Uncategorised

Negative interest rates

Today, government bond yields and bank deposit rates sit very substantially – and uncomfortably – below where they were 5 and 10 years ago, in negative after-inflation terms and more-or-less-zero before inflation terms.  In March this year, the UK Government issued its first negative-yielding gilt borrowing £3.8 billion at -0.003% for a 3-year maturity.  In other words, they are getting paid to borrow money by investors! What a strange world we live in today.

On a retail basis, falling yields are evidenced in the NS&I products on offer from the UK government.  The days of Index-linked certificates at RPI + 1%, seem like Nirvana.  The recent slashing of rates across the board on NS&I products leaves savers struggling to cover the erosion of their cash by inflation.

Figure 1: NS&I rates since 2008

Note: Highest rate used, where interest rate steps up by assets. *Not available except for roll-over since 2003. Source: NS&I

The Bank of England – alongside other central banks – has hinted that negative interest rates remain in its arsenal of tools to help the economy.  Denmark has already seen home loan offers at a negative interest rate, meaning that mortgage borrowers pay back less than they borrow! One can perhaps see why the ‘Old Lady’[1] sees this as a useful stimulant in helping firms and consumers to have the confidence to borrow. However, if commercial banks are charged for placing deposits with the Bank of England then, in all likelihood, they will pass these costs onto retail depositors.

In effect, negative interest rates represent a transfer from savers to borrowers. However, there would appear to be limitations to negative rates as banks and individuals might well decide to hold bank notes instead at no cost if negative interest rates persist.

One possible solution is to run a system of dual interest rates^[2]. Specifically, this could be targeted at one rate for bank lending (e.g. -1%) and one for bank deposits (e.g. +0.5%).  Various terms and conditions could be applied, such as directing the type of lending the banks could do with this facility.  It has even been suggested that this could be used to drive a new ‘green deal’ where money would be available to companies focused on sustainability.  Borrowers’ net income would rise, as would the benefits of greater economic stimulus through lending to companies to invest in projects.  At the very least, this is an interesting concept.

The one thing that is certain is that it will be extremely hard to preserve the purchasing power of cash in the coming months and possibly years.  Having enough cash to meet emergency liquidity needs is important, but make sure that any longer longer-term assets are sensibly invested.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Past financial performance is no guarantee of future results.

[1]    See the following link for an explanantion how the Bank of England got its nickname: www.bankofengland.co.uk/knowledgebank/who-is-the-old-lady-of-threadneedle-street

[2]    Eric Lonergan, Megan Greene, 03 September 2020, Dual interest rates give central banks limitless fire power. https://voxeu.org/

WINTER ECONOMY PLAN
Here are the headlines from the Chancellors statement in Parliament on 24^th September 2020 where a series of measures to help jobs and businesses were announced.

NEW JOB SUPPORT SCHEME ANNOUNCED
Chancellor Rishi Sunak announced a new job scheme starting 1 November 2020 to replace the current Job retention (“furlough”) scheme which ends 31 October 2020.

All small and medium-sized businesses are eligible, larger businesses must show their turnover has fallen during the pandemic. Employers can use the new scheme even if they have not previously used the furlough scheme. The new Government scheme will last for six months to 30 April 2021 and to be eligible employees will need to be working a minimum of 33% of their hours. For the remaining hours not worked the Government and employer will pay one third of wages each.

This means: Employers will continue to pay the wages of staff for the hours they work – but for the hours not worked, the government and the employer will each pay one third of their equivalent salary. Employees who can only go back to work on shorter time will still be paid two thirds of the hours for those hours they can’t work. The level of grant will be calculated based on employee’s usual salary, capped at £697.92 per month.

By way of an example an employee working 33% of their hours will receive at least 77% of their pay, 22% paid by the Government and 55% paid by their employer (the “worked” 33% plus 22%).

SELF-EMPLOYED INCOME SUPPORT SCHEME
The existing self-employed grant (SEISS) will also be extended on the same basis as the job support scheme. An initial taxable grant will be provided to those who are currently eligible for SEISS and are continuing to actively trade but face reduced demand due to coronavirus. The initial lump sum will cover three months’ worth of profits for the period from November to the end of January next year. This is worth 20% of average monthly profits, up to a total of £1,875.

