Financial Tips

Helping Dentists & Doctors Achieve
Their Most Important Goals

Active or Tracker Funds?

We have discussed the ways you can invest your hard earned cash many times over the last 12 years, and recently we also covered MiFID II.

This aims to ensure that in order to restore consumer confidence after the 2008 crash, European markets are safer, efficient and  transparent.

From our point of view, this entails being very clear about the risks of investing, and, where we can, minimising the risk of our clients not achieving their goals in life.

We interpret the word transparent to mean that you the client know in advance all the costs of what you are buying.

Of course, when it comes to how to invest in the stock market you will often be bombarded with advice and tips on the 'best' way to do this.

And picking funds based on their historical performance is certainly no guarantee of future positive returns.

Those of you with long memories will remember when the traditional insurance companies' own funds were the only real choice when it came to investing.

From the early 2000s the option of using platforms meant that financial planners / advisers had access to many very low cost institutional funds that up until that point were only accessible to the very rich with substantial amounts to invest.

This meant that we could now build portfolios for our clients that were more robust, consistent and at a lower cost.

It also meant we moved away from 'active' fund managers, who aim to beat the market however over time and after costs invariably don't deliver (there are exceptions).

Now, we simply track the market using asset class passive funds, albeit in a sophisticated way.

Over the last decade it has been interesting to observe that more and more planners have realised these truths, and are now using this 'new world' way.

Commentary

These subjects came to mind with a few recent articles in the press, with the first from trade journal Money Marketing:

"Fund manager Baillie Gifford has hit out at the active fund management industry for failing to put capital into the hands of the companies that deserve it.

Baillie has launched a campaign for “actual” investing, where managers target tangible, sustainable activities to generate long term growth as well as positive shareholder returns.

The firm says that instead of this purpose, active management “has been hijacked by many fund managers who think active means ‘activity’ and simply being different from an index” 
and that “activity has more to do with trying to outsmart other fund managers, rather than with the creative deployment of capital.”

Baillie acknowledges that while passive delivers better post-fee performance than active managers on average, it fails to allocate capital to innovative companies."

Our summary here is that the passive route has the potential to give better returns when investing, say in an ISA. 

However, their view is that active investing is more to do with looking for innovative companies for your money - but of course this will usually be with higher risk.

Then there was a New Model Adviser (another trade journal) article:

"Discount broker Hargreaves Lansdown plans to cut down the number of funds on its ‘best buy’ list as it seeks to push down fund management fees. 

New Model Adviser® understands the Wealth 150 list, which currently offers Hargreaves clients discounts on 90 funds from a range of managers, could be cut down to just 40 funds. 

New Model Adviser® has learned Hargreaves Lansdown is currently reviewing the number of funds on the Wealth 150 and Wealth 150+. The platform intends to cut down the number as part of a bid to further squeeze fund managers’ charges through negotiations."

So more pressure on sales companies and fund managers to cut their charges.

And in Portfolio Adviser Magazine: 

"Tracker funds under management stood at £194bn at the end of September, accounting for 15.4% of overall industry funds under management, compared with 14.5% in September 2017.

Laura Suter, personal finance analyst at investment platform AJ Bell, said: “Tracker funds saw the biggest inflows, with a whopping £1.1bn being invested in them in the month. 

The news won’t be welcomed by active managers who have been struggling to hold onto assets. According to Morningstar data, investors pulled more than $86bn (£67bn) from active managers globally in the third quarter."

Again in Money Marketing:

Investors have more money in under-performing funds than ever before, according to Tilney’s latest list of “dog funds”.

The latest edition of the bi-annual list of under-performing funds features the highest number of dogs in its history. The 111 funds featured hold a combined £54.6bn in assets – the highest number recorded since the list was first issued in 1994.

The Spot the Dog report includes funds that fail to beat their benchmark for three consecutive 12-months periods by five per cent or more.

Bestinvest managing director Jason Hollands says: 

“In each market the difference in return between the best and worst performing funds is huge. These differences in fortunes cannot be explained by variations in fees but come down to the decisions taken by the managers as to which companies to invest in. It is therefore vital for investors to choose their funds very carefully."

But of course, it is very much a gamble whether or not you end up choosing a good fund!

Looking Ahead

And there is the rub. We have learnt that it's easy to look back at performance, but it’s impossible to predict the 'winners' consistently 10-20 years ahead.

