Loz Gee

Thank you very much for coming along today, it’s great to see so many of you log in, we really love doing these webinars. It’s fantastic that you you’re logging in to see what we have to say. This is our final webinar of 2021, where this year has gone, we don’t know. And so I hope you’re wrapped up warm in this cold weather and ready for a good session. As ever, here’s the small print. So I’ll just leave this up here for a few minutes for you to have a look at. Okay, so the agenda for today, for those who don’t know us or aren’t working with us, a little bit about who we are and then we’re going to go across to Ben here today to talk about investing post pandemic, very apt subject. Then Adrian is going to be talking to you about inheritance tax and legacy planning. Please do post any questions that you would like to ask us in the question section at the bottom of your screen. And then we’ll just review the session at the end. So a little bit about us. Here’s a picture we took by the lake, which is just behind our office here. We’ve got Neil Wattam there on the left, followed by Tim Kirby, myself in my bright pink coat there, Adrian and Ben you can see with me today. We’ve done things a little bit differently today and we’re all sat together as we’re now able to so it’s nice to be together rather than on individual screens. So we’re a group of five, really small team, the advisors and the investment manager here have a wealth of experience in what they do, formed in April 2021. And gone from strength to strength ever since. They brought me on in September to help with the client experience to make sure that everything was being touched upon and things are running smoothly and hopefully, that’s what you’re experiencing. Why do we do it? We love what we do. We love that client engagement and seeing the journey that our clients go on and we’re there every step of the way with you. So over to Ben to talk about investing post pandemic.

Ben Wattam

Morning, everyone. Now, I do appreciate that title of investing post pandemic, a lot of you will be thinking we’re still in the pandemic and from a healthcare perspective, we probably are however, you look at a host of economic and investment data, I’ve put some up on the screen here, we’re pretty much back to either above 2019 levels, or pretty much back to 2019 levels. I think most of the recovery, since the pandemic has been done, the easy wins have happened and now it’s going to get tougher, and we really need to see some growth coming through. We’re still pretty confident but you’ve got to be a lot more careful, I think because as I said, the easy wins, the recovery has happened. Now, one way to look at whether investors are feeling confident or gloomy about the world is looking at interest rate expectations. Bond investors are usually pretty decent, pretty good at forecasting what’s going to happen. So this orange line is the interest rate expectations for the UK towards the end of 2019. So pre pandemic, no one knew what COVID was at this point and this shows interest rate expectations for the next 30 years in the UK. The blue line is what it was two weeks ago. So you can see now, interest rates expectations are higher than where they were pre pandemic. So bond investors are more positive than they were for the economy before the pandemic started. If things are looking pretty rosy, why are we saying that actually, it’s going to become a bit tougher. And the new kind of worry is, everywhere you read the financial crisis a word called stagflation. This word called Stagflation is absolutely everywhere in the financial press at the minute, and it’s two words that stagnation and it’s inflation and someone funny decided to combine them with a snappy word called stagflation. So this just shows how many times the words stagflation has been used in financial press. And to be honest, we’re not too concerned about the stag, part of the stagnation because I think there’s still pretty decent growth levels, both in the UK around the world. The economy is actually growing quite well, it’s the inflation part that could become a problem. I get a weekly email from a fund management group called Artemis. And this was last week’s start of their blog. I kind of thought it summed up the world quite nicely at the minute. We like to panic about absolutely everything. And absolutely everything you read about is unprecedented. We agree that inflation is probably the biggest risk that you will face from a financial perspective in your lifetime but it’s important to understand what is driving inflation and whether that inflation that is being driven is actually transitory, so if it’s going to wash out in the system over the next year or two, or whether we’ve got some more permanent effects driving inflation. I don’t have to tell you that we’ve had supply issues around the world in the last 12 months, and usually supply problems that cause inflation are seen as transitory, because demand and supply will sort itself out and produce a price that stabilizes, because the issue is that prices can’t keep being pushed up by supply, because there’ll be a demand effect or a supply effect. We’re seeing some of this come through actually, at the minute, everyone has heard