Ben Toms

Right Hello. So here’s the little disclaimer on screen now, you should be able to see it. We will leave it on screen for a second, we will be sending the videos out soon as well after. So if you do wish to read through it all, you will be able to see it in the email we sent out.
So good morning, welcome to third webinar of the year, the client conversations webinar. I’m joined with our investment manager Ben Wattam here today and our new to the team Chartered Financial Planner Dan Partridge on the left. So what to expect from this webinar. For those of you who have watched before, you’ll understand that we usually use a presentation and pick out some specific topics to go through with the guys. But today, we’ve opted for a little bit more of a structured Q&A session. So we’ve handpicked some questions to do with Financial Planning and Investment Management, especially with the current environment. I’m going to be going through those with you today, as well as a little Q&A session for you guys at the end. So please do put any questions you have in the chat box and look, we’ll have a designated time zone for that at the end of the session. So before we do get started, if you’re new to this, then a little bit about us. So we’re a Financial Planning and Investment Management Company. We’re quite unique in the way that we have our own onboard discretionary investment management platform, which is managed by our investment manager, Ben Wattam. And now we’re actually a team of seven. So we have recently took on Dan Partridge, who’s another Chartered Financial Planner. Now the team consists of four financial planners, an investment manager, an operations manager and myself as an administrator. The guys now have a combined 70 years worth of experience in the financial services industry, ranging from pension consultancy, to investments to just general financial planning. And I suppose one thing that separates us from the rest of the crowd in terms of businesses is that we love to build relationships with clients, as well as just helping them with their finances, and helping them achieve their financial goals and objectives. So without further ado, we’ll ask the first question.
So Dan, as the newest member of the team, what attracted you to join WKM? And how do they do things differently?

Daniel Partridge

Thanks, Ben. I think like many of my former colleagues at WKM having worked, for 20 years, the large national financial management investment firm. I think the advantage that WKM offer is the fact that we work directly with clients and the philosophy of the business is very much client focused. So rather than being very concerned with the sort of wider financial services markets, there’s lots of consolidation that’s been going on over the past few years. The ability to focus on clients, what clients want, what clients need, is probably the key element.

Ben Toms

So what would the experience be like for a new WKM client?

Daniel Partridge

Yeah, that’s a great question. I’ve got a lot of experience in financial services, financial planning, charter financial planner. But essentially, I mean, the key thing is, the financial planning process is the start of that journey, it’s understanding where the client is at the present time. It’s understanding the client’s objectives, and it’s creating the financial plan for that client. I think the advantage that we can offer at WKM is probably multiple. We’ve harnessed a lot of technology at WKM which makes a huge difference, we have a very innovative app that provides clients with a great level of information about their financial investments & about their broad financial circumstances. So it’s providing that information to the clients, we have quite an innovative means of conducting our financial planning meetings, we refresh that, each time we meet the client, because we’ve got the time to assist clients in their financial planning journey, we’re able to meet clients more frequently than perhaps some of those were previously, because we put the time into the client. So that creates a very personalized and direct relationship with the clients on that basis. And it’s using other technologies such as cash flow planning, got some very powerful cash flow planning tools, that make a huge difference in terms of the investment management decisions that are made. So actually, in periods of volatility, clients have a lot more confidence and certainty over what their position is, they know when liquidity can be made available. They have clear visibility when liquidity is available, so essentially, clients have less stress in that respect.

Ben Wattam

I suppose the other thing is that we try and communicate in different ways as well. This is an example, this is the first time we’ve done this in our own office. So hopefully, no one rings our doorbell whilst we’re doing this. But it’s just trying to communicate in different ways using video and rather than just normal kind of Word documents or PDFs that are sent out to clients, trying to make it bit more engaging and hopefully, you’ll see more video from us in the coming months as well, just talking, whether it’s market events, or planning and things like that.

Ben Toms

Okay, on to the next question. So inflation is clearly a big risk at present. How do you incorporate inflation into financial planning?