An additional second grant, which may be adjusted to respond to changing circumstances, will be available for self-employed individuals to cover the period from February 2021 to the end of April.

VAT CUT FOR HOSPITALITY SECTOR CONTINUES
The reduction in VAT to 5% for the hospitality and tourism sector will be extended until 31 March 2021.

DEFERRAL OF VAT BILLS
Up to half a million businesses who deferred their VAT bills will be given more breathing space through the New Payment Scheme, which gives them the option to pay back in smaller instalments. Rather than paying a lump sum in full at the end March next year, they will be able to make 11 smaller interest-free payments during the 2021-22 financial year.

SELF-ASSESSMENT TAXPAYERS – TIME TO PAY EXTENSION
Approximately 11 million self-assessment taxpayers will be able to benefit from a separate additional 12-month extension from HMRC on the “Time to Pay” self-service facility, meaning payments deferred from July 2020, and those due in January 2021, will now not need to be paid until January 2022.

BOUNCE BACK LOANS – FLEXIBILITY GIVEN TO PAY BACK AMOUNTS BORROWED
More than a million businesses who took out a Bounce Back Loan will get more repayment time through a new Pay as You Grow flexible repayment system.

This includes extending the length of the loan from six years to ten, which will cut monthly repayments by nearly half. Interest-only periods of up to six months and payment holidays will also be available to businesses. The Government also intends to give Coronavirus Business Interruption Loan Scheme lenders the ability to extend the length of loans from a maximum of six years to ten years if it will help businesses to repay the loan. The chancellor also announced an extension in applications for the government’s coronavirus loan schemes until the end of November.

Further guidance will be issued in due course.

See: https://www.gov.uk/government/news/chancellor-outlines-winter-economy-plan

‘Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.’

To this day we can still relate to the words of American industrialist John D. Rockefeller, despite their utterance over a century ago. Be it a privately owned business or publicly listed stock, dividends come part and parcel with owning a portion of a business. Cash dividends have long been an effective tool used to attract investors to a company’s shares. ‘A bird in the hand is worth two in the bush’.

Dividends have historically been a way to disseminate information. A change in a company’s dividend could hint at financial health. In a world becoming increasingly dominated by information, mostly available at our fingertips, the power of the dividend, from this perspective at least, has diminished. Also, corporate finance departments have tools at their disposal, such as share buybacks, that have become increasingly popular.

Such phenomena, in addition to perhaps a shift in investor sentiment, have resulted in a reduction in the number of firms paying regular cash dividends to shareholders. The volume of dividends, however, has not necessarily decreased meaning that dividends are concentrated in a smaller number of companies. Dividend-targeting strategies, therefore, tend to be less diverse[1].

‘Do lower dividends mean lower returns?’

Not necessarily. Once a stock goes ex-dividend, it’s price decreases by the amount of the dividend, ceteris paribus. Not issuing a dividend would mean the cash remains in the company and thus is still part of the shareholder’s claim on assets.

Figure 1: Illustration of the impact of a dividend on stock price

Source: Albion Strategic Consulting

‘Does it matter to me what my portfolio yields from dividends?’

Not really. We adopt what is called a ‘total return’ approach to investing[2]. We are agnostic to companies’ dividend policy and instead structure diversified portfolios with a focus on risk exposures. Your portfolio will usually generate some income from dividends each year, and sometimes some capital appreciation too. However, as figure 1 demonstrated, it doesn’t matter where that return comes from. One does not draw out cash, stare at two £20 notes and wonder: ‘which of these came from dividends and which from capital appreciation?’. Return, is return, is return.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

[1] Fatemi, A. & Bildik, R., (2012). “Yes, dividends are disappearing: Worldwide evidence,”

[2] For investors not requiring a ‘natural yield’ from the portfolio.

Good things come to those who wait. This was the strapline once used by Guinness to refer to the 119.5 seconds it takes to pour a ‘perfect’ pint of their iconic stout[1]. In investing, the time periods we are concerned about are measured in years, rather than seconds. Looking at your investment portfolio too often only increases the chance that you will be disappointed. This of course can be challenging at times, particularly during tumultuous markets.

