Here Finance Monthly hears from Kasim Zafar at investment specialists EQ Investors, who looks back at the past decade and considers the investment opportunities we should be considering ahead.
We started the decade with the global economy still reeling from the worst financial crisis in modern times.
Following the failure of the banks, trust in capitalism was then further eroded by the largest financial fraud in US history; Bernie Madoff was imprisoned for 150 years after defrauding clients to the tune of $65 billion.
Extraordinary times called for extraordinary measures. By 2012, most major central banks had slashed interest rates close to zero or below, hoping that ‘free money’ would help the economy heal and return to growth. Trillions of dollars were pumped into financial markets to plug anything resembling a hole. The idea was basic, yet oxymoronic. To save free market capitalism, central banks staged the greatest market intervention of all time.
Europe was tested further by its sovereign debt crisis. Despite zero interest rate policies, the rate demanded to fund government debt of the ‘PIIGS’ (Portugal, Italy, Ireland, Greece and Spain) soared between 2010 and 2012, reaching almost 30% in the case of Greece’s 10-year debt.
The European Central Bank created its rescue package to save the European Union from imploding, committing to buy a massive amount of European sovereign debt. Despite this, since the root cause of the problem was too much debt, European governments adopted austerity measures, cutting fiscal stimulus spending.
Quantitative easing in the US put a line under asset prices, first bringing stability and then allowing growth, to the substantial benefit of those with wealth invested. The wave of economic austerity that swept across Europe led to an increase in income inequality and sowed the seeds of populism.
Distrust of big companies spread beyond bankers like wildfire with the largest environmental disaster in American history. BP’s Deepwater Horizon oil spill in the Gulf of Mexico eventually cost the company more than $65 billion in clean-up costs and compensation.
There was no shortage of environmental tremors. We saw floods on multiple occasions in Pakistan, India, China, Brazil, Thailand and the UK. Hurricanes Sandy, Irma, Maria and Harvey; earthquakes devastated Haiti, Chile, Mexico and of course Japan where in Fukushima we witnessed the world’s second largest nuclear power plant disaster after Chernobyl.
The latest signs of an overheating planet are record temperatures (high and low) across the globe, including fires in the Amazon rainforest and across Western Australia in 2019.
A concerted effort to tackle the climate crisis was finally embraced by 195 governments in the form of the Paris agreement. Last year, the EU declared a climate emergency, no doubt inspired by Greta Thunberg. All legislative and budget proposals will be fully aligned to limit temperature increases to under 1.5 degrees – seen as the danger line for global warming.
The last decade has seen rapid technological advances and we see a number of these coalescing over the next decade. Let’s take a glimpse into the future because we think it’s pretty exciting.
Why would you want to invest unsustainably? Now that’s a powerful question. When the rules of the game change, only a fool plays the same strategy.
The next decade is going to see financial markets transform to incorporate a broader set of stakeholders and interests well beyond the bottom line. Legislative changes are already underway in the EU that will significantly alter the reporting requirements for companies and investment products including:
Although the UK will have exited the EU by the time these rules come into force (around December 2021), we fully expect the UK to adopt similar reporting requirements.
The next decade is going to see financial markets transform to incorporate a broader set of stakeholders and interests well beyond the bottom line.
This will help to establish a common language for what qualifies as sustainable and unsustainable through legislature. The associated data reporting will bring transparency to the conversation and encourage us all to consider the merits of economic activities, particularly those ones which are deemed to be harmful.
A decade ago, we were buying the iPhone 4 and the original iPad had only just been released. The idea of cloud storage and cloud computing was just taking off and the volume of data in the world was estimated to be around two zetabytes – that’s two trillion gigabytes. For comparison, entry level iPhones today have a data capacity of 64 gigabytes. The volume of data in the world has since exploded to around 41 zetabytes. That’s a lot of data! Through analysing these big data sets, we are finding better ways of doing things and finding altogether new things to do.
This is the realm of artificial intelligence (AI). Data scientists are creating sophisticated computer algorithms that identify esoteric features in data of a known entity (such as known ailments in radiology scans). When the algorithms are presented with new images, they are now able to identify things better than their human equivalents. This technology has incredibly wide applications in everything from early stage healthcare diagnoses to logistics route optimisation.