Daniel Partridge

Yeah, so I’ll probably start with that one as well. Because I think, you know, inflation has been a huge concern for many clients, many people, everybody, really, this current year. But perhaps for the past decade, it’s not really been a key consideration. But when WKM was formed, particularly from an investment point of view, we had clear targets set for the investment to portfolios around inflation, plus the level of growth in that respect, but that all comes back to the financial planning that is put in place. So understanding client’s objectives, ensuring that the financial plan meets those objectives and then implementing a proper bespoke investment solution within that plan. This points confidence that actually, although inflation does affect everybody, and clearly, we’re suffering very high levels of inflation at the moment, actually, in reality, the financial plan is there, it’s managed that process come what may.

Ben Wattam

Yeah, I think inflation point is really important, because, as Dan said, when we started, we wanted the portfolios to have specific targets. And inflation is the biggest financial risk that clients will face. We’ve said that throughout starting, and is clearly in focus at the minute. And we need to make sure that our portfolios have as much inflation that we can get. The issue is that inflation linkage isn’t the only driver of asset prices that in the last few months, there’s been concerns about recession, which has actually driven asset prices more strongly than inflation concerns. So we do have quite a lot of assets that have inflation protection, but it’s going to be inflation protection over the next few years, day to day movements and asset prices are often affected by the things of inflation.

Ben Toms

So how do you manage clients in retirement with markets like they are? Is it appropriate for retirees to be invested in equity?

Daniel Partridge

Yeah, I think first thing to say is that actually, what you don’t want to miss is the opportunity for growth? Because we’ve seen it many times before, there’s always volatility. In markets, markets go down, markets go back up again, but missing that opportunity for growth is potentially a significant cost. So from my point of view, it comes back to the financial planning, once again, keep laboring this point, but if the financial plan is correct, then timescales, investment horizons, collect so you actually can take a longer term view on that, rather than making knee jerk reactions to events that occur I’m pretty much on an ongoing basis. So even with this inflationary environment, we’ve got the volatility we’ve seen in this current year, if the financial plan is correct then that comes back to the fact finding from the financial planning side comes back to, in particular the cash flow modeling that we do with clients then actually, you’re able to take a level of risk, even in the current circumstances that provides the opportunity for growth.

Ben Wattam

Yeah, because one of our clients who has retired has probably still got 30 or 40 years. And so they’ve got a really long time horizon. And I think when people retire, they think they should go into safe assets and cash and government bonds. And the problem we’re seeing at the minute is that inflation is eating away at Fixed Rate assets, such as cash and government bonds, and if you’ve got a 30 year time horizon, and you’re gonna be eating into your capital, you need assets to still produce growth. So whilst it can be more difficult to persuade people to keep invested in equity, when they hit retirement, because naturally they become more cautious, it’s really important that they still have assets that can provide growth, because, as Dan said, the upside risk, I think, is a huge issue in our industry, that people underestimate upside risks, everyone’s very concerned about downside risk, everyone’s trying to protect capital, which is fair enough, however, you still need to be positioned in the right places to capture growth. And if you look at the US market yesterday, the worst bull run that we’ve had in the S&P since World War Two, so when the US market’s had a bull run it has gone up, over 20%, the worst bull run we’ve is up 48%, which was in the 60s, most of them when we have a bull run in equity markets are up 100 or 200%, over quite a long period of time. And that’s hugely powerful. If you can capture that upside. It makes planning on those, it’s so much easier.

Daniel Partridge

Yeah, I certainly agree with that & from a planning point of view, I’ve certainly seen the the effects of not capturing the upside, particularly with drawdown & clients in drawdown without drawing down pensions, or whether it’s drawing down from ISI’s or general investments accounts, the effects of not capturing upside, when it’s I mean, we look at the pandemic, a huge initial market shock but, you know, very strong growth after that period, if that growth wasn’t captured, then it’s going to have a significant effect on your capital values going forward, which then has a knock on effect to cash flow and income planning. So, it’s the combination of financial planning and the investment management’s that really is a huge benefit.

Ben Wattam

Yeah, we sit down for our clients that are in retirement, we sit down every three months formally, and go through the client’s position from a planning point of view, to ensure that cash flow is is adequate to pay out the income that the clients need. And that’s irrespective of your risk profile, or how much income you’re looking to draw. And that is absolutely key. Because if you get cash flow right, that means you can take more risk, you might not want to take more risk, but allows you the ability to ensure that cash is aside to pay out income and you can put the rest of your assets to work to grow, which is what you need to fund your future income.

