Loz Gee

Good morning, everybody. Thank you so much for joining us this morning and happy New Year I guess as we may not have seen a lot of you since last year. Welcome to the first webinar of 2022, we hope you’ve had a good start to the air and you’re happy and healthy. Today, we have a fantastic session with Ben and Neil, where we’ll be running through investing for business owners.

So today, as I said, we’ll be running through a little bit of a session on who we are, if you don’t already know us just a little bit of an understanding of who we are and what we’re about. Neil will then be having a session focusing on corporate and family investing and then Ben will share his insight and give us a current market performance. There will be a question and answer section at the end. So please do send through any questions that you have and we’ll monitor those as we go along. Then we’ll tell you what the next steps are afterwards. So a little bit about us. This shows us as a team of five and we’re actually now a team of seven. So we will be updating this photo. We’re a company that was formed in April 2020. They don’t do things by halves, these boys like they start a business in the start of a pandemic, very experienced in their field and essentially we all love what we do and we want to make sure that the interaction with our clients is on point and to provide planning and advice based on the long term goals of our clients. So over to Neil, for a session on planning.

Neil Wattam

Thank you Loz and good morning, everybody. So I’m going to start this section with some reminders. So the focus of the session, as Loz mentioned is not on broad planning topics but it’s worth a reminder as we’re getting nearer to the end of the tax year. So some of the more normal planning perhaps aspects for you just to remember and be mindful of and if you can take advantage of then I’d certainly look into them if you haven’t already. ISA’s and this is in no particular order but ISA’s and pensions are the typical areas we would look to help people with. So for adults, you have a £20,000 annual tax year allowance per adult, it is a use it or lose it. So if you don’t make that contribution in this tax year, you get a new one next tax year, but you can’t go backwards. Junior ISA’s are not so well known but equally very powerful for children’s savings, albeit they can’t touch them until they’re older but there’s a £9,000 per child limit each tax year so that can be quite useful. The main benefit is that gains and income are free from tax forever. So very flexible and tax free. Pensions are really there for that longer term, obviously, depending on your age but for most people that longer term pot, the contribution limits do vary. I mean there are annual allowances and limits but effectively it’s down to your circumstances as to how much you could put in. So rather than dwelling on the detail, and you can save tax now so it’s particularly useful if you’re an earner between £50,000 and £60,000 pound gross or the £100,000 to £125,000, a nice position to be in but from a tax perspective pretty painful and you do lose benefits such as child benefits and other benefits and your personal allowance at that top level as well. The future growth is free from capital gains tax and other benefits. Then finally, always make sure you’ve got emergency cash, three, six months whatever you want, but have something decent there for that unknown event. Have you got insurance for the family critical illness insurance, and life cover etc. We all don’t want to think about those sad times but they will happen. And what’s the why, what are you doing all this for? It’s all very well suggesting pensions to save tax but if that’s not what you want in future to have that big pension pot because you want to spend all your money sooner then fine, but just be mindful of why. So some of you if you’ve been to these webinars before will recognize this sort of slide. I’m not going to go through this one, but the point is that this couple fictitious couple have got pensions, ISA’s, buy to let’s, a business, lots of stuff going on. Pots here there and everywhere, income from different places. But they’ve got to a point where they’ve got a good established base, but it’s what else could they do. So I’ve mentioned the kind of more traditional, perhaps planning points, which are here on the screen, and recommend that you have these in varying degrees, typically. But they have various benefits, which I won’t dwell on here. But they all have their place. Now, pensions and ISA’s are things that hopefully many of you are aware of, and have, likewise with emergency cash and life cover, etc. These are things you should be considering if not already. But what else is there, that’s what I’m here to really talk about. So there are lots of extra options. There are more beyond this screen clearly. But these are three, which we often help our clients with, depending on the circumstances, and they are less well known perhaps so that’s why I wanted to bring it to the attention of you guys today. Starting from the left, general investment account. This is just effectively a normal account that allows you to invest. So there are no tax benefits per se within the account but it allows you to invest additional cash, each of us have tax allowances such as a dividend allowance, which is £2000 pounds a year, and capital gains tax allowances, which a lot of people do not use. So this is an area where you can help utilize some of those allowances and it’s very flexible, you can put money in and you can take it out with largely without too many tax consequences. They’re very helpful if you’ve got extra cash, perhaps from inheritance or a lottery win or something. The middle section corporate investment accounts. So this is similar to the general investment but for a company. So again, your company might have extra cash and might have profits that you’ve generated that you don’t want to withdraw. Their flexible, but there is corporation tax payable. And then finally, the Family Investment Company, which again is a company and it’s there to really facilitate future plans and potentially help children or grandchildren for example. It is effectively an alternative to trusts. Trusts have their place, but perhaps have fallen slightly out of favor in light of capital gains tax and other tax positions we have today. So I’m gonna go through each of them in a bit more detail.

