers. The situ-ation is improving, but the regulatory shackles remain in place.

The two-speed world economyThe banking crisis was a global crisis, and the Great Recession was a global reces-

sion. It was the first time in (postwar) his-tory that world output actually fell year on year. The global economy emerged relatively quickly from recession and re-sumed rapid growth from 2010 onwards. But these global statistics disguise a huge

difference in performance between the developed and the developing countries.

The developed world, like the UK, suf-fered a steep drop in output and a stutter-ing recovery. Although, according to the IMF, the advanced countries as a group climbed above their pre-crisis peak in 2011, the underlying reality is that among the major economies only the US and Germany have truly recovered. Japan and most of the eurozone countries have yet to get back to their 2007 levels of output.

By contrast the developing world has shrugged off the crisis. Output fell for one year in Brazil and Russia, but swiftly bounced back. In India, China and most of the smaller emerging markets, there was only a slowdown in growth. In con-sequence, total world output is now well above its pre-recession level.

Two-speed recovery: output fell for one year in Brazil but swiftly bounced back

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ECONOMIC OUTLOOK

Developing countries have survived the crisis better than the developed world because they are much less dependent on bank finance. The banking crisis flat-tened investment across the developed world, but had no such effect on the de-veloping nations. In addition, it is entirely normal for developing countries to grow faster than advanced countries. By defini-tion, developing countries are not at the forefront of technology. They lack infra-structure, manufacturing plant and ma-chinery and know-how. As they acquire these things, they grow faster. The Chi-nese growth phenomenon has essentially been based on transferring their labour force from low value-added agriculture to much higher value-added manufactur-ing. There is a long way still to go in this process, and not just in China, as the less developed nations catch up to best west-ern standards and practices.

Globalisation is a much-used and ill-defined term. Because the world is very interconnected, by trade and, more es-pecially, by finance, economic shocks are quickly transmitted around the global economy. So, one of the first victims of the recession was world trade. Imports are driven by economic activity, and when activity fell imports fell. Trade also depends on bank finance, which dried up. The result is that trade between developed countries is still below the

2007 peak and in that sense “globalisa-tion” has gone backwards.

For developed countries, the great chal-lenge is how to connect with the more dynamic and faster-growing countries. It is not easy. The surprising truth about the global economy is that most trade still, despite the massive growth of air trans-port and the arrival of the internet, takes place between close neighbours. Half of

UK exports go to Europe, and the UK ex-ports twice as much to Ireland as to China – even though the Chinese market is 40 times larger than the Irish.

The eurozone is still strugglingThe UK’s close economic ties with Eu-rope mean that the eurozone crisis has been a significant factor holding back our recovery. Back in 2011, the Treasury fore-casted export growth of over 6 per cent in both 2012 and 2013. The outturn has been an average growth rate of around 1 per cent per annum over those two years. Furthermore, since exports account for around a third of UK output, that 10 per cent shortfall over two years was a signifi-

Recovery in the US and Germany brought the Dow

above its 2007 peak

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cant factor delaying our recovery.The threat is ongoing. The eurozone

economies have addressed their prob-lems: their government and external defi-cits have been brought down by large cuts in public spending and increases in taxa-tion. As a result, both inflation rates and bond yields have been converging across the eurozone. But this result has been achieved at a heavy cost in terms of lost output and there are worrying signs that the eurozone is headed towards a nega-tive inflation rate. If prices start to fall in a still heavily indebted economy, the eurozone crisis will enter a worrying new phase.

What does all this mean for the finan-cial markets? Share prices reflect expected future growth of profits. Profits are deci-mated in downswings and tend to grow faster than GDP in an economic upswing. So it is not surprising that equity markets have broadly followed the same trajec-tory as GDP over the crisis. The relatively strong recovery in US and German out-put has carried the Dow Jones and DAX indices above their 2007 peak. The FTSE has been trading sideways for a year at the 2007 level. Other European equity mar-kets remain in the doldrums.

Equity markets: ECB to the rescue?So the recovery is certainly good news for equities – but that news has long been priced in. It remains to be seen how fi-nancial markets will react if prices actu-ally start to fall in the eurozone. In the 2009 crisis, the direct purchase of long-dated bonds by central banks around the world had an immensely positive ef-fect on financial markets. The European Central Bank president, Mario Draghi, has indicated that the ECB stands ready to do something similar if necessary. If he acts decisively and soon, then financial markets should be able to with-stand the bad news. If he does too little, too late, we could see some turbulence this autumn.

In short, the global economic outlook is relatively benign. But financial markets are also driven by politics, and there is at present an unusually long list of politi-cal uncertainties – such as Scottish inde-pendence, the UK’s exit from the EU, conflict in Ukraine, Gaza and Iraq – any one of which could shatter the calm. lBill Robinson is chairman of economics at KPMG

In it together: the eurozone crisis has been a significant factor in holding back the UK’s recovery



Investment in bricks and mortar has long been a national obsession, whether you are looking for a home to live in, or to leverage the significant benefits of capital growth and high rental-yields the UK market has to offer. From buy-to-let landlords with just a few properties, to property funds and institutional investors considering large-scale private rental sector (PRS) schemes, property remains an attractive option for many, especially considering lower returns from other investment options in recent years.

At Connells, we work with a range of inves-tors, helping them get the best return from their property investment. From sourcing opportunities including off-plan, standing stock, new or second-hand property, tenanted portfolios and land, to managing negotiations and providing detailed research and RICS valu-ations, our work ensures investors are getting the best return from their portfolios.

Knowing when and where to invest in prop-erty can be a challenge, but the rewards of getting it right are certainly worth it. Whatever the size of investment, be it a small number of properties or a scheme worth millions, the same rules of best practice property invest-ment apply.

Look for a location where the rental market is producing good yields, and where property prices are increasing. Taking a national, rather than regional or localised view of opportu-nities will further boost the potential of any portfolio, and is an essential component of large-scale investment planning which we

deliver for our clients. From a seller’s per-spective, we work with owners on disposing of residential property portfolios whilst the rental market and capital values are balanced, before values become too high and yields less attractive.

The housing marketThe current housing market is, and has been for some time, characterised by over-demand and under-supply of property. Greater avail-ability of mortgages and schemes like Help to Buy have boosted individual buyer confidence, but the number of homes available has not matched their enthusiasm. This has driven up house prices.

The investment community remains fierce-ly competitive in property hotspots, while government efforts to boost the supply of good quality rental accommodation through initiatives like Build to Rent and the housing debt guarantee scheme have peaked interest in new-build PRS projects. With demand for rent-al accommodation showing no signs of abating, understanding the cyclical, tiered nature of the property market, as well as the delicate balance between the rental market and capital values, is vital to making effective property investment decisions.

Property hotspotsAlthough property in the capital remains popular, rising prices in London have had a detrimental impact on yields which are now just 2 to 3 per cent. This is drawing savvy investors’ attention to other large UK cities. Indeed, we are working with investors in

locations including Birmingham, Leeds, Manchester, Bristol, all of which offer excellent yields of between 6 and 7 per cent.

There are now opportunities for the invest-ment community in funding new-build PRS schemes in these locations. With recent reports that the London property market may be starting to cool, property investors are seeing huge opportunities in catching the wave of the UK’s second tier of major-cities. For example, Connells Group recently brokered the sale of an entire development off-plan in Birmingham for £15.7m, which will complete in March 2015. Additionally, we recently completed a tenanted portfolio of 62 units in Birmingham for £7m, and are currently working on a £70m project in the Midlands for over 600 units and a large tenanted block of apartments in Manchester for £15m. Our client database includes major plc developers, smaller regional house builders, pension funds and high-net-worth individuals.

In three to five years time, it is likely that locations such as Liverpool, Newcastle, Milton Keynes and Swindon will provide purchasers with the best investment opportunities, which is why we work on a national rather than regional basis to provide customers with best practice advice.

With the right advice and knowledge of the housing market and its trends, there is never a bad time to invest in property. Location is key and knowing which areas will provide the best returns to guarantee success.

Donna Smith is Investment Director for national estate agency and property services provider the Connells Group.

Please contact her at [email protected] or 07760 172 176 to discuss property investment opportunities.

Best Practice Property Investment

Connells group fp adv V2.indd 1 09/09/2014 11:19:10


PENSION REFORMS

One baby in every three born in 2013 is expected to live until he or she is 100, and the average time spent in

retirement is now 22 years for a man and 26 for a woman. These improvements in life expectancy offer many oppor-tunities, but they also present new and pressing challenges.

Most people expect the standard of living to which they have become accus-tomed throughout their working life to continue when they retire. But, in real-ity, around 12 million people are simply not saving enough for the retirement they would like.

The world of pensions is full of com-plexity, but there is one very simple and easy-to-understand principle underpin-ning everything: the sooner you start saving for a pension, the more time you leave for your money to grow. It is more important than ever that people begin to make financial plans for their retirement as soon as possible and that we start get-ting that important message across to younger age groups.

With this very much in mind, the gov-ernment is laying a new foundation for saving through its reforms to the state pension. The new state pension, which will come in from April 2016, has been

designed to ensure that people know what income to expect in retirement and have a solid and reliable base, set above the means test, upon which to build fur-ther saving. Everyone’s personal aspira-tions for their own retirement income are different, but knowing the pension income they are likely to receive from the state will help us all to plan for any addi-tional saving we may need to carry out in order to reach our target.

Building on this landmark reform, we are continuing to roll out the very suc-cessful policy of automatic enrolment into workplace pensions. We have al-ready seen great progress, with saving increasingly becoming a societal norm, with more than four million people now having been automatically enrolled.

In 2013, the decade-long downward trend in pension saving reversed when the number saving into a workplace pension scheme increased to 11.7 mil-lion. Meanwhile, the opt-out rate has re-mained much lower than all expectations at around 9 per cent. The lesson from all this is that, if we make it simple and easy for people to save, by and large they will take the time to do so.

Our “We’re all in” campaign won awards for reminding people that saving

for their future is important, and helped people to understand what being in a workplace pension means to them. More than 45 million adults (around 87 per cent of the adult TV-watching population) have had multiple opportunities to see our television adverts, helping to estab-lish a social norm for working-age peo-ple that saving into a workplace pension is part of working life. It has also helped increase understanding of the benefits to individuals, making it clear to people that if you do the right thing and save, then your employer and the government will contribute, too.

