Archive for January, 2018

Reasons to be Cheerful – Another Quarter of Above Average Performance from the James & George Collie Model Portfolios!

Tuesday, January 30th, 2018

5Q3 2017 Update
By Scott A. Middleton APFS BA (Hons)
Chartered Financial Planner

Comment

Once again, we have had another quarter of continued positive returns for equity investors with both UK and Global Equities moving strongly ahead. In contrast, Fixed interest investors have seen little return from corporate bonds and there was actually a small fall in the value of UK Gilts. However, the High Yield Bond sector did fare better.

Within the various equity sectors the most notable performances came from Japan, returning 7.19%, Asia Pacific Ex Japan returning 4.08% and Global Emerging Markets returning 3.90%.

This quarter marked a continuation of positive returns for most investors. After an extended period of positive returns, the question of profit taking versus continuing to expect further growth is in the minds of many investors, and we are setting out our current strategy within the context of this question throughout this update.

Investment cycles vary considerably in length from a matter of weeks to multi-decade cycles. The longest cycles can extend for more than 30 years and when these cycles change they can provide the highest level of risk and opportunity to investors.

When regulation was first brought into financial services in 1985 the most prominent warning introduced was to ensure investors were told that past performance was not a guide to future returns. Yet, more than 30 years later, the performance of an investment often remains the most significant determining factor in terms of selection.

The reason, in our opinion, is explained by the study of behavioural finance as people use their recent experience as the main basis for future expectations and current decision making. The longer the cycle, the higher the conviction, to the point where long cycles can make expectations so strong, that historical wisdom derived from experience becomes accepted as hard fact. The quote ‘It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’ captures the essence of this point and appears at the beginning of the film ‘The Big Short’.

It is our view that another long term cycle has ended, but that investors are likely to continue to have expectations based on the old cycle for some time, leading to lower returns than might be available from a fresh review and interpretation of the current position. As a consequence we are reducing the value of recent past performance in our considerations, looking at much longer historical periods and closely considering the current position and prospects based on factual information rather than inherited bias.

The current bull (rising) market in equities has lasted 8.6 years to date, the previous bull markets since 1926, starting most recently, lasted 5.1 years, 12.8 years, 12.9 years, 2.5 years, 6.4 years, 13.9 years, 15.1 years and 3.7 years. The bear (falling) markets have lasted from 3 months to 2.8 years with the most recent two lasting 1.3 years and 2.1 years. This data suggests that the length of bull markets varies significantly and the current bull market is well within the range. Whilst the most recent bear markets have been towards the shorter end of the range the bull markets have been towards the longer end. Some investors are nervous that the current bull market has lasted longer than the previous cycle, but history suggests that this is not a relevant factor in determining when and if to take profits.

There is, however, a clear indication of danger within fixed interest markets at present, which we believe is being ignored in the same way as the warning signs mentioned previously in relation to the recent banking crisis.

The basic principle of investment is to invest money which is not required so as to provide greater spending power in the future. In order to be successful, the returns created must exceed inflation otherwise the spending power will be lower in the future. The current position is that fixed interest returns, particularly in gilts, are not likely to meet this basic fundamental requirement.

The problem is that fixed interest investments have enjoyed a favourable 30 year plus cycle and investors continue to have expectations based on the recent cycle. In addition, the investment community lacks professionals with experience of cycles where fixed interest returns have been disappointing. In fact, the recent cycle experience has been re-enforced with definitions of risk, which define fixed interest investments as low risk, as they generally only consider 20 years of data and disregard the fundamental lack of value which now exists.

To illustrate this, if a typical return from a fixed interest asset is 1.3%, but target inflation is 2% and inflation expectations are above 3%, risk appears high and the consideration of the historical strong returns, which caused the current position is an unhelpful distraction in determining asset allocation today. We are aware of this and will therefore continue to monitor these markets very closely.

