Investing in volatile markets – not for amateurs!
Information in this article should not be taken or relied upon as personal financial advice. Any individual requiring information or advice on their own specific circumstances or on their own account should contact a suitably qualified professional.
Trustees appreciate that they have a duty to invest, with professional advice in most cases, in line with the trust’s objectives (ss 4 & 5 Trustee Act 2000). This might, for example, mean choosing investments that deliver a certain level of income or which do not create adverse tax consequences for either themselves or the beneficiaries. Usually a suitable professional, typically an independent financial adviser or tax accountant, who is an authorised person under s.31 Financial Services & Markets Act 2000, will be able to give the right advice to help the trustees with decisions on issues like that.
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However, it is rarer for trustees to find that they have any specific guidance about how much risk they are allowed to take with the trust funds. Common sense and legal precedent will assist in interpreting what is quite open guidance in the current statutes and in many cases trustees will look to be prudent without being over cautious. That means that a balanced investment portfolio, well diversified and with low volatility will be the sought after result.
Delivering income and growth
Any investment adviser of experience will admit that in a world where global stock markets events are closely correlated and market price movements are now faster than ever, delivering stable income and growth and maintaining the value of capital is increasingly challenging. The old techniques of mixing fixed interest securities (gilts and bonds) with blue chip UK shares and maybe some deposits or National Savings Certificates may no longer stand up to scrutiny.
Ultra low interest rates (some investments in gilts would actually guarantee negative real rates of return at the date of writing), the globalisation of the trading and profits base of large listed companies and the fact that all the real economic growth is in the developing world mean that responsible trustees need to be looking at the latest investment products and a much wider spread of investments. Of course, more complex investments may cost more money to look after, either in investment manager and dealing fees, or in advice costs, so the expenses factor needs to be allowed for too.
Who to instruct?
It is less and less likely that the average general practice financial adviser will have the ability to research the full market, carry out the necessary due diligence and construct and maintain portfolios that can be run at a reasonable price. In fact, many such advisers are outsourcing their investment propositions to “model portfolios” from insurers, investment management groups and stockbrokers. This may mean the right skills have been applied, but costs can be doubled up and the portfolios will inevitably be of the “one size to fit all” variety.
Trustees need to know that their chosen financial adviser has the qualifications and resources to deliver investment advice exactly tailored to the trust’s objectives at a reasonable overall price. A suitable firm will likely have advisers with specialist investment qualifications, Chartered or Certified staff and a published and verifiable investment policy. Example portfolios should be made available as part of the commissioning process. There should also be clear explanations of what portfolio volatility can be expected and guaranteed regular updates of performance with results compared to an agreed benchmark.
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