The efforts we have made to inform people about the importance of pension saving and encourage them to do it have paid off. However, automatic enrolment is only the first chapter in the story. There are other attitudes we need to change if we’re going to achieve a pension system that reflects the modern age.

As well as living longer, we’re also ageing more slowly. People in their fif-ties, sixties and even seventies are no longer “old” in the way they were in our parents’ or grandparents’ generations. So we are encouraging those for whom it makes sense to consider deferring their retirement so that they can earn more and

Old age might seem a long way off – particularly for the young – but starting early is the one simple rule for a secure retirement. That is why the government is making it easier to get hold of a pension plan that pays off

By Steve Webb

Investing for the future

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continue or start to save into a workplace pension.

Although older individuals will have less time to build up large savings, the ma-jority can still expect to benefit, thanks to the employer contribution and tax relief. And if people choose to continue work-ing beyond state pension age, they will have a right to continuity of membership of their workplace pension scheme until they are 75.

To support those people who want to work longer, it is important that we work to change outdated attitudes towards older workers, and tackle some of the in-built barriers to employment that are dis-proportionately experienced by the over-fifties. Through our Fuller Working Lives agenda, that is exactly what we are doing.

But it is also vital that all those people saving into a pension – whatever their age – are reassured that as much of their sav-ings as possible will actually go towards boosting their retirement income.

To help build people’s trust and con-fidence in pensions, we are taking ac-tion to protect savers who are automati-cally enrolled from excessive and unfair charges. Tough new measures to be in-troduced from next year will ensure that pension schemes deliver value for money

for savers. We will end rip-off charges – imposing a 0.75 per cent cap for the default funds of all qualifying schemes – and ban hidden costs, helping people build up the best retirement income possible from their savings.

New transparency measures will allow employers and employees to see exactly what they are paying for, compare across the market and make informed decisions when choosing pension schemes. We are introducing quality standards to ensure that people running schemes understand and consider the key components of scheme quality and have members’ inter-ests as their priority.

The average person has 11 jobs in their lifetime, and to help them keep track of their pension savings we have also legis-lated to ensure that people can take their savings with them from job to job and build one big pension pot. We are now working with the pensions industry to develop a model that identifies where pension pots are, as well as how we sim-plify the transfer process, ensuring that pots are moved securely and cheaply.

We are legislating to encourage inno-vation in the pensions industry and to develop products that work better, both for employers and employees. Traditional

final salary benefit schemes may be in decline but that doesn’t mean we have to accept poor-quality pensions.

Automatic enrolment means more savers will be joining workplace schemes and, with the market growing, employers and industry are already thinking about future pension provision. Legislation that this government is taking through parlia-ment at the moment to develop so-called “Defined Ambition” pension schemes will enable a greater sharing of risk be-tween employers and staff, and give com-panies more options to offer their staff attractive, high-quality pensions.

We are also committed to protecting pension scheme members through an ef-fective pension protection regime and are working across the government and with industry to combat pension scams and protect people from losing their pension savings to fraud.

Finally, the government believes that people who have worked hard all their lives should have the freedom to decide how to use their savings – and this is where perhaps the most well known of the government’s pension reforms comes in. The current system allows those with the smallest and largest pension pots complete flexibility, but restricts it for those in the middle. That’s an inequality we won’t allow to continue.

We are removing the requirement on individuals to turn their defined contri-bution savings into annuities when they retire so they can decide the best way of using their pension pots to meet their future needs. This is about trusting indi-viduals who have made the responsible decision to save for their future to make choices to provide for their own retire-ment. We expect that, in turn, this will make saving more attractive to those who are not already doing so.

We understand that people will need support to make such a significant deci-sion. That is why we are introducing a guidance guarantee to ensure that every-one approaching retirement receives free and impartial guidance about their avail-able choices.

The government is rebuilding a new framework for pensions saving. Together, we are developing a sustainable pensions system that is fit for the 21st century and beyond, supporting people to plan for and achieve their retirement dreams. lSteve Webb MP is the minister of state for pensions

For a rainy day: 12 million Britons are not saving enough to have the retirement they would like

8-9 Investing for the future.indd 9 09/09/2014 12:20:26

An interview with Simon Calton, director of Rycal Investment Group. With offices in the US and the UK, Rycal Investment Group aims to offer sustainable land and property invest-ment opportunities.

Q: What’s so special about North Dakota? Simon Calton: The Bakken Shale oil field in North Dakota has seen a massive oil boom, and has done for some time now. New technology means we’re able to find oil in different ways, it means that no longer will $10m be spent on wells and drills, only to find you haven’t struck oil. New horizontal drilling techniques mean that they can de-tect how long an area will be in abundance of this fuel. To give you an example of the positive impact this has had, unemployment in the area is at 0.4 per cent, and it’s one of the only US states that has a budget surplus. While large in terms of land mass, North Dakota has a permanent residential popula-tion of only around 700,000 people. It des-perately needs more people to fill the jobs that have risen off the back of the oil boom. And once you get more people into an area, everything booms, so there is a need to in-vest in infrastructure too. That’s why we’re there, really. Q: Oil booms can be here one minute and gone the next, so what’s the expected life span of this boom? SC: Some of the latest reports say the boom is here until 2100. It is believed that up to one million barrels could be produced every day for many years to come.

Q: We’ve been hearing about North Da-kota since 2008. Hasn’t it calmed down by now? SC: No, we are actually here at just the right point. As with any other boom, most of the initial developers arrived and put up tempo-rary accommodations that are still there. But it’s a solution that is not secure and lacks long-term value. For example, there’s depreciation that you’ll have to take into consideration. Temporary solutions might have high yields and high returns, followed by depreciation at an alarming rate. That’s why, once the dust has settled, you have the permanent developments that comes in.

Now, it’s these kind of developments that are most important. We need to make sure the depreciation isn’t there for our clients, and that their investment will hold its value.

We need to make sure that we outperform others in the a r e a

and that we’re not just thinking about returns. Our returns are

still very good, but we also want to make sure that

we give the client a good fixed return that doesn’t waiver over time.As it stands today,

permanent construction is a more sustainable op-

tion for the region, and this is the perfect time for permanent developments.Temporary worker accommodation in

the state is being shut down, which at pres-ent house a lot of people. So they need the permanent infrastructure that will take over. Q: What projects are you involved with at present? SC: We have a number under way. We’re building a small city on Highway 2, which includes a railway branch line, truck stops, water treatment plant, warehousing, retail outlets, residential and multi-family homes. There is a whole hosts of projects allocat-ed for the city. We also have our hotel proj-ects, the Sky Watch Inns, which are aimed at the market for transient workers and their families.

If you look at our Sky Watch project in Ray, North Dakota, you’ll see that it has far more amenities than any other hotel in the area. For example, most hotels in North Dakota do not have restaurants, bars, underground parking, laundry or room services. Essen-tially, their priority is achieving higher yields by getting as many guest rooms as possible into a single building. By contrast, our ho-tel has all of these things. Furthermore, it sits next to a fishing lake and a golf course and even a rodeo. We offer more amenities while keeping our prices low, because we care about keeping our quality high. Q: How do the returns in North Dakota compare to other areas of the world? SC: There is no comparison, it’s as simple as that. For example, let’s take the Sky Watch Hotel chain: it’s a 15 per cent return in year one, a 15 per cent return in year two and a 25 per cent bonus. This bonus is still returned even if we decide to pay off inves-tors early. These returns beat most returns that you’ll find in the market place, and our group still makes good money.

Keeping an investor for life is about be-ing able to offers great returns. To this day, I have rarely found anywhere that offer re-turns like these, and if they do, they aren’t as accessible. For example, the minimum entry for our Sky Watch inns product is only $50,000, which is a very accessible invest-ment. These, and many other reasons, are what make North Dakota such a special place.

To find out more go to www.rycalgroup.com to register interest.

North Dakota: land of the black gold rushNorth Dakota: land of the black gold rush

Rycal fp adv.indd 1 09/09/2014 12:05:02


INTEREST RATES

When the recession hit in 2008, the official bank rate was over 5 per cent. It seems hard to imag-

ine now after five years of rock-bottom rates, but that was perfectly normal at the time (a little low, even, compared to the double-digit rates common in the 1970s and 1980s). In September 2008, the con-sumer price index (CPI) inflation rate peaked at 5.2 per cent, the highest annual growth in prices since we started tracking CPI in 1996.

The traditional response would have been to put the bank rate up in an attempt to slow the economy down and relieve some of the pressure on prices. Howev-er, the next month, the Bank of England decided instead to begin the process of cutting the bank rate, initially just to 4.5 per cent, but over the course of the next five months it continued to fall until on 5 March 2009 it was lowered to the cur-rent “emergency rate” of 0.5 per cent.

The Monetary Policy Committee (MPC) of the Bank of England wasn’t concerned about inflation when it slashed the inter-est rate to the new historic low – it was worried about growth. By lowering the bank rate to 0.5 per cent, combined with the policy of quantitative easing, the com-mittee hoped to stimulate the financial

side of the economy and to encourage pri-vate banks to keep lending. The danger in a recession is that economic activity dries up as people become overly cautious. As consumers and businesses either can’t or won’t spend money, incomes fall and jobs are lost, which in turn leads to a dangerous downward spiral as spending decreases

further. By making it cheaper for house-holds and companies to borrow, the hope was that the 0.5 per cent rate would pro-vide a temporary boost to help kick-start the economy back towards growth.

That was the theory, but what actually happened? Well, with the exception of variable rate mortgages, the interest rates offered on private loans actually went up instead of down (see table on page 12). Private banks were stung by the financial crisis, and were wary of passing on low in-terest rates to consumers in the new post-crash environment. Credit became harder to come by, not easier.

Meanwhile, the interest rates offered on savings accounts fell to almost nothing (and in most cases represented a negative real interest rate, once you take inflation into account). In the five years preceding the drop in the base rate, the average inter-est rate offered on an instant access savings account was almost 2 per cent. In the

Slashing the Bank of England’s interest rates to a rock-bottom 0.5 per cent was meant to boost the economy. But what actually happened? And what effect will the “gradual” climb to an expected 2.5 per cent have on financial markets, businesses, households, borrowers and savers?