In terms of equity markets the position appears more favourable than many commentators are reporting. Whilst valuations do appear quite high, historically there are a number of reasons to be optimistic that current levels are well supported and markets can continue to provide positive returns.

History shows that equities often outperform during periods of moderate inflation as companies are often able to raise prices providing some inflation protection for shareholders. The amount of quantitative easing injected into the global economy now exceeds $15trn and continues to rise at present. This cash is gradually filtering into the real economy and is driving global economic growth, reducing unemployment, increasing future confidence and beginning to increase inflation. The effects of quantitative easing are likely to continue for a decade or more given the gigantic size of the programme.

The US has raised interest rates 3 times, beginning at the end of 2015 and the Bank of England recently increased interest rates from 0.25% to 0.5% in the UK, which was the first rate increase for a decade. Clearly central banks are starting to worry about inflation, however both the Federal Reserve and the Bank of England have made it clear that the pace of increases will be very slow, as they are more worried about damaging economic growth than controlling inflation. While we expect further rate increases this year for both economies, we expect that the level will be modest and not enough to meet the long term inflation target which will be exceeded. Simply put, the $15trn inflationary stimulus applied through quantitative easing resembles a flame thrower, whilst the interest rate increases that are deployed to control the resulting inflation looks like a water pistol.

Whilst downside risk is important there is also the possibility of upside risk where markets move to a higher level and never re-visit lower thresholds. These periods of growth have occurred during periods of significant technological advancement, which many feel we are currently experiencing. If this is occurring it would also be likely to extend the current rise in equity prices.

In summary, fixed interest markets remain overvalued in our view and the risks in these markets are not being measured accurately by many investors. Equities have enjoyed strong returns which could continue in the short, medium and even longer term and are presently supported by synchronised global economic growth, high corporate confidence and central banks’ reluctance to raise interest rates aggressively. The key potential risks for equities are low wage inflation and high interest rates if central banks do target inflation effectively, which would reduce both bonds and equity markets and these risks are being closely monitored.

Strategy

There is no change to the strategy at this time and the portfolios remain overweight to equities whilst bond exposure is generally focussed within shorter dated bonds, which are less vulnerable to capital losses if interest rates increase.

If we believe the risks to equities increase in the future we will consider profit taking, but at this time we believe that the upside potential is attractive, especially given the low returns available from cash.

The equity funds held are generally value rather than growth in style. There have been strong returns from some growth strategies, however the underlying business models often require on-going cash investment. Therefore growth valuations are vulnerable to the tighter conditions, we expect within fixed interest markets going forward.

This article is not intended to, and does not, provide investment advice. You should always seek professional advice.

For more information on the James & George Collie Model portfolios or how you could invest in them please feel free to contact Scott Middleton on 01224 581581 or via email at scott.middleton@colliefinancial.co.uk

Finally – A Happy New Year from all at James & George Collie Financial Management!!

Residential Property Sales – 2017 Review

Monday, January 29th, 2018

detached-house2017 was another challenging year in the Aberdeen Property market, however not to the extent of the previous year. In 2016, average prices fell by 10%; in 2017 the fall was 3½%. This reflects the general feeling that we are either at, or very close to, the bottom of the current downturn, with prices not expected to fall very much further from their current levels.

Since the beginning of the year detached properties in Aberdeen have been selling on average at 5% under the Home Report valuation figure, taking on average 5½ months on the market to achieve a sale. Non detached houses are also selling at 5% under valuation, but they are achieving a deal, on average, after 4 months on the market. Flats are suffering to some extent from the volume of properties on the market for sale. They are selling on average after 5 months on the market at a price 10% below Home Report valuation.

There are some reasons for mild optimism. The average house price in Aberdeen is still higher than it was 5 years ago and sale volumes certainly increased in 2017, up 3% on the number of sales in 2016. If this continues in the first quarter of 2018, combined with an increase in oil industry activity, then confidence in the market should return leading to a slow but steady improvement.

