We are all familiar with the usual suspects when it comes to investments with ISA’s Unit Trusts, OEICS, Capital Investment Bonds, Investment Trusts, National Savings and General Banking Products being the general fare when it comes to advising our clients.
However whilst these products often can and do achieve the desired results there are many alternatives investments available that offer a wider choice and variety which can be used instead of or to complement mainstream products.
Lets look at these alternatives and see what benefits they have and of course any drawbacks associated with them.
The AIM Market (Alternative Investment Market)
“AIM is the most successful growth market in the world. Since its launch in 1995, over 3,000 companies from across the globe have chosen to join AIM. Powering the companies of tomorrow, AIM continues to help smaller and growing companies raise the capital they need for expansion” (www.londonstockexchange.com/companies-and-advisors/aim.htm 18/02/2011).
Aim is the international market for growing companies trading on the London Stock Exchange.
Businesses you will find range from new venture capital-backed companies to well established, mature organisations looking to expand into a wider market.
Created in 1995 by the London Stock Exchange principally to offer a diverse range of smaller companies the opportunity to sensibly raise capital in a regulated market, hence AIM has developed into a highly flexible public market easily accessible to both investor and company.
Aim companies come from 37 sectors, 90 sub-sectors and 26 countries. It has over 250 companies from outside the United Kingdom, with many more joining every year, which is testament to the viability of the AIM market as a place fro the younger international companies wishing to fund expansion and raise their global profile.
Aim is an exchange Regulated Market and enjoys a reputation for effective regulation: it offers a secure yet flexible trading environment for both companies and investors.
Aim is wholly owned and run by the London Stock Exchange and has three investment indices – the FTSE AIM UK50, FTSE AIM 100 and the FTSE AIM ALL-SHARE Supersector Indices
Investors wishing to buy or sell shares in AIM stocks will deal through a stockbroker in a traditional way. However, whilst dealing in the shares in an execution-only basis may be relatively straightforward; those investors who want advice may have to be more selective.
There are some brokers with specialist knowledge of AIM stocks and which spend a considerable amount of time researching the AIM market. It clearly makes sense for investors to deal via such brokers so as to take advantage of there expertise.
Due to the tax breaks which are currently available, many brokers run specialist portfolios which have been set up with the intention of mitigating Inheritance Tax. (IHT).
The shares after being held for at least two years qualify for Business Property Relief and therefore as long as they are held until death after the two year period will be fully exempt from IHT. If the purchaser is married or in a civil partnership and they die prior to the two year period, the shares may be transferred to the spouse or civil partner so that they may retain the shares until their own death so that the two year requirement may be exceeded.
Capital Gains Tax (CGT) is payable in respect of sales of AIM stocks and any losses can be set off against losses in the usual way.
“The AIM market should be regarded as higher risk as AIM market shares tend to be relatively illiquid and therefore may be difficult to sell or obtain reliable information as to the value and the risks to which the shares are exposed.
A company on AIM can elect to revert to private status, in which case the shares may become impossible to trade or value and the protections offered by AIM will cease to apply” (www.rensburg4ifas.co,uk/ Iht for Ifas v 3.2-07/10 7323)
“Every AIM company is supported, advised and monitored by its own Nominated Adviser (NOMAD). Firms that wish to act as Nomads must undergo stringent checks before they can be authorised to become a London Stock Exchange-approved Nomad for AIM. These Checks ensure the suitability both of Nomads and of the companies they assist to operate as part of AIM, bringing investors increased certainty and security” (http:///www.aimslisting.co.ukindex.php/page/The-Aim-Market 25/02/2011).
Venture Capital Trusts
“The Venture Capital Trust scheme started on 6th April 1995. It is designed to encourage individuals to invest directly in a range of small higher-risk trading companies whose shares and securities are not listed on a recognised stock exchange, by investing through Venture Capital Trusts (VCTs). So, if you invest in a VCT, you spread the investment risk over a number of companies” (www.hmrc.gov.uk/guidance/vct.htm 18/02/2011).
VCT’s have to be approved by HMRC and once given offers a unique tax break, in that as long as you hold ordinary shares for at least 5 years from the date of purchase 30% income tax relief is payable, therefore a ?200,000 investment held for 5 years, if it had not grown or fallen in value would be valued at ?260,000.