By Greg Opie

The impact of the “new normal”

Private banks have been wary of passing on low

rates to consumers

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11&13 Interest Rates.indd 11 09/09/2014 12:23:42

YPC Client purchased an

exclusive opportunity for

£273,125 in March 2014

Another happy YPC Client

having already seen an icrease of

£81,875

In August 2014similar plots are now selling at

£355,000

Why Invest in Property? YPC Group have access to investment opportunities that you won’t find anywhere else...

For an Investment Guide on the opportunity above and access to others like itVisit: www.ypcns.co.uk or

Text: YPC10 + your name and email to 66777 orCall us: 0203 538 3086

Why now is the time to invest in propertyAn interview with property expert and founder of YPC Group, Brett Alegre-WoodWhat’s your personal property investment history?I have been in property since 1994. My personal portfolio covers three countries: the UK,

Spain and Australia. I actually haven’t sold a property for over 10 years now as I am a big believer in “buy and hold”.

What’s the minimum amount someone needs to start out as a property investor?In this market, they should rely on a 30 per cent de-posit on a buy-to-let. In terms of a minimum amount, I always consider what the investment will cost over two years including holding costs. On a £400,000 property, they are looking at around £130,000. This will ease up as the market comes back.

Is there any one fundamental mistake that you see investors making? Two in fact! First, they chase deals and not funda-mentals. Fundamentals are shops, schools, transport links, major employers and major investment in the

area surrounding the property. You can renovate property but you cannot fix an area up that takes mil-lions of pounds of investment. Secondly, they ignore the property cycle. I call it the Property Trend Cycle because you can track the trends and make very accurate decisions about your portfolio. The best way to do this is to watch my property market updates.

What’s the core benefit of working with YPC Group?There are two reasons why clients want to work with us. Firstly, they know the difference between being an investor and a landlord. A landlord manages property and tenants – an investor seeks a return on their money. We’re able to connect our clients with the most-effective mortgage brokers, solicitors, lettings agents and management companies: completely removing any hassle from your investment and letting you enjoy what you’ve worked hard for.

Secondly, YPC Clients are offered exclusive access to property investments that are simply not available to the general public. Working with some of the UK’s best-known developers, we provide phenomenal op-

portunities that deliver fantastic retu rns. All of which are presented with a complete investment guide and due diligence.

Finally, why is now a great time to invest in property?As the years go by this question seems to become more and more rhetorical. If you saw the returns made by YPC Clients (and other investors), I think you would probably feel the same way.

One of my research staff recently put together a report based on data published by the Office of National Statistics, and it outlined the growth of UK property over the last 80 years or so. In the 30s, it was a few hundred quid for an average UK home, in the 60s it was a few thousand, in the 90s we reached close to £100,000 and today we’re nearing £300,000.

For me, these figures are a simple illustration of why investing in property is something you should consider today and not tomorrow. Property investment isn’t complicated;what is complicated is knowing how, when and why.

YPC group fp adv.indd 1 09/09/2014 12:33:12

for consumption, particularly as the sav-ings ratio is just starting to come down. “Cheap credit” hasn’t really existed since the recession for individuals, despite the low bank rate, but it will become even less available in the “new normal”.

This is not necessarily a bad thing – household debt is at record high levels – but there will be a knock-on effect as households decide to pay off their debts or to save more instead of spending. Retail sales are likely to be hit first and hardest, and this will feed through to the rest of the economy, providing a drag on future growth.

In the financial markets, bond prices have an inverse relationship to interest rates, so expect bonds to fall in value as the base rate is ratcheted up. For short-term bonds, this won’t matter so much, as most investors will be able to afford to hold them to maturity, but any portfolios which have invested heavily in bonds are likely to fall in value.

The effect on the stock market is harder to predict, as it depends on so many dif-ferent factors. In the short term, it comes down to psychology. If investors antici-pate that profits will take a hit as a result of lower consumer spending, then prices could begin to fall. If they do, this could snowball. On the other hand, if they be-lieve that the rise in interest rates is being handled well, and that there will be mini-mal effect on profits, then the stock market may remain unaffected – and prices might even rise, as investors seek an alternative to devalued bonds.

One of the most interesting (and im-portant) impacts will be on the housing market. At the Economic Research Coun-cil’s annual property debate in June, all of SO

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For Generation Rent, the rise in interest rates will

be bad news, too

INTEREST RATES

five years since, it has been 0.3 per cent.Despite all this, household financial

debt (excluding debt linked to property) increased by 10 per cent in the two years after 2008 compared to the two years be-fore, according to a report by the Office for National Statistics. At the same time, the household savings ratio (the proportion of disposable income put into savings) shot up from 3.4 per cent to 8.6 per cent in the second quarter of 2009 driven by a rise in gross savings, and has only just begun to come back down in the last year or so.

In the corporate sector, lending to busi-nesses has been falling year-on-year every month since September 2009. Instead of loans, businesses have been largely relying on bonds to raise finance where required.

In theory, record low interest rates and pumping money into the system through quantitative easing should have led to high rates of inflation, and initially at least, it did seem to. The CPI began to rise dangerously in 2010-2011, and equalled the 5.2 per cent peak (from 2008) again in September 2011. However, since then, price levels have come back under control, almost exactly meeting the MPC’s 2 per cent target in June.

With output now finally back to the level it was pre-recession after the longest recovery in the UK’s modern economic history, we should expect to see the bank rate start to rise (although there will no doubt be political pressure on the Bank to postpone the bulk of the changes until after the election next year, pushing the economic pain into the next parliament as far as possible).

The Bank of England’s governor, Mark Carney, has suggested this will happen over the next couple of years, with “grad-ual and limited rate increases” towards a “new normal” rate of 2.5 per cent being reached by 2017. Carney recognises that the economy has been so deeply affected by the crisis and the prolonged persistence of low interest rates that a 5 per cent rate, previously considered the norm, is now unrealistic. Instead, we should expect in-terest rates to stay at the midway point of 2.5 per cent for the foreseeable future.

This rate rise will first be felt in private banking and the financial markets. In-terest rates at private banks are likely to increase, both for savers and for borrow-ers. This combination – making savings accounts more appealing and personal credit harder to afford – is a dangerous one

our experts predicted that the growth in house prices would slow down over the next couple of years, primarily because of anticipated interest rate rises. This was before Mark Carney had explicitly spoken about the scale and time frame of future rate rises, but the verdict was unanimous: the housing market is strong, and growth is likely to continue, but interest rate rises will dampen that growth. The thinking behind this is clear. As interest rates rise, mortgages on new properties will become more expensive. Even with government funding from schemes such as “Help to Buy”, potential buyers will have to go for cheaper housing than they can currently afford (except for the top end of the mar-ket, where wealthy foreign buyers rely less on mortgages).

Homeowners on a variable rate mort-gage have had it relatively easy for the past five years, with rates at an all-time low. Needless to say, this is about to change. This will be particularly painful for new homeowners, especially for those who have used “Help to Buy” to purchase a property that they perhaps will not be able to afford as their mortgage payments creep up over the next three years. Com-bined with poor wage-growth, this has the potential to end in disaster.

For Generation Rent, the rate rises are probably going to be bad news, too. As mortgage bills increase, landlords may have to push up rents to cover their costs. It is not clear how much capacity there is for rent increases, however, particularly in already overpriced markets like London.

The overall effect of even gradual in-creases in the interest rate will be to pro-vide a slowing influence on the economy, and that is why the MPC has delayed any rate rises for so long. With the recent pickup in GDP growth, the time is now right for slow and steady change back towards a semblance of normality, but it won’t be easy. lGreg Opie is the programme director of the Economic Research Council

Average Interest Rate

2004 - 2008 2009 - 20134.13per cent8.51per cent

12.38per cent16.88per cent19.23per cent

6.71per cent7.78per cent9.99per cent15.78per cent16.51per cent

Standard Variable Rate Mortgage£10,000 Personal Loan

£5,000 Personal LoanCredit Card

Overdraft

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11&13 Interest Rates.indd 13 09/09/2014 12:23:42


STOCK MARKETS

From the end of August 2008 through February 2009, an investment in the FTSE All-Share Index lost roughly

a third of its value as markets worldwide crashed, governments bailed out banks, profits plunged, and unemployment spiked. However, since the markets hit bottom in early 2009, that All-Share in-vestment has more than doubled in value. Financial economists will continue to study the 2008-2009 financial crisis and its aftermath for years to come. Neverthe-less, there is much that investors can take away now from that experience. These ideas are not new, but the past five years have emphasised their importance.

1. Identify all the risks in your potential investmentsMost investors appreciate that equity markets are risky. The sharp decline in world stock markets in late 2008/early 2009 confirmed that view. However, the financial crisis and the fallout afterwards

revealed that many investments that may have been thought of as relatively safe by investors were actually far from risk-free. For example, foreign depositors in high-yielding Icesave accounts lost money when Landsbanki, the Icelandic bank that marketed and sold those products, failed in 2008. Greece’s debt restructuring in March 2012 underscored the potential for significant default risk in sovereign bonds. An extreme example comes from the structured notes sold by Lehman Brothers that offered “uncapped appreciation po-tential” along with “100 per cent princi-pal protection”. Of course, when Lehman failed in 2008, that promised protection effectively disappeared. Finally, the sharp decline in US house prices that precipi-tated the drop in worldwide equity mar-kets made it clear that houses are risky investments as well. Investors should carefully consider the risks in the poten-tial investment opportunities they face. Pay attention to default risk, inflation risk,

and other sources of uncertainty that are easy to overlook. Be suspicious of “safe” investments offering superior returns.

