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Have you Lost interest in Banks?

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How to build a modern income portfolio

How to build a modern income portfolio

Published in: Economy & Finance, Business

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  • 1. Have You Lost Interest in Banks? 2 nd April 2009
  • 2. Agenda 10.00 Introduction Andrew Whiteley MD - WKH Financial Services Ltd 10.05 The Search for Income Andrew Whiteley 10.25 Constructing the Modern Income Portfolio Philip Bailey – Investment Consultant - WKH Financial Services Ltd 11.00 Questions & Refreshments 11.30 Close
  • 3. Andrew Whiteley Managing Director WKH Financial Services Limited “ The Search for Income”
  • 4. How did we get here?
  • 5.
    • Lord Stevenson, former chairman, HBOS
    • Andy Hornby, former chief executive, HBOS
    • Sir Fred Goodwin, former chief executive, RBS
    • Sir Tom McKillop, former chairman, RBS
    • John McFall MP, chairman Treasury select committee
    • Alistair Darling, Chancellor of the Exchequer
    • Sir Terry Wogan, presenter of Radio 2 breakfast show.
    Question: Who is the odd one out? Answer Terry Wogan – He is the only one with any formal banking qualifications! How did we get here?
  • 6. How did we get here? 15 May 2006 : “The mortgage market is going to be a great market in this country for a long time” – Ken Thompson, Wachovia ex-CEO 9 Oct 2006 : “I think the worst of this [housing market] may be over” – Alan Greenspan 16 March 2007 “The problems in the subprime market seem likely to be contained” –Ben Bernanke 10 July 2007 : “As long as the music is playing, you’ve got to get up and dance. We’re still dancing” – Chuck Prince, Citigroup ex-CEO 16 Aug 2007 : “Looking over periods of stress that I’ve seen, this is the strongest global economy we’ve had” –Hank Paulson, Treasury Sec 5 Dec 2007 :”We believe the probability that [AIG] will sustain an economic loss is close to zero” – Martin Sullivan ex-CEO of AIG 10 Mar 2008: “Bear Stearns’ balance sheet, liquidity and capital remain strong” – Alan Schwartz, ex-CEO of Bear Stearns 7 May 2008 : “I do believe that the worst is likely to be behind us” – Hank Paulson
  • 7. Source: Bloomberg, 20.01.09, JP Morgan The Result World Banks - Market Capitalisation Market Value as of Q2 2007, $Bn Market Value as of January 20 th 2009, $Bn Deutsche Bank Credit Agricole Societe Generale Barclays BNP Paribas Unicredit UBS Goldman Sachs Santander Citigroup JP Morgan HSBC Credit Suisse Morgan Stanley RBS 49 120 76 67 80 91 108 93 116 75 100 116 255 165 215 16 4.6 10.3 17 26 7.4 32.5 26 35 27 35 64 19 85 97
  • 8. The result UK Interest Rates
    • 90% reduction in just 5 months
    • Free “gummed up” credit markets
    • Encourage expenditure
    • Penalises the prudent saver
    • For how long?
    • Will it work?
  • 9.
    • No longer a safe haven - £50,000 FSCS limit
    • Northern Rock
    • HBOS
    • Bradford & Bingley
    • Dunfermline BS
    • More to come?
    • Foreign Deposit Takers offer better returns...but
    • Ice-save
    • Landsbanki
    • Kaupthing
    The Security of Cash
  • 10.
    • Historically.....
    • “ The higher the potential return over time, the
    • higher the level of risk involved”
    • Deposit accounts never viewed as risky....
    • Still true??
    RISK – what does it mean?
  • 11. How do other investments fare during a recession?
  • 12. Recession - Jan 2008 to Feb 2009
  • 13. What about during a Recovery – Jan 2003 to Feb 2004
  • 14. Banks “pushing” alternative products.....
    • Instructed by BoE to increase lending AND rebuild balance sheets.....
    • Structured or “guaranteed” Products - SCARP
    • With Profit Bonds
    • Corporate Bond Funds
    • LOW RISK?
  • 15. Banks “pushing” alternative products.....
    • Structured or “Guaranteed” Products
    • SCARP - S tructured C apital A t R isk P roduct
    • Derivatives based products
    • No dividends
    • “ Guarantees” only apply at maturity - illiquid for term – 5 years
    • Some based offshore - FSCS protection?
    • Counterparty risk – what if the counterparty goes bust and not the issuer – UCITS3
    • Index Returns are averaged over last 6/12 months.
    • Fees – hidden....high
  • 16. Banks “pushing” alternative products.....
    • With Profit Bonds
    • Insurance Company product – How secure are UK Insurers?
    • Smoothed returns – how long for??
