UK Budget – Some implications for income investors and expats.

There has been some interesting announcements made in the 2015 Budget, which will have an impact on individuals who gain income through dividends and rents.  In the last quarter, record dividends were paid out by FTSE 100 companies in the UK. This partly reflects the fact that many UK firms announce dividends in Dollars, and when one factors in the depreciation of the Pound against the Dollar, in Pound Sterling terms the payout was a record.

It does also reflect the strong balance sheets that many big firms continue to have in the UK.  Interestingly, the financial sector has started paying dividends in a big way again, with lloyds TSB paying out their first dividend in years.  Despite this good news, there has been some tax implications which will have an impact on UK residents and expats who receive such income.

A new tax free 5,000 dividend allowance has been announced, but for rates above this, the effective tax rate has been increased by 7.5%, meaning that most of those above the allowance will be taxed more.  With good planning, however, investors can reduce their exposure.  They should make the most of tax shelters such as ISAa (for UK citizens) and offshore financial planning (for expats).

In addition, landlords in the buy-to-let sector will also see some changes from 2017.  At the moment, landlords can put the interest costs on such mortgages on their self-assessment forms, meaning they are getting tax relief on mortgage interest. In the future, this system will be only be restricted to the basic rate of tax.

The changes that have been made, once again shows the benefits of having liquid investments that can easily be sold.  After looking at the specific situation of an individual, it is usually quick and easy for an expat to transfer their funds offshore, if they are an income-investor that wants tax-efficient investments.  In comparison, selling a house can take months, and can ultimately be worthless if a buyer does not make a bid for any number of reasons such as worries about floods or structural problems in the house.

Asset allocation: the importance of bonds and liquidity

Let us consider, for a moment, some facts. 1). There are many different asset classes such as property, bonds, commodities and equities. 2). Some of these asset classes are liquid and some are illiquid. 3). Nobody can, for certain, predict the movements of financial markets despite the fact that markets have historically risen over time.

These points are important, because it is safe to assume that sometime in your life, the financial markets will be down 10%, and quite possible, as much as 50%. This does not need to trouble long-term investors who can ride out the volatility, and is especially good for those that have cash lying around.

However, sensible asset allocation not only reduces your risk, but it also gives you a chance to benefit from the downsides as well. Let’s give an example of government bonds. Government bonds produced by the US Government and other developed and mature economies are one of the least volatile asset classes.

They usually barely outperform inflation, because investors do not demand much of a risk premium on such a safe asset. It is true, therefore, that bonds over the long-term do not yield as much as financial markets. Whereas the S&P and Dow Jones has historically yielded around 6.6% after inflation, which compounded has made them the best performing asset class, government bonds have yielded barely above inflation.

So why should investors consider bonds? Well for one, having some bonds in your portfolio cushions the blow of any market falls, as bonds usually go up during financial crashes, as they are seen as a safe heaven. Just as importantly, bonds allow you to buy equities cheaply during the crash.

Consider the following portfolio. The value is worth $100,000. 75%, or 75,000, is in international equity markets, and 25%, or 25,000, is in government bonds. Now imagine there is a market crash. The equities go down by 20% to $60,000 and the bonds have risen to $26,500 in the wake of the crash.

Now the portfolio is worth $86,500 and the bonds are worth $26,500 of that, meaning that the bonds are now worth more than 30% of the portfolio. This is important, because investors can now sell 5% of the bonds and buy equities at discounted prices, or even buy another 5-10% if markets fall further. Using this strategy, even if the market only recover back to there previous level, the investor will have more than the original $100,000, because he or she bought at discounted prices when the market fell.

Of course, investors can only make such a trade if their investments are liquid and there are no hefty exit charges for leaving funds. Nobody can sell physical art, property land or many commodities in a day or probably a week, and selling a fund which has a 5% exit charge does not make sense. This illustrates the importance of having a relatively liquid portfolio, where assets can be moved freely, quickly and cheaply from one asset class to another. It means that rational, medium and long-term investors, can actually look forward to buying at lower prices, which will help returns.

Predictions for 2015.

Predictions always put you on shaky grounds, and markets are notoriously difficult to predict. With that said, I will look into my crystal for 2015 with predictions for different asset classes:


The US markets are at nominal records, whilst some markets are still struggling.  This has made some people very cautious about the Dow Jones and S&p, but it does appear as though the US economy is rising and sentiment is on the side of the USD, US equities and US housing.  Don’t be surprised if the Dow reaches 19000-20000 sometime next year.