We can see from the figure below that monitoring markets on a monthly basis looks rather stressful, as they yoyo through time. Green areas represent times during which the market is growing its purchasing power (i.e. beating inflation) and red areas when it is contracting.

Figure 1: Monthly real growth/contraction of global equities, Jan-88 to Jun-20

Data source: Morningstar Direct © All rights reserved. MSCI World (net div.) net of UK CPI, before charges. Dividends reinvested.

The evident month-on-month noise captured by the figure above is a consequence of new information being factored into prices on an ongoing basis. Investors around the world digest this information, decide whether it will cause a change in a company’s cashflows (or the risks to them occurring), and hold or trade the stock accordingly. These are the concerns of active investors casting judgements on individual stocks’ prospects.

Over longer holding periods, the day-to-day worries of more actively managed portfolios are erased, as equity markets generate wealth over the longer term. The figure below illustrates that monthly rolling 20-year holding periods has never resulted in a destruction of purchasing power. A longer-term view to investing enables individuals to spend more time focusing on what matters most to them and to avoid the anxiety of watching one’s portfolio movements.

Figure 2: Monthly rolling 20-year real growth/contraction of global equities, Jan-88 to Jun-20

Data source: Morningstar Direct © All rights reserved. MSCI World (net div.) net of UK CPI, before charges. Dividends reinvested.

This is not to say that investing is a set-and-forget process, however. The Investment Committee meets regularly on your behalf to kick the tyres of the portfolio, after reviewing any new evidence. Over time there may be incremental changes to your investments (there may not!) as a result, but the Committee shares the outlook illustrated in the figure above – we have structured your portfolio for the long term, and it is built to weather all storms.

Delving deeper

The figure below provides longer term market data in the US back to 1927. The result is the same. The cherry-picked 20-year example provided towards the bottom of the figure shows a time fresh in many investors’ minds: the bottom of the Credit Crisis. In this (extreme) 20-year period, to Feb-09, equity markets had barely recovered from the crash of technology stocks in the early 00s, before falling over 50% in 2008/9, in real terms. These were scary times.

Despite the headwinds, investors had been rewarded substantially for participating in the growth of capital markets over the longer term. An equity investor viewing their portfolio for the first time in 20 years would have seen their wealth more than double, whilst at the same time the media was reporting headlines such as ‘Worst Crisis Since ‘30s, with No End Yet in Sight’[2].

Have faith in wealth-creation through capitalism and try not to look at your portfolio too often. As the adage goes: ‘look at your cash daily if you need to, your bonds once per year, and stocks every ten’.

Figure 3: Long term US stock market growth in purchasing power

Data source: Morningstar Direct © IA SBBI US Large Stock Infl Adj TR Ext in USD. Market events: https://eu.usatoday.com/

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Use of Morningstar Direct© data

© Morningstar 2020. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

[1] https://www.guinness-storehouse.com/en/guinness-academy

[2] Wall Street Journal, September 18, 2008

Investors love good stories. In recent years, many of these stories have centered around innovations that have fundamentally changed the way we live our lives. Some examples might include the release of the original Apple iPhone in 2007, the delivery of Tesla’s first electric cars in 2012[1] and the launch of Amazon Prime’s same-day delivery service in 2015[2]. No doubt, many of you will have had conversations with friends and family around the successes, failures, and prospects of some of the world’s largest firms and the goods and services they offer. In this note, we take a deeper look at the ‘Big Five’ tech companies – Amazon, Apple, Alphabet (Google), Facebook and Microsoft – through the lens of the long-term investor.

In what has been a turbulent year thus far, some larger firms have come through the first – and hopefully last – wave of the ongoing pandemic relatively unscathed. Those investors putting their nest eggs entirely in any combination of the ‘Big Five’ would appear to have done astonishingly well relative to something sensible like the MSCI All-Country World Index, which constitutes 3,000 of the world’s largest firms[3]. At time of writing, Amazon’s share price has faired best, increasing 75% since the beginning of the year.