Daniel Partridge

Yeah. I’d also say that actually that process gives clients a lot more confidence in their financial decisions that they make on the back of that planning. And it’s the ability we have at the WKM to link up Financial Planning and Investment management’s on that very focused client basis, that makes a huge difference. There’s not many organizations that are able to do that, but because we put the time into the client, the solutions that we provide, it makes a huge difference.

Ben Toms

So moving on to quite an important topic in this environment. So are we heading into a recession? How do you view current opportunities and risk in markets?

Ben Wattam

I think it’s getting some bad news out the way first, are we going into a recession. Well, depending on how you look at recession, the US could already be in a recession. If you look it from a technical point of view. There are lots more indicators that make a recession rather than just GDP. However, we possibly are going into recession. That’s the kind of bad news. The good news is that asset markets look forward. And I think the majority of asset markets are now pricing in a recession and have already priced into recession. So markets are saying we are in a recession. So whether we are actually in a recession or not, almost doesn’t matter, because that’s what markets have already been pricing in. We need to look at asset prices going forward. And saying right, what is priced in, how much stress is priced in? We think majority of markets are pricing recession, I would say apart from two markets that probably aren’t. The first is energy. Energy is not pricing in any real recession. I should say. There’s a few commodity markets that have started to price that in the last couple of weeks, but on a whole, most energy markets aren’t. And with that the FTSE 100, the large cap, UK equity market isn’t really pricing in a recession, because it’s so heavily in commodities and energy. And the second area is government bonds in particularly US Treasury bonds. Again, that’s changed in the last couple of weeks it’s more pricing in recessionary conditions. And we think that it’s a really big opportunity. Because it’s not pricing in a recession. We think the potential returns in US Treasury bonds are really quite exciting at the minute, which is the first time you can say that in probably 15 years. But when we when we build portfolios, we say right, what do we own that thing for what we owning this asset for? So we own things, for three reasons, it might be that we think that asset is going to grow. We want that asset to protect against inflation, or we want the asset to protect capital values under stress. So this year, we’ve actually added to all three of them. We’ve added US Treasury bonds, quite a lot, actually, in the last month at the start of July, both conventional treasury bonds and inflation and treasury bonds. That’s on the defensive side. Earlier this year, we thought government bonds were pricing in risk. So again, when we look forward, what’s being priced in is there wasn’t enough risk priced into government bonds, that’s now flipped, and there’s almost too much risk priced in. So we like that we’ve added that into defensive assets, we’ve added an asset called Gore Street’s energy storage in April, just after the war kicked off in Ukraine, we think it’s really well positioned to benefit from power, price volatility, and inflation protection. So we’ve added that to all portfolios in April, and the end of last year, we added an asset called Tufton oceanic, which owns ships, secondhand ships, which has been a clear beneficiary from inflation pressures and supply chain problems. So when we look at portfolios, it’s not just saying, what does the macro environment look like? What does the recession look like? It’s also understanding what markets are pricing in? And what could the recession be? Is it going to be a 2007/2008 recession? Or is it going to be early 90s recession which are very very different and have very different drivers. So it’s understanding what’s priced in and what the outlook looks like? And what are the drivers for those risks?

Daniel Partridge

Yeah, I think it’s always an interesting conversation with clients around those asset conditions and actually there are opportunities, as Ben has mentioned, Tufton Oceanic, Gore street energy which are really exciting opportunities in the current environment and positive opportunities as well. So it’s not all negative in that respect. And as long as the Cash Flow Planning is correct, the objectives are defined, then actually it’s possible to take advantage of these opportunities at the present time.

Ben Toms

So what about tail risk events such as Taiwan?