2. Avoid complexity and minimise costAs the financial crisis unfolded, even casual investors became aware of the role played by the securitisation of home loans. Mortgage-backed securities ena-bled capital to flow to housing markets which, before securitisation, had been constrained by local supply and demand. However, the complexity of these securi-ties made them difficult to value. Though the complexity of mortgage-backed secu-rities may be appropriate for sophisticated market participants, the typical inves-tor should be wary of investing in overly complex products, which typically have higher commissions attached to them, providing advisers with an incentive to push those products to their clients. Broadly, investors should be sceptical that they will receive more in returns just be-

The past five years have highlighted the importance of some long-standing rules

By Christopher Polk

What the financial crisis can teach us about investing

14-15 Stock markets.indd 18 09/09/2014 12:29:36


cause they pay more in fees. On the con-trary, reducing costs is perhaps the easiest way to improve portfolio performance.

3. Do not confuse growth and stock market performanceIt may be surprising to see the strong stock market performance since early 2009 unaccompanied by corresponding-ly strong economic growth. However, the link between economic growth and stock market performance is tenuous. To be-gin with, growth in GDP can only move markets if the gains accrue primarily to capital rather than labour. Moreover, even if capital receives all of the gains, market returns will be strong only if pub-licly traded firms are the companies deliv-ering the growth. Furthermore, markets are forward-looking. Even if listed-firm profits are high, returns will be flat if that profitability had been anticipated by market participants. Finally, stock prices move not only because of news about

profitability, but also because of news about discount rates. Holding expecta-tions of future profitability constant, stock prices will increase if investors dis-count those future profits less aggressive-ly. As a consequence, an investor should be careful when basing investment deci-sions on views about GDP. Just because a country is expected to have strong GDP growth in the future does not mean that its stock market is necessarily a good buy.

4. Pay attention to valuation ratiosFinancial economists have shown that low stock prices, relative to a measure of expected cash flow such as dividends or earnings, predict higher subsequent stock returns over the next several years. Since measures of expected cash flow move slowly, as a consequence, after a signifi-cant drop in equity prices such as in late 2008/early 2009, valuation ratios tend to fall and expected future returns tend to increase.

Understanding the source of this pre-dictable variation in returns is a hotly- contested debate in financial economics. On the one hand, proponents of efficient markets would argue that the higher ex-pected returns in early 2009 were because risk and/or risk aversion had increased. On the other hand, advocates of behav-ioural finance would claim that investors were excessively pessimistic and thus stocks were underpriced.

Regardless of the economic reason for the high expected returns in early 2009, if an investor is financially sound and feels comfortable taking on risk when valua-tion ratios are low, then these times repre-sent buying opportunities. Put simply, in-vestors should not reduce their exposure to equities when market prices are falling just because others are doing so. lChristopher Polk is professor of finance and the director of the Financial Markets Group Research Centre at the London School of Economics

Bull market: traders crowd the floor of the New York Stock Exchange, 2010

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More than a third of Brits say that too much debt is the biggest source of stress in the family home, yet will spend between six and 12 months living with “unmanageable” debt before seeking help.**

Step in QuidCycle. Launched in November

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With 34 per cent of the population** wor-

QuidCycle’s aim is to help the UK’s mid-dle-income families and individuals achieve

It does this by removing the obstacle of per-sonal debt, via low-rate consolidation loans that enable its members to pay off their debts faster. Currently, QuidCycle’s average APR is 11 per cent.

However, it’s the company’s education fo-cus that sets it apart from other peer-to-peer lenders. QuidCycle provides its members

advice, with a view to increasing general -

vices sector by addressing the root cause of the problem.

And it doesn’t stop there. QuidCycle goes on to work with its borrowers until they be-come savers on the platform once their loan is repaid, using the money that formerly ser-viced debt.

QuidCycle offers borrowers generous in-centives to repay their loans – a cash-back bonus of up to 4 per cent – at rates that are far more competitive than many high street bank loans and credit cards. In order to qualify for the bonus, the borrower has

over the year; demonstrate they have re-duced their debt; and complete a minimum

which focuses on how money works and how to free up more savings. The fourth el-

adviser, which will be paid for by QuidCycle.

invested via the QuidCycle platform by sav-vy savers who want to bypass the bank and earn decent returns while helping families

Savers can earn between 5 and 6 per cent AER on the money they lend through Quid-

how long they want to keep their money in-vested – but the longer they commit to, the greater the return they stand to earn.

Savers can grow their nest egg safely in the knowledge that their investments are spread

a Provision Fund which holds 1.5 per cent of QuidCycle’s total loan book; this currently represents six times more than the expected default rate of 0.25 per cent.

** Based on QuidCycle research, conducted by Atomik Research among a weight-ed UK representative of 2,000 adults in August 2014.

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Quidcycle fp ad.indd 1 09/09/2014 12:27:52


INVESTMENT STRATEGIES

People who are not used to financial spread betting are like Windows users trying to use a Mac, bemoaning

everything from the lack of a delete but-ton to the absence of an uninstal control panel icon. Using a Mac is actually easier for computing beginners, and – contrary to popular belief – spread betting can actu-ally be easier for beginner investors to use compared with traditional stockbrokers.

Starting with the basics, financial spread betting is essentially a wager on the move-ment of an underlying financial asset. While traditional investing is centred on “pounds invested”, spread betting is all about “pounds per point”. In the tradi-tional investment case you would buy, say, £10,000 worth of Tesco shares. If the share price goes up by 10 per cent, then you have made a profit of £1,000.

By contrast, in the spread betting case you bet an amount per “point price move” of the stock. Let’s take a look at a simple worked example. Say that Tesco is being quoted by a spread betting provider at a price of 250p to buy. You like the look of the company so decide to place a “buy” spread bet of £10 per point. This is also known as going “long” on Tesco – betting that the shares will rise in value. When the Tesco share price moves from 250p to 251p, it has moved one penny (which corresponds to one point), and you have made £10 in profit. However, if the shares fall to 249p you will have made a £10 loss.

The main point here is that with finan-cial spread betting, the key is to predict the correct direction of the market movement. The more right you are (and the higher your stake size) the more profits you will make. Of course, this also works the other way round when placing a losing bet.

The financial spread betting industry has been around since the mid-1970s, when the banker Stewart Wheeler set up his firm IG Index in order to trade the gold price. Limited mainly to professional traders at the time, IG grew further by in-troducing new products to trade, includ-ing major financial indices, currencies and other commodities.

The growth of the internet in the 1990s, however, was when the industry really took off, as the new technology made fi-nancial spread betting accessible to the private investor. While the industry has matured in terms of growth, IG Index estimates that there were around 93,000 active users of financial spread betting in the UK in 2013.

Advantages of spread bettingSo why is spread betting so attractive? While it is not without its risks, any trad-ing strategy that you can undertake in a traditional stockbroker account can be replicated by spread betting, but also with some additional benefits:l No capital gains tax Spread betting proceeds are currently free from capital gains tax in the UK because it is classified as “gambling”. . . even though it need not be as reckless as this designation suggests. l The ability to “go short” Unlike more traditional forms of financial trading, spread betting offers investors the ability to profit regardless of which way market prices are heading. “Shorting”, as the terminology is known, is essentially placing a bet on an asset/index going down in value.l Global coverage Spread betting provid-ers usually offer access to many markets from a single account. You can trade inter-national equity indices, individual equities

from several countries (without exchange rate risk), plus bonds, interest rates, op-tions, commodities, currencies and more. You will rarely find a stockbroker offering such a wide range of markets to trade.l Leverage Perhaps the most attractive point for investors is that spread betting al-lows you to open positions by depositing a fraction of the total cost. In certain cases, for the most liquid assets, you can leverage your positions up to two hundred times your deposited funds. So for every £1 you put down, you get £200 to trade with. If you don’t have a five- or six-figure trading fund, you’ll find this aspect a big plus.

Be wary of the dangersThere are many advantages to spread betting, and in fact it is a great way of trading the markets. Nevertheless, trad-ers should be aware that the last aspect covered above, leverage, needs to be care-fully managed. Too much leverage means bigger wins, but also bigger losses. There-fore, sound risk management is abso-lutely crucial to ensure that you don’t lose your shirt.

A myth that sometimes prevents people from spread betting is the not-quite cor-rect idea that it effectively amounts to financial “gambling”. In fact, what makes financial speculation “reckless gambling” rather than “carefully considered invest-ing” is the trader’s attitude towards risk. Nothing more.

Spread betting need not be dangerous, and indeed can be lucrative, if you have a sound stock-picking strategy, and if you take a sensible approach to managing your positions and their associated risks. lRichard Gill CFA is the editorial director of Spreadbet Magazine

By Richard Gill

Spread betting: what the devil is it and how does it work?You’ve heard the hype, but getting to the bottom of spread betting basics is less complicated than you might imagine

17 Spread betting.indd 17 09/09/2014 12:31:37


INVESTMENT AND SOCIETY

Social investment is booming. Fore-cast by Big Society Capital to grow at 38 per cent per annum, it has cap-

tured the public’s imagination, attracted cross-party support, secured involvement from large institutions and is touted by some (for better or for worse) as the pos-sible salvation of capitalism. Over the past few years, we have seen the social impact investment market move from the mar-gins to the mainstream. Yet the question for many entrepreneurs and investors looking to get involved is still, well, “what actually is it?”

The basics

In the simplest terms, social investment searches for more than just risk-adjusted rates of return. Rather than the two- dimensional world of traditional invest-ing – the sort that has dominated financial markets – in the case of social investing, a conscious decision is made to adjust for the social, ethical or environmental (col-lectively described as “social” for ease) impacts of investment decisions. One might call it “3D investing”.

Its importance lies in addressing some of the drawbacks of our financial system,

powerfully manifested in the recent cri-sis. Many commentators have noted that the narrow-minded pursuit of short-term profits at all costs brought about unfortu-nate consequences, and these stemmed from negative externalities that were ig-nored as institutions pursued profits with abandon. Such externalities frequently impact on society, as financial agents (cor-porations as well as banks) go about their business. These costs include damages to the planet caused by high-polluting indus-trial firms, as well as the consequences of the financial market meltdown wrought

This burgeoning new marketplace is one of the few growth fields in a tainted financial sector, writes Rodney Schwartz

A beginner’s guide to social investment

Delivering growth: Italian olive oil producers are part of the fair-trade supply chain of the Body Shop, one of the original social enterprisest SH

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BUY-TO-LET INVESTMENT: IT’S NOT ALL GRIM UP NORTHThe UK’s property market has undoubtedly taken a battering over the past few years, but bricks and mortar, in particular buy-to-let, are now outperforming other types of in-vestment when it comes to providing high yielding, long-term returns.