Figure 1: The ‘Big Five’ have held up well so far this year

Data source: Morningstar Direct © All rights reserved. Returns in GBP from 01/01/2020 to 22/07/2020. [4]

These types of firms tend to struggle to stay out of the headlines for one reason or another. Perhaps as a result, many of the investment funds found in ‘top buy’ lists – such as the one on AJ Bell’s Youinvest platform[5] – have overweight positions in one or more of these stocks. The final column in the table below shows the weight of each ‘Big Five’ stock as it stands in the MSCI All-Country World Index. If an investor were to adopt a purely passive investment strategy that owned each company as its proportional share of the world market, the final column would be that investor’s top 5 portfolio holdings at time of writing. Many of todays most popular funds are making big bets on one or more of these companies, anticipating that the past will repeat itself moving forwards.

Table 1: AJ Bell’s top traded funds in the past week

Data source: Morningstar Direct © All rights reserved. AJ Bell for top traded funds between 15/07/20 – 22/07/20.

Sticking to the long-term view

The challenge for these managers, and others making similarly large bets, is that these are portfolios that will be needed to meet the needs of individuals over lifelong investment horizons, which for the vast majority of people means decades, not years. With the benefit of hindsight, managers who have placed their faith in these firms have stellar track records since Facebook’s IPO in 2012, as the table below highlights.

Table 2: ‘Big Five’ performance since Facebook’s IPO

Data source: Morningstar Direct © All rights reserved. Returns from Jun-12 to Jun-20.

An interesting exercise would be to investigate the outcomes of these firms over a longer period of time, for example 30-years seems more prudent. This is somewhat difficult given that 30-years ago, 3 of these firms did not exist, Mark Zuckerberg was 6-years old, Apple came in at 96^th on Fortune’s 500 list of America’s largest firms[6] and Microsoft had just launched Microsoft Office[7].

A partial solution to this problem is to perform the exercise from the perspective of an investor in 1996, which is the start of Financial Times’ public market capitalisation record[8]. The ‘Class of 96 Big Five’ consisted of General Electric, Royal Dutch Shell, Coca-Cola, Nippon Telegraph and Telephone and Exxon Mobil. The chart below shows the outcomes of each firm over the past 26-years. A hypothetical investor with their assets invested in either Coca-Cola or Exxon would have just about beaten the market over this period, those in Royal Dutch Shell, Nippon Telegraph and Telephone and General Electric were not so lucky. This experiment is illustrative only, one look at the chart below is enough to see that almost no investor would want to stomach the roller coaster ride they would have been on in any one of these single-stock portfolios.

Figure 2: The winners do not necessarily keep winning

Data source: Morningstar Direct © All rights reserved.

Summary

The beauty of the approach you have adopted is that judgemental calls such as these are left to the aggregate view of all investors in the marketplace. No firm is immune to the risks and rewards of capitalism; be it competition from Costco or Walmart taking some of Amazon’s market share, publishing laws causing Facebook to apply heavy restrictions on its users or some breakthrough smartphone entering the marketplace that is years ahead of Apple – remember Nokia? Rather than supposing that firms who have done well recently will continue to do well, systematic investors can rest easy knowing that they will participate in the upside of the next ‘Big Five’, the ‘Big Five’ after that and each subsequent ‘Big Five’. Those who can block out the noise of good stories and jumping on bandwagons are usually rewarded in this game.

“But the problem that people don’t understand is that active managers, almost by definition, have to be poorly diversified. Otherwise, they’re not really active. They have to make bets. What that means is there’s a huge dispersion of outcomes that are totally consistent with just chance. There’s no skill involved in it. It’s just good luck or bad luck.”
Eugene Fama – Nobel laureate

Figure 3: Your eggs are in many baskets

Source: Albion Strategic Consulting. For demonstrative purposes only.

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Use of Morningstar Direct© data

© Morningstar 2020. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

[1] The Mercury News (2012) https://www.mercurynews.com/2012/06/22/tesla-motors…

[2] Wired (2015) https://www.wired.com/2015/05/free-day-delivery-amazons-gambit-retail/

[3] MSCI (2020) MSCI World Factsheet. https://www.msci.com/documents/10199/149ed7bc-316e-4b4c-8ea4-43fcb5bd6523

[4] The Guardian (2020) https://www.theguardian.com/technology/2020/jul/21/jeff-bezos…

[5] AJ Bell (2020) Top traded funds. https://www.youinvest.co.uk/funds

[6] Fortune 500 (2020) Fortune’s list of America’s largest corporations

[7] Allan R. (2001) A History of the Personal Computer

[8] Financial Times (1996) Market capitalisation record.