    • Typically 40 - 60% equities – Low Risk??
    • Market Value Adjustment (MVA) – Lock in
    • Fees – 7% initial commission!
    • Early encashment penalties
  • 17. Banks “pushing” alternative products.....
    • Corporate Bond Funds
    • Company issued debt
    • Different grades
    • Default risk
    • Liquidity issues
    • Fees High - 5% initial charge – 1.5% TER
  • 18. Designing a modern Income Portfolio
  • 19. Reduce Risk through diversification
    • Combine multiple asset classes
    • Achieve high yield without locking money into rigid “products”
    • Ability to alter asset weightings at any time
    • Move back into “safer” deposits when interest rates improve
    • Opportunity for capital growth as well as growing income yield
  • 20. Diversification is essential
  • 21. Components of a modern income portfolio UK Equities Percentage of Portfolio 18% Contribution to Yield 1.1%
  • 22. Corporate Bonds Percentage of Portfolio 22% Contribution to Yield 1.7% Components of a modern income portfolio
  • 23. Conventional Government Bonds - Gilts Percentage of Portfolio 30% Contribution to Yield 1.3% Components of a modern income portfolio
  • 24. Index Linked Gilts Percentage of Portfolio 20% Contribution to Yield 1.1% Components of a modern income portfolio
  • 25. UK Commercial Property Percentage of Portfolio 10% Contribution to Yield 0.6% Components of a modern income portfolio
  • 26. Components of a modern income portfolio UK Equities 1.1% Corporate Bonds 1.7% UK Gilts 1.3% UK I-L Gilts 0.2% UK Commercial Property 0.6% Total Annual Yield 4.9%
  • 27. Philip Bailey Investment Consultant WKH Financial Services Limited “ Constructing the Modern Income Portfolio”
  • 28. Private Client Fund Manager
    • Active management
    • Annual management fees
    • Limited Client Risk Analysis
    • High Equity exposure
    • High Dealing Costs
    • High Trading Volume
    • Double Charging on Funds
    • No Crystal Ball!
  • 29. Asset Allocation – Contribution to overall Returns Other Factors (2%) Market Timing (2%) Security Selection (5%) Asset Allocation (91%) Source: Ibbotson Associates Et Al 2000
    • Asset allocation is the key driver to long term portfolio return
    • Provisio’s disciplined investment strategy is totally focused on asset allocation
  • 30. Fundamental Choice - Active or Passive?
    • In the 10 years to September 2008, only 38 out of 152 funds in the Equity United Kingdom sector beat the FTSE All Share Index – 75% failed
    • In the 5 years to the same date, the figure was 44 out of 236 – 82% failed
    • For the 3 years to the same date, the figure was 48 out of 269 – 82% failed
    • Over 12 months , the proportion was less than a quarter – 63, out of 311 funds – 80% failed
    • source: Money Management October 2008. Study of UK Registered Investment Funds
  • 31.  
  • 32. Traditional IFA - Features
    • Use Active Managers
    • Unit Trusts
    • Latest popular funds
    • Retail charges
    • Commission remuneration
  • 33. Provisio from WKH Financial Services – Efficient Portfolio Construction
    • Investment and asset allocation at the heart of the process
    • Institutional charges and cutting edge investments
    • Risk Graded portfolios
    • Rigorous independent research
  • 34. Rigorous independent research
    • Bespoke – Commissioned by WKHFS
    • Detailed asset allocation research
    • Robust methodology
    • Stress tested portfolio design
    • Strategic Asset Allocation
    • Back tested performance
    • Expected Risk (Standard Deviation)
  • 35. Exchange Traded Funds (ETF)
    • Sophisticated Index tracking instruments
    • Baskets of individual securities
    • Lower cost than traditional retail index funds
    • Extremely low tracking error
    • Ensure accurate asset allocation
    • Global coverage
    • No stamp duty
    • No manager or mandate changes to worry about
  • 36. Exchange Traded Funds (ETF)
  • 37. Recognised ETF Experts.....