about gas prices rocketing in the last couple of months. But equally, probably very few people have actually heard what has happened in the last couple of weeks that gas prices have been falling sharply. I mean, one of the main benchmark gas prices in Europe is down by a third in the last two weeks, because Russia have said that they’re going to increase supply. So I think there are still problems with supply. And probably some of those transitory effects are going to take a bit longer than usual to wash through, but we still think it will be transitory and not lead to long term inflation. The usual thing that causes inflation is the demand side. Now, one impact of the pandemic is that households have saved a lot in the last 18 months and as households we are still saving a lot now. There’s a concern as to what actually happens to their savings, that could cause a demand shock in the next six months at a time when supply still isn’t quite right. But usually what happens with demand, the inflation demand shock is caused by wages because the impact of wages is permanent. If you give all employees a 10% pay rise, that’s very difficult to get back, you can’t then the next year give them a 10% pay cut. So wages is usually what drives inflation. This is what’s happening to wages in the last year in the UK, we’ve had a spike. Now a lot of that spike is due to base effects. Inflation is a year on year figure. So to work out this year’s inflation, you need to look at what inflation was doing last year. And in the autumn of last year, in the summer, we had huge deflationary impacts going on. In particular, we had furlough at its peak and we had quite a lot of redundancies as well. So wage growth actually fell last year. Now, this year, we’ve had people coming out of furlough. So we’ve had that apparent boost in wages. We don’t think this is actually sustainable over the long term because we’ve got a lot of spare capacity in parts of the economy still. There are definitely pockets where wages might remain strong but in the economy as a whole, we don’t think wage growth is going to be a key driver that makes inflation take off. Now, what’s the inflation outlook? What are the Bank of England saying? On the left hand side, the Bank of England do a fan chart. Every three months, they did this fan chart of what they expect inflation to be and you can see they think inflation is going to be at 4% or so at the end of this year, maybe the start of next year, then fall back to 2%. Now, if you’ve heard me speak before, I’m not a big fan of the Bank of England, I think a lot of their forecasting is appallingly bad. There’s a report from the University of Liverpool looking at the the accuracy of Bank of England forecasts on the right and the orange line is the Bank of England’s two year inflation forecast going back to 2006. So effectively, every single time they do this every three months for the last, what 15 years. They’ve said inflation will be at 2% pretty much consistently. They’ve never said inflation will be above 3% ever since they’ve been doing this. And this two year view is what’s driving interest rate expectations. If the Bank of England think that inflation will be at 2% in two years time, there’s no need to move interest rates. And the correlation between that Bank of England expectation of inflation and actual inflation is actually negative. So when the Bank of England think inflation will go up, inflation is actually gone down & when they think inflation is going down, inflation is actually going up. So I’m really concerned that the Bank of England are going to be wrong in their management of interest rates going forward because they’re inflate inflation expectations are wrong. Now, what happened in the last 10 years or so, this blue line is actual inflation in the UK, the gray line is the Bank of England base rate bank rate. You can see post the financial crisis back in 2009/2010, we had an inflation pickup, because we had supply issues back then, not to the same degree but we had supply issues and we had a pickup in demand, which meant inflation spiked, but the Bank of England do anything about interest rates. Over the next 10 years, I pretty much guarantee the Bank of England aren’t going to do anything about interest rates, it might move them back up to half a percent or so, but that’s not driven by inflation that’s driven by the emergency levels we’re at. I don’t think that the Bank of England is going to react to rising inflation. If they’re not going to move interest rates, a big concern, which we’ve spoken about in the past, is people have too much money in cash. Now, in the last 10 years, if you’ve had your money in a cash bank account, that account has had their interest rates linked to what the Bank of England rate has been, you’ve lost about 14% of your real wealth over the last 10 years. Now, if you think inflation might be 3%, over the next 10 years, you’re going to lose about a quarter of your wealth. If interest rates are the same in the next 10 years as the last 10 years. Now, the UK market at the minute is actually pricing in 4% inflation for the next 10 years. So if that does actually happen, you will lose over a third of your real wealth in cash in the next 10 years.

