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Jonathan Gibson

Don’t be blinded by the light of a star manager supernova

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Persistently skilled fund managers are a very rare commodity, hard to identify in advance and hard to live with over time.  Anecdotes and examples of great managers are often used to justify active management, yet even some of the truly ‘great’ managers have failed to live up to their billing.

Like the laws of physics, where many big stars eventually reach their evolutionary end in a supernova, the rules of efficient markets, the zero-sum game where losers must fund winners, investment costs and poor investor behaviour have a similar impact on those labelled as ‘star’ managers.  Here are some examples of fading stars.

Bill Miller of Legg Mason outperformed the S&P500 fund 15 years in a row from 1991 to 2005, returning just over 16% p.a., which compared well to the US-based Vanguard S&P500 index fund’s return of a little over 11% p.a.  Investors in his fund only achieved a return during that period of just over 11% p.a.[1].  Roll forward and the story is very different.  Bill Miller had a disaster during the Credit Crisis, after changing strategy and investing the fund heavily in bank shares.  He lost around 70% of the value of the fund in three years.  The fund recovered poorly, and he retired as its fund’s manager in April 2012.  Over his entire tenure as manager of the Legg Mason fund (5/1982 to 3/2012) the fund returned almost exactly the same as the US-based Vanguard S&P 500 index fund.

Anthony Bolton, after retiring from the Fidelity Special Situations fund with a strong track record in smaller company value stocks set up an investment trust investing in China.  The latter was a very humbling experience for him and a tough ride for his investors.  He retired altogether in 2014 stating ‘I was wrong about the market in China’[2], having tarnished his golden reputation.

Neil Woodford, as anyone who has been reading the paper lately would know, has suffered a humiliating and effectively career ending demise, as liquidity problems associated with holding privately held companies in his Woodford Equity Income fund spiralled out of control.  He and his business partner are estimated to have taken dividends from the firm of around £100 million.

Warren Buffett does not escape comment.  Over the past 10 years to the end of 2018, Berkshire Hathaway, Buffett’s holding company, has turned US$10,000 into US$32,350 whereas the S&P 500 index of US stocks delivered US$34,225[3].  Even the ‘best of the best’can struggle against the relentless market.  Capturing the market return is a worthy goal as he himself often points out by recommending index funds as a sensible investment solution.

Investors today are fortunate as you can invest in low cost, diversified systematic (disciplined, rules-driven) funds that seek to capture specific risks in the market which are expected to deliver higher returns than the market, such as the premium associated with smaller companies or those of value (less healthy) companies.  Identifying the best-in-class funds and living with them over time becomes far easier.  It takes away the risk of attaching the success of your investment programme to one or a small handful of stars, who may well become supernovas.  Remember that over a 15 year period, around 6 in 10 funds cease to exist.

The key conclusion is that although there may well be some skilled managers to invest with, they are few and far between, are difficult to identify in advance and very difficult to live with.  A real risk exists that you may be wrong, which in cases such as Woodford can have very real financial consequences.

In today’s investment space, taking these risks is unnecessary, stressful and the odds of them paying off are low.  If you stick to sensible market risks captured by systematic funds, then sensible longer-term returns should follow.  Don’t be blinded by the light of a supernova.

[1]           Allan Sloan (2011), Bill Miller had a great run, but did his investors?

[2]           Bradley Gerrard (2014), Anthony Bolton: ‘I was wrong about China’

[3]           Berkshire Hathaway Letter to Shareholders 2019

Your Financial Planner will see you now

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A recent survey carried out by Lloyds and Schroders identified that nearly one in five people would prefer a visit to the dentist than a visit to their financial planner.  

We all know the benefits to our health of visiting our dentist regularly, but what about the benefits to our finances or wealth of visiting a financial planner?  It seems that the financial planning profession needs to do much more work to make visiting your financial planner more palatable than the regular trip you schedule to your dentist!  

In the survey, over a quarter of those people asked said they would feel uncomfortable seeing a financial planner.  While a financial planner might not have their hands in your mouth, perhaps there is some concern about the impact of a visit to them on your wallet!  

In reality, financial planners will be going to great lengths to make your experience of visiting them more enjoyable than painful.  Not only will they have spent a great deal of time attaining the level of professional qualifications required of them to advise you but they will also have spent considerable energy understanding how best to communicate with you in an understandable and non-painful manner.  After all, they will want to be encouraging a long-term relationship; they will want you to be seeing them regularly.  

Visiting a dentist will mean good oral hygiene as well as an engaging smile.  Visiting a financial planner will also have substantial benefits, mostly around your ability to live the life that you want to live.  

The financial planner will help you to understand what you can get from life by effectively employing all of your financial resources.  

