The MAM Blog – The Discontented Consumer


Amanda Forsyth – Investment Manager & Business Development

The most recent data from the Office for National Statistics shows the unemployment in the UK continues to hit new lows – only 3.8% of the workforce is, we are to understand, without a job.


 

Why, then, is the story from the high street so markedly different? Thanks to comparisons with the period when the Beast from the East kept shoppers away, the month of March saw a sharp year-on-year rise in retail sales; but the underlying picture is less rosy, with 23,000 stores expected to close during the course of 2019. The high-profile collapse of Debenhams has been accompanied by a litany of other retailers announcing that they are calling in administrators – fashion chains like Pretty Green and LK Bennett, the bathroom suite distributor Better Bathrooms and Patisserie Valerie are all on the list of failures in the first quarter.

Nor is the blame entirely to be laid at the door of the online onslaught. Online retailers Wine Direct and Miss Shoes also suspended trading, the latter citing intense competition among their reasons for failure.

 

There is certainly a fierce battle for the attention of the UK consumer, but one would have thought that with so many in work, there should be enough retail spend to go around. The devil, though, is in some of the detail of the unemployment data. The growth in zero-hours contracts means that a worker can be regarded as employed, while still failing to secure any earnings; and the result of that has been a fall in productivity and consumer confidence.

The challenge, therefore, is to overlay on the rosy employment picture a realistic assessment of the shopper’s wallet, and both high street and online retailers must work hard to retain a share of that slim purse.

 

The MAM Blog – Reviewing a fund


Charles Robertson – Senior Investment Manager

I was recently asked by a client to provide some comments in relation a recently launched Investment Trust because they were considering purchasing shares. The following is a summary of my reply and it provides a useful insight into how we review a fund.

The launch of the fund involved was incredibly popular and as a result it raised far more money than was expected (roughly 3x more). Generally, Murray Asset Management do not participate in fund launches which attract such a level of support because:-

• Too much hype – triumph of marketing
• Too much support from retail investors
• Tend to involve a ‘star’ fund manager with a long and successful track record based on a particular investment style

Retail investors may not fully appreciate the characteristics/risks of the fund they are supporting and may quickly become disillusioned if short-term performance is disappointing. Typically, if this leads to a lack of demand for the shares then the share price may move lower (and independently to the Net Asset Value performance). Investment styles may go in and out of favour – marketing typically focuses on a ‘here is what you could have won approach’ if you had only invested five years ago in the fund. However, you could not invest in the fund five years ago and so we treat any such performance claims with a healthy degree of cynicism.

However, the fund involved has a number of attractive features, but again some of these require further consideration:-

• A focus on global small and mid-sized companies (good) – but really not that small with the average investment being in a company with a market capitalization of approx. £7 billion
• A long term investment approach (good)
• A focus on quality (good) – particularly if economic headwinds are starting to build
• A concentrated portfolio (good – but adds to risk)
• A clearly defined investment strategy (good).

Typically, we favour managers who have the experience of being ‘through an investment cycle’ – i.e. through both good times and bad. There are other factors to take into account when reviewing a fund, for example costs and the investment opportunity relating to the asset class involved. Finally, given it is an investment trust the share price needs to be considered in relation to the Net Asset Value.

It would be wrong for me to provide details of the recommendation we made, but hopefully the comments are a useful insight into how we begin to construct a recommendation.

The MAM Blog – What does Compliance actually do for clients?


Lisa Hamer – Compliance Director

One of the few times I have heard compliance discussed with any real enthusiasm (aside from with other Compliance professionals) was when ‘Comply or Die’ won the Grand National in 2008! Compliance is the reason we have to issue so much information to clients, and obtain so much from them in return – it is just a burden! Or is it?

Actually, Compliance is your champion and protector. In conjunction with MAM’s Management Board, it ensures that the firm meets all regulatory requirements – everything from financial solvency to suitability of advice.

Suitability is the reason that we need to ask for so much information from clients, both at the outset of our relationship and periodically thereafter. We need to ensure that our services, investment decisions and advice are suitable; that our clients understand any risks involved and have the financial capacity to bear these. We need to regularly review our clients’ circumstances to ensure any changes are considered in our on-going advice and investment decisions. In order to do this, we need a lot of information.