What about other assets, this is a bit of a busy slide. The dark green bars are equity returns and the light green bars are bond returns, depending on how inflation has been over the last 120 years. So in the far left, in the lowest inflationary environments, has produced the highest returns for equity and bonds, on the far right on the highest inflationary environments. It’s produced the lowest returns for equity and bonds, which kind of makes sense. Now, when we looked at inflation at the start of this year and asked is it going to be a concern? We still think it might be a little bit higher than it’s historically been comfortable. But we don’t think it’s going to get to a level that’s going to cause significant disruption to equity and bond markets. So on that slide, if inflation gets above 7% or so a year, that’s going to cause significant disruption. Now, we don’t think inflation is really going to get to those sorts of levels sustainably over the next few years. But we do think it might be sticky. So what can you do about managing inflation in your portfolios. One traditional way is to buy index linked gilts, so buying government backed securities, which have inflation protection. Now, the current interest rate yield on those assets is minus 3%. So you get minus 3% plus inflation. So if inflation is 3% a year, you’ll end up with zero, it’s not going to protect you against inflation. Commercial property is also another popular area, I’ve got a bit of a worry about rental growth, rental growth drives the protection around inflation protection, we’ve got big pockets of commercial property that is still in stress or you could buy oil and gas equity. So you could buy BP and Shell and buy commodities. I have massive concerns about the sustainability of those areas and we try and have minimal areas of exposure to those sectors. So what have we been doing? We’ve bought this asset since we actually started back in April 2020. It’s called tufton oceanic assets, and they own and lease ships. Pretty simple business model. But as everyone knows, shipping has actually boomed this year, you can get a really healthy dividend yield on this of over 5%, it’s really well covered by cash so they can they can easily increase that dividend. They’ve had strong dividend growth, and we’ve had decent total returns. Another thing we’ve been owning since we started is renewable infrastructure which is actually really topical at the minute. This is a UK listed company that owns wind farms around Europe. Again, a nice healthy dividend of 5%, well covered, a bit of dividend growth and decent total returns from an area that’s probably expected to grow in the next few years. Another area we’ve been investing in is gold. Now I have no idea what the gold price is going do over the next few years, absolutely no idea. However, this chart looks at the gold price in gray, and the real interest rate in the US in blue. So the real interest rate is the Federal Reserve interest rate minus inflation, there’s a pretty good correlation when the real interest rate drops gold price does well, which makes sense and if we think that the central banks aren’t going to really react from an interest rate perspective, but inflation might kick in, that blue line could go further down, which could provide a bit more support for the gold price. The way we structure our portfolios is all of our portfolios apart from our income portfolio is structured to beat inflation by different degrees. And the reason for that it is because we think it’s the biggest financial risk for clients. Our number one goal is to ensure that our portfolios grow in real terms year on year because that will produce real growth for our clients. Now, if you want to understand how we’re doing that more, please speak to any of us after the webinar, we’re happy to talk you through how we structure the portfolios. Just to finish off, often you hear people saying, I think you need to structure your portfolio’s for the long run, the long term. Often the long term is so far out that it’s almost kind of irrelevant, which is what John Maynard Keynes was saying 100 years ago. I think some current themes are actually long term themes. When we started, we wanted all our portfolios to be structurally long towards the environment, healthcare, and technology. And we think they’re great long term themes. They’re not long term themes anymore. They’re short term themes. This last week is a great example of the amount of energy and investment going into the environment. Healthcare we’ve seen in last two years, we need huge amounts of investment into healthcare and everyone knows how technology has changed your life over the last couple of years. These are growth sectors that you need exposure to. Whilst over the last month or two, we’ve had booms and energy prices that we don’t really have much exposure to, you still need to be positioned for next year, the year after, and the year after which we think these areas will be key to have exposure to. So with that, I’ll hand over to Adrian.