Data and artificial intelligence is being combined with robotics to achieve some pretty incredible feats, often referred to as the ‘internet of things’. Computing power is now decentralised, agile and mobile, freed from the confines of the home and office. The smartphone heralded a new era of fast and interactive data sharing and then the proliferation of sensors has taken things to another level. Everything is being connected: the smart home, smart buildings, wearable consumer devices, remote machine & engine diagnostics and of course, our transportation systems.
[ymal]
Healthcare is getting better from improved diagnostics, but there are improvements in treatments themselves. Increasingly healthcare is become an exercise in engineering. Biotechnology is developing medicines that are designed to combat specific diseases; treating the cause rather than the symptoms. In the future, it is easy to envisage so called ‘designer drugs’ that are designed for our specific genetics and perhaps beyond a decade from now, we could even be 3D printing these at home.
The current world population is 7.7 billion and the UN forecasts we’ll add another one billion people over the course of the next decade. Resource efficiency will be crucial for this to be sustainable, especially to create enough food for everyone. Robotics assisted precision agriculture and partially or wholly embracing veganism will help, but a new technology could change the face of agriculture and food supply altogether. Precision fermentation is the name of the technology behind the various meat alternatives we see in restaurants and supermarkets.
These are synthetic, precision engineered proteins that have similar nutritional value and are approaching cost parity to animal protein. We haven’t synthesised the perfect rib-eye steak yet, but we believe there is a good chance that agriculture will look wildly different in a decade’s time. Could we be looking at the path to ending poverty by then?
Many of these transformational technologies are based on analysing data using artificial intelligence with computer power that is thousands of times faster today than it was a decade ago, all connected through the digital infrastructure of the internet. There is one problem though. We are approaching the physical limits of computer miniaturisation that has driven the increase in computer power.
However, human ingenuity is pushing through this boundary, developing a new breed of computing. Based on Einstein’s concepts of quantum superposition and quantum entanglement, this new breed of quantum computing would rewrite the rulebook and open the door to… a world of even more new possibilities yet.
From more intelligent healthcare to synthetic steak, the decade promises major developments.
With UN Secretary-General Antonio Gutterres warning that climate change is about to reach a point of no return - and with Boris Johnson and Nigel Farage empty-chaired for Channel 4’s climate change debate in Novermber – new research suggests the green agenda is gripping the UK investor community. Renewable energy is now a top investment choice for investors of all ages; it is equally popular with men (29%) and women (31%) and it also transcends investment philosophy. For example, active traders, those that are simply looking to make an opportune gain, place as much emphasis on renewables as those investors that act with a specific ethical investment philosophy (33% and 36% respectively).
At a time when the general election and protracted Brexit delays are casting a cloud of uncertainty over what lies ahead in 2020, GraniteShares research suggests economic and political events have powered a greater sense of conviction among investors, with 76% seeing clear investment opportunities to capitalise on. Further, more than a third of UK investors (37%) identified as being in control of their investment decisions, acting with conviction.
Given this UK appetite to amplify their investment edge, GraniteShares asked a nationally representative sample of 1,560 UK investors which sectors they would put their money into if they were looking to make a long-term gain over the next year. After renewables, the most popular sectors were technology (28%), property (25%), and gold (22%). Technology was most popular with younger investors aged 25-34 (31%), whereas property was most popular with the over 55s (33%). Gold was evenly popular across all age groups, a top choice with around one in five investors.
In addition, pharmaceuticals and biotechnology were particularly popular with over 55s (36% and 23% respectively), cannabis was most popular among the over 40s (20%) and oil and gas was top choice among the 25-34s (17%).
With recent warnings that UK car production could plummet with a non-deal Brexit and bleak warmings of the health of the high street for the crucial Christmas season, retail (8%) and auto (7%) along with industrials were the sectors that investors were least interested in putting their money into. With all these sectors, it was older investors (over 45) that were walking away and investing their money elsewhere.
