Business Finance

Investment company assets reach £200bn milestone

Assets managed by investment companies have surpassed £200 billion for the first time. An investment company often referred to as an investment trust, is a form of a collective investment fund. It has a closed-end structure, which differs from unit trusts or open-ended investment companies OEICS), where new units are created and cancelled based on investor demand.

With an investment trust, a fixed number of shares is in circulation, with the share price fluctuating based on the underlying value of assets and investor demand for the shares.

This closed-end structure makes it easier for investment trusts to invest in illiquid or less easy to trade assets, as the fund manager can take a longer-term view. Shares in investment companies are traded on a stock exchange, just like other listed companies. Each has an independent board of directors, who are responsible for looking after the interests of investors.

An interesting feature of investment companies is their ability to borrow money to invest. This is known as ‘gearing’ and can result in additional profits from investing, once the cost of borrowing is covered. The investment company sector passed the £2bn milestone to record assets under management of £200.3 billion on 31st July 2019. It’s been an impressive run for assets in the sector during the past few years.

Assets have doubled in less than seven years, after reaching £100 billion at the end of January 2013. Nearly half of this growth during the period has come from investment companies investing in alternative assets, rising from £34.7 billion on 31st January 2013 to £80.3 billion on 31st July 2019, a rise of 46%.

Investment companies can invest in a much more extensive range of assets than other types of investment funds. They set out their approach to investing in their investment policy.

It’s good news that the investment company industry is growing strongly, reaching a record £200 billion of assets at the end of July. This growth demonstrates the adaptability of investment companies, which have been helping investors meet their financial needs for more than 150 years.

It reflects growth in mainstream investment companies which are investing in cutting-edge opportunities such as technology, healthcare, frontier markets and venture capital. As investment companies are the natural home for illiquid assets, it is not surprising that a significant part of this growth has been in the alternative sectors, which are often invested in assets that are harder to sell such as property and infrastructure.

Investment companies’ income advantages have also come to the fore in the current low interest rate environment. Many investment companies have increased their dividends for decades, making them highly sought after in recent years.

Ian Sayers, Chief Executive of the Association of Investment Companies (AIC)
Jon DoyleInvestment company assets reach £200bn milestone
read more

It’s official. We are going nowhere fast

It’s official. The UK economy has shrunk in size for the first time in seven years. According to the latest official figures from the Office for National Statistics (ONS), the British economy contracted during the second quarter.

Economists were already predicting a weak second quarter, with an average forecast of 0%. Instead, the official figures point to a 0.2% decline in the gross domestic product (GDP), placing the UK economy on a recession footing. The technical definition of a recession is two consecutive quarters of GDP decline. We won’t know for sure whether this level has been breached until after the end of September when the ONS publishes their first estimate for the third quarter. If a recession transpires, it would be our first since the global financial crisis more than a decade earlier.

But what’s behind the economic decline experienced in the second quarter? Predictions of a weak second quarter were driven by stockpiling by companies ahead of the original Brexit deadline. The manufacturing sector, in particular, contributed to the decline, with some factories scheduling their usual summer maintenance shutdown for earlier in the year, immediately following the original March Brexit deadline.

This stockpiling and shutdown combination resulted in the fastest rate of contraction in the manufacturing sector since its deep recession of 2009. Also, the services sector grew at a more modest rate than usual. It was the weakest growth in the service sector in three years. Among this doom and gloom, household spending appeared to hold up in the second quarter.

Growth in household spending was broadly the same as during the first quarter of the year. So are destined to enter recession in the third quarter, just as the UK prepares to leave the European Union, with or without a trade deal?

A new survey of economists suggests they expect the British economy to grow by 0.3% in the third quarter, reversing the second-quarter decline and resulting in a slightly larger GDP. But a considerable amount will depend on how businesses respond to the direction of Brexit between now and the end of October. Business confidence could be crushed by a political event, including a snap election, that results in more uncertainty.

On the face of it, this first contraction in GDP in almost seven years is a surprise. But the fall in output in the second quarter is largely due to the impact of the scheduled date of 29 March for the UK to leave the EU.

Some manufacturers, especially carmakers, brought forward their annual shutdowns to April rather than the summer and this contributed to a large drop in manufacturing output in the second quarter.

In addition, stocks built up in anticipation of a March EU exit were likely run down in the second quarter, dragging growth down further. There is likely to be a rebound in activity in the third quarter and so we do not expect the UK to enter recession, despite fears of this being expressed.

But economic confidence has been dented here in the UK, as our last Q2 edition of our Global Economic Conditions Survey (GECS) showed. The message from the GECS continues to be moderate growth, restrained by stagnant business investment spending held back by Brexit uncertainty. Consumer spending, supported by rising real incomes, will help support modest economic growth in coming months.

As for the global economy, GECS points to a slowing global economy with significant downside risks reflected in weak confidence. The biggest risk to the global economy remains a significant further escalation in the US-China trade war. A sharp slowdown in China and a no deal Brexit are additional downside risks.”

Commenting on the latest economic figures, Michael Taylor, chief economist at ACCA (the Association of Chartered Certified Accountants)

What’s always worth keeping in mind, during times of economic downturn, is the usual lack of correlation between a declining economy and a falling stock market. A recession does not guarantee investments will lose value, especially when you hold a well-diversified portfolio with global exposure.

Investment values do tend to fluctuate in the medium term, which is why investors should stay focused on the long-term outcome of investing money and how investment decisions made today ultimately affect their long-term financial objectives.

Jon DoyleIt’s official. We are going nowhere fast
read more

Modern Monetary Theory branded ‘rotten’

Many organisations have made a case for Modern Monetary Theory (MMT) in recent years. In simple terms, MMT is an argument that nations that issue currencies, like the UK and Pound Sterling, can never run out of money in the same way individuals or corporations can.