On 29 May the Chancellor announced that the grant scheme to support the self-employed would also be extended with a further payment based on 70% of average profits for the 3 years ended 2018/19, limited to £6,570 rather than £7,500.

The eligibility criteria remain broadly the same as the first grant claim. Self-employed profits in 2018/19 must not exceed £50,000 and must be more than 50% of your total income.

If that test is not met, then the same £50,000 and 50% tests are applied to average profits and total income over the three years (or shorter period) to 5 April 2019.

Self-employed traders need not have claimed a grant under the old scheme to qualify for the August payment and are required to confirm that their business continues to be adversely affected by Covid-19. The deadline for making a claim for a grant under the original SEIS scheme is 13 July 2020.

This week HMRC will start contacting self-employed people who are likely to be eligible, through a combination of emails, SMS texts and letters, to tell them what they need to do to get ready to claim.  Applications will open in tranches based on the unique taxpayer number (UTR) given to all self-employed taxpayers.

From this week, people will be able to use a new online eligibility checker. If the checker confirms that they are eligible (and they qualify due to being affected by coronavirus and because they intend to continue trading), they will be given a date when they can use the online service to make a claim from 13 May.

Payments will be made to claimants’ bank accounts from 25 May 2020 (ahead of the original June schedule)

Self Employed Income Support Scheme Eligibility checker see: https://www.tax.service.gov.uk/self-employment-support/enter-unique-taxpayer-reference

 HMRC have issued some more details relating to the claims for the Self-Employed Income Support. The latest guidance was issued on 1 May.

Details are in the link highlighted below.

As with many HMRC “guidance notes” issued recently, these tend to be quite basic, and, unfortunately, leave many questions unanswered.

It is hoped that HMRC may rethink the method of claim, but at this moment, the latest guidance clearly states: “Your tax agent cannot make the claim for you”, meaning we cannot apply on your behalf.

The guidance goes on to indicate that you will require: –

• Your Self-assessment Unique Taxpayer Reference Number
• Your National Insurance Number
• Your Government Gateway ID and Password
• Bank account number and sort code for payment

Contact us if you are unable to locate 1 or 2 above. However, the biggest issue is likely to be item 3.

IF YOU KNOW YOUR GOVERNMENT GATEWAY ID AND PASSWORD YOU DO NOT NEED TO TAKE ANY ACTION AT THIS TIME.

IF YOU DO NOT KNOW OR DON’T HAVE A GOVERNMENT GATEWAY ID AND PASSWORD WE RECOMMEND YOU APPLY AS SOON AS POSSIBLE TO AVOID DELAYS IN RECEIVING PAYMENT. YOU MAY BE ABLE TO SUBMIT A PAPER CLAIM (FULL DETAILS NOT YET PUBLISHED) BUT THIS WILL ALSO LEAD TO DELAYS IN PAYMENT.

Details on the application process are set out below. This will take a few days before it is ready.

If you need any assistance please contact us as soon as possible.

https://www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme

The Bounce Back Loan scheme helps small and medium-sized businesses to borrow between £2,000 and £50,000. The government guarantees 100% of the loan and there will not be any fees or interest to pay for the first 12 months. Loan terms will be up to 6 years. No repayments will be due during the first 12 months. The government will work with lenders to agree a low rate of interest for the remaining period of the loan. The scheme will be delivered through a network of accredited lenders.

Guidance on how to apply is given on the British Business Bank Website: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/for-businesses-and-advisors/

Actions required:

1. Find an accredited lender – there is a link on the above page;
2. Approach them, ideally via their website;
3. Complete a short application form which self certifies that your business is eligible for a loan under BBLS;
4. If eligible you will need to complete the Banks Anti-Money laundering, fraud and Know Your Client checks;
5. The lender makes a decision.

Talk to us if you need assistance in applying for a BBBL we will do our best to help.