So the general investment account, so when might it be appropriate. So like I mentioned, you might have used your ISA’s, you might have used your pension contributions for particularly higher earners, pension contributions can actually not be as beneficial as they are perhaps for more modest earners and therefore, where else do you go? Well, this is a potential place to get your cash working that might otherwise languish in a normal bank or savings account. There are no limits. So you can effectively put in as much as you can afford, obviously, there’s risk with investing. So you need to be mindful about what is where and what it’s doing. But effectively, you could put in an amount that’s of your choosing. These are personal accounts. So there’s no corporates, there’s no children, necessarily here, this is all about you, or a spouse, etc. Tax, as I mentioned before, these accounts can really help you utilize some of those tax allowances. So they there’s no tax free allowance in it, but you could use those capital gains tax or dividend allowances, for example. As I mentioned at the bottom, just briefly, these are particularly useful potentially if perhaps you’ve got one of you earning a higher say £100k or more, and the other spouse potentially not earning anything or less, the lower taxpayer could benefit potentially more so using a GIA than the higher rate taxpayer. Capital gains, as I mentioned, helps you utilize that tax allowance which would otherwise go away and not be utilized. But for inheritance tax, this is still in your estate. So inheritance tax is on your radar, this is still in it. Corporate investments accounts, similar to the previous one, this is to get additional cash working within a business within a business in this case, I’m typically thinking of a limited company here that perhaps you’ve been profitable generating extra cash, but you don’t want to withdraw it because you’ll pay additional tax. In the example earlier. This couple are earning between them £100,000 pounds, which means they’re potentially both basic rate tax rates payers, they don’t necessarily want to withdraw money because they’ll start paying even more tax. So this is a good idea potentially for those guys within the company. The limits are limited to the cash ultimately available. And the ownership is the existing shareholders, it is possible to set up another limited company to be an investment company. And I’ll talk about that in a minute. The tax, there’s obviously a tax perspective from the company as well as the shareholders, but from a shareholder perspective, they are liable to income tax on the dividends, depending on the values, the shares may be eligible for business asset disposal relief, which used to be called entrepreneurs relief. And I say maybe eligible, because it depends on the values we’re talking about, and what trading activity the business retains. And inheritance tax, again, depends on who owns what and what structures they’re owned in.

So briefly, the potential structure here, so on the left hand side, this couple’s company, they trade. So in this scenario on the left, they will continue to trade but also invest some of that cash so they have got two streams of activity. It’s using some of that extra cash, as I mentioned, but you do need to be mindful on the impact on those reliefs, as I mentioned at the bottom. HMRC have a view that if the investment activity in values gets beyond 20%, i.e. becomes I think substantial is their term, then there’s a question mark about those reliefs being available. So just be mindful. For most companies, I dare say that this wouldn’t be the main part of the business. But just be careful. On the right hand side, this is where we’ve split, or we’ve got two companies, it could be a holding structure, it could be a group, whatever the structure is, but they have another company that is there to do the investment activity that could be alone, or dividends paid between the companies to facilitate that investment. But it’s cleaner. So the trading company continue continues to trade, and those reliefs would likely to be available still, and the investment side would not have those reliefs, but it is there to do that activity.