The sectors UK investors would put their money into if they were looking to make a long-term gain over the next year (by age group)
| Investment sector | Total | 25-34 | 35-44 | 45-54 | 55-64 | 65+ |
| Renewable energy | 30% | 31% | 26% | 33% | 35% | 33% |
| Technology | 28% | 31% | 22% | 32% | 30% | 29% |
| Property | 25% | 21% | 31% | 26% | 33% | 28% |
| Gold | 22% | 23% | 21% | 26% | 27% | 10% |
| Biotechnology | 19% | 20% | 16% | 18% | 23% | 22% |
| Pharmaceuticals | 19% | 16% | 17% | 22% | 36% | 25% |
| Cannabis | 17% | 16% | 17% | 20% | 18% | 14% |
| Oil and Gas | 14% | 17% | 15% | 11% | 10% | 15% |
| Banks and Insurance | 14% | 14% | 13% | 9% | 13% | 11% |
| Crypto-Currency | 13% | 20% | 14% | 11% | 3% | 5% |
| E-Commerce | 12% | 14% | 10% | 9% | 15% | 6% |
| Utilities | 11% | 11% | 12% | 10% | 10% | 7% |
| Mining | 9% | 12% | 4% | 8% | 7% | 11% |
| Retail | 8% | 10% | 8% | 5% | 3% | 5% |
| Industrials | 8% | 9% | 3% | 6% | 6% | 7% |
| Auto Industry | 7% | 9% | 10% | 4% | 7% | 4% |
Tell us about some of the key services that you offer to investors.
In Switzerland, CACEIS covers its whole “one-stop-shop" offering, from fund administration to global custody and depositary bank. Our client base is very diverse - from management companies to pension funds, insurance companies and private banks.
Our fund management subsidiary provides a full range of tailored services that meet the specific needs of securities funds, real estate funds and private equity funds. We provide asset managers with analysis of the fund creation project, its launch, day-to-day administration, performance measurement and reporting to investors and regulatory authorities, regardless of the fund's jurisdiction in the main European markets.
More specifically, for foreign law funds, we act as a representative and paying agent.
The "execution to custody" model of the CACEIS group allows us to specifically target private banks through the execution of orders on the markets and the middle office. We offer a service covering the entire front, middle and back-office chain in partnership with Azqore, offering a core banking and BPO solution.
You also offer tailored services to your clients – who can benefit from your tailor-made solutions?
Swiss clients can benefit from our ability to be a one-stop-shop. Our front-office teams have the experience to understand the commercial strategy of clients and cater to the complex needs of our global clientele. CACEIS Switzerland has a thorough knowledge of the local real estate market and we are the leader in “private label” fund management.
What are some of the most common problems that the investors that reach out to you are faced with? In what ways can you help them overcome them?
Regulations are everywhere and today’s asset managers and asset owners are working within a financial-economic context with negative rates. We need to adapt quickly to these changes as in Switzerland, we are in a negative rates environment. Our services and our legal teams are here to advise our customers and to guide them in this changing environment.
On top of that, costs remain a key issue.
Looking forward, what excites you about the future of CACEIS? Are there any exciting projects in the pipeline that you can share with us?
As part of one of the largest banking groups, Crédit Agricole, CACEIS is a reliable partner in terms of business. The acquisition of KAS Bank in 2019 has strengthened our position in the Netherlands, Germany and the United Kingdom and boosts the range of services we offer to pension funds, insurance and asset management companies. It is exciting to see how the Group is evolving and developing itself.
Contact details:
Website: https://www.caceis.com/
Email: philippe.bens@caceis.com
Telephone: +41 58 261 28 31
The warning from Nigel Green, chief executive and founder of deVere Group, follows the landslide victory for Mr Johnson’s Conservative party in the UK’s general election last week in which he secured an 80-seat majority, and as stocks rose across Europe on Monday.
The Queen will officially open Parliament on Thursday, outlining her new government's legislative programme.
It is expected that the Withdrawal Agreement Bill on leaving the EU could be put before MPs as early as Friday. Nigel Green affirms: “The decisive win for the Conservatives triggered one of the pound’s biggest ever rallies, the FTSE 250 index of UK shares climbed by 3.6% and the FTSE 100 rose 1.3%.
“On Monday, European stock markets reached all-time highs.
“This has been driven in part by investors’ relief that a hung parliament had not been delivered, meaning years of uncertainty and indecisions over the UK’s way out of the EU is coming to an end. Also, perhaps, because the Conservatives promised a more pro-business agenda.”
He continues: “But Boris Johnson now has the daunting task of turning his powerful election campaign slogan of ‘Get Brexit Done’ into reality.
“When Britain leaves on January 31, there will be only 11 months to thrash out the basics of the future relationship with the European Union.
“The self-imposed end of December 2020 deadline is a mammoth challenge or Britain will fall through the ‘trap door’ of no-deal Brexit on January 1 2021.”
The Prime Minister could request another extension for the transition period. The government has until 1 July 2020 to agree with the EU a one-off extension, until the end of 2021 or 2022.