Discerning buy-to-let investors are begin-ning to look outside the traditional hotspots of London and the South East thanks to cities like Manchester and Liverpool of-fering far stronger yields. Greater London, for example, typically offers rental yields of around 4 and 5 per cent, whereas yields of over 8 per cent can be found in Manchester. The recent announcement that there will be direct flights between Manchester and Bei-jing coupled with HS2 and the One North transport proposal provide concrete proof that the city and its surrounding areas may well rival London one day.

One Manchester-based property company that has seen a surge in interest in its buy-to-let opportunities in the North West is Sequre Property Investment. Sequre specialises in a hands-off investment service, sourcing bulk deal, high income producing buy-to-let properties. The company particularly focuses on deals in the North West due to the genuine discounts that the region’s cities have to offer.

Sequre’s Managing Director, Graham Da-vidson, comments: “Many people who have never invested before tend to want to focus on areas close to home. We instead provide advice as to the best options on where to invest, concentrating on areas where there is likely to be high rental demand for years to come, coupled with capital growth. Man-chester is a perfect example of this.”

The addition of MediaCityUK has helped boost the entire Manchester economy for well-documented reasons. With more com-panies now following on from the BBC and ITV relocations, the outlook can only be positive for buy-to-let investment in and around Manchester. Over the past five years rental demand has been very strong, with in-vestors seeing virtually no void periods.

Graham adds: “All this means there is a very high demand for city centre rental property. This is good news for buy-to-let landlords as it means these properties are virtually

never empty, so they are generating a rent-al income from day one. One of our current deals, for example, comprises a range of de-signer studio apartments on the waterfront in Salford Quays from just £72,000 with ten-ants in place paying £6,000pa: an impressive gross rental yield return of 8.33 per cent. The apartments even come fully furnished.”

The right buy-to-let investment in the right city can effectively offer you that “golden ticket” – high yields and capital growth to-gether – something which the vast majority of property investments across the rest of the UK cannot.

For more information about Sequre, visit www.sequre.co.uk or call 0800 011 2277.

Sequre will be holding an exclusive buy-to-let seminar at the Emirates Stadium in Lon-don on Friday 24th October. The seminar will include expert comment and insight from property and business experts, as well as the launch of an exclusive property deal only available to those attending the event. Sign up at www.sequre.co.uk/media/sem-inars/ or email [email protected] for further details.

Immediate return on investment – prices from just £72,000Fully tenanted apartmentsSalford Quays waterside developmentYields over 8 per centState-of-the-art design developmentBalconies to all apartments

MANCHESTER’S PREMIER WATERSIDE DESTINATIONThese luxury state-of-the-art apartments are situated in Salford Quays, home of MediaCityUK, and benefit from stunning views over the canal areas and water-front. All apartments have floor to ceiling windows which lead to a good size balcony. The development is located close to the Metrolink for easy access into Manchester City Centre.Agent: Sequre Property Investment. Telephone: 0161 8712190 Email: [email protected] Web: www.sequre.co.uk

15.8% Return on Capital Off Market Investment

Sequre fp adv.indd 1 09/09/2014 12:31:28


INVESTMENT AND SOCIETY

by reckless speculation. Banks rightly calculated that the state would bail them out if they messed up – which it did, at great cost to the public.

In short, social investment takes society into account. Financial markets still form the core of capitalism, but we all stand to benefit when these tools are used both for financial gain and positive social impact. Under this model, financial markets are likely to prove more sustainable, as enter-prises that secure such investment pursue financial and social objectives simultane-ously.

What does social investment look like? The now well-known Body Shop was one of the first to generate social impact as a core part of their business model. Its founders, Anita and Gordon Roddick, built a successful haircare and beauty business, but also drew the world’s at-tention to animal-free testing, product sourcing and other ethical issues.

Its founders and early backers profited handsomely when it sold out in the mid-1990s, and they subsequently backed a multitude of charities and other socially impactful businesses with the proceeds. But social investment is very different from charity. Those who make the invest-ments expect a return and the enterprises that receive the investment are expected to become sustainable. By constructing a company, there is leverage that is absent from the charitable sector.

Take Justgiving, a company that facil-itates online charitable giving. It was started in 2001 with around £5m in angel funding and has grown enormously. It is a profitable company worth many times this original sum. More importantly, over £1.5bn has been donated via the website since its inception. Had the original £5m simply been donated to charity in 2001 instead of invested, there would have been no such leverage. It’s case studies like these in today’s fiscally-constrained times that mean many see socially orient-ed enterprises providing “more bang for the buck” than donation-based charity.

Who makes social investments?

Foundations such as the Esmée Fairbairn Foundation were early pioneers, and they were joined by a selection of “Impact In-vestment Funds”, such as Bridges Ven-tures and Big Issue Invest, an affiliate of the Big Issue. Large financial institutions such as Deutsche Bank and AXA Invest-ment Managers have followed suit, with

Case study: BreezieBreezie was founded by Jeh Kazimi after he failed to get his parents to use Skype to speak to their grandson. It creates software for touch-screen tablets, providing a simplified and personalised interface to open up the internet’s benefits for the elderly. It offers solutions (I want to see my grandson) without the complexity (I don’t understand Skype). It also has an online facility for a family member or care-giver to log in and remotely personalise, support and troubleshoot.

Social impact

It supports communication with family and friends, reducing isolation. It also offers easy access to critical content – such as .gov.uk services – and entertainment, supporting mental health and well-being through assistive technologies and health apps.

The investment

Breezie succeeded in raising a total of £600,000, including both angel investment and crowdfunding. The equity investment was raised in less than six weeks, £180,000 coming from Clearly Social Angels. Investors were convinced by the market opportunities in digital inclusion of the ageing population, as well as the strong scalability of social impact. l

dedicated impact funds – and more enter each month. This is being catalysed in the UK by Big Society Capital, an institution conceived by the previous Labour govern-ment, implemented by the coalition and endowed with more than £600m. Its ob-jective? To give life to a world-leading so-cial investment marketplace. And things are off to a good start; most countries per-ceive the UK to be a leader in this field.

For individual investors who are con-sidering entry into this market as a more ethically-informed alternative to existing investment products, websites such as Ethex and the Social Stock Exchange pro-vide a useful window into this new and exciting arena, as will independent finan-cial advisers who are members of the Ethi-cal Investment Association.

For those with a little more capital to invest, or those who are already sophisti-cated investors, there are angel networks focused on social impact investing such as Clearly Social Angels. These groups screen deals for impact as well as business potential, and offer investors a chance to learn how to impact-invest alongside oth-ers – philanthropists, high-net-worth in-dividuals, and cashed-out entrepreneurs. Additionally, we are seeing some private banks (such as Coutts and JPMorgan) be-ginning to make such opportunities avail-able to interested clients.

Challenges and opportunities

Those considering social investing should understand that the field is very new, so the broad array of products available in the mainstream has not yet been fully de-veloped. Nevertheless, the most common forms of investment are: impact funds (pools of socially impactful enterprises or microfinance loans), bonds and direct equity stakes. The small average deal sizes means that more customisation is possi-ble, helping meet the varying preferences of different investors.

It is fair to say that “track records” are generally not available, as the population of historical data is too small at this early stage. However, targeted returns tend to range from market returns down to the

t low single digits. While it is not neces-sary to accept a lower return, many in-vestors do – on the other hand, however, it is widely believed that the riskiness of investments is, on average, lower.

Looking ahead

Ultimately, this is a new market and there-fore still underdeveloped – but it is boom-ing. In fact, social investment is one of few growth fields in a tainted financial sector. And while returns can never be guaran-teed, the likelihood of these projects gen-erating significant and positive impact at community and even global levels is very high. Social investing enables pioneering companies to deliver original solutions to vexing societal problems. This is new, sig-nificant and highly timely. lRodney Schwartz is CEO of ClearlySo, a company connecting social entrepreneurs and social impact funds with investors

Social investment is forecast to grow by

38 per cent per annum

18-20 Social investment.indd 20 09/09/2014 12:35:14

The question of whether using a broker to arrange your mortgage or whether to approach a lender di-rectly has been a pertinent question this year amidst fears of a rise in interest rates. So, can an individu-al negotiate themselves the best mortgage, or can forming a banking relationship independently cut the middleman out and get you the best solution? Besides our obvious bias as a high-net-worth, Lon-don-based mortgage broker, we are happy to say that research appears to support the broker cause. There are a number of reasons why using a broker in the large-mortgage market is advisable. After the Financial Conduct Authority (FCA) intro-duced new mortgage rules following their MMR (Mortgage Market Review) this April, it’s particularly hard for people to circumnavigate what each lend-er’s new criteria may be. This, compounded by a possible bank rate increase this year, can perhaps explain the fact that mortgage brokers have report-ed a surge in the number of people looking for advice. This increase is prominent amongst those purchasing at higher levels and, considering the climate, it’s easy to see why this is the case. Many “best buys” have disappeared entirely and the overall average of rates has risen. Add to this the fact that half of our best million-pound mortgage rates aren’t even available on the high street, and you’ll see why we say things can be confusing. There are also a number of different “perks” and fees which are attached to differing mortgages. Without the advice of a broker it’s often easy to get swept away by the idea of an enticing incentive without thinking about the long-term consequences.

Having an expert to weigh the pros and cons of mort-gage options ensures a balanced perspective. Islay Robinson, CEO of Enness Private Clients says: “We fill a niche within the high-net-worth mortgage mar-ketplace because lenders (particularly private) don’t offer a flat rate for all applicants. Rather, they offer options depending on the way in which each deal is structured, and upon the borrower’s unique circum-stances, meaning insider knowledge is invariably a distinct advantage”.

A broker is often the best (or only) solution for your large mortgage requirements if you don’t have a traditional income stream. The majority of our cli-ents, for example, include those who receive bo-nuses or have complex sources of income, such as expats and the self-employed.

Other buyers include those seeking the best struc-ture for a buy-to-let portfolio, or who want to buy a new-build home, complete a transaction in a hurry, change a property’s planning permission, and a whole lot more.