Experience tells us that the first meeting we have with our clients may well be slightly nervous. However, by the end of theDiscovery Meeting,” most clients will realise that the financial planner has their best financial interests at heart.  

Financial planners can help you answer some of life’s most important questions, such as;  

  • When will I be able to retire and never run out of money? 
  • Will I be able to help my children or grandchildren onto the property ladder through gifting them money or lending it to them? 
  • How will I be able to cope if I need later long-term care? 
  • Am I taking too much or indeed to little risk with my money? 

Just as the dentist is likely to ask you the question, as you sit down in the chair for the first time, “Have you had any problems with your teeth?”, the financial planner will also be armed with questions such as; 

  • What do you want to achieve with your life? 
  • How much will it cost you to achieve those things? 
  • Are you going to do this now and if not now when?  

Like the dentist, the financial planner will deliver the best possible service to you especially if you remember, prevention is better than the cure and, you meet regularly for a wealth check-up.  

What happens if you retire without enough?

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If you reach retirement age with insufficient savings, you face several choices.  You might continue working.  Delaying retirement by working longer gives you the option to save more, and means your savings don’t need to stretch quite as far when you eventually retire.

Alternatively, you could reassess your lifestyle and spend less in later life.  Cutting back on expenditure in retirement isn’t always the answer, as some expenses are unavoidable.  For homeowners, one option on the table is to release equity from the value of your property, which can be used to fund your retirement income.

New research by insurer SunLife has found that most people in their 50s have insufficient pension savings to afford a comfortable lifestyle in retirement.  The research looked at the finances of 3,000 over 50s, finding that 21% don’t have any pension savings.  For the 79% in their 50s who have saved for retirement, the average pension pot stands at £146,666.

A recent report from The Pensions and Lifetime Savings Association found that the price of a moderately comfortable retirement is £20,200 a year.  By ‘moderately comfortable’, they mean enough to cover the cost of necessary living expenses and some luxuries, including an annual European holiday.

With the full basic state pension at £8,767 a year for an individual, the balance of £11,433 to reach this moderately comfortable retirement income level would take a pension pot of around £282,000.  SunLife calculated the size of the pension pot based on current annuity rates and factored in a 3% inflation growth a year for the retirement income.

Based on their calculations, this means it would require savings to make up the shortfall of £357 a month from age 50 to age 65. For a 55-year-old, they would need to save £531 a month, and the savings target rises to £876 a month for a 59-year-old.

However, what about if your goal in retirement is more than a ‘moderately comfortable’ lifestyle?  The Pensions and Lifetime Savings Association defined a more comfortable lifestyle, including more than one holiday and more spending on home improvements, at the cost of £33,000 a year.

This means that, for the average size pension pot, a 50-year-old would need to save £1,669 a month to retirement with sufficient savings at age 65.  The target monthly savings rise to £2,492 for someone who is 55 and to £4,125 a month at age 59.

Simon Stanney, equity release, marketing director at Sun Life said:

“According to our research, just 9% of people in their 50s are confident they have enough in savings, investments and pensions to fund their retirement; a further 32% say they ‘hopefully’ have enough with a 36% saying they definitely don’t. A further 15% say they are not sure.

“Obviously the average over 50s’ pension pot is not yet mature, and many over 50s will reach their target by the time they retire, but for others, especially those nearing retirement age, the amount they need to save each month is quite substantial if they are to build up a big enough pot to retire ‘comfortably’.”

At Wells Gibson the primary goal of the majority of our clients’ is, to either achieve financial independence or maintain their desired lifestyle in retirement.  Financial planning is key, so you can visualise your financial future, be less anxious about tomorrow and secure all that you value.

Please contact Wells Gibson if you want to know much is enough.

DIY retirement planning is a bad idea

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Despite the advantages, relatively few people speak to a financial adviser or financial planner before making important decisions with their money.  A survey carried out by the Financial Conduct Authority (FCA) as part of their 2017 Financial Lives report found that only 6% of UK adults had worked with a regulated adviser in the past year.

Instead of taking professional advice, choosing to go it alone means you carry the responsibility of your decisions and their subsequent outcome.

New research from financial services provider Sanlam found a high degree of confidence among DIY investors.  They found that almost half of adults in the UK are choosing not to work with a financial adviser to plan their finances.  The ‘What’s Your Number?’ report from Sanlam found 44% of those that haven’t spoken to a regulated adviser believe they can manage their finances themselves.

The lack of people seeking advice, and their confidence in making the best decisions without the help of an adviser, comes at a time when more than half of savers have doubts about their ability to retire on their timetable.  55% of savers fear they won’t be able to retire on time, and 77% admitted they haven’t set a target for their retirement savings.  A timetable for retirement and knowing your number (how much you need to save to live the life in retirement you want), are two important duties fulfilled by financial planners such as our business, Wells Gibson.