Family Investment Company. So I’ve mentioned on the previous slide that investment company could well be a Family Investment Company. When is it appropriate? So it’s really to potentially use some extra capital that you have, that you want it to go to a noted beneficiary, often children or grandchildren. But it could be anyone in theory. The benefits, there is an inheritance tax potential benefit, depending on how the funding is positioned. But often it might be to fund say, a children’s or grandchildren’s university fees or just provide an income for them. There’s a bit of flexibility there. There are no limits. Again, it’s down to really affordability, typically using a loan into the company to facilitate the investments. Ownership, now this is really the key for, fundamentally a Family Investment Company is typically a normal limited company. But the real benefit comes from the structure of ownership. So I’ll talk about that in a minute again, but that’s really the key point. Again, tax from a shareholders perspective is very similar to the limited company or the corporate investments we just talked about. But it’s unlikely to have those extra reliefs, because it is effectively an investment company and not trading. Inheritance tax, as mentioned, will depend on the shareholder structure. So things to think about really the key takeaway is that ownership structure. How that might look from a structure. So in this scenario, I’ve just suggested to parents, typically, it’s a loan to the company, but it could be whatever form but preference shares is often used as well. The parents in this scenario would retain voting shares, so they have control, they are directors of the company. And the children in this scenario, again, have non voting shares, depending on their age, it could be held within those shares could be held in the trust, excuse me, if they’re under 18. But the point here really has been that the focus of the future income and growth is for the children or whoever the beneficiaries are, but they have no control. So the parents can fund the company. They have control but the future benefits can go to those beneficiaries in this case children. In terms of on the right, the outcomes really is for the children is dividend and growth arguably, and to the parents depending on the scenario and how its funded, they could take the repayments of loans can be tax free, they could charge the company interest on that loan, if they wanted, and it suited their tax position and potentially dividends, those outcomes all depend on really the funding structure and the terms of the business ultimately but the flexibility comes from setting up in the first place and the funding structure. But the outcomes can be really powerful. It’s just another opportunity to consider for extra cash and what you want to happen for your family’s future wealth. It’s quarter past 10. So I’ve hopefully covered my patch, I will now pass onto Ben. Or, excuse me, there’s one last slide. Apologies. So this is just a summary of what that structure could look like as a family unit. So the slides will be sent out, so you can dwell on them as you wish. But those previous slides are kind of summarized here in a what that could look like and I will now pass onto Ben.