Ben Wattam

So I think earlier this year, the majority of people didn’t think Putin would invade Ukraine because everyone was like, it’s this ridiculous thing. It’s a stupid thing to do. It will cause chaos and cause lots of risks for Russia and Russians. And they did it anyway. So I think, at the start of this year, we would have said, well, China are invading Taiwan, it is a tail risk as it’s something that’s quite unlikely, but could be a big event. We will be saying it’s a very, very low probability. Don’t bother planning for it because it’s such a low probability. You’re wasting your time doing it. I think Putin and Ukraine has changed that slightly, because we’ve seen the West’s economic response to Russia. So I think China would be looking at the West response to that thinking, if we test Taiwan, we’d probably get a similar response, which would be hugely negative for China as well, and the rest of the world, but I think we’ve seen Nancy Pelosi’s visit this week, which has definitely annoyed the Chinese. And I personally think, it’s just a matter of time that China will want to take Taiwan formally. I don’t know whether that’s three years, five years, 10 years, 50 years. But there’s a definite desire to formally incorporate Taiwan into China, it’s just a matter of time, which is quite scary, because the US has been very formal in saying we will support Taiwan. So it’s a huge risk, it is enormous risk, much bigger risk than Russia and Ukraine. Unfortunately, this thing is a matter of time. The issue is planning for that, because it could be a 50 year event. It’s difficult to plan for it today. But I think it’s tail risk that’s becoming more of a mainstream risk, rather than a “it’ll never happen” type risk.

Daniel Partridge

Yeah, I’d agree. I mean, the China/Taiwan is obviously not a new issue in any way, it’s very much known issue. Been around for many, many years. But I think increasingly, as we’ve seen over the past 20 years, the world is a more volatile environment, than it has been prior to that to a greater extent and becomes a more volatile environment. And that’s where the advice is the importance. I think the ability for us to combine a financial planner, investment manager, together for clients in this sort of environment is a huge benefit, in that respect, because clients very much benefit from the information that we provide & the ability for us back the decisions we make.

Ben Toms

So in the world of financial planning and investments, what excites you most about the coming months?

Ben Wattam

So from an investment management point of view, I think part of it is that markets have reacted very very strongly this year. Most asset prices, it doesn’t matter if its bonds, or equity, or property have fallen quite a long way. And they’re pricing in a lot of bad news, they’re pricing in a pretty bad recession, some areas more than most, I think some areas have been really, really badly hit. And that creates an opportunity, because especially if you’ve got longer time horizons because this year, we need inflation to peak in the US. And I think we were hoping it was going to be last month, it might be this month or next month, but it’s going to peak in the next few months. That is a really big trigger, I think for markets to improve and get over. That won’t lead itself to a bull market. But it’s an important mindset that we’ve now got peak inflation, and that will come down to what extent will come down? I don’t know. But it’s a positive momentum. And with asset prices like they are, I think we’re going to make some really, really strong returns in the next couple of years because of negativity that’s priced into asset prices. So part of the thing aside from it was that just the asset prices at present a really attractive and if you’ve got time and you can be patient, you will perhaps make some really, really strong returns.
Yeah, being the newest member of WKM, I’m very excited. I think the ability to bring the innovation that we’ve created here to see clients, I’ve mentioned the app, mentioned the fact that we can combine Financial Planning and Investment Management on a very one on one basis for clients. The innovative financial plans that we create for clients is a huge, huge excitement.

Ben Toms

We’ll move on to the question and answer now for you guys. So we’ve got one question here. There are lots of articles predicting the super bubble in the US markets may be about to burst leading to over 50% falls in share values. What are our thoughts on these predictions and how exposed are our investments to the US markets?