Timing should also be considered. Speedy movement is often required in today’s fast-paced property market. Most people cannot afford to wait weeks for an appointment, only to find that they are not eligible candidates to that particular lender. When you use a broker, they can help you find a variety of lenders worth approaching. A well-connected broker will also know which lenders are quick at processing applications.

Experience and an ability to think on their feet is what brokers are known for. It can make the differ-ence between securing a property and losing it. l

Enness Private ClientsWWW.ENNESSPRIVATE.CO.UK

Should you use a broker to find your large mortgage?

Enness Private cllients fp adv.indd 1 09/09/2014 12:16:05

LENDING STRATEGIES

The concept of peer-to-peer (P2P) lending has been around for thou-sands of years – since the invention of

money, in fact. Quite simply, P2P lending is defined as someone with money lending to someone who wants to borrow money. Now, in the 21st century, this concept has been brought online.

Today, it is quite easy for an investor with some spare cash to lend money to hundreds, or even thousands of consum-ers and/or small businesses. Companies such as Zopa, Ratesetter, Funding Circle and MarketInvoice have all been started in the past ten years to enable P2P lend-ing to be conducted online in an efficient and secure manner. These companies have created technology platforms where lenders can build a diversified portfolio of loans quickly and easily. Entirely web-based, these new kinds of finance compa-nies are very efficient and provide good returns to investors as well as competitive interest rates for borrowers.

How does peer-to-peer lending work?The online platforms make it very easy to connect lenders and borrowers. Lend-ers can start with as little as £10 and then decide what duration loans they want to invest in. Platforms can automatically allocate this money or allow lenders to choose individual borrowers. Many plat-forms have an auction system where the ultimate interest rate paid by the borrower is dependent upon investor demand.

Lenders on all platforms will receive interest and principal payments from borrowers on a regular basis and they can choose to reinvest this money or withdraw the proceeds. The borrowers typically pay the loans monthly and that money flows through proportionally to lenders.

We have already mentioned consumer

loans and small business loans but P2P lending is also expanding into areas such as real estate, very popular among proper-ty developers and individuals seeking real estate financing. Such platforms include LendInvest and Assetz Capital.

What are the risks?It is important to note that the Financial Services Compensation Scheme does not cover any investments through P2P lend-ing. However, many platforms have cre-ated so-called provision funds that protect investors from defaults.

The P2P platform Ratesetter likes to pro-claim that no lender has ever lost a penny investing on its platform. Ratesetter was the first platform to have a provision fund, and this fund has paid and continues to pay any losses suffered by lenders. All the major platforms now have similar funds to protect their lenders.

Having said all that, the losses at the main platforms are small. At Zopa, the actual losses from bad debts are running well under 1 per cent annually. At Funding Circle, the bad debt rate is 1.4 per cent – the highest rate of the three main platforms.

What kinds of returns can lenders expect?Returns can vary a great deal between platforms depending on how much risk lenders are willing to take. Longer dura-tion loans earn higher interest – but lend-ers take on more risk with a longer loan.

At Ratesetter, expected returns for its monthly access product, according to its website, is 2.2 per cent, and on its five-year income product, it is 6 per cent (these are before tax). At Zopa, expected returns are 3.7 per cent for its three-year loans and 5.2 per cent for its five-year loans. Funding Circle quotes an average return of 6.1 per cent to lenders after fees and bad debts.

What about regulation?On 1 April 2014, the Financial Conduct Authority (FCA) began regulating the P2P lending industry. The regulation requires platforms to have minimum operating capital requirements, meet client money requirements and adhere to a disclosure-based regime. It is important to note that in the UK the industry formed its own association, the P2P Finance Association several years ago and the association has actively lobbied for regulation of its indus-try. Members realise this is an important part of gaining the trust of lenders.

What trends are we seeing right now?One of the biggest changes for the UK is that P2P will soon be brought within the scope of Isas. Individual lenders often complain of the tax treatment of earnings, – taxed before losses due to bad debt are calculated – so this announcement is ex-pected to be a huge boost for the industry. Another major trend is that the big mon-ey is starting to take notice. In the past six months, institutional investors have started investing in this space. We saw the world’s first publicly listed fund from MW Eaglewood launch earlier this year. It raised £200m from investors and is de-ploying this capital on platforms across the world, including several in the UK. Hedge funds are also starting to take an interest in UK platforms.

Some say this is against the principles of P2P: a peer lending to a peer. However true, this is the natural evolution of a new asset class. And platforms are adamant that they can manage the large investors without hurting the small. Times are ex-citing for this fledgling new industry. lPeter Renton is the founder of Lend Academy and co-founder of the LendIt Conference for educating investors in P2P

By Peter Renton

Peer-to-peer lending: what’s all the fuss about?The internet has opened up a world of possibilities for our oldest form of lending


22 Peer to peer lending.indd 22 09/09/2014 12:39:04

PRS: the new buzzwordThe new buzzword amongst property professionals, funds, and buy-to-let investors alike is “PRS” (Private Rented Sector). To date, the rental market has been dominated by individual owners, two-thirds of whom let fewer than five properties. However, the PRS model is directed at larger institutional monies where they can acquire and manage large, purpose-built residential de-velopments. The market conditions are perfectly set for PRS developments: owning your home is now unlikely until your early 30s, even if you earn the national-aver-age salary, and tenants are now renting for much longer periods. So if it’s such a great model, why haven’t the funds already stepped in? There are many reasons, however the biggest problem for institutional funds is acquiring fit-for-purpose PRS developments which can be efficiently and effectively managed. Romiga: developing and operating PRS develop-ments in the regions Romiga Holdings, under their newly formed PRS de-velopment and management brand “Citi’zen”, will aim to develop and manage over 3,000 apartments over the next 5 years. We are currently working with high-net-worth individuals, family offices and equity funds to acquire more suitable sites. The intention is to create and manage a portfolio across the regions, then hand over the PRS portfolio and management to an institutional fund: providing a ready-made, turn-key operation for in-stitutional pension funds. Romiga aims to design, develop and manage desirable homes that people want to live in and call home. We succeed at this by creating luxury residential city-centre accommodation, superior to our competition in design, quality, pricing and management. By acting as developer and operator, we ensure the development is purpose-built and designed as a home for a variety of young professionals.

We ensure our developments are:

- Perfectly located, designed to be timeless and attractive to young professionals - Developed to be durable and withstand the rigours of everyday life - Designed with easy and accessible maintenance solu-tions in mind

Once the building is finished to our exacting standards, we then install our in-house Multifunctional Management Concierge (MMC), which plays a multiple role as con-cierge, soft security, managing agent, building manager and friendly face. Some 48 million people live outside London. Hence, we’ve deliberately developed our “Citi’zen” brand in major regional cities like Birmingham, Sheffield, Bristol and Liverpool that are under-supplied with new, quality city apartments. These regions have a pool of young professionals who want to live in the city, but cannot afford to buy. We’ve spent the past two years choosing our specific locations down to the exact streets which fit our requirements, alongside working with the planners to ensure we are developing schemes for the city that have their full support. Finally, these regions suit the PRS model because they offer fantastic rental yields. Most of these cities are offering in excess of 8 per cent yield on year one, a figure which increases year-on-year with the right management.

Romiga are now in the early stages of fundraising for their next round of acquisitions and development of their existing stock.

For further information about Romiga and Citi’zen please visit www.romigaholdings.co.uk or contact Gavin Reid on 0203 405 4072

Romiga fp ad.indd 1 09/09/2014 12:29:04


JARGON BUSTER

Alternative Investments

What are they?Alternative investments are any non-traditional (that is, stock, bond or cash) investment. This includes a tangible asset class of classic cars, racehorses, wine, art, real estate and private equity. Many offer investors the opportunity to enjoy their purchases while at the same time making money. Indeed, while much of the rising interest in alternative investments is said to be the result of economic uncertainty, it could also be said that there is a growing appreciation of the value of, and satisfac-tion of, turning passions into profit.

How do they work?Investors buy a piece of art, property or

other items such as a classic car. Depend-ing on the type of asset, investors tend to be looking for qualities such as rar-ity, good condition, and a likelihood of trading. This investment is then sold at a future date, hopefully for more money than was paid for it.

The price is not as beholden to external factors such as market swings or political and economic instability. Instead, the val-ue is often driven purely by how much a future buyer likes the asset and how badly they want it.

What are the risks?There are plenty of risks to consider. Al-ternative investment strategies can often involve putting faith in external factors beyond our control, such as relying on a

horse to cross a finish line first or, for those investing in vineyards, a gamble that the weather will remain favourable. How-ever, they can also offer the opportunity to diversify and generate high returns. Recent examples of major sales include Edvard Munch’s painting The Scream, which was auctioned at Sotheby’s New York in May 2012 for nearly $120m and a stamp issued in 1856 bought in New York for $9.5m.

Investment returns for rarities and collectibles are never guaranteed, while small-time investors may find themselves shut out of some alternative investments altogether. Specialist knowledge is essen-tial to avoid purchasing a fake.

Stamps are a case in point. As Keith Heddle, director of investments at the

Do you know your commodities from your currencies? Your bonds from your equities? Get up to speed with our guide to key investment terms

Investment speak for dummies

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24-31 Jargon Busters.indd 24 09/09/2014 12:58:21

With people living longer, extending their working lives, providing for what may be 30 or so years of retirement, and with new changes to pensions and tax, it has never been more important to have a financial plan. Many people are comfortable planning for the short term: day-to-day living, or a few years down the line. Any longer, and most people recognise the need for professional advice.These few timeless tips may help when considering your financial planns for the future.

1. Know your financesUnderstand your starting position, your assets and liability, income and expendi-ture, family situation and tax status, and plans for key lifetime milestones. Make improvements where you can through regular financial housekeeping. Getting the best deal on utilities, insurance and mortgages can make a substantial differ-ence. Review these regularly, especially if your circumstances change.

2. Beware inertia For many, inertia is the biggest enemy to improving finances. Don’t leave the budget planner until tomorrow, or put off transferring your money to a higher interest account, or delay reviewing your utilities and mortgage costs.