Ben Wattam

Thanks, morning everyone. My presentation is going to be quite US heavy and US centric today. Because I mean, the US still leads the way in investment markets and year to date, it’s been a bit rough from investment market performance perspective. I’m not going to say markets are wrong, because they are what they are but I think we see it slightly differently. I think now’s a great opportunity to put some cash to work and I’ll explain why as we go through. So the end of 2021 was pretty decent actually. The second working day of 2022 is when things started to go wrong and it coincided with the release of the Federal Reserve minutes from December 2021. Now, if you’ve seen anything from us in the past month, you will have seen these charts before. But what it shows was for each participant of the Federal Reserve interest rate setting committee, they set out what they think interest rates are going to be this year, next year, the year after and in the long run. So each little blue dot is a member of the Federal Reserve interest rate setting committee. So you can see in September, nobody thought rates are going to rise in 2021. And a few of them thought rates might rise a little bit in 2022 was a massive spread in 2023 and in 2024. Roll forward three months to December 2021. And everything’s jumped. So there’s a lot more cohesion around where rates were going to be in 2022 and 2023. So everything’s jumped. And we were thinking in January, okay, well, what’s changed? Why is the fed all of a sudden, made this big jump in rates, and it is quite a big jump. Because at the minute rates at the start of this January, we’re at 0.08%. , so pretty much zero. So moving them to nearly 1%, which is what the Federal Reserve is suggesting is quite a big change. So what’s going on? If you’ve read anything in the last month, actually a few months, it’s inflation. This time last year, everyone was really worried about inflation. Now, forget the orange and gray lines. Look at the blue line, the blue line is inflation expectations in the US over the last year. So you can see it’s this time last year inflation expectations were rising. This is 10 year inflation expectations. But actually, in the last couple of months, inflation expectations haven’t changed. So we were scratching our heads again, if inflation expectations haven’t changed, what’s the Federal Reserve reacting to? We were looking at what the Federal Reserve have been saying, and they had their press conference last week. So look at what the chairman is saying ‘we expect inflation to decline’. So maybe it’s not about inflation, because if inflation is declining, why the raising rates, but look at the other comments that he’s been making ‘the economy no longer needs sustained high levels of monetary support’. There were lots of comments about the labor market and employment. So what is actually going on? Now, inflation on the left hand side, these are expectations at the end of 2021. Inflation is falling, everyone is expecting inflation still to fall. So we don’t actually think it’s the current inflation pressures which the Federal Reserve is reacting to. We look at nine indicators every single month. And the one on the right is one of the indicators we look at. And what it looks at is US economic growth, including inflation. And then what we do is we minus what the Federal Reserve interest rate is. So when that blue line goes below zero and out of that orangey kind of patch is suggests that the economy is too weak and interest rates are too high. When that blue line goes high above where it is at the minute. It suggests the economy is running hot and interest rates are too low. But there are several data points in the last couple of months that’s pointed to not actually being inflation as the key concern it’s actually growth that the Federal Reserve is worried about. And it’s not just any growth. If you’ve heard us speak as well, in the last year or so, we’ve always been saying, look at wage growth, wage growth is the most important part of long term inflation. And there’s been lots going on. Now, the Federal Reserve, unlike the Bank of England has a dual mandate. So they have two things that they have to look out for one is price, which is inflation. But the second one is employment, they have a goal to maximize employment. Now the chart on the left shows the percentage of the US population in employment. So you can see the share of working age in the US has actually been shrinking. And you can see a big jump actually, at the start of the pandemic, when for lots of reasons but a lot of those at or near retirement probably just took early retirement, there’s been a trend now for a few years that the share of US workers has been shrinking. We saw some data in the UK, last week actually, it said the UK has supposedly got a million people that’s unemployed at the minute. On the right, this is data that came out at the end of December in the US that wage growth is spiking. There’s lots of noise behind wage growth at the minute but there’s some interesting data behind it, that in December, we had the lowest ever amount of people sacked in the US, lowest on record. Yet we had the highest amount of people quitting their jobs on record in the US and in the mid 2010’s after the financial crash, we had really low wage growth, and we have really low turnover of staff in employment, that’s picking up strongly people have got the confidence now to move jobs to higher wages. So this is what we think the Federal Reserve is reacting to, it’s effectively reacting to the economy’s getting too hot, not short term inflation problems. And because the economy is running too hot, we actually think it’s good news, that the economy is actually really performing really well and the Federal Reserve is a bit behind the curve in reacting to it. The Federal Reserve is increasing interest rates this year. The question is how much by, with rising interest rates, you’ve got to be aware of some asset classes because they don’t perform very well when we have rising interest rates. The first area is cash, and long duration assets such as government bonds that perform really poorly. Actually most equities have long duration assets as well that can perform poorly as well. Companies with high levels of debt, when we have rising interest rate costs, lots of companies in last few years have been reliant on too much debt and government support. Companies that can’t pass on price rises, we’re seeing it alot at the minute, especially in utilities, there’s a lot of stress and strain in those areas. And lastly, some companies that have very high growth expectations can struggle in the short term. And this is where we have some assets. This is one example of a company we buy for clients in our highest risk portfolio. So a company called Chrysalis is listed in London. We’ve owned it since we started out and it effectively primarily invest in private businesses, mainly in tech enabled businesses, a bunch of companies they own is on the right hand side, you’ll probably recognize some of the names, but the company is dominated by two holdings. One is in Klarna, the Swedish payments business and Starling bank, the UK digital bank. Now this company has grown by about 38% per annum since it launched in 2018. So really strong growth. The chart at the top, the blue line is the net asset value of the growth, the green line is the share price. So year to date to the end of January, the share price has fallen by about 25%. So you can now buy this company a discount of nearly 30% of his net asset value, which effectively saying Klarna which is about 30% of the business, you can get it for free at the minute it’s been discounted to zero. We think this is way too pessimistic. Net asset values might fall but by 30% and stay there we just think is too pessimistic. Do we need to change into more value assets? We don’t think that is the case. Earnings Growth is absolutely key to growth investing. So investing in businesses we think are going to grow, earnings is absolutely key. However, are we wrong? Are we heading into recession? We don’t think we are heading into recession we think is almost the opposite. We’re heading into a period of strong growth. Are interest rates heading to 10%? If they , we need to change our strategy? Again, we don’t think we are. We spoke to a healthcare team a couple of weeks ago that was saying that some of the prices are reflecting interest rates heading towards 10%. Or if inflation stays at current levels for next few years. Again, we don’t think that is the case. If it is, we’re going to be wrong. And you definitely want to be moving to value investing.