But, says Mr Green, this is unlikely. He notes: “I don’t believe that Johnson will use his significant majority to slow down or soften - the Brexit process.
“Instead, his assumption from the election outcome will be that people want quick, easy answers.
“Indeed, in an interview on Sunday, Michael Gove guaranteed that the Brexit transition period will not be extended.”
He goes on to add: “The task ahead is monumental. The time frame in which to complete it is narrow. Failure to agree a free trade deal by the end of next year will mean the UK crashing out of the EU and all the far-reaching negative economic implications, including the likelihood of a recession.
“With such uncertainty, following the election bounce, in 2020 investor confidence in the UK is likely to remain subdued and Boris Johnson’s Brexit stance could be a major source of volatility in financial markets.”
The deVere CEO concludes: “Despite the markets currently surging, investors must avoid complacency.
“2020 promises to be a year in which political factors – including Boris Johnson’s Brexit plan and the U.S. presidential election, amongst others – could potentially spook markets.
“Investors should assess and, where necessary, rebalance their portfolios to take advantage of the potential opportunities and to mitigate the risks.”
Below Peter Wood, CEO at CoinBurp delves into the current crypto-scene, the value of Bitcoin and the grey cloud that looms over the future of crypto-investment.
Bitcoin saw highs of over £7,000 at the end of October, dropping to just over £5,000 in the early hours of the 25th of November – a 6 month low.
Just as media headlines and finance experts began to offer damning opinions on the declining value of the digital currency, bitcoin skyrocketed – increasing by £600 in value within just six hours.
This is not surprising. In fact, at any given time of the year, a 24-hour cryptocurrency price chart will have more peaks and troughs than a rollercoaster. Therefore, first-time crypto investors should never be concerned about the declining value of their digital finances, as they need only wait a period of time, be it a week or a month, before the value soars again.
[ymal]
Newcomers to cryptocurrency, or those who have considered investing in cryptocurrency, should do their best to ignore the negative media headlines when Bitcoin suddenly drops in value, as there is quite simply no better time to invest. With any business investment or purchase, the aim is to buy low and sell high. Those who invested in Bitcoin this time last year probably purchased at the value of £2,500 to £3,000; within just seven months, this value more than tripled to around £9,500.
Therefore, investors should never be concerned about the short-term future of their digital finance investment. In fact, one can be optimistic when looking at the fact that, year on year, the tail end value of Bitcoin has grown increasingly higher – thus demonstrating gradual annual growth in the way of higher lows, and possibly even higher highs to come.
A grey cloud that looms over cryptocurrency, however, is what is known as bitcoin halving: this is where the number of bitcoin rewarded to miners for every block mined is cut by half, occurring every time 210,000 blocks are mined. As it stands, the next bitcoin halving is expected to take place in the middle of May 2020.
Much like the short term value of Bitcoin, nobody knows exactly what impact the next bitcoin halving will have on the value of the cryptocurrency – all we can say for sure, is that the next bitcoin halving is expected to have a significant effect on the price of bitcoin, we’re just not certain about whether this ‘effect’ will be positive or negative, upwards or downwards.
Much like the short term value of Bitcoin, nobody knows exactly what impact the next bitcoin halving will have on the value of the cryptocurrency.
If cryptocurrency has set any precedent, however, it’s that low valuations and high valuations are never permanent. If the upcoming bitcoin halving does cause a large-scale crypto crash, you can be rest assured that your money has probably not been lost forever. On the other hand, it could be worth investing in bitcoin at the next affordable opportunity before the halving, in preparation to reap the rewards of a possible soar in value.
I would love to offer specific, short term investment advice on when exactly to invest in cryptocurrency, but the time between me publishing this article, and you reading it, could be the difference of thousands of pounds in any given cryptocurrency market.
This depends on many factors, but you can still determine it nonetheless. Here's how you can do it.
First, remind yourself which cryptocurrency you will be buying or choose one if you haven't decided yet. Here are the most popular types of cryptocurrency to choose from:
There is no right or wrong cryptocurrency to buy, so consider all your options and make a choice you will be satisfied with.
The next thing you should do is think of why you are buying the cryptocurrency you chose. Consider what you will be doing after you purchase the cryptocurrency. Are you going to sell it? Or maybe you will be donating it or gifting it to someone?
This point is very important as it will decide your further actions. You must know what goals you are pursuing so that you can find the best means to achieve them. Besides, some cryptocurrencies might have technical restrictions that will prevent you from doing what you want to do.