3. Check your cash balancesProviding this fits with your future plans, an average of six months expenditure is sufficient for day-to-day access and the

“boiler replacement fund”. The rest of should be put to better use earning you money.

4. ProtectionMost people insure their property, car and household assets, but often miss out on personal protections such as life assurance, loss of earnings and mortgage protection. Personal circumstances will determine your needs. These should be reviewed regularly or whenever your circumstances change.

5. Understand risk when investingEstablish your own risk profile and then invest in line with that profile. Review this regularly and when your circum-stances change. Recognise that not investing bears a risk too: a risk that your money will lose purchasing power due to inflation, and the danger of “missing the market”. 6. Plan your taxes as well as your moneyThere are a wide range of tax allowanc-es and reliefs available. However, many people do not know how to use these opportunities to their advantage, and so they can end up paying more tax than they need to.

Whilst tax planning is a fundamental part of a good financial plan, you should tax-plan your investment strategy rather than make investment decisions based on tax efficiency.

7. Make the most of your pension It is unlikely that the state pension (£7,717 from 2016 and then index linked thereafter) will provide the desired lifestyle in retirement for most people. So occupational pensions, personal pensions and other savings will be needed to bolster that.

Throughout your career and subject to staying within your annual and lifetime pension allowances (£40,000 and £1.25 million respectively), review your pension contributions, any additional voluntary contributions, and your fund investment choices (if relevant) to en-sure you maximise this benefit.

When planning to take your pension, from April 2015 there is increased free-dom and wider choices. Make sure you review and understand these so you can make an informed decision in how you take your pension benefits. For an asset accumulated over many years, poor decisions can be irrevocable and potentially catastrophic for your lifestyle in retirement.

8. Passing on wealthFor many, the inheritance tax (IHT) allowance of £325,000, (£650,000 between spouses), will be enough to ensure any estate passes to loved ones without suffering IHT. For those with larger estates, there are a number of tax reliefs that can be considered. Specialist advice would be recommended.

The benefits of financial planning

If you wish to review your finances or seek advice we would be happy to help. Please call 0800 588 4064 or email [email protected]

Any tax benefits gained depend on individual circumstances and tax rules are subject to change.

No investment, or investment strategy, is without risks. The value of investments will go up and down and you may get back less than invested.

Close brother adv.indd 1 09/09/2014 12:06:53

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stamp and coin merchant Stanley Gibbons, points out: “Without special-ist expertise, stamp investment can be extremely difficult and those at risk of getting their investment strategy wrong need advice.”

Bonds

What are they?Bonds are a form of debt where the inves-tor loans their money to a company, city or government, which in turn promises to pay you back with interest.

For example, a company may sell bonds to raise the capital it needs for a new pro-ject, while a government may sell bonds to finance its debts, a war, or public-spending projects.

How do they work?Corporate bonds can be bought as short-term, intermediate, or long-term in-vestments. Short-term bonds (generally lasting around five years) often produce lower yields. This is because investors

are paid when the bond “matures” – the longer they loan their money, the more they typically stand to make in returns.

Investors can, however, sell bonds at any time, as long as they can find some-one willing to take over the investment. As a result, bonds are impacted by inter-est rates, bond prices falling as rates rise.

Alternatively, if an investor retains their bonds until they mature, they will receive the amount previously agreed as the interest rate is set at the time of pur-chase and will not change.

What’s the risk?The most immediate risk lies around whether or not the bond issuer will make good on their payments. Those compa-nies, cities and governments that are less creditworthy will pay a higher yield – commonly known as a junk bond. Con-versely, those with good credit ratings will pay less interest.

Some risks can be managed through us-ing schemes such as strategic bond funds which provide a greater flexibility, giving

room to manoeuvre across different sec-tors and level of yield.

Commodities

What are they?Commodities are usually divided into four main categories: energy, precious metals, base metals and agricultural prod-ucts. This can cover some of the world’s most essential resources such as oil, wood and raw foods such as corn and wheat.

How do they work?There are various ways to invest in com-modities, one of which is a futures con-tract. Here, it is agreed that a particular commodity will be purchased in the future at a set price. The investor makes his money if the value of the commodity rises above the agreed price. As prices for commodities constantly fluctuate, many speculators will often not see the contract to its expiry date, instead selling off when it is highly valued and then buying a dif-ferent futures contract at a lower price. t

Rock solid: precious metals, such as gold, are a category of “commodities” investment

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In it for the long haulSalaries have stagnated in real terms since the financial crisis in

2008, so many people are putting aside less of their hard-earned

cash. Furthermore, we are living far longer into our retirement. It’s

a stage of life that may seem a long way off, but you could be letting

your best saving years pass you by.

Understanding how your earning potential is likely to change over the

course of your working life can help you plan and align your saving

and investing habits to your long-term financial goals.

Know your pulling power If you’re expecting a soaring trajectory until the day you retire, it

might be time to reel in your expectations. According to a study by US

employment data researchers PayScale, it’s more likely your earnings

will flatline long before then, with women reaching their salary peak at

age 39 and men reaching theirs at 48, after accounting for inflation.

Some industries are chasing younger, hungrier talent, shortening the

average job life-cycle and forcing older workers to lower their salary

demands in order to compete. It’s enough to turn you grey. Of course,

your choice of profession will have a bearing on your salary curve,

with careers requiring lifelong learning, such as law, achieving a much

later (and higher) peak.

PayScale reveals average salary growth of around 60 per cent for

job-hopping, promotion-chasing 20-somethings. During our 30s the

increase in salary is likely to be a lot less, rising as little as 20 per cent

for women, largely due to postnatal, part-time working.

Payback timeAs your earning potential fluctuates, so do your expenses. Key life

events, such as having a family or moving to a bigger house, will have

a major impact on your spending. You could say that saving now is a

bit like spending later. Despite the pay hikes becoming less frequent

and less chunky in your 30s and 40s than those enjoyed in your 20s,

you’re still likely to be earning more in absolute terms. That makes

it a time to consider saving as much as possible, before your salary

increases stagnate further into your 50s and 60s, and the major

expenses of paying the mortgage and rearing a family into adulthood

really bite hard.

Setting your savings goalsGoal-oriented investing means that you give each of your savings pots

a purpose. You can then start to attribute a timescale and level of risk

to your different goals. For example, if you’re saving for your child’s

university education in, say, 15 years’ time, you may want a portfolio

that is geared towards high risk and high reward to start with, as you

have many years in which to benefit from market gains and ride out

the downturns.

As you near the end of your 15-year time horizon, or indeed if you

have a three-year savings plan in mind, perhaps for a luxury purchase

such as a car or a big family event, then you may take a more cautious

investment approach. This might help you lock in any profits earned

to date, and protect you from any big losses in the market from which

you’d have less time to recover.

Start early, grow slowlyThe average British wage is about £26,000 – to replicate that in re-

tirement you’d need a pension pot of more than £300,000, according

to a recent report by Which? However, The Pensions Policy Institute

estimates that more than six out of 10 people aged 18 to 65 are not

saving for their retirement.

Meanwhile, with every 10-year delay in starting a nest egg for retire-

ment, you’ll double the amount you need to set aside to provide your

target income.

Saving isn’t easy. You probably have a mortgage, kids to bring up and

possibly ageing parents to take care of. But the undeniable truth is

that the earlier you start stashing money away, the better off you’re

likely to be. Even small amounts can make a big difference over time,

and the benefits of compound returns can really help grow your

portfolio.

Risk warning

With investment, your capital is at risk. The price and value of invest-

ments mentioned and income arising from them may fluctuate and

you may get back less than you invest.

Go to nutmeg.com to try Nutmeg for free. It takes just a few minutes to set up a sample portfolio based on your goals, appetite for risk and financial profile.

Nutmeg adv.indd 1 09/09/2014 12:18:37

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JARGON BUSTER

A range of commodities indexes, such as the S&P Commodity Indices, will track the performance of a basket of commodi-ties and are useful to investors.

What are the risks?The volatility of commodities can result from a number of factors, most of which lie beyond the control of the investor, such as the weather.

For instance, severe drought in Brazil early this year resulted in a spike in the price of coffee. Geopolitical factors can also have a important influence – the price of oil increases, for example, when supply becomes more difficult due to tensions in areas such as the Middle East and Russia.

Currencies

What are they?As the name suggests, this is the art of in-vesting in currencies around the world. Trading is conducted on the foreign-ex-change market, which is often known as “forex” for short.

The forex is the world’s largest finan-cial market and is primarily populated by sophisticated traders such as companies and banks.

How do they work?Investors trade and speculate on the con-stantly fluctuating values of a currency, relative to that of another country. The price thus depends on the exchange rate between two countries.

What are the risks?As forex trading has entered the main-stream, a number of brokers have popped up on the internet promising large profits fast. In many instances, this money can be invested poorly or can disappear into a fraudster’s pocket.

There are also many technicalities to consider, so investors should make sure that they take proper advice.

Free apps are currently available for smartphones which provide users with one-touch trading and live market infor-mation. These can be helpful, but are dan-gerous if not used properly.

t Equities

What are they?Equities is the name given to the oppor-tunity for an individual to buy a share of a company. When investing in equities, one becomes a part-owner of the com-pany, regardless of the size of the share. Investments tend to be made through a stockbroker, whose role can range from merely handling the funds, to offering advisory services, to managing and con-trolling the investment strategy. The fees increase the more work that is required.

How do they work?Shareholders can make money in two key ways. The first is to sell the shares for more than they were purchased for. The second is via the dividends that are paid out as a “reward” for having invested.

Shareholders can buy shares within in-dividual companies, or they can choose to invest via funds such as a collective investment fund. The latter pools money from a variety of individuals into a single fund, and can see investments being

Foreign exchange: investors can trade and speculate on the shifting value of a currency

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What would I buy now?

A strategy I believe will always deliver long-term is buying good value, quality assets and letting them accumulate by reinvesting their dividends. A basket of dividend-paying, quality companies should be a staple of any invest-ment portfolio. It is so often repeated, perhaps because as investment mantras go, this one actually works: dividends matter.

But why do they matter, and why now?