In addition there is no liability to Capital Gains Tax on disposal.
The benefits to individuals investing in a Venture Capital Trust include not only the opportunity to participate in the growth the unquoted investment portfolio but also to enjoy the valuable tax benefits on an investment of up to ?200,000 in each tax year.
This type of investment should be seen as medium to long term and the capital value is not guaranteed.
Enterprise Investment Scheme
The Enterprise Investment Scheme (EIS) is designed to help smaller higher-risk trading companies to raise finance by offering a range of tax reliefs to investors who purchase shares in those companies.
The EIS is a concession by HMRC whereby an investor can invest between ?500 and ?500,000 in an EIS company in a single tax year and claim the income tax relief at 20%.
Furthermore, providing the shares are held for 3 years, then there is no Capital Gains Tax on the eventual disposal.
“All shares must be paid up in full, in cash, when they are issued.
They must be “full risk” ordinary shares, with no preferential rights to dividends, or to the companies assets in the event of winding up. There must also be no arrangements to protect the investor from the normal risks associated with investing in shares and no arrangements for the shares to be purchased by anyone else after the end of the relevant period” (www.hmrc.gov.uk/guidance/eis.htm 02/02/2011)
Investment can be directly into the company or through an EIS Fund.
If you invest through an EIS fund, the fund manager will invest on your behalf in a number of qualifying companies.
You are still the owner of the shares.
Hedge funds are collective investments that aim to make money whether the market is moving up, down or sideways. Unlike Unit Trusts, Oeics or Investment Trusts, which tend to only grow when shares rise, hedge funds can make money when share prices are falling.They do this using a range of complicated specialist techniques. The most commonly used is going long or short on a share. Most private investors simply go long on a share, buying in the hope that the price will rise.Where an investor goes short, they believe that the equity will fall in value. There are two main ways a hedge fund can do this. The first is by “shorting” the stock, where the investor “borrows” a stock to sell it, with the hope that it will decrease in value so they can buy it back at a lower price and keep the difference.
For example, if an investor borrows 500 shares of X company at ?10 each, they would then sell those shares for ?5,000. If the price falls to ?8 per share, the investor would buy the shares back for ?4,000, return them to the original owner and make a profit of ?1,000.
These funds now reportedly manage over ?750bn of clients’ money and their highly-paid managers can achieve remarkable returns.Hedge funds are not restricted to equities, they will invest in anything that will make a profit, including Foreign currency, Bonds, or Commodities. The return achieved by the fund is likely to be dependent on the skill of the manager rather than the underlying economic conditions and that is why they are so highly paid.At the moment Hedge funds are only available to high wealth individuals who are prepared to invest around ?500,000, or to professional investors, such as Pension Funds or Insurance Companies.If individual investors want exposure to hedge funds, they can purchase shares in the companies that operate the funds.Hedge Funds are regarded as high risk investments as many funds are “leveraged” which means they borrow money to add to their fund rather than just using investor capital.Because the funds use Derivatives, where they bet against the future value of an asset, rather than purchasing the asset directly, the funds are effectively borrowing money.The result is that gains and losses are magnified, with some making huge profits, but if things go wrong the fund can go bust.
The majority of Hedge Funds are domiciled offshore for tax reasons, but the UK based managers are fully regulated by the Financial Services Authority. (FSA).However the FSA does not regulate the funds themselves and if a fund goes bust, investors do not have any recourse to compensation.
“A physical substance, such as food, grains, metals, which is interchangeable with another product of the same type and which investors will buy or sell usually through futures contracts” (http://www.londonstockexchange.com/focus-on/018-commodities. 07/03/2011)
The Commodity Markets are markets were raw or primary products are exchanged. They are traded on regulated commodity exchanges, in which they are bought and sold in standardised contracts.
Commodities investing is volatile, promising big gains and capable of big losses. But this volatility can work in your favour in a broad investment portfolio, where a small amount of commodities can offset risks associated with stocks, bonds and cash.
Commodities can be an excellent way to diversify your portfolio, especially if you believe that stocks are heading downwards for the next few years.
The Commodities traded include:
Corn, wheat, oats.
Livestock and Meat
Crude oil, natural gas, heating oil.
Copper, zinc aluminium.