James & George Collie’s dedicated sales office at 450 Union Street, Aberdeen, located between Rose Street and Chapel Street, in the heart of the city centre, enjoys a prominent position on Aberdeen’s main street and provides ideal exposure for properties on the market for sale. Located directly opposite the new Capitol and Silver Fin office developments, it is ideally placed to advertise properties for sale in anticipation of the property market bouncing back.

For further information or advice please contact our property sales office on 01224 572777 or our estate agency partner Brian Sutton on 01224 563340 or by email at b.sutton@jgcollie.co.uk

Pensions in the context of separation and divorce

Monday, January 29th, 2018

pensionLast year, the Supreme Court (the highest Court of Appeal in the UK) made a landmark decision in the case of McDonald v McDonald relating to the question of pensions on divorce. Pensions can form substantial assets for these purposes. A question arose as to how much of Mr McDonald’s pension should be taken into account when calculating the assets to be divided on divorce.
The law sets out the formula to calculate the proportion of any pensions which should be taken into account. The regulations (regulation 4 of the Divorce etc (Pensions) (Scotland) Regulations 2000) provide the relevant formula. The formula is A x B ÷ C. A is the value of the pension at the relevant date (normally the date of separation), C is the length of time the individual was in the pension scheme before the relevant date and B is the amount of time C which falls within the marriage itself before the relevant date.
The difficulty in the above case arose with regard to the definition of the period of membership. It had previously been thought that would relate only to being an active (generally speaking a contributing) member rather than the whole period of membership whether contributing, not contributing or receiving the pension.
Mr McDonald joined his British Coal pension scheme in December 1978. He married his wife in March 1985. He took early retirement on the ground of ill-health and started receiving his pension in August 1985, a few months after marriage. In 2010 when the parties separated Mr McDonald argued the value of his pension rights should be restricted to the period during which he was an active member of the scheme, and this would amount to £10,002. Mrs McDonald argued the whole period of her husband’s membership of the scheme, both contributing and receiving, should be taken into account, which meant the value to be included would be £138,534.
The Supreme Court agreed with Mrs McDonald, deciding the period of membership should not be restricted to active membership but should include the entire period of membership.
This is not however the end of the road for anyone attempting to exclude the portion of their pension which does not relate to the time that they were contributing during their marriage. The Family Law (Scotland) Act 1985 allows for some flexibility under Section 10(1). This provides there may be special circumstances which allow that scenario to be taken into account and it remains possible to attempt to persuade the Court that a certain portion of a pension be excluded.
However, this case does bring about a significant change in the way pensions on divorce will be dealt with. This is a complicated area and legal advice should be obtained.
If you wish to discuss any matter raised in this article, please contact Senior Court Solicitor, Susan Waters, by telephone on 01224 581581 or by email at s.waters@jgcollie.co.uk

Building Warrants – An Art and a Necessity

Monday, January 29th, 2018

constructionAberdeen City Archives recently held an exhibition called “The Art of the Building Warrant”. The exhibits were original building warrant plans of iconic Aberdeen buildings past and present such as the Northern Hotel with its Art Deco frontage, the police office at Lodgewalk, the Pittodrie Pavilion and the Tivoli Theatre. Looking in particular at the symmetrical lines of the plans of the Tivoli theatre it is obvious that drawing a building warrant plan can be a work of art.

No matter where you are reading this, the chances are that you will be sitting in a building which at some point has been the subject of a building warrant. The submission of plans to the Local Authority for approval and the grant of a building warrant for those plans has been part of our lives for many years. Modern building warrant legislation dates back to the Building (Scotland) Act 1959, but building warrants themselves have been in existence for some years before that. The building warrant plans for the Tivoli Theatre date back to 1872. However, in over 35 years experience of property transactions, I can say that nothing gives more trouble than a building warrant, or more accurately, the lack of one. If alterations which require a building warrant are carried out without one, this can cause untold problems and delay in a house sale even leading to the sale being called off. Also, mortgage lenders may not be prepared to lend on a property which has unauthorised alterations and that may radically affect its value. Anyone carrying out unauthorised alterations to their property should realise that he or she might directly be affecting the value and marketability of the property.

