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Japan still the cheapest market

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Global income funds the obvious post brexit choice

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The winners and losers after Brexit

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Rothschild move for Alliance Trust

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Time to take another look at airlines

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Card Factory UKs leading card company is a gift

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New era for Saga as former backers jump ship

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Charts point to more glitter for gold

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The tide turns for China and emerging markets

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Telecom Plus a steady provider on the growth track

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Global income funds the obvious post BREXIT choice

Global income funds the obvious post BREXIT choice

Global income funds the obvious post BREXIT choice
UK equity income funds, which are a core holding for many UK investors, are subject to greater risks after the BREXIT vote. The majority of these funds hold a high proportion of capital in large cap stocks and these are the businesses most subject to uncertainty. Will they move operations, headquarters or even listings away from the UK? How long will it take until the leaders of these firms have any idea what the best course of action is? In the meantime, they are likely to put any major investment decisions regarding the UK on hold.

In any case, UK dividend distributions have risen steadily since the financial crisis, at a faster rate than profits. That cannot continue. So prospects for growth in income distributions from these funds are not great.

I now own no UK equity income funds but hold several global funds using similar styles and strategies, and there are plenty of choices out there, with initial dividend yields of 3-4%.

I last reviewed these funds last December (Issue 374). Now, as then, Scottish American Investment Trust (SAINTS) trades at a 5% premium to its net asset value, and if it were not for this I would own the trust and recommend its shares. Perhaps more turbulence in coming weeks will provide a buying opportunity.

Global IT yielding 5.7%

If you do want an investment trust, then consider the £1bn Murray International, yielding 5.7% and on a 1.8% discount to NAV. The longer-term record of manager Bruce Stout is good, but performance has been relatively poor over the past two years, largely because the fund has only modest US exposure (12%) and almost nothing in Japan. In its favour, it is more widely diversified and defensively managed than many “international” funds that slavishly follow benchmarks and therefore allocate around 50% of their equity holdings to the US.

Global equity funds post BREXIT
Global equity funds

The UK open-ended funds I favour remain Newton Global Income (yield 3.3%), Artemis Global Income (3.8%) and Invesco Perpetual Global Equity Income (3.5%).

As is usual in times when volatility rises, Newton has done well since last autumn. The managers remain broadly bearish and their portfolio is heavily invested in huge, solid global businesses that can weather any storm. In contrast, Artemis Global Income owns few such large-cap stocks and is more actively managed, with manager Jacob de Tusch-Lec having moved into more cyclical companies last autumn. This has held back performance in recent months, but previous such moves have been well-judged. Finally, Invesco Perpetual Global Equity Income applies the traditional “value” style used by many UK equity income managers.

In addition to the dividend growth argument, I believe sterling is likely to be weak for years as a result of BREXIT, which adds to the strong case for UK investors increasing their overseas exposure.

Chris Gilchrist, July 2016

Lifetime ISA Lovely Lisa ramps up help to buy bungs

Lifetime ISA – Lovely Lisa ramps up Help-to-Buy bungs

The pensions industry had got itself into a right pre-Budget tizz as a result of carefully managed Treasury leaks suggesting the Chancellor was about to abolish the current system of pension tax reliefs. Any such move would be the ultimate administrative nightmare, since merging existing pension schemes with ones designed for the new regime would be all but impossible without either a vast government subsidy or a massive rip-off of taxpayers. This was never a serious proposition. But the speculation about this meant that the Chancellor’s Budget wheeze, the Lifetime ISA, was immediately categorised by pension nerds as a back-door start to replacing tax relief on pension contributions.

Fortunately for Osborne, this has meant that almost nobody has questioned the logic of the huge government bungs involved in Lifetime ISA, the vast majority of which will be used towards property purchase by moderately wealthy kids.

The current Help-to-Buy Isa gives a 25% bung on savings up to £12,000, making the maximum subsidy for home ownership £3,000. With Lisa, the maximum bung escalates to £32,000. You can invest £4,000 a year from age 18 to age 50 and collect £1,000 in subsidy each year. If you spend the entire sum in your Lisa account on a first home valued up to £450,000, you keep the bung. Likewise if you cash it in after age 60. Use it for any other purpose and you lose the bung and pay a penalty.

This is not, as some dim commentators have suggested, an alternative to pension savings for young people. Most young people will get matching contributions by their employer. If they put £1 into the pension scheme, the employer puts in £1. The employee’s contributions get tax relief, so for most it will cost 80p. That means the employee using the pension plan gets an investment of £2 for 80p. With Lisa, it is £1 for 80p. No contest. Even allowing for the fact that you can only take a quarter of the pension fund as tax-free cash, you will end up with far more capital or net income from the pension than from Lisa.

Lisa will, of course, be exploited by the wealthy for their children. I don’t know any 18-year-olds who can save £4,000 annually out of their earnings, but there are plenty of parents who will save that amount for their children’s first home. Unlike the normal ISA, the loving parent will have the comfort of knowing their child cannot access the cash for a wedding beano or a shiny new motorbike. Get planning now for the scheme launch in April 2017.

Gains tax cut will backfire

Most analysts at the Treasury know that if you have differential rates of tax on income and capital, money morphs into the form bearing the least tax. So the only predictable effect of the cut from 28% to 20% and 18% to 10% in gains tax rates for higher rate and basic rate taxpayers, effective from 6 April 2016, is that it will result in financial engineering to benefit the wealthy. I expect by the autumn we will see schemes which transform income taxable at 40% into gains taxable at 10%.

The change might have one good effect, though, which is that Trustees, who have historically been reluctant to take profits and pay CGT, may feel they can now adjust trust portfolios to better meet beneficiaries’ needs.

ISA for more

The annual ISA allowance remains the same at £15,240 for 2016-17, but the following year it leaps to £20,000, a level you should probably expect it to remain at for some years to come. The Lifetime ISA falls within this allowance.

Given that for wealthy people, keeping capital untouched in pension funds is the best way of getting cash to the next generation free of inheritance tax, there’s a strong case for getting as much of your other capital as you can into ISAs so that you can draw as much of your retirement income as you can from this source. And the extra 7.5% tax on dividends is also an incentive to do this.

Dividend tax ahead

The extra 7.5% tax on dividends in excess of an annual £5,000 dividend allowance, announced in the 2015 Budget, takes effect from April 2016.

Apart from private company owners who are paying themselves through dividends, the losers from this tax hike should be able to avoid at least some of the effects by progressively switching capital into pension funds or ISAs. Income from these sources does not count towards the allowance. And transfers between spouses can also be used to avoid breaching the limit.

Simpler with the PSA

The Personal Savings Allowance is that rare beast, a genuine tax simplification measure. From April 2016, interest from deposits up to £1,000 per year for basic rate taxpayers is exempt from tax (£500 for higher rate taxpayers). At current interest rates, over 90% of savers will pay no tax.

From April 2016, banks will pay interest without (as they have done previously) deducting tax at source.
Savers will need to review their Cash ISAs–- many thousands of savers have accumulated large cash piles. Interest rates on cash ISAs are lower than those on non-ISA accounts. You would need well over £50,000 on deposit at current rates to breach the £1,000 annual interest allowance.

Chris Gilchrist, April 2016

Conviviality a share to keep spirits up

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IFL portfolio off to a cracking start

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When to pick up previous IRS Report selections at bargain prices

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There’s nothing half baked about Finsbury

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The road to being a DIY investor

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The confessions of an investing addict

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New year new start for Castle Street

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Another Jacob Marley or a late Chinese Christmas gift

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