Remember that the cryptocurrency market is constantly evolving and changing. For instance, there’s this new concept of stablecoin being developed that may be the next big thing in the world of cryptocurrencies.
“Stablecoin initiatives are developing at a rapid pace. Adoption of stablecoin, a form of collateralized cryptocurrency pegged to a stable fiat currency like the yen or dollar are being debated by central banks,” says Robert Anazalone, an expert on cryptocurrencies.
You are probably aware that some cryptocurrencies are more expensive than others, so if you are on a budget, you probably won't be able to buy them. You have to take into account your financial situation before going online and looking for your cryptocurrency.
“Due to the limitations placed on capacity, cryptocurrencies like Bitcoin and Ethereum see higher transaction fees when the networks become congested,” writes Kyle Torpey, a writer and a specialist on Bitcoin, in an article for Forbes.
At the same time, this point is directly tied up with the next one as the current state of the market will influence the price of your chosen cryptocurrency. Sometimes, even a usually cheap currency may cost more due to the fluctuations in the market. This can also influence what you will be buying and when.
Last but not least, think of the current state of the market. Research and read about what is going on so that you are aware of the situation and clearly know what you are doing. Analyze the data you collect and decide whether or not it's the right time to buy cryptocurrency.
You should be conducting such research and analysis regularly so that you can determine the best time for buying your chosen type of cryptocurrency.
Clem Chambers, the CEO of private investors website ADVFN.com and author of Be Rich, The Game in Wall Street and Trading Cryptocurrencies: A Beginner’s Guide, says: “Market timing is incredibly difficult, especially in a hugely volatile asset like bitcoin.”
To sum up, try to be skeptical of what you read online when someone is claiming that it is the right time to buy cryptocurrency. Read and research or seek help from a professional adviser to understand when is the right time to buy and which cryptocurrency to choose.
This was authored by digital marketing executive Cynthia Young .
BlackLine commissioned independent global research firm Censuswide to survey over 760 institutional investors across the world to establish their attitudes to financial risk, due diligence and reporting. The findings reveal the financial practices that raise red flags for investors, as well as the factors they rely on to make informed investment decisions.
According to the survey, creative accounting, where companies exploit financial loopholes to present figures in a legal though misleadingly favourable light, was identified as a major concern for the global investor community. Not only do the majority of investors believe that these tactics are commonplace at their portfolio companies, but 91% believe that more large companies will resort to these techniques over the next 12 to 18 months.
Worryingly, 83% of investors surveyed also agreed on the likelihood of a global recession in the next 12 to 18 months, meaning businesses will need to work even harder to outstrip the competition. However, companies should think twice before trying to manipulate their figures; a quarter (25%) of investors singled out evidence of creative accounting as the factor that would make them least likely to invest in a company.
“In many ways the international business landscape is more complex, uncertain and challenging than it was a year ago. Companies are therefore under increasing pressure to perform and retain a competitive edge,” said BlackLine CEO Therese Tucker. “However, businesses cannot afford to have the integrity of their financial data questioned at a time when investors are evidently becoming more stringent about unnecessary and unwarranted financial risks.”
In fact, inaccurate reporting and poor financial controls raise alarm bells for a large number of global investors. Less than 1% of those surveyed say they will invest in a company with poor financial controls without taking some form of corrective action first, such as imposing changes on the company or its management team.
A third of investors (33%) say risk of internal financial fraud or financial non-compliance make them less likely to invest. Meanwhile, a quarter (25%) are put off by consistently late filings, with a slightly higher portion less likely to invest in companies that make adjustments post reporting (29%).
These red flags are encouraging investors to take a much closer look at the numbers, highlighting the importance of accurate and transparent financial data. When asked what the most important considerations were when deciding whether to invest, a company’s financial growth forecasts (46%), access to real-time snapshots of company finances (42%) and key metrics within financial reports (46%) came out on top. This suggests that while investors are forward-looking, they also need a clear and realistic view of current financial data in order to make informed decisions.
“It’s likely that investors will increasingly want to look ‘under the hood’ of their portfolio companies, to ensure they are getting a transparent and accurate view of their finances,” continued Tucker. “The ability to access, and more importantly analyze, data in real time will not only be vital for driving business competitiveness, but also for maintaining investor trust.”
The full findings are outlined in ‘The New Age of Increased Investor Due Diligence’.