What may seem to be intrusive questions are extremely important. Would you trust a medical diagnosis based on your answers to a few simple questions, or would you trust the one based on a comprehensive and detailed review of your current and past history? Similarly, which analysis of your financial needs would you trust if done on the same criteria?

Yes, we have compliance obligations but primarily we want to do the very best for our clients, and this means asking for quite detailed information in order to undertake a comprehensive analysis of needs and so propose suitable, effective and tailor made solutions.

So, rather than being intrusive or inconvenient, our requests for information are the foundation for suitability.

The MAM Blog – Tapered Annual Allowance


Richard Johnston – Financial Planning Director

The Annual Allowance (AA) restricts the value of pension contributions that can be made by an individual in a given year and, for some years now, the standard AA has stood at £40,000.

Since April 2016, however, the AA has been tapered for those with high levels of income and the rules relating to it can lead to complex calculations being required to determine the AA that is to apply. Typically, the taper applies when income exceeds £150,000, but that is further complicated by the fact that employer contributions are also deemed to be income, and there is a get out of jail card which can be played if income, according to an alternative definition, is below £110,000.

At worst, the taper reduces the AA to £10,000, which is typically achieved once income reaches £210,000, as £1 is lost for each £2 of income above £150,000.

The taper is all the more relevant now because whilst AA rules may permit a person to carry forward unused AA from the previous three tax years, it is now the case that all of those years could be subject to the taper, so a separate calculation may be required for each.

The matter is even more complex for those with defined benefit pension schemes, because 1) a special formula is used to calculate AA usage and 2) it can be difficult to predict what AA usage will occur for a current tax year, in order to decide whether to make a top-up contribution to a personal pension.

It is, therefore, the case that the seemingly simple question of ‘How much can I contribute to my SIPP this year’ may, in fact, be a complex one that requires some time (and a good spreadsheet!) to calculate. For those who may be affected, it is important to assess the position sooner rather than later

The MAM Blog – US-China Trade Wars – What Price Services?


Simon Lloyd – Chief Investment Officer

As tensions remain high in the ongoing negotiations between representatives of President Xi Jinping of China and President Donald Trump of the US, all eyes are on the next deadline of March 2nd. If insufficient progress has been made by that stage, tariffs on $250bn worth of Chinese goods will rise from 10% to 25%, with impacts expected both in China and the US. At present, the expectation is that Mr Trump will stand by his Tweet from 24th February, delaying that punitive hike.

However much less attention is being paid to what are, arguably, at least as important to international business; the supplies of services. While automotive parts and food ingredients are tangible evidence of the two countries’ reliance on one another, there is arguably much greater value to be obtained for the US if access to banking and financial services was opened up. When China joined the WTO, it undertook to let in foreign electronic-payment services; however, Mastercard and Visa have both struggled to make any headway with the authorities. American Express was finally granted a license in late 2018, after agreeing to form a joint venture with Lianlian Group; while Mastercard may finally break a deadlock by linking up with Chinese clearing house Nets Union Clearing Corp.

At the same time, telecommunications services remain resolutely dominated by Beijing; freedoms promised are, eventually, shown to be only very narrowly defined, and permitted only at a pace that befits a nation of long history and long memory.

So, while the US soybean market continues to struggle, the stakes for service industries in the ongoing trade conflict are high enough to give both Mr Xi and Mr Trump vertigo, should either of them look down.

The MAM Blog – Smartphone sales as economic indicator


Stuart Ralph – Investment Manager

The stockmarket recently wiped $50bn off Apple’s stockmarket valuation following its news of slowing iPhone sales in China. The US tech giant now anticipates revenues of around $84bn for the latest financial quarter, a decrease of approximately 8% from earlier guidance. Since China accounts for 20% of all company revenues, and as weakness was specifically seen within iPhone sales, the decline indicates quite a sharp fall in demand. In the aftermath, commentators have also suggested that given the iPhone’s symbolism of affluence within China, declining sales is a worrying sign for Chinese consumer confidence and the wider global economic outlook.

While I agree that weaker sales in China is of concern to Apple (and its suppliers), I am reluctant to see this as a more widespread and worrying sign. It’s obvious that US – Sino relations are increasingly challenging, and incrementally damaged by the arrest of Huawei’s CFO in Canada on the request of US authorities in relation to Iranian Trade embargo matters. The fact that President Trump suggests a more widespread deal between the two countries could remedy the situation clearly masks the wider political intent.