The research found it was members of the older generations who were least likely to have spoken with a financial planner.  51% of over 65s have never taken financial advice, and 57% of people in this age group said it was because they could do it on their own.  One in five of those responding to the survey who had more than £100,000 in savings said they had never spoken to a professional financial adviser at any time in their lives.

The majority of those said they trusted their instincts to make the right decisions.  Unsurprisingly, the Internet seems to be a popular source of information in helping DIY investors make their financial decisions.  It came in second place after speaking to family members.

However, the research did show that those who seek advice are far more confident about their decisions.  Advised clients were twice as confident as non-advised clients about being able to retire how and when they wish.  Advised clients were also far more likely to have set an income target for retirement, and to have allocated or passed on money to the next generation while they are still alive.

Lawrence Cook from Sanlam said:

“In this age of accessible information, the temptation is to think that all the answers to problems we face can be found online.  When it comes to retirement, the real task lies in identifying the right questions to ask.

“Holistic financial planning is about so much more than tactical advice, and most will naturally be unaware of the financial planning strategies that can help them reach their financial goals.

“At the heart of the problem, many are simply crossing their fingers – in some cases burying their heads in the sand altogether.  The truth is the majority – 55% – have doubts they will be able to achieve the retirement they want.

“The fact remains that proper, robust financial planning is the best way to ensure you can achieve your financial goals in a smooth and timely way.”

DIY retirement planning is a bad idea.  Working instead with a professional financial planner, means getting answers to your big questions and carefully considering all of the options, and mapping out a retirement plan on your terms.  The question is, what does your financial future look like?

Retirement is one of life’s transitions, not a cliff-edge

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The traditional approach to retirement has changed, dramatically so, in recent years.  What used to be viewed as a cliff-edge has, for many retirees, become more of a gradual transition into a different lifestyle.

Where retirement used to involve a complete break from work – one-day clocking in at 9 am, the next with no employment commitments to fulfil – it’s now increasingly common for retirees to work part-time, or volunteer in some capacity.

New research from Fidelity International has found that more than half of UK adults plan to work at least part-time during their retirement.  The retirement trends research found 52% of people intend to continue working in later life.  This still represents ‘retirement’, as on average people expect to step back from their primary job at 66 years old.

However, a significant 45% of those surveyed expect to continue working in some capacity well into their 70s, and almost one in ten expect to be still working in their 80s or beyond.

An expectation of having or wanting to work for later could be linked to improvements in longevity.  Average life expectancy at birth in the UK is now 79.3 year for men and 82.9 years for women, with a child born today expected to live for a decade longer than a child born in the 1950s.  As we’re living longer, on average, it’s natural to expect to work longer.  Alternatively, the amount saved during our working lives would need to be significantly higher, to last for longer in later life.

Already, this improved life expectancy is feeding through into different lifetime working patterns.  The latest official figures show the proportion of over 70s in full-time or part-time employment has doubled in the past decade.

Maike Currie, director for workplace investing at Fidelity International, said:

“With 60 now widely seen as ‘the new 40’, today’s so-called retirees are healthier, living longer, and retiring at different ages. So, it is unsurprising that people have no desire to retire and are defying traditional expectations.

“The economic power of those who were once considered ‘past it’ can now be felt everywhere.  This will transform the jobs market as more people work into their late 60s or even early 70s and they will have a growing influence on consumer spending as pension reforms allow them to cash in their lifetime savings and spend the money as they wish.”

The research also found that higher-income households are more likely than lower-income families to plan to work into their retirements.  The financial choice could, therefore, play a role in this decision.  58% of people from higher-income households had this intention, compared with 50% from lower-income families.

Higher earners do however expect to step down from their primary career an average of two years earlier.  Households with income exceeding £50,000 a year expect to retire at age 65 on average, while families with income of less than £50,000 plan to retire at age 67 on average.

What this research shows is that, for many of us, retirement is no longer the one-off event it used to be.  Instead, retirement increasingly involves a gradual transition from work to leisure.  As well as financial, there are many benefits to working in retirement.  The sense of purpose and identity that comes with continuing to work can have positive mental and physical health outcomes when compared with retiring fully from all work.

What matters is having a clear plan for retirement and having choices when it comes to continuing work.

Sometimes, it’s not possible to work in our 60s, 70s or 80s, due to poor health (for ourselves or a loved one who needs our care), or the lack of suitable employment.

To create these choices, having a robust and fully funded retirement plan, that can kick in should work become impossible, is a must-have.  Working with a financial planner to identify how much you need to save and how to best structure your retirement wealth is a valuable step.