In simple terms, dividends are an excellent stock selection guide. Dividend payers have outperformed the broad mar-ket, and non-dividend payers significantly underperformed. Second, if you invest with pa-tience, dividends’ significance increases dramatically. They deliver 60 per cent of total re-turns over an average 20 year

period.1 And they are even more important in periods of low returns.

Dividends are much more stable than company earnings. There have been eight years of dividend cuts since 1940, versus 22 years in which earnings declined. Finally, dividends can provide an effective inflation hedge. Dividend income has grown at least in line with (and often faster than) inflation. These powerful factors mean that, whatever global markets do, we believe in harnessing good value, quality companies with growing dividends.

So why now? Economic forecasting is a famously bad science, even in the good times. In the unknown terri-tory of the post quantitative easing (QE) world, there are only two things I can point to with any confidence: inflation, and rising interest rates. So what to own in your portfolio?

Rising interest rates are clearly bad for fixed-income investors, but they’re bad for growth-style equity investors too. A lot of the supposed value of growth/momentum companies is derived from fu-ture estimates of cash flows. Rising interest rates potentially threaten these companies’ long-term margins, as higher interest rates can push up their cost of capital.

By contrast, a lot of “quality” companies have been able to refinance their long-term debt at exceptionally low levels. Microsoft, for example, last year sold $750 million of 10-year bonds with a coupon of 2.125 per cent, and $900 million of 30-year bonds at 3.5 per cent. Considering that 10-year US government Treasuries were trading with a yield of 1.6 per cent at the time, it implied a credit spread of just 0.525 per cent for Microsoft’s 10-years bonds. Locking in such good terms should provide some pro-tection in the event of rising rates, and may potentially give them an advantage over their competitors. Any impact of rising interest rates on these high-quality companies is going to be very modest.

Our approach in the Guinness Global Equity Income Fund, which combines quality and value, is to focus on compa-nies that achieve top quartile returns on capital every year

throughout an entire business cycle – this is our definition of “quality”. We then seek to narrow this list further to identify those companies that we believe offer good value, and in particular where valu-ations sit relative to industry peers, relative to their own historic valuations, and to the broad market in general.

This gives us a portfolio of good-value dividend payers with unusually persistent earnings – a staple for any portfolio, a must have amid rising interest rates.

Tim Guinness is the founder and Chief Investment Officer of Guinness Asset Manage-ment

www.guinnessfunds.com

The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations; you may not get back the amount originally invested. Past performance is not a guide to the future.

All or part of the fees and expenses will be charged to the capital of the Fund, which will lower the capital value of your investment. This document is provided for information only. All the information contained in it is believed to be reliable but may be inaccurate or incomplete; any opinions stated are honestly held at the time of writing, but are not guaran-teed and should not be relied upon. It should not be taken as a recommenda-tion to make an investment in the Fund or to buy or sell individual securities, nor does it constitute an offer for sale. Guinness Asset Management Limited is authorised and regulated by the Financial Conduct Authority. 1S&P500, average of each annual 20 year period from 1940.

Guiness Asset adv.indd 1 09/09/2014 12:16:29

Building Homes: supply shortage offers potential to the discerning investor

UK house-building has been held back in recent years by the reticence of high street banks to lend, and experts seem to agree that growth in the UK’s hous-ing stock is woefully inadequate. With the population projected to reach 70 million in just over a decade, according to ONS projections, the country simply isn’t building enough houses to satisfy current and future demand. Mean-while, returns on cash deposits remain stubbornly unimpressive, despite the economic recovery. So why don’t more investors see building the right kind of houses in the right areas as a safe and rewarding bet?

Investors with a minimum investment of £25,000 have an opportunity to access potential returns of 9.5 per cent PA in residential property development. Lend-Secure operates a peer-to-peer (p2p) lending model specialising in property development loans secured by first-rank-ing mortgages.

The key difference is that LendSecure loans its own money along with that of its members – website users can choose from a range of property developments on which to jointly lend, safe in the knowledge that the deals they choose

have passed through LendSecure’s thorough scrutiny and are a profitable proposition.

LendSecure offers investors an unusually high degree of security. Key to this is choosing the right deals to fund. They chose deals that limit loan-to-hous-ing-development-value to around 55 per cent, and take first-charge mortgages on all loans. For example, most of their loans are made on developments of three to four bedroom houses and tend to be within 45 minutes of the M25, rather than in the centre of London. “We look for a certain type of develop-ment within pre-defined geographical areas” explains Investment Director Rob Raymond. “We will not, for example, lend on large developments of flats or commercial property – we look for areas where there is and always will be a steady source of working families and professionals.” From a developer’s perspective, Raymond believes LendSe-cure has compelling advantages too. “Becoming a borrower with us cuts out most of the faceless paperwork that property developers hate” he says. “Of course we run full due diligence on every borrower. But our short term loans are secured against the property being

developed, not against personal assets. Our system ensures that solid decisions are made by real people, who under-stand the industry.”

Raymond should know. LendSecure’s parent company, Hunter Finance, has pursued this model since 2009 with impressive gains every year. “Hunter Finance was created to invest the Chair-man’s own money” he explains. “The business has become very successful. We are regularly approached by medium to high-net-worth investors who want their money to earn more in a secure environment. LendSecure now gives investors and even small businesses the opportunity to make impressive returns on spare cash in a genuinely low-risk investment vehicle.”

Potential investors should note that despite these precautions, capital is still technically at risk and therefore LendSe-cure joint lenders face the possibility of losing money. Investments in develop-ment finance are short to mid-term in nature and may not be immediately realisable. Investors should note, for example, that LendSecure and other p2p platforms are not covered by the Finan-cial Services Compensation scheme. l

We recommend that you seek independent financial advice if you are in any doubt as to whether lending with LendSecure is suitable for you.

How peer-to-peer lending with first charge security on safe-bet housing schemes can help solve the housing crisis.

To find out more, visit

www.lendsecure.co.uk

Lend secure.indd 1 09/09/2014 12:17:11

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made in numerous different stocks and shares. For retail investors, these are usually operated by a bank or investment supermarket.

What are the risks?As with all types of investments, the value of shares can go down as well as up. With so many options to choose from, it can be difficult to know what would make a good investment.

Collective investment funds are often felt to offer a less risky option, as Laith Khalaf, senior analyst at Hargreaves Lans-down says: “By creating a diversified portfolio, it is less risky than placing all your eggs in one basket.” However, these are still subject to market pressures, as are all investments, and can still lose the investor money.

Emerging markets

What are they?Emerging markets are countries that are experiencing growth but haven’t yet ful-ly developed. When the term was first coined in the 1980s, this included coun-tries now known as the Bric (Brazil, Rus-sia, India and China) nations. However, their economies have arguably grown to such a degree that they should no longer be classed as “emerging”.

More recently, the spotlight has been on the MINT countries (Mexico, Indone-sia, Nigeria and Turkey) and others in Lat-in America, the Middle East and Africa.

How do they work?Investments can be made by way of op-portunities offered by governments, such as the purchase of bonds, or through com-panies that operate in those regions.

The food and personal hygiene com-pany Unilever recently reported that 57 per cent of its sales take place in emerg-ing markets. The finding indicates the increasing buying power of the growing middle classes.

What are the risks?Emerging markets can be very volatile. Russia is a prime example of a market where demand has waned following the conflict with neighbouring Ukraine. Elec-tions can also have a major positive or negative impact on investors’ confidence. For instance, investors are waiting to see what impact the arrival of India’s new

prime minister, Narendra Modi, will have on the country’s economy.

Hedge funds

What are they?A hedge fund allows the pooling of capi-tal from a number of investors. However, unlike standard collective investment schemes, hedge funds are often aggres-sively managed in order to generate a higher return.

How do they work?Mostly restricted to institutional and high net worth investors, they typically re-quire a minimum investment of around £500,000. Unlike mutual funds, which primarily stick to stock and bond invest-ments, hedge funds have a “wider invest-ment latitude” which can encompass commodities or currencies.

A “hedge fund” or “portfolio” manager will oversee the collective value of the fund, which is contributed to by the vari-ous investors who have a stake in it.

As an investment strategy, hedge funds have a long-standing reputation as an ex-clusive rich man’s club. Traditional hedge funds are only open to “accredited” inves-tors with a set (and very high) net worth. However, there are signs that this field of investment is gradually opening up, par-ticularly as mutual funds, available to a wider range of participants, begin to adopt hedge fund-style strategies.

What are the risks?As with many other investment classes, hedge funds are exposed to risks such as

liquidity (the degree to which an asset can be easily bought or sold) and manager risk – failure to manage the funds correctly can impact on the value and leverage po-tential of a fund.

Hedge funds are also notoriously lack-ing in transparency, meaning investors may not know exactly which companies have benefited from their investments.

Mutual funds

What are they?Mutual funds, sometimes known in the UK as unit trusts and open-ended in-vestment companies (OEICs), are a kind of collective investment scheme. This means they allow investors to pool their money into a single company, which is looked after by a money manager.

How do they work?A professional manager is responsible for investing the funds into a diversi-fied selection of investments, mostly in stocks, bonds or cash. Some fund manag-ers choose an active style, regularly buy-ing and selling assets and attempting to beat the market. Other managers remain passive, simply picking the shares and tracking them. Passive management is the cheaper option, while active management can be dependent upon the expertise of the manager. When profit is earned, the fund pays out dividends to all the inves-tors in the company.

What are the risks?As with hedge funds, mutual funds can seek a widespread diversification to re-duce the risk of the investment. Mutual funds differ from hedge funds in that the regulation on them is far tighter. Unlike with hedge funds, fund managers cannot borrow to invest. They are also far more ac-cessible to regular investors; for instance, they require less initial capital. Designed as a medium to long-term investment of around five to ten years, this allows funds to mature and survive short-term market scares.

Investors should also be aware of the extra fees involved. The initial fee tends to sit at no more than 5 per cent of the in-vestment, while annual management fees come in at an average of 1.5 per cent. Funds that invest in the riskier asset classes can face higher management fees than those investing in lower-risk classes. lTurkey is among emerging markets to watch

t



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01 Investment cover - New Statesman · ing two real issues. Investors either need to take on more risk to continue to achieve the higher yields to which they have become ac-customed,