The news comes after recent debacle surrounding the collapse of London Capital & Finance. The ban, set to be introduced on 1 January, will comes just as consultancies and financial managers encourage clients to place money into ISAs before the end of the tax year.
Currently, various mini-bonds have ISA status and would therefore be included in said advice, however the FCA believes many consumers may not have the expertise required to understand and therefore appropriately evaluate the risks involved in certain mini-bonds.
According to reports the ban will exclude mini-bonds that raise capital for individual companies or properties.
The intervention comes in regard of the recent administration of London Capital & Finance, whereby over 11,000 customers were left in debt and at a loss when the financial management firm collapsed after peddling 6.5% to 8% yearly returns on mini-bonds.
Subsequently, the FCA was under immediate scrutiny and was heavily criticised for not taking action when warned about the firm’s operations three years prior.
[ymal]
Both the FCA and LC&F are now under investigation by a leading high court judge, Dame Elizabeth Gloster, and the SFO respectively.
Andrew Bailey, Chief Executive of the FCA said: “We remain concerned at the scope for promotion of mini-bonds to retail investors who do not have the experience to assess and manage the risks involved. This risk is heightened by the arrival of the ISA season at the end of the tax year, since it is quite common for mini-bonds to have ISA status, or to claim such even though they do not have the status.
“In view of this risk, we have decided to complement our substantial existing actions with a further measure which will involve a ban on the promotion and mass marketing of speculative mini-bonds to retail consumers. We believe this will enable us to further consumer protection consistent with our regulatory principles and the FCA Mission.”
A press release from the FCA has also stated: “The FCA ban will mean that unlisted speculative mini-bonds can only be promoted to investors that firms know are sophisticated or high net worth. Marketing material produced or approved by an authorised firm will also have to include a specific risk warning and disclose any costs or payments to third parties that are deducted from the money raised from investors.”
The research found that:
UK investors are turning to traditional assets as a result of the political uncertainty currently facing the country, new research from Butterfield Mortgages Limited (BML) has found.
The prime property mortgage provider surveyed 1,100 UK-based investors, all of whom have assets in excess of £10,000, excluding pensions, savings, SIPPs and properties they live in.
The research revealed the most common assets investors hold are stocks and shares (53%), property (41%) and bonds (30%). On the other end of the spectrum, classic cars (16%), cryptocurrencies (17%), art and forex (both 19%) ranked as the least popular.
Delving into the factors influencing their investment decisions, 61% believe traditional assets like property are best positioned to deliver stable and secure returns during this current period of political uncertainty. One in five (20%) property investors are planning to invest in more real estate in 2020.
[ymal]
When it comes to non-traditional asset classes, nearly two thirds (64%) of investors surveyed by BML do not think cryptocurrencies are a safe or reliable investment. A tenth (10%) of those who have invested in cryptocurrency plan to reduce their amount of investment in this asset in the new year.
Looking into the factors influencing their financial plans for 2020, 43% of investors said they have become more socially and environmentally conscious and this will influence their financial strategy in 2020.
Brexit is also playing on investors’ minds. Two fifths (42%) are holding off making any major investment decisions until Brexit has been resolved, though half (49%) are confident in the long-term performance of UK-based assets. This compares to 23% of investors who are looking to assets based outside the UK for their investments in 2020 because of Brexit.
Alpa Bhakta, CEO of BML, said: “In this era of political uncertainty, investors are rallying towards traditional asset classes like property, which are historically resilient and able to hold their value in times of transition. The fact a significant proportion of investors are planning to increase investment into property in 2020 shows that despite Brexit, demand for real estate remains resoundingly strong.
“Interestingly, the factors influencing financial strategies are also changing–on top of security and stability, investors are also taking into account the environmental and social impact of their investments. This will evidently be an important trend over the coming years, and is something both financial services firms and advisers will need to pay attention to in 2020.”
Part of the reason for this is a series of falsehoods which have taken root in the collective conscience of investors, including the belief that responsible investing somehow underperforms compared to alternative investment styles. Another popular one is that there is simply no place for being responsible when it comes to investing.
However, the rise of companies such as Beyond Meat, which are displaying clear signs of success, are helping to change some of these ingrained biases, according to Ryan Smith, head of ESG research at Kames Capital.
Below Smith looks at some of the most common myths around responsible investing, and reveals the reality of the situation behind them.