However, the real problem is that companies such as Apple, Samsung and Huawei are victims of their own success. They have over recent years produced increasingly complex, technologically sophisticated and ultimately increasingly “must-have” devices that the populations of the world have embraced. However at the same time, their high-end devices have become ever more expensive.

As I look at my 4 year old iPhone 6 Plus and the images it can take, I can’t see a clear imperative to buy a new phone with an ever better camera or faster processor. It can do all the surfing, emailing, texting, video conferencing, ticket purchasing, music listening and media consuming activities that I could possibly need. I can even login into my work desktop should I wish and it’s a great sat-nav system at the weekends. While it doesn’t have some of the operating bells and whistles that newer devices have, the underlying functionality remains virtually identical.

My belief is that for the vast majority of people, once devices reached a certain point in technological evolutionary terms, the applications that can be run on them is key – new operating system updates / compatibility issues / and dare I say it, intentional obsolescence are the critical factors.

So the question is – if Consumers are happy with their amazing devices and not cajoled into upgrading, then the additional disposable income required to purchase a new device can be used to purchase a range of different products. In economic parlance, the marginal utility per unit of cost associated with a new device is less than the marginal utility per unit cost gained consuming a range or basket of alternative goods.

There will of course be new consumers that underpin future sales, but a combination of enhanced functionality and cost increases have resulted in the replacement cycle being pushed out. The higher the technological bar and cost, the further this cycle will be pushed out.

Growth in China is almost certainly slowing and a deeper economic downturn may yet be seen, but the truth is that no single data point should be regarded as a proxy for the overall performance of the Chinese economy.

The MAM Blog – National Savings & Investments


Charles Roberston – Senior Investment Manager

From 1 May 2019, existing holders of Index-linked Savings Certificates will only be able to re-invest the maturity proceeds in Index-Linked Certificates where the return is based on the Consumer Price Index (CPI) measure of inflation, instead of the currently used Retail Price Index (RPI). The change is due to the reduced use of RPI by successive governments to measure inflation and is in line with NS&I’s requirement to balance the interests of its savers and the cost to the taxpayer.

CPI has historically yielded a lower rate of inflation than RPI (currently 0.9% lower). This can largely be attributed to the way the two indexes are calculated and the fact that RPI incorporates the housing market (which has historically been a volatile asset class); taking into account rises in mortgage payments, rents and council tax while CPI does not. Therefore, existing holders of Index-Linked certificates (they are currently not available for new purchases) which mature prior to the 1st May 2019 deadline should consider re-investing the proceeds for the maximum period of 5 years if they are able do so. The new measure of inflation will only be applied when a re-investment is made because existing holdings will continue to be based on RPI.

The MAM Blog – Budget 2018


Richard Johnston – Financial Planning Director

On Monday 29th October, Philip Hammond delivered his third Budget as Chancellor and, similar to the previous two, there were few standout policy changes.

It has been commented that it was an agreeable Budget and one typical of a party running for re-election, but Mr Hammond did highlight that a more severe ‘emergency’ Budget may be required in the event of a ‘no deal’ Brexit.

Focusing on one giveaway, the personal income tax allowance will be increased from £11,850 to £12,500 for 2019/20, with the higher rate income tax threshold for residents in England/Wales/NI increased from £46,350 to £50,000. This lofty, round number was originally promised for 2020/21, but will now be enjoyed a year earlier – assuming, of course, that a Brexit deal can be agreed.

For residents in Scotland, this should prove to be interesting with the SNP’s Derek Mackay due to deliver his own Budget on 12 December.

The Scottish Government cannot control the personal allowance (as it is reserved for Westminster), although it might not be inclined to use a lower figure, in any event.

It can, however, determine the higher rate threshold in Scotland, with it already lower than that of the rest of the UK, at £43,430. It would be surprising if Mr Mackay introduces a similarly large increase and, therefore, the gap between the two parts of the UK is expected to widen from April 2019.

I previously wrote about how the gap causes some undesirable results, as certain taxes remain reserved for Westminster. If the gap widens further, it may lead mobile, high earners to move south – something which the Scottish Government should be keen to monitor before it is too late.