Trading is normally via Futures Contracts, which is basically an agreement to buy now, pay and deliver later.
In essence, a futures contract is a standardised forward contract in which the buyer and the seller accept the terms in regards to the product, grade , quantity and location and are only free to negotiate the price.
Commodities are regulated and authorised by the FSA in the UK and Investing in commodities is normally done through a stockbroker or a commodities broker.
Property can be a very attractive asset to include in any investment portfolio – especially as it often performs well when stock markets are going through an unstable period.
Over the long term, property has been proven to outperform most sectors, so it might be a good bet even when share or bond prices fall.
Of course, property markets can still be volatile, as shown by recent events. However, the best property funds will spread their exposure across many property areas.
For example a property fund could give you access to the commercial property sector as well. This may include retail premises, office space and warehousing.
Property funds remain one of the most practical ways to gain exposure to the property sector, some invest in actual bricks and mortar, while other funds may include shares in property companies or property securities know as real estate investments trusts. (REITS). Investments in funds of this nature are subject to specific risks arising from investment in REITs and property related securities and investors should ensure that they full understand these.
A REIT is a company that owns and manages property on behalf of shareholders. A Reit can contain commercial and/or residential property. REITs provide a way for investors to access property assets without having to buy property directly in the UK REITs can apply for “UK-REIT” status, which exempts the company from corporation tax.
It is an investment through buying shares in a listed property company that has elected for REIT status and operates in accordance with REIT regulations. The REIT regulations are intended to ensure the company is primarily engaged in property investment, rather than in development or other non property related activities.
Most UK REITs focus on the UK, though a few have European investments.
REITs can be very tax efficient, as the property company pays no corporation or capital gains tax on the profits made from the property investment.
As a condition of these tax breaks REITs must pass 90% of their taxable income through to shareholders.
As the real estate appreciates in value, the REIT becomes more valuable and the share price may rise.
REITs can also offer predictable income streams because of long term lease agreements.
Also as REITs trade like stocks, you can get into and out of them with ease.
Risks of REITS
However as stated earlier there are risks associated with REITs and investors need to approach them with these in mind.
Most REITs focus on particular types of commercial development, such as apartments or office buildings. This concentration leaves them vulnerable to a downturn in this particular sector.
Investors should examine where the REITs projects are located. A high concentration of development in one community or geographic region may leave it vulnerable to a downturn in that area’s economy.
Better to invest in more than one REIT and choose different property sectors, also make sure that they are in different geographic locations.
As stated earlier REITS are traded like stock on the major markets and can be purchased via a stockbroker in the normal manner.
Fine art offers the opportunity for portfolio diversification into an area that has historically provided high returns.
Quality works of art have proved to be a remarkable store of value. This is predominantly due to increasing rarity caused by an expanding demand from museums and collectors and dwindling supplies.
Art has evolved considerably over the last decade or so. Now building up a portfolio of works of art is not the only way to invest. Dedicated funds have been launched and there are investment advisers specifically geared to help investors with little or no experience of the art market.
Far from just being a hedge against inflation art investment is now just one of range of alternative investments that can be used to diversify portfolios.
Investing in ART can be done in the traditional manner via Art Dealers or now through an increasing number of specialist fund managers were the funds are structured like private equity investments and investor commitments are drawn down over a period of time to facilitate purchases.
Due to the nature of Art works and how they appreciate in value over time they should be seen as a buy and hold investment rather than a buy and sell one.
“ What makes fine wine such a good investment is that production of the world’s top vintages are strictly controlled. As supply of the very best wines dries up, the prices of the very best vintages invariably rocket”
Investing in fine wine is an attractive proposition for many investors, who wish to diversify their investment portfolio.
As wine matures, more bottles are consumed and like all things rare and desirable, its valuation will rise.
Demand has increase enormously over the past decades,resulting in some extremely good returns.
Wine is also an easily transferable asset, as there is an established fine wine market and a thriving auction market.
There are no limits to wine investing, however the current prices of top wines are such that one should start investing with at least %,000 to ?10,000.
It should be remembered that investment in wine is a long term investment and experience suggests that a minimum five year term would be a reasonable benchmark.