Gordon (as they say) would sell his granny. In contrast, we think there is value in judging a company on the sustainability of its products or services. Industries or companies that perform no social function are inherently unsustainable. They impose costs on society and ultimately, it is highly probable that such activity will simply be regulated out of existence. The sustainability of a company’s products or services is therefore vital to its long-term strategic success. Strategic positioning and vision can be a long-term tailwind or headwind. An unsustainable product (e.g. coal) is a huge strategic headache for any management team, just as a sustainable one should create a tailwind of opportunities.
True. Thinking about sustainability, combined with other risk metrics can provide investors with powerful downside protection. However, risk is a backward-looking measure. Thinking sustainably promotes a longterm focus, helps us to avoid short-term distractions and can also be useful for identifying sources of competitive advantage. In the Kames ethical and sustainable strategies, we look for growth stock investment opportunities and typically find that these disruptive, innovative growth companies are more likely to provide responsive investment opportunities and be willing to engage and improve.
In most instances, they adopt a ‘best-in-class’ approach; because the best ESG companies must be the best investment right? Maybe, but in our experience, it’s often a bit more nuanced. ‘Best-in-class stocks’ according to these ratings also tend to be large-cap, well-known and well researched, and hence provide less opportunity for mispricing opportunity to capture alpha. Which is fine, because our focus is on the small and mid-cap space, where we believe better investment opportunities often occur. And to provide our clients with the breadth of negative screens that they seek, our ethical funds are always actively managed. Then, once invested, we take our stewardship responsibilities very seriously; meeting with management, challenging them and if we need to, selling our position.
Actually, academic studies increasingly disprove this. Empirical evidence supports the premise that thinking carefully about sustainability as part of an investment process can enhance investment returns. Ultimately, investing is about employing an effective set of tools consistently in order to tip the odds in your favour. Sustainability analysis is one of these tools and it fills a key role in our toolbox, but it’s one which many investors still don’t consciously utilise.
For many small enterprises an injection of cash is required at some point - either at the start-up stage, in preparation for growth, or simply to stay in the game.
However, many small business owners set out with blind optimism and underestimate the level of funds required to keep a business afloat. Oliver Spevack, Chartered Accountant and co-founder of OS Accounting specialises in supporting start-ups and SMES.
He says: “Poor financial planning can cripple a small business and lack of funds is one of the common reasons why new businesses run into problems and fail.
“So many small businesses that come to us have no business plan and no idea how to raise capital. They are completely unaware of the grants and tax relief schemes available to them.”
Funding can make or break a small business. Let’s take a look at the options available.
The cheapest way to borrow money is by getting an interest-free loan from family or friends. You may be able to negotiate a longer-term payment plan than you would get with a traditional loan through a bank, or agree to pay the money back in a lump sum once your company reaches a certain profit or turnover target. You probably won’t have to give a share of your business away either.
Crowdfunding has become an increasingly popular option for funding a small business in recent years. It does, however, require a strong promotional strategy, increased transparency, and the possibility of giving up a stake in your business. See more on the different types of crowdfunding and the best crowdfunding sites to launch on here.
A wide range of lenders offer loans to small businesses, from traditional banks to online specialists. Small business loans are also available from the government. The British Business Bank (the government’s publicly owned development bank) was set up to help small businesses in the UK access funding. The bank offers start-up loans from between £500 to £25,000 and helps small enterprises understand and access funding options.
See some frequently asked questions on small business loans here.
Not a suitable option for businesses that want to retain 100 per cent control over their business, but angel investors do offer funding opportunities and can often bring some expertise to small businesses.
Essentially, an angel investor is a person, or group of people, who provide funding in exchange for a part of the business. They can be silent (i.e. just provide a capital injection) or can be active and offer advice and expertise to help grow the business.
BBC2’s Dragons’ Den has become the template for what happens when a small business needs investment from an angel investor.
Read more on the pros and cons of angel investors here.
[ymal]
Venture capital is similar in its concept to an angel investment – there are, however, differences. Essentially both offer funding in exchange for a share of the business. The main difference is that angel investors work on their own, whereas venture capitalists are a division of an organisation or an organisation in their own right.
Venture capitalists are only interested in businesses that are likely to make a high return. They look for small businesses that have the potential to grow into large companies.
Small business grants are one of the best sources of funding available to start-ups, developing and established small businesses. There are many private and government schemes available. The qualifying criteria varies hugely, but there are literally hundreds of schemes from Princes Trust Grants to global investor, Unltd Social Enterprise Funding.