Ben Wattam

So US markets, have had pretty tough year, depending on whether you look at the NASDAQ technology index, or the main, S&P 500, which is the main biggest 500 companies listed in New York, they’ve had a tough time. Share prices move for 2 reasons. One is that people will pay less for earnings. And the second is that earnings go up or down. And this year is all been about people willing to pay less for those earnings. earnings have actually been strong, profits have been strong, we’ve just gone through quarter 2 earnings in the US. And expectations have dropped all those earnings. But they were pretty good. I think about 73% of companies beat expectations, and the majority of them were pretty resilient, pretty strong. And we think they’re a positive. That’s led to a bit of a rally in the last couple of weeks, which has been good to see. And it’s good to see that micro events, company fundamentals have been changing prices. This year, it’s all been about macro, it’s all been about interest rates & inflation, so it’s good to see a slight change in mindset. This year, today, it’s all been about the change in price, not the change in earnings, it’s the change in price. Now the risk is that in the next six months to a year, that earnings fall. So if earnings fall, that could lead to prices falling because at the minute, it’s just been a price fall, not an earnings fall. So there definitely is a risk that earnings fall, and we get another leg down in the US markets. However, I think markets are pricing in some pretty bad earnings already. We’ve seen in the last couple of weeks, some good earnings announcements from some of these big mega cap tech names, the likes of Google, Alphabet, Apple and Amazon are all pretty good. Majority of our exposure isn’t actually in those big names, it’s more in medium sized US firms and smaller firms, we think there is a bigger opportunity there. And that’s a good point for the smaller firms, not only in the US, but in UK, Europe, and Asia have been hit really, really hard. This year, most small firms share prices struggle going into a recession, but rebound much, much quicker, and much, much stronger. So we’ve seen this year small cap markets have been really, really weak across the world.
There is a risk, I think a 50% drawdown from here would be a 2007/2008 event where we have huge dislocations across the economy, that would cause another 50% drawdown, we don’t see that. If we do I mean, the US might already be in recession. This is the sort of recession we feel like we might have where, we might be in a recession but a lot of people might not actually realize we’re in a recession, we won’t see huge job cuts. Employment is the key because if people still have a job, they will keep spending, they want to spend as much as they did last year because of inflation and worries about the economy, but they’ll keep spending. If you lose your job, that’s when you really get defensive, you really really tighten your purse, and you stop spending, employment markets are still really strong. So this is why we’re pretty confident at the minute that we’re not going to see a huge economic fallout like 2007/2008, it’ll probably be more like the early 90s. The last point I’d make is housing. Housing markets are starting to soften around the world. But it will soften as mortgage rates rise, the average mortgage rate in the US is now about just under 6%, which is going to stop people moving because they want to move. It will just cool the housing markets down, which is a big multiplier for the economy. But on the whole, we don’t see that 50% drawdown happening unless something cataclysmic happens that we can’t see. So we’re still positive. We think there’s a lot of risk priced in, and we’re willing to take on that risk.

Ben Toms

Good stuff, we’ve got another question here. How do you think political uncertainty will affect the tax rules in the coming months and years?

Daniel Partridge

Yeah, I mean, particularly in the UK, we have an array of different views on changes to tax rules, whether it be pensions, whether it be an inheritance tax, and so forth, that’s sort of an annual event to some extent and certainly the media, I think like to make the most of that sometimes. If you think back over the past few years, I mean undoubtedly at the present time with inflation, cost of living, there’s probably a demand to really ease the cost on households in that respect. And I guess the knock-on effects of that probably longer term is how they pay for that. We’ve seen huge sort of impacts of legislation on pensions, tax on pensions over the past few years, particularly the lifetime allowance. In that respect, we’ve had fairly substantial changes with estate planning and inheritance tax as well over the last few years, that’s probably actually got better than it has been for a long time. So I think the the key thing to that is there will always be a level of change to it. But it comes back to putting the plans in place, but in financial planning in place, looking at objectives to basically find a route through those changes, be as flexible as possible with what we’re doing on the planning side, and just be ready for those events when they do happen. Ultimately, changes will be made for the good and for the bad, but it’s having the financial plan in place to navigate to read through them.

Ben Wattam

I think just quickly one point about the upcoming new prime minister, is that inflation, especially cost inflation, so fuel and filling up your cars and things like that, is a tax, it’s a tax on consumers. One thing that the UK could change from an economic perspective is that, if say Liz Truss gets in and does significant tax cuts, that could be quite harmful for consumers in the UK economy. It will be horrendous for the budget, but from an economic point of view and consumer point of view, that could be a bit of a positive.

Ben Toms

Perfect, thank you both. So that’s all we’ve got time for today. So thank you all very much for joining us this morning. Hopefully you found this session useful and informative. If you have any feedback, then just get in contact with us. And if you have any further questions on anything we’ve covered in this session, then do get in touch. Don’t hesitate. Thank everyone for watching and we’ll just put a disclaimer on the screen now to end it as well.