Although Fund Managers are beginning to take a keen interest in this market, with wine investment funds now readily available, care should be taken as their investment charges will inevitably eat into any gains made and also they may not have the in-depth knowledge of Fine Wines that a reputable broker has.
Perhaps best to use a reputable broker, who will ascertain the exact nature of the fine wine holding you require, taking into account your dealing range, liquidity needs and risk/return requirements.
The broker will then obtain on your behalf, the fine wine most suitable for you, either from their suppliers or from their own extensive stock holding.
The broker will also organise safe storage and insurance for your wine. It is critical wine is stored and cared for in the correct manner and in order to maintain the very high quality of the product and ensure its longevity, fine wine must be stored in a controlled environment and again reputable brokers will have this facility.
Once this has been done you will receive written confirmation of your holding from your broker.
Your broker will also attend to your needs for the duration of your holding and will keep you aware of developments in the markets on a monthly basis.
When the time comes to sell your holding, your broker will organise this on your behalf.
Again it should be remembered that as with all investments returns are not guaranteed and you could incur substantial losses, if the market for Fine Wine falls into decline.
Short Answer Questions
Question 1. The disadvantages of repaying debts by encashing investments are:
Lack of liquidity.
No guarantee that you would subsequently save the new found disposable income.
No longer have the expertise of the fund managers or the investment asset mix.
Less time for subsequent investments to build up.
Any new investments would have fresh set-up charges therefore reducing the potential returns
May lose valuable tax relief on existing investments that cannot be re-used.
Interest rates on debts may be lower than your investment returns.
May need to borrow again in the future at higher interest rates and or a shorter repayment term, costing more.
May be unable to borrow in future years due lower income or credit crunch.
Divide Annual Income by Current Market Price.
7% divided by ?132 x 100 = 5.30.
Gross Redemption Yield:
Current Price ?132 Minus the Nominal Value ?100 and divide by remaining 3 years to run. Divide this figure by current price and then add to Interest Yield.
?132 – ?100 = ?32 divided by 3 = 10.66 divided by ?132 = 0.08 add to Interest Yield = 5.30 + 0.08 = 5.38.
Guaranteed 100% secure: total capital invested is returnable
Any winnings are tax free
Partial withdrawals from initial investment allowed
No regular investment required
No fixed investment term.
Automatically eligible for monthly prize draw
Can win valuable cash prizes
Investment is subject to decrease in value due to inflation
Savings in interest earning accounts may earn more
Chances of winning a larger cash prize are slim
No guarantee of a win
Minimum and maximum investment required
Chances of winning a larger cash prize are slim
Money is not instantly accessible
HMRC Venture Capital Trust. www.hmrc.gov.uk/guidance/vct.htm 18/02/2011
This website provides commanding and very valuable information for advisers and the general public. This proved to be an extremely relevant site for my research, as the site lists all articles produced on specific tax areas and also includes historical information for research thereby providing a one stop shop for all tax related enquiries.
The reference to Venture Capital Trusts allowed me to give a factual overview of the investment and also to explain the tax relief available to this type of investment.
www.hughespartnership.co.uk/enterprise investment scheme 01/03/2011.
This is an excellent financial website and helps advisers keep up to date with what’s going on in the world markets. It has a reputation for accuracy and has a specialist team of financial journalists, whose aims are to ensure that readers are accurately informed in financial matters.
This makes it a very relevant site for my research as there are regular articles on all aspects of investments including alternative investments and what they have to offer.
Its journalists write in a straightforward and understandable manner, which makes it easy to digest what can sometimes be very complicated subject matters.
The ifs School of Finance is a registered charity incorporated by Royal Charter and provides the financial services industry with a skilled and competent workforce. They have been providing financial education for the past 130 years. The website is very informative and provides students with a wealth of information, tailored to helping them progress. An on-line knowledge bank library to assist with studies and understanding is available at the click of a button. In addition the in-house magazine, Financial World, has features, comments and reviews on financial matters relevant to the financial services sector, which enables advisers to constantly keep up to date on financial services matters.
www.rensburgsheppards.co.uk/discretionary management solutions 04/03/2011
IFS School of Finance. Financial Planning Principles (2009)
Taxbriefs Life Assurance & Pension Handbook. 2009/10
Taxbriefs Tax Guide 2009/10
Financial Adviser, published weekly.
Money Week, published weekly.