What’s happened in previous times when interest rates have risen. So this is a 20 year chart of two year interest rates in the US. So you can see back in the early 2000s, interest rates rose sharply in the first move and the red line. And then, towards the end of 2010s, interest rates rose sharply again, you can see the latest rising interest rates right at the end of this chart. So what happened to growth investing back then. So I’ve chosen Allianz technology Trust, which is as growthy the as you can almost get, it’s a listed company investing in technology firms mainly in the US. Over those two periods, the first two rises, technology performed really strongly, and that’s on the back of earnings growth. Interest rates rose sharply over that period but because earnings growth was strong, the company performed really, really well. Last three months, the share price has been hit hard. So Allianz technology trust is down by about 25% or so in the last couple of months, people are panicking. However, as we seen in the last few days, it’s earning season in the US at the minute. Allianz owns Google, Alphabet, Apple and Microsoft. Those earnings releases of those three businesses have been superb in the last week or so. So we think people are panicking. And it’s a good opportunity to start buying into businesses like this, if you’ve got a longer term time horizon. Now, there clearly are other risks around, Russia is one of them, I have no idea if they’re going to invade Ukraine or not, my gut says they won’t but I don’t have any better insight than anyone else. I don’t know what Putin is thinking. But when they annexed Crimea in 2014, the chart on the right shows what happened in the calendar year, the red line is the Russian market which fell 40%. The blue line is the global equity market, which actually went up 10%. So I think as long as we don’t have Russian and US tanks facing each other in the next year, which will clearly be bad for risk assets, but also oil, oil is a big risk in this, then I think we can carry on with a positive outlook. The last point is we get a lot of questions now again, saying what’s going to happen to markets in the next month, week, day? And we have no idea to be honest, this shows it since 1976. This shows the performance of the global equity market. So on a day by day basis, it’s a flip of a coin, whether it’s positive or negative, it’s roughly 50/50. But the longer time horizon you have, the more probability that we’ll get positive returns. And we think at the minute, it’s a really good opportunity to buy some assets at cheap valuations.

So just to conclude outlook, the Federal Reserve are clearly behind the curve and we were saying last year that we don’t think the Fed are going to react, but we didn’t expect growth to be as strong as it has. They’re now behind the curve. We don’t know how aggressive they’re going to be. So I think until March, when they probably do the first rate rise, there’s going to be uncertainty as to how aggressive they’re going to be. JP Morgan’s boss a couple of weeks ago said they are going to do 8 rate rises this year, which is every meeting they have. Plus, they probably should have done one last week, we don’t think they’re going to be that aggressive. But until March, we’re going to find out we don’t really know. So there is quite a bit of uncertainty. Wage growth is absolutely key. Don’t worry about day to day inflation that we’re seeing at the minute. That’s largely transitory, wage growth isn’t. As soon as you get wage growth into the system, you can’t reduce wages very easily. And the last point, look we think we’re in a period of strong growth coming through, and if that’s the case, it’s pretty good for growth assets in some of the areas we’re investing in. It’s been a rough start to the year, but we’re bullish, we’re optimistic, as long as you’ve got a longer time horizon than March. So on that, I will wrap up and go back to Loz.