  • 38. ETFs for precise asset allocation Asset Class Security TER Bps Yield % FTSE 100 iShares FTSE 100 0.40 5.62 FTSE 250 Lyxor FTSE 250 0.35 4.72 Smaller Companies iShares DJ EuroStoxx SmallCap 0.40 5.36 High Dividend iShares FTSE UK Dividend + 0.40 10.88 USA iShares S&P 500 0.40 2.52 EU iShares MSCI Europe ex UK 0.40 5.11 Japan Lyxor Japan Topix 0.50 0.00 Asia Pacific Lyxor MSCI Asia Pacific ex Japan 0.65 1.61 Emerging Markets Lyxor MSCI Emerging Markets 0.65 0.00 UK Gov Con Bonds iShares FTSE UK All Stocks Gilt 0.20 4.36 UK Gov I-L Bonds iShares Index-linked Gilts 0.25 1.86 Corporate IG Bonds iShares GBP Corporate Bond 0.20 8.02 Corporate SIG Bonds AEGON High Yield Bond (inc) 1.11 12.31 Property iShares - FTSE EPRA/NAREIT UK Prop 0.40 7.06 Commodities Lyxor CRB Commodities 0.35 0.00
  • 39. Risk Weighted Portfolios STRATEGIC POSITION Defensive Defensive to Balanced Balanced Balanced to Aggressive Aggressive FTSE 100 10.00% 10.00% 12.00% 11.00% 20.00% FTSE 250 5.00% 5.00% 6.00% 7.00% 10.00% Smaller Companies 3.00% 3.00% 3.00% 4.00% 6.00% High Dividend 5.00% 5.00% 6.00% 8.00% 9.00% USA 0.00% 2.00% 3.00% 4.00% 5.00% EU 0.00% 2.00% 3.00% 4.00% 5.00% Japan 0.00% 2.00% 3.00% 4.00% 5.00% Asia Pacific 0.00% 2.00% 3.00% 4.00% 5.00% Emerging Markets 0.00% 4.00% 5.00% 8.00% 15.00% UK Gov Conventional 19.00% 12.00% 7.00% 7.00% 0.00% UK Gov Index-Linked 16.00% 8.00% 6.00% 6.00% 0.00% Corporate IG 27.00% 21.00% 12.00% 9.00% 5.00% Corporate SIG 5.00% 9.00% 11.00% 5.00% 0.00% Property 10.00% 12.00% 15.00% 12.00% 5.00% Commodities 0.00% 3.00% 5.00% 7.00% 10.00% Total 100.00% 100.00% 100.00% 100.00% 100.00% Equity Sub Total 23.00% 35.00% 44.00% 54.00% 80.00% Bond Sub Total 67.00% 50.00% 36.00% 27.00% 5.00% Other Sub Total 10.00% 15.00% 20.00% 19.00% 15.00%
  • 40. Provisio – Risk Weighted Portfolios Portfolio Defensive Defensive to Balanced Balanced Balanced to Aggressive Aggressive Balanced High Yield Expected Total Annual Returns 6.4% 7.4% 8.1% 8.7% 10.2% 7.6% Expected Standard Deviation +/- 7.8% +/- 9.3% +/- 10.9% +/- 12.7% +/- 17.7% +/- 11.5% Average annual yield (included in above annual returns) 4.00% 3.82% 3.53% 3.06% 2.53% 5.20%
  • 41. Provisio – Total Expense Ratios (TER) Extremely low portfolio management costs The TER of the average UK Equity unit Trust is 1.68% per annum* Average fund of funds TER is over 2.00% Beware - Total Expense Ratios do not include dealing costs. It is not uncommon for actively managed portfolios to have TERs of over 3% per annum when dealing costs are taken into account. *( source: Fitzrovia UK Fund charges Jan 2007 ) Provisio Portfolio Defensive Defensive to Balanced Balanced Balanced to Aggressive Aggressive Balanced High Yield Weighted Average TER (P.A) 0.33% 0.42% 0.47% 0.43% 0.44% 0.48%
  • 42. Provisio – the effect of charges Initial investment of £250,000 and 7% per annum growth Investment  Term Return  0.6% p.a. charges Return  1% p.a. charges Return  2% p.a. charges Return 3% p.a. charges   5 years £340,272 £333,530 £317,243 £301,740   10 years £463,141 £444,969 £402,574 £364,188   15 years £630,377 £593,642 £510,857 £439,561   20 years £857,999 £791,991 £648,265 £530,533
  • 43. Summary
  • 44. Building a Modern Income Portfolio
    • Banks have lost the trust of investors
    • Alternative bank “products” are costly and inflexible
    • Modern Income portfolios must be diversified
    • Asset classes bought through index tracking
    • Exchange Traded Funds (ETF) as core holdings
    • Tactical allocation to enhance returns
    • Applied to any tax wrapper – ISA & SIPP
    • Online valuation 24 hrs a day
    • Access to additional high quality Independent advice
    • Simple fee structure for advice
  • 45. Thank You 2 nd April 2009
  • 46. Legal disclaimer
    • No liability is accepted for any loss or damage occurring as a result of reliance on any statement, opinion or any error or omission contained in the preceding presentation.
    • Any statement or opinion reflects our understanding of current or proposed legislation and regulation which may change without notice.
    • These presentations should not be seen as a substitute for professional advice.
    • WKH Financial Services Limited is authorised and regulated by the Financial Services Authority (FSA).