 Who is eligible:

Your business must be able to self‑declare to the lender that it:

• has been impacted by the coronavirus (COVID-19) pandemic
• was not a business in difficulty at 31 December 2019 (if it was, you must confirm your business complies with additional state aid restrictions under de minimis state aid rules)
• is engaged in trading or commercial activity in the UK and was established by 1 March 2020
• is not using the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) or the Bank of England’s Covid Corporate Financing Facility Scheme (CCFF), unless the Bounce Back Loan will refinance the whole of the CBILS, CLBILS or CCFF facility
• is not in bankruptcy or liquidation or undergoing debt restructuring at the time it submits its application for finance
• derives more than 50% of its income from its trading activity (this requirement does not apply to charities or further-education colleges)
• is not in a restricted sector (see below)

Note: The above is not an exhaustive list – see The British Business Bank for more information.

Bounce Back Loans are available to businesses in all sectors, except the following:

• Credit institutions (falling within the remit of the Bank Recovery and Resolution Directive)
• Insurance companies
• Public-sector organisations
• State-funded primary and secondary schools

One of the positive consequences of the current lockdown is that is does provide the opportunity to revisit a few of those old tasks, hobbies and pleasures that always seem to get put on the back burner in our busy lives. For some that might be picking up a new or re-reading a favourite book.

Here is an example of the latter: in the early 2000s Nassim Nicholas Taleb published a wonderful book titled ‘Fooled by Randomness’ with the descriptive sub-title ‘The hidden role of chance in life and in the markets’. In it he compares the wealth of a dentist to a wealthier Wall Street trader. The trader makes more money and lives in a far bigger house than the dentist, based on the one life that they have both lived, so far. Yet on an ‘expected’ basis, the dentist is wealthier because if one re-ran the personal earnings drawn from a dental practice over many alternatives lives, each would come out broadly similar (teeth need to be cared for after all). The product of the outcome and the probability reflects a dentist’s ‘expected’ wealth, which is quite consistent and, to a large extent, divorced from randomness.

On the other hand, the trader’s wealth represents the spoils of one life that is potentially the outcome of randomness and hides the left tail risk of complete disaster (e.g. losing lots of money, being fired, defaulting on the mortgage and getting divorced!) and all of the other less lucky lives the wealthy trader could have lived, or other unsuccessful/unlucky former traders have already travelled.  The dentist’s wealth on this basis, makes her the richer person!

Taleb also uses the analogy of playing Russian roulette which – as any who has watched the Deer Hunter[1] will know – is likely to end in tragedy. Many people – such as the trader above – play Russian roulette in their investment lives, only with a gun with far more empty chambers. At some point, the chamber with the bullet in it will end up against the firing pin, with often disastrous portfolio consequences. However, because the event is rare, it often gets ignored. In the meantime, their investment life may be extremely rewarding.

From an investment portfolio perspective, one cannot simply use the lens of past (single life) returns – particularly with 20/20 hindsight (e.g. ‘we should have had more in US growth stocks and less in global value’) – to judge a portfolio. It requires a lens that looks at ‘expected’ outcomes and the chances of them occurring. We should ask ourselves whether over multiple lives – like those of the dentist and the Wall Street trader – the expected outcome of a portfolio structure is higher than the expected outcome of other alternative portfolio strategies. Taleb provides further wisdom:

‘Over a short time increment, one observes the variability of the portfolios, not the returns.  In other words, one sees the variance, little else. I always remind myself that what one observes is at best a combination of variance and returns, not just returns (but my emotions do not care what I tell myself).’

Nassim Nicholas Taleb, Fooled by Randomness

The investment weather can be exceptionally varied and one of the goals of good portfolio construction is to make sure that all the bases are covered. In structuring client portfolios, we seek to avoid the single left-tail bullets that ultimately result in the cardinal sin of investing – permanent loss of capital. Amongst these are concentration risk (e.g. too much in any one stock), liquidity mismatches between a fund’s investors and its underlying assets (e.g. bricks and mortar property funds), low quality bonds (default risk), active manager risks (e.g. Woodford), non-UCITs products and opaque investment strategies, to name a few. A broadly diversified global equity core across all markets, sectors, and companies, balanced with higher-quality bonds as necessary, provides structural robustness, if not necessarily the best absolute outcomes over specific short-term periods.

Figure 1: Making sure expected outcomes are likely to be good

As Taleb states:

‘One cannot judge a performance in any given field (war, politics, medicine, investments) by the results, but by the costs of the alternative (i.e., if history played out in a different way).’