As previously mentioned, sentiment is on the side of the USD, and to a lessor extent, the Euro and Sterling.  The new `currency wars` and devaluations appear to be happening in Asia – starting with Japan but also with oil exporting countries.  There will be a bottom somewhere and patient investors can gain from volatility – as the sharp appreciate of the Russian Rubble after previously devaluations shows.  For cautious and longer-term investors, stick the cash component of your portfolio in USD.


Commodities are extremely volatile, as the recent price of oil suggests.  Commodities is a risky play but with oil trading in the $50s, it is hard to see how medium term investors won’t make a profit.  In fact, it is realistic that oil will be trading at at least $70 this time next year.  Some oher commodities that have fallen sharply may rise this year from current low levels on technical buying.


The combination of quantitative easing and rising economies meant that real estate prices in many developing countries has skyrocketed.  However, times and sentiment has changed.  Already the depreciation of many emerging market currencies and falls in some housing markets, has meant that USD returns this year have been steep.  Expect the same trend next year in terms of lower USD based prices in many markets.  US housing in many cities look well-placed to gain from an improving economic outlook.

So those are my predictions for 2015.  Let’s wait until next year to see how accurate they are.

Rotary Club: Change and Continuity in Financial and Insurance Industry in Indonesia for Locals and Expats

A few days ago, I delivered a presentation to the Rotary Club in Jakarta, about changes and continuity in the insurance and financial industry in Indonesia. I focused mainly on people in the individual level, rather than for firms.

I made the following broad points:

• For locals, only around 3% have life policies. Take up of many types of pensions is also low. However, with new compulsory pension and insurance changes on the way, that might be about to change.
• Culture dictates investment more than logic. A good example of this is that locals have typically focused on real estate rather than equity investments, despite the superior performance of the later.
• Trends, such as slowing growth and aging populations, make change imperative.
• For expats, in recent years there has been significant changes at the government level which affects, in particular, UK and US citizens.
• Some things have remained the same, however. In particular most citizens in Indonesia, especially expats, save too little, as the expat lifestyle makes overspending easy.

The full presentation is available on request.




`Guaranteed Returns`

A lot of investment products will speak about `guaranteed returns` or `capital guaranteed`, especially in the largely unregulated offshore market. Guaranteed returns are offered in closed funds, and structured notes linked to markets in Europe, Japan and North America amongst others.  The truth is, nothing is truly guaranteed, because the guarantee is only as strong as the institution or government making the pledge in the first place.

Lehman Brothers produced a lot of products claiming to be guaranteed, but depositors lost their money after the company went bankrupt. Government pledges to guarantee deposits after the financial crisis only covered, typically, less than $100,000 or equivalent of bank deposits, often excluding pure investment related products. Moreover, even assuming all governments always kept their pledges and were able to keep such pledges, the currency and inflation risks in the event of an economic crisis are huge.

During my time working overseas advising expats, many funds promising guaranteed returns, often with excellent track records, have collapsed. LM, an investment which was based in Australian, collapsed last year. The fund, which was regulated in one of the most regulated financial centers in the world, had a great track record and was based on investing in real estate, has left many investors completely out of pocket. Recent funds being sold onshore and offshore, such as UK student accommodation funds, are also in liquidation.

I am not saying that all structured notes and leveraged and illiquid assets are bad. Having one home to live in, which isn’t mortgaged, is good for people in many situations; and some liquid funds and structured notes have performed well and returned investors a good return.

However, readers should consider one thing. If structured lending to developers and other industries such as farming, was so profitable, with so little risk, then why are private equity firms and other people in the know not looking to buy into such opportunities? Why do such products need to be retailed, and sold hard, to consumers, if they are such great opportunities?

The world’s top markets have had more than 100 years of consistent gains over long periods of time. Somebody who invests monthly into the markets, moreover, does not need to worry about short-term trends, as buying cheap, can allow for higher returns, as dollar-cost averaging shows.

One of the positives of equity investing, which isn’t always stated, is that it is a more liquid investment, and a buyer and seller can be found. Next time you are pitched by your adviser/stockbroker, a good question to ask is `is this fund liquid` or `does the fund allow daily trading`.