Many of the grant schemes available to small businesses are industry or location-related, such as the Energy Entrepreneurs Fund which supports the advancement of energy technology or council-run business development grants, which may also have industry-related criteria.
Not strictly funding, but tax relief schemes are another underused resource that can provide a considerable boost to a small business’s funding pot. The tax breaks commonly overlooked by small businesses include:
Let’s take a brief look at each of these.
R&D Tax Credits – a government scheme designed to reward and encourage greater innovation across the UK business sector, which can amount to tens, even hundreds of thousands of pounds, every year. See more about the government scheme here.
Annual Investment Allowance – a government scheme offering tax relief to British businesses on qualifying capital expenditure, specifically on the purchase of business equipment.
EIS and SEIS – these are government backed investment schemes that encourage investment in small and medium-sized companies.
Enhanced Capital Allowance – the government ECA scheme was introduced in 2001 to encourage businesses to invest in energy-saving equipment. Businesses can claim 100% first year tax relief on qualifying equipment.
Employment Allowance - The government’s EA scheme was introduced in April 2014 to incentivise recruitment in smaller businesses - this is worth up to £3,000 per year to set against an employer’s Class 1 NIC bill. Single director companies without employees do not qualify.
What is the enterprise investment scheme and could it be useful to you and your business? Below Tony Stott, Chief Executive of Midven, has the answers.
The Enterprise Investment Scheme, we believe, is one of the investment sector’s best-kept secrets. Despite helping 26,000 privately-owned small businesses to access £16bn worth of funding for growth over the past 25 years, and securing attractive tax-efficient returns for investors in the process, the scheme has a relatively low profile.
That is now changing, however, as savers seek out new opportunities to plan for their long-term financial needs in the face of increasing restrictions elsewhere.
Most obviously, the once-generous rules on contributions to private pension plans have been steadily curtailed. Today, most investors are limited to annual pension contributions of no more than £40,000; moreover, higher earners, with annual incomes of more than £150,000, get a smaller allowance – as little as £10,000 a year for those with incomes of more than £210,000. The lifetime allowance, which levies tax charges on pension funds worth more than £1.03m, is also a problem for increasing numbers of people.
By contrast, the EIS offers much more generous allowances, with investors able to put up to £1m a year into qualifying companies. For many savers, the scheme therefore represents an increasingly valuable opportunity as a complement to pension saving, particularly as it may also be a more flexible option. Investors must hold on to their EIS shares for only three years to retain their tax incentives; pensions, by contrast, can’t be accessed until age 55 at the earliest.
[ymal]
Those tax incentives are certainly alluring, spread across income tax, capital gains tax and inheritance tax:
It’s important, however, not to let the tax tail wag the investment dog. After all, tax reliefs aren’t much use to investors who end up losing their starting investment.
It’s only fair to point out that the Government offers these tax breaks partly because it recognises the high risk of EIS qualifying companies, due to their illiquid nature. To be eligible for the scheme, companies must meet some restrictive tests: amongst other criteria, they must have assets of no more than £15m, fewer than 250 employees and be less than seven years’ old. These small, early-stage businesses are, by their nature, more likely to fail than larger more established companies.
That said, the best of these privately-owned companies also tend to deliver much more exciting returns than their larger counterparts trading on recognised stock exchanges. And investors can mitigate the risks of EIS investment through diversification. While would-be EIS investors do have the option of investing in individual companies with EIS-qualifying status – including many businesses on equity crowdfunding platforms – it is also possible to get exposure through a managed fund of such businesses run by a specialist asset manager. Such vehicles represent a potential way to spread your bets.
There are no sure things in investment, but the tax breaks on the EIS, allied with the opportunity to build a portfolio of shares in potentially high-growth companies, are an tempting mix for long-term savers. They are likely to be particularly attractive to those who are running out of pension allowance.
Indeed, the secret appears to be getting out there, with official figures suggesting EIS popularity has surged in recent years.
Figures from HM Revenue & Customs reveal that in the 2016-17 financial year, the most recent period for which data is available, some 3,470 companies raised a total of £1.8bn of funds under the EIS, though this was an initial estimate that HMRC expects to increase. In 2015-16, 3,545 companies raised £1.9bn of funds.
This won’t be a scheme for everyone. Investors will need to be prepared to accept the risk of partial or total losses, significant volatility over the short term, and to be patient. But for investors seeking out new opportunities to maximise the financial provision they are making for the long term, then EIS may be worth considering with your independent financial, legal and tax advisor.