Nassim Nicholas Taleb, Fooled by Randomness

We think that with the longer-term horizons of most clients, combined with the broadly diversified portfolios that they own, which have excluded the key sources of permanent capital loss, are well positioned to navigate the future. It may be less glamorous to look in people’s mouths for a living than to be the Wolf of Wall Street[2], but it should pay higher dividends over time!

Risk warnings

This article is distributed for educational purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy or investment product.  Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Errors and omissions excepted.

[1] A great but harrowing Vietnam war movie, worth watching if it’s your genre – it is available on BBC iPlayer

[2] The Wolf of Wall Street (Leonardo DiCaprio) is another fun watch, if a little hedonistic.

The Government has announced a range of measures to assist businesses in dealing with the financial impact of COVID-19.  We have outlined below the various support packages available. We will be in touch when details of how to apply for the various packages become available.

HELP FOR THE SELF EMPLOYED

The scheme is called the Coronavirus Self-Employment Income Support Scheme (CSEISS).

If you have suffered a loss in income, a taxable grant will be paid to the self-employed or partnerships, worth 80% of profits up to a cap of £2,500 per month.

Initially, this will be available for three months in one lump-sum payment and will start to be paid from the beginning of June.

You cannot apply for this scheme yet. HMRC will contact you if you are eligible for the scheme and invite you to apply online.

Government advice: Individuals do not need to contact HMRC now and doing so could delay the work being undertaken to introduce the scheme.

Who is eligible?

Self-employed individuals and a those who are a member of a partnership. In addition, those eligible must have more than half their income from being self-employed and:

• have submitted your Income Tax Self-Assessment tax return for the tax year 2018-19
• traded in the tax year 2019-20
• are trading when you apply, or would be except for COVID-19
• intend to continue to trade in the tax year 2020-21
• have lost trading/partnership trading profits due to COVID-19

Your self-employed trading profits must also be less than £50,000 and more than half of your income come from self-employment. This is determined by at least one of the following conditions being true:

• having trading profits/partnership trading profits in 2018-19 of less than £50,000 and these profits constitute more than half of your total taxable income
• having average trading profits in 2016-17, 2017-18, and 2018-19 of less than £50,000 and these profits constitute more than half of your average taxable income in the same period

If you started trading between 2016-19, HMRC will only use those years for which you filed a Self-Assessment tax return.

There a few individuals who have not submitted their 2018-19 Self-Assessment tax return and to qualify they now have until the 23 April 2020 to do so.

CORONAVIRUS JOB RETENTION SCHEME

Under the Coronavirus Job Retention Scheme, all UK employers will be able to access support to continue paying part of their employees’ salary for those employees that would otherwise have been laid off during this crisis. All UK businesses are eligible.

Eligibility

You will need to:

• designate affected employees as ‘furloughed workers,’ and notify your employees of this change – changing the status of employees remains subject to existing employment law and, depending on the employment contract, may be subject to negotiation
• submit information to HMRC about the employees that have been furloughed and their earnings through a new online portal (HMRC will set out further details on the information required)

HMRC will reimburse 80% of furloughed workers wage costs, up to a cap of £2,500 per month.

HMRC are working urgently to set up a system for reimbursement. Existing systems are not set up to facilitate payments to employers.

RATES  HOLIDAY

The Northern Ireland Executive has committed to providing a three month rates holiday to all businesses from April to June.

BUSINESS SUPPORT GRANT SCHEMES

The Executive announced last week a grant of £10,000 to be provided to all small businesses who are eligible for the Small Business Rate Relief Scheme and a grant of £25,000 to be provided to companies in the hospitality, tourism and retail sectors with a ratable value from £15,000 up to £51,000.

Together these schemes will provide circa £370m of assistance to some of the most vulnerable businesses by helping their immediate cash flow pressures.

Economy Minister Diane Dodds announced the first set of payments for small businesses impacted by the Coronavirus crisis will be made under the Small Business Grant Scheme on 31 March, if not before then.

An online portal: https://www.covid-19smallbusinessgrants.economy-ni.gov.uk/

has gone live for businesses to register their bank and rates details to secure payment.