Loz Gee

Thank you for sending these questions through. So first question, can children under 18 own shares in a family investment company?

Neil Wattam

So I’ve kind of briefly touched on this, but short answer is yes. But the longer answer is typically not. The trust structure is often used for minors. There are technicalities ultimately about children owning shares. And ultimately, whether contractual law etc applies. So short answer is they could but typically not.

Loz Gee

Is it the year of value?

Ben Wattam

It could be. So value investing generally works well when you have high levels of inflation and rising interest rates. So it could be and it’s done pretty well actually, in the last couple of months, it did well, at the start 2021, did well at start of this year, as well and it could be. However, the problem I have with value investing is you’ve got to be very, very clever as to when to sell, because a lot of these businesses aren’t growth businesses. So they’re currently cheap, but they’re going to become fair value, and you need to be able to sell it at fair value, because they will probably become quite cheap again, at some point. I should say, as well, that one reason why we don’t think interest rates are heading to 5% is that we can’t afford it. I say we collectively because if interest rates go up by 1% in the US it will add about one and a half trillion dollars to the cost of maintaining that debt over the next 10 years. Just to put that into perspective, back in 2008/2009 when we had the financial crash, the US government came out with a support package, which was £800 billion. So the support that we got back in 2008/2009 from the financial crash is about half the cost of rising interest rates in the US. So we can’t afford it. The central banks know that. So I don’t think interest rates, they’re going to go up this year, but they can’t go to rates that we saw back in the mid 2000s, which is probably what we need rates to get to for value to have a good decade. So they might have a good year. But generally we don’t invest for three to six months. We’re trying to invest for the next three, five, ten years. And we think growth is a much better place to be.

Loz Gee

Does COVID come into your thinking or are you assuming we have won the battle?

Ben Wattam

It’s a good question, we haven’t had a COVID question is ages. I think, from a markets investing point of view. It’s not done and over. But I think we’re concentrated on other things, because we don’t know like everyone else about what might happen to COVID over the next year or two. I think there’s lots of other things that are bigger concerns to us at the minute. In most of the areas we invest in, it’s becoming more endemic, isn’t it that I think we’re going to live with COVID. There’s some massive opportunities mainly in healthcare, COVID has changed the way that we’re going to have to supply healthcare and consume healthcare in the next 10 years. So COVID is clearly not over. But it’s more of a healthcare issue in the healthcare space now, rather than affecting general markets. I mean, if there’s a massive new variant that completely is a game changer, then things might change, but at the minute it’s not affecting our thinking.

Loz Gee

Okay, markets have been crazy since the start of the pandemic with most asset classes suffering, what are your thoughts on diversifying this risk?

Ben Wattam

The problem we have in the last couple of months is the equity markets have been quite weak but so have bond markets. Rising interest rates is actually generally pretty bad for those diversifying assets, usually you own equities for growth and bonds for your safe defensive part of the portfolio. And they’ve been awful. So diversifying, has been really difficult. We hardly own any traditional bonds anymore, because we don’t think they act as a good diversifier. Which means you’ve got to look at alternatives and we think there are some really interesting good alternatives at the minute, commercial properties is one of them, this morning, we had some really good results from some of the commercial property companies we own. But it’s not without risk. It’s just a different sort of risk we think infrastructure is still really interesting. Gold is interesting aswell. We don’t have anything in crypto, I don’t understand it is my honest answer. And we have regulatory pressures on that side as well. But it’s definitely more difficult to diversify risks, especially when there’s risk to interest rates. I think over the next couple of years, we might start to add more bond assets again, as interest rates stabilize, but you’ve got to look at more alternative assets and afraid.

Loz Gee

Okay, excellent. Thank you so much. for joining us today. We’ve got next steps on the screen if my clicker works. Behave yourself. Our next webinar will be in May, and we hope to see you there. We’ll send out details of today’s webinar. Thank you so much for joining us, any feedback or suggestions for topics for future webinars, please send them through to us if you’d like to get in touch details are there. Have a great day. Many thanks.