If you insist on buying into illiquid funds and bonds, at least go through some of the more sound financial institutions. Ultimately funds guaranteed by Goldman Sachs or any of the other big players, have a much better chance of honoring their guarantees than some boutique fund.

QROPS – act sooner rather than later

Your pension pot is one of the most important aspects of financial planning. For UK residents living overseas, Qualified Recognized Overseas Pension Schemes (QROPS) can be an excellent way to maximize your pension pot from taxes, whilst providing you with more flexibility. The purpose of the scheme is to provide expats, or those planning on living overseas in the future, easy access to their pension fund. For many UK expats living overseas, QROPS is a fantastic option for their retirement planning.

Before anything else, the UK’s pension situation is concerning. Private pensions, such as final salary schemes, were made during a time when people were dying younger and having shorter retirement periods. Quite a few companies in the UK, including household names such as the Royal Bank of Scotland, have future pension liabilities which are greater than their total value on the stock market. In the current situation, more and more pension schemes are being changed. Those who transfer their pensions overseas are ring-fenced from such changes.

Moreover, new changes in UK law will make it possible for retrospective changes to pensions to be made, for example by changing allowances available to dependents. Further planned moves by the UK Chancellor George Osborne to change UK expatriates tax situation, by in affect suggesting that UK earned income such as rental income will be taxed more highly, gives a further reason why more and more people will consider cutting their financial ties with the UK.

There are also obvious tax benefits in terms of overseas transfers. Some pensioners are taxed at 40-50% and often have to pay inheritance tax, whilst transferring overseas can allow that tax rate to be cut close to zero, both when you are alive and the lump sum after death.

A further benefit of QROPS is the flexibility they offer clients, which a good adviser can take advantage of. Not only can clients take a lump sum upon retirement, it is possible to review funds every three years and take a draw down every year to provide pension income. Typically, many pensions in the UK are held in low-yielding government gilts, which therefore decreases the likelihood of strong investment performance, especially as interest rates are likely to stay low for the foreseeable future. The ability to denominate the pension in the local currency, can also reduce future risks to your pension’s purchasing power.

So who can qualify for such schemes? Rules differ depending on providers, but generally anybody who has a pension pot in access of 50,000, who has a private pension over the age of 55 and isn’t drawing it, and is a UK non-resident can apply. If you have any questions regarding QROPS, don’t hesitate to contact me via email – International AMG –

Risk and return

Risk is an important subject in life, and vital in investing. Even novice investors understand that there is some trade-off between risk and potential returns. However, most investors tend to want to take a balanced approach to risk, and very few are cavalier on the subject. The following article will look at some types of risk, how to reduce them, and misconceptions about the subject.


Types of risk


There are too many types of risks to speak about here, but below deals with some of the most important types of risks:


Political and legal risks


A gain only occurs once you sell, and hence no gain can be achieved if your investment has been confiscated from you due to a nationalistic government being elected, or new laws which enact confiscatory tax rates.


Illiquid investments


In addition to the above, if you can’t sell an investment because you can’t find a buyer, then you could be left with absolutely nothing.   Land, property and illiquid funds all have risks, including hidden risks, which liquid cash and property investments don’t have.


Currency risks and inflation


Your returns can be dramatically reduced if you invest in a financial instrument which is not denominated in a currency which you plan to spend money in, or if inflation is higher than expected.


Credit or default risk


Of particular concern to investors who have government or corporate bonds in their portfolio, is the risk that the entity will not be able to pay their bills – witness the threat of certain European governments for investors to take `a haircut`.


Interest rate risk


When central banks unexpectedly increase or decrease the base rate, all asset classes are affected. Typically currencies tend to rise, whilst real estate, gold and any speculative investment funded by debt decrease.


Market risks/volatility


This is particularly important for short-term investors. Short term news changes the price of securities instantly – sometimes by many percentage points if leverage is used by major financial institutions to short a stock or currency. Timing markets is almost impossible, and hence volatility due to unexpected news can hit speculators hard.


Doing nothing!


People tend to decide to do something if two conditions are met: they are uncomfortable about where they presently are and comfortable about where they are going. Therefore one of the risks of thinking about risks all the time is……that you will do nothing! As a result of this you will be one of those people who will not have the money to retire when you want or do the things that you want to do, when you want to do them.