Payments of the £10,000 grant will be available in cash to 27,000 small businesses including those in receipt of the Small Business Grants Scheme. An additional 4,000 businesses in the tourism, hospitality and retail sectors will receive £25,000 in cash if they have a ratable value of between £15,001 and £51,000.

DEFERRING VAT AND INCOME TAX PAYMENTS

The Government will support businesses by deferring Valued Added Tax (VAT) payments for 3 months. If you’re self-employed, Income Tax payments due in July 2020 under the Self-Assessment system will be deferred to January 2021.

VAT

For VAT, the deferral will apply from 20 March 2020 until 30 June 2020.  All UK businesses are eligible. If you cannot pay remember to cancel your Direct Debit.

How to access the scheme

This is an automatic offer with no applications required. Businesses will not need to make a VAT payment during this period. Taxpayers will be given until the end of the 2020 to 2021 tax year to pay any liabilities that have accumulated during the deferral period. VAT refunds and reclaims will be paid by the government as normal.

INCOME TAX

For Income Tax Self-Assessment, payments due on the 31^st July 2020 will be deferred until the 31^st January 2021.

If you are self-employed you are eligible. This is an automatic offer with no applications required.

No penalties or interest for late payment will be charged in the deferral period.

HMRC have also scaled up their Time to Pay offer to all firms and individuals who are in temporary financial distress as a result of Covid-19 and have outstanding tax liabilities.

SUPPORT FOR BUSINESSES WHO ARE PAYING SICK PAY TO EMPLOYEES

The Government will make legislation to allow small and medium-sized businesses and employers to reclaim Statutory Sick Pay (SSP) paid for sickness absence due to COVID-19.

The eligibility criteria for the scheme will be as follows:

• this refund will cover up to 2 weeks’ SSP per eligible employee who has been off work because of COVID-19
• employers with fewer than 250 employees will be eligible – the size of an employer will be determined by the number of people they employed as of 28^th February 2020
• employers will be able to reclaim expenditure for any employee who has claimed SSP (according to the new eligibility criteria) as a result of COVID-19
• employers should maintain records of staff absences and payments of SSP, but employees will not need to provide a GP fit note.
• eligible period for the scheme will commence the day after the regulations on the extension of SSP to those staying at home comes into force
• the government will work with employers over the coming months to set up the repayment mechanism for employers as soon as possible.

You are eligible for the scheme if your business is UK based and your business is a small or medium-sized and employs fewer than 250 employees as of 28^th February 2020.

THE CORONAVIRUS BUSINESS INTERRUPTION LOAN SCHEME

A new temporary Coronavirus Business Interruption Loan Scheme, delivered by the British Business Bank, will launch this week to support primarily small and medium-sized businesses to access bank lending and overdrafts.

The government will provide lenders with a guarantee of 80% on each loan (subject to a per-lender cap on claims) to give lenders further confidence in continuing to provide finance to SMEs. The government will not charge businesses or banks for this guarantee, and the Scheme will support loans of up to £5 million in value.

Businesses can access the first 12 months of that finance interest free, as government will cover the first 12 months of interest payments.

You are eligible for the scheme if:

• your business is UK based, with turnover of no more than £45 million per year
• your business meets the other British Business Bank eligibility criteria

How to access the scheme

The full rules of the Scheme and the list of accredited lenders is available on the British Business Bank website: https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-scheme-cbils/

All the major banks will offer the Scheme once it has launched. There are 40 accredited providers in all.

You should talk to your bank or finance provider (not the British Business Bank) as soon as possible and discuss your business plan with them. This will help your finance provider to act quickly once the Scheme has launched. If you have an existing loan with monthly repayments you may want to ask for a repayment holiday to help with cash flow.

The scheme will be available from early week commencing 23^rd March.

SUPPORT FOR BUSINESSES PAYING TAX: TIME TO PAY SERVICE

All businesses and self-employed people in financial distress, and with outstanding tax liabilities, may be eligible to receive support with their tax affairs through HMRC’s Time to Pay service.

These arrangements are agreed on a case-by-case basis and are tailored to individual circumstances and liabilities. You are eligible if your business pays tax to the UK government and has outstanding tax liabilities.

If you have missed a tax payment or you might miss your next payment due to COVID-19, please call HMRC’s dedicated helpline: 0800 0159 559. If you’re worried about a future payment, please call them nearer the time.