So more advisers and investors generally are seeing the advantages of Tracker Funds, which just 15 years ago accounted for only a small percentage of the market, and are at around 15% now.

With trackers, you simply buy the market at a low cost in ratio to your risk preference, and then hold, ignoring the siren voices of sell sell sell (which isn't always easy to do) when markets fall.

We also advocate rebalancing periodically, so that the risk you are taking does not deviate from your original starting point / preference. 

Hot Topics Q&A: Annual Allowance NHS Pension Tax and Disappearing Doctors

Every week we receive questions from clients regarding all aspects of their financial planning. So, rather than keep the answers to ourselves (and clients) we publish one key topic each issue. 

Q. As a Consultant doctor approaching age 54, I am worried about the impact on my NHS pension of the new taxes that is all the talk of my colleagues.

I am told that I will fall foul of the Annual Allowance next year if my pay increase happens, and I will also exceed the Lifetime Allowance meaning more tax!

I see many of my colleagues leaving the profession or going part time, and this causes chaos in planning as this was not expected at all just a short time ago.

Are these taxes to stay or are the government going to listen to sense? 

A. This topic is indeed the talk of the decade with senior medics & dentists.

The Financial Times discussed this recently:

"The biggest union for doctors in the country has put pressure on the government to address the annual allowance, which is hitting consultants with ‘punitive’ tax charges. 

The British Medical Association (BMA) is calling on the government to change both the annual allowance and the tapered annual allowance which it claims is forcing doctors to reduce working hours.

Gary Wannan, BMA consultant committee chair, told the Financial Times cuts to the annual allowance, which is now £40,000, are hitting doctors and their patients.

"Like our GP colleagues, many hospital consultants are also facing punitive charges and tax levies on their pension funds.

This is forcing consultants to, at best, reduce their working hours. At worst, many  are leaving the profession long before retirement age, frustrated the current pension legislation means they are effectively working for nothing.

This means patients are losing the opportunity to be seen by highly skilled clinicians and more junior doctors are losing out on the vital training and mentoring they need."

Summary

Even though all versions of the NHS Pension Scheme remain very generous, it still means that many doctors are reducing their hours or leaving their posts entirely due to the additional taxes.

These are doctors that should have a few more years to contribute to their profession and help their junior colleagues' progression. 

It would be nice to think this will have an impact on ministers and lead to rapid change.

But, as ever, we don't hold out much hope!

Please send us your questions! It's easy to do. Just send an email to us here (and if we publish it we'll make it anonymous).

Wrap-Up - Seeing Things Differently

Last year my optician informed me that I was developing cataracts in both eyes and I needed to have the lenses replaced with surgery.

I knew my eyesight was getting worse, as night driving was more difficult and when playing real tennis I was losing the flight of the ball as it neared my racquet. 

Of course, a friend I play with regularly commented that it was simply that I was just a useless player!

Anyway, moving on, I have just had my left eye done and it has been a total success. I chose to deliberately have short sight, as I do a lot of close work, and this means I just need glasses for driving or sport.

Keep it simple works for me

Hopefully my right eye will be sorted soon and I can have my glasses finally adjusted.  Needless to say, my real tennis needs to be better or I will never hear the last of it from my so called friend!

At the same time, my dad was going totally blind as a result of having Glaucoma, and Mucous Membrane Pemphigoid, where any sight he had was affected by an aversion to light!

He had some very limited sight until the last few months, which gave him some quality of life and being able to get around the house. But now he has no sight at all.

He has been told that it is not worth another operation as the risk of more infection is very high, as it would mean sixteen stitches. 

Dad is very disappointed and does get a bit down at times, but he is very resilient and really enjoys his radio with LBC on, and TV quizzes.

And there is the rub.

How many of us have a whinge about not much at all, while some folk have terrible misfortune and stoically carry on?

Counting your blessings is a well worn saying, but it is so true.

I think this way particularly since my divorce trundles on having started over a year ago! You couldn’t make up some of the goings on, and my ex is now on her third lot of solicitors!!

However, having met a new lady last year, it is great to know someone who laughs and smiles all the time. It is such a total contrast to what I had got used to, and Maggie even laughs at my terrible puns!

What's not to like?

Our relationship is now in its second year and I had the novelty of buying a Valentine's card and flowers for the first time in ages!  

So ever onwards, and our next step is deciding where to live.  

See you next time!