How to reduce financial risk


Have some cash


In most situations having too much cash in current accounts is foolish because the rates of returns are so small. But having 6 months living costs in savings, in a currency with a track record of maintaining some value, makes great sense in case the worst case scenario happens.


Protect your income and health


Most people wouldn’t dream of buying a $200,000 house and not insuring it, or a $50,000 car. But your health really is your wealth. If you are disabled, especially as an expat living abroad, who is going to pay the bills? Your social security back home won’t. Quality health and income protection insurance is cheap relative to the cost of losing your health.




Diversifying doesn’t mean investing in every asset class. But it does mean having a balanced portfolio, or accepting that having an unbalanced abroad might lead to big falls as easily as big gains. Having a cushion in liquid cash, one house as your home provided it is not overly leveraged, little or no debt, equities in developed markets and SOME developing markets and commodities makes sense for most client’s risk profile.


Avoid leverage and illiquid funds


Avoid stretching yourself to buy a house and thereby ensuring you not only can’t move for a pay rise, but might get yourself in negative equity. Avoid funds which are illiquid regardless of past performance unless you want to expose yourself to a lot of hidden risk.


Save monthly


Timing markets is very difficult and most people don’t have a lot of self-control. Therefore, saving monthly in a way that ensures good habits, is an excellent way of having self-control. Direct debits linked to an investment account are one such option. Moreover, dollar cost averaging means that monthly savings get you out of the timing trap. In other words, even if markets fall, you can make money if you are patient as you are buying cheap.


Save for the medium or long term


Partly linked to the last point, medium and long term investors do not need to keep logging into their accounts to check values. As much as timing markets is difficult, a market crash can even help those investing for the long-term, provided they have cash lying around,


Don’t panic!


Do not panic if your account is down, and in some situations, see it as a buying opportunity!


Don’t become too enthusiastic when the going is good!


As Warren Buffett said, if too many people are on one side of the boat, one should be worried. Bubbles occur when people get too bullish about the outlook for one particular asset class. Don’t be that person who buys your 5th house on mortgage, assuming that the value is going to keep going up and up.


Don’t assume


Don’t assume that as a UK expat you can get free NHS healthcare if you get sick whilst overseas, that the average age of death and retirement won’t change, that you will have enough in retirement, that you will get a specific sum from inheritance and that you will always have a stable job and business.


But if you are going to make just one assumption…….


Assume that you may never have enough. Take any figure you have in mind, whether that is your ideal retirement income or your six month savings cushion, and double that figure. Few people ever have enough. And if nothing happens, no harm has been done.



Some misconceptions about risk


There are so many misconceptions about risk. I will just deal with a few of the most common:


Risk/volatility are the same thing


They are not. The Soviet Union seemed `stable` before it collapsed, as did the housing market before the financial crisis. If an investment is not moving too much to either side, that could be because there are investors with differing opinions (which is sometimes a good thing), or it could be because of other reasons. Perceptions change. Especially with individual firms. Malaysia Airlines doesn’t look as stable as it did last year, because the facts have changed.


Property is a safer investment than stocks


Real estate is a medium-risk investment in most markets. Yes everybody needs to live somewhere, but they don’t need to buy a place. It is an illiquid asset, which has the risks which were alluded to earlier. There is fire and flood risk, re-sale risk due to a lack of buyers, more tax risks than stocks, it is harder to hide from a partner in the event of a divorce and it brings about many social, legal and political risks. Moreover, over the long-term, stocks in developing markets tend to outperform real estate investments.  This is because companies tend to become more efficient over time.  The 100 biggest firms in the world today are clearly more efficient than those 50 years ago.  As technology improves, the very best firms in a generation from now, should be more efficient than those today.  In comparison some of the factors that have given rise to rising property prices – i.e loose monetary policy, women joining the workforce and increasing household earnings and rising population levels – aren’t likely to continue into the next generation in many countries.


Physical assets are less risky


One can touch property, land, gold, cars and so forth. That doesn’t mean they are safer. To the contrary most of the aforementioned assets can be inherently risky, especially if you invest in them in the wrong way. If you are really bullish about property prices in, let’s say Canada, and you don’t plan to live there, investing in a reasonably priced fund which tracks the price of 50 property developers in the North American market might well be a better bet than buying just ONE property.


In essence, if you don’t want to take risks, don’t invest, which is the biggest risk of them all.