It hinges on the claim that governments can print currency to fund substantial government spending to deliver full employment. With economists coming out in favour of MMT, and many arguing against it too, a neoliberal think tank the Adam Smith Institute has attempted to break it down in a newly published paper.

They claim that MMT advocates are driven by Utopian thinking, wanting massive unaffordable public spending programmes, the cost of which never have to be repaid through higher taxes.

According to the Adam Smith Institute, advocates of MMT claim that government spending can activate substantial unused economic capacity, but this claim is false. In practice, the impact of MMT is inflationary and hyperinflationary.

Despite being a fringe economic theory, MMT is gaining mainstream support in areas of political activism, including the Green New Deal and Jeremy Corbyn’s People’s Quantitative Easing. But the economic collapse experienced by Venezuela, following years of spending fuelled by a deficit, should bring an end to any belief that deficits don’t matter to the economy.

As a result, the Adam Smith Institute believes MMT needs critical thinking and debunking before it starts to influence government policy in a major Western country. With the economic idea of MMT gaining ground among heterodox economists and left-wing politicians in the UK and US, the Adam Smith Institute is arguing the theory is powerfully wrong. Lead author of the report, Professor Antony P. Mueller, has drawn comparisons between MMT and the flat earth movement.

Mainstream economists have rejected MMT, with a poll carried out by the University of Chicago’s Booth School of Business, speaking to 50 elite economists, finding that not a single one believed governments don’t need to worry about deficits. None of the economists surveyed found it possible to fund as much government spending as desired, only by printing more money.

“MMT promises politicians almost limitless cash to spend on their pet projects. But if something sounds too good to be true it probably is. The state cannot print money without risking crippling inflation. More cash chasing the same amount of goods inevitably leads to sellers increasing their prices. When inflation spirals out of control it has disasterous consequences from the Weimar Republic to Zimbabwe to now Venezuela. MMT may just be wishful thinking today – the danger is that tomorrow a politician is stupid enough to follow its prescriptions.”

Matthew Lesh, the ASI’s Head of Research

The Adam Smith Institute argues that MMT ignores ignorance on the part of politicians and government actors with no price incentive or competition to counterbalance political prejudice. Instead of treating MMT as a serious economic theory, the Adam Smith Institute argues the growing political support for MMT should be viewed as a sign of growing tolerance for debt and deficits.

The report argues that the absence of fiscal restraint for public spending means massive public spending programmes lose their legitimacy. This includes projects like the ‘Green New Deal’, ‘free’ university education, renationalisation, and considerable increases in infrastructure spending, all of which can be launched with enthusiasm.

“Old wine in new bottles is a recurring phenomenon in economics, particularly if it is the bad wine of economic ideas that failed in the past. Modern Monetary Theory (MMT) is neither modern nor a theory – it is the attempt to sell something as new which is spoiled and rotten. “While promising to cure all kinds of economic woes, MMT is the poisonous elixir that will ruin those who take it as it has happened before.”

Professor Antony P. Mueller, the paper author
Jon DoyleModern Monetary Theory branded ‘rotten’
read more

Autumn Budget 2018: How does it affect you?

Will you be better or worse off because of today’s Budget?

In a relatively quiet Budget our summary answers that question, please read on to find out.

Winners

Earners

The Chancellor brought forward an election pledge to increase both the Personal Allowance and Higher Rate tax band, affecting 32 million people. From April 2019, the Personal Allowance will increase to £12,500, while the higher rate tax threshold will be £50,000, rising from £11,850 and £46,351 respectively.

The National Living Wage will also increase to £8.21 from April 2019 from the current £7.83, representing a 4.9%, and significantly above inflation, increase.

Homeowners

Main residences will remain exempt from Capital Gains Tax (CGT), ensuring families that sell their home don’t face a tax from the sale of their property.

Furthermore, all shared equity purchases of up to £500,000 will be exempt from Stamp Duty.

Small businesses and self-employed

The threshold for VAT registration will remain unchanged for the next two years despite speculation that it would drop. The fact the current £85,000 turnover threshold remains in place will be a relief to many people who are self-employed or run small businesses.

Businesses occupying property with a rateable value of less than £51,000 will have their business rate cut by a third over the next two years. The amount businesses pay in rates has been a longstanding issue for many, particularly those in retail as the high street attempts to compete with online businesses. The changes will mean savings for 90% of shops, restaurants and cafes.

Finally, a £695 million initiative that will help small businesses to hire apprentices was also announced. Those firms taking on apprentices will have the amount they need to pay halved.

People paying into pensions

Despite concerns ahead of the Budget that there would be some changes to tax relief on pensions, no changes were announced in the speech. For those paying into a pension, it provides some level of certainty, at least for a further year.

Losers

Technology giants

There will be a new tax targeting digital businesses. The UK Digital Services Tax will target specific platform models and technology giants. It will only be paid by firms that generate £500 million in revenue globally and will come into effect in April 2020. Digital tech giants will be taxed 2% on the money they make from UK users.

Tax avoiding businesses

Once again, the Chancellor accounted that there would be a clampdown on large companies that avoid paying the correct level of tax. The Chancellor aims to raise £2 billion over the next five years by targeting tax avoidance and evasion.

Questions?

If you want to discuss how you are affected by today’s Budget or have any questions, please contact us to speak to one of our finance professionals.

The content of this newsletter has been provided by The Yardstick Agency and is based upon their interpretations of today’s Budget. Further analysis and clarifications will be published as necessary.

Jon DoyleAutumn Budget 2018: How does it affect you?
read more