If the alterations were carried out before 1 May 2005 without a building warrant, there is a procedure whereby a “Letter of Comfort” can be obtained from the Local Authority. This is a letter confirming that the Local Authority will not take any action against the owner. Unauthorised alterations taking place after that date will require a retrospective building warrant which can be a time consuming and costly procedure. Fees for retrospective applications are substantially higher than for normal applications.

The message is clear. Check with the Local Authority or a qualified architect or building consultant whether or not a building warrant is required before carrying out any alterations. Many minor alterations do not require a building warrant but you cannot assume that and it is better to be safe than sorry. The building regulations are complex and constantly changing. Alterations which may not have required building warrant in the past may need one now. Don’t put yourself in the position of having to obtain retrospective building warrant for alterations in a hurry when you are selling or remortgaging your property.

Should you wish any further guidance on the requirement for building warrants, or indeed any other conveyancing related matter, please contact the author, Forbes McLennan, by telephone on 01224 581581 or by email at f.mclennan@jgcollie.co.uk

EQUITABLE SHARING OF MATRIMONIAL PROPERTY ON DIVORCE

Monday, January 29th, 2018

barristerOne common misconception that is often held by clients who consult a Family Lawyer for the first time, is in relation to what is possibly the couples most valuable asset, namely the family home.

A decision by Lady Carmichael in the Outer House of the Court of Session in the case of JA against WA has reinforced this point. This case revolves around a couple who were divorcing. The husband contended that the matrimonial assets ought not to be shared equally because the net value of the matrimonial assets derived substantially from his gifted, inherited or pre marriage property. He sought an order that the matrimonial home and two other heritable properties owned should be sold and the proceeds be divided in the proportion of two thirds to him and one third to his wife. The wife agreed that the matrimonial home should be sold but sought an equal sharing of the net proceeds. She also sought a transfer to her of her husband’s interest in each of the other two heritable properties, again with other orders.

By way of background, the husband’s father died when he was a child and he had inherited money. He brought investments to the marriage in the amount of approximately £100,000. He also owned a flat in Edinburgh. During the marriage he inherited a further £10,000 from his father’s estate and received a sum in excess of £200,000 from the estate of an aunt, and approximately £25,000 from his godfather. His mother also gifted him over £230,000, again during the marriage. On his mother’s death he received £140,000 by way of the proceeds of a Life Assurance Policy, the residue of his mother’s estate in the sum of approximately £23,000, a shared investment portfolio and a property in Bamburgh. Before their marriage the wife had owned a property in Edinburgh which she still retained. Since the date of the parties separation the husband had received further sums by way of inheritances totalling almost £580,000. During the marriage the husband had received redundancy and resettlement payments from the Army, part of which was attributable to his pre marriage service.

The Judge focused, in particular, on the matrimonial home which was bought during the marriage for £757,070, funded partly by a mortgage of approximately £300,000. In addition, the husband transferred £161,000 from his current account to settle the deposit. The proceeds of sale of a flat in Edinburgh of approximately £253,000 was also applied to the purchase and the husband’s mother contributed £75,000. The parties took title in equal shares. The wife contended that the £161,000 contributed did not come from her husband’s inherited wealth but from contributions he had made during the preceding years of marriage.

The Judge also looked at the background relating to the various other properties and reflected on the law. She then looked at the law regarding the unequal sharing of matrimonial assets. It is a trite principal that the whole of an asset may be excluded from sharing on the basis of the source of the funds used to acquire it, but at the end of the day the task of the Court is to achieve fairness between the parties.

In this case, the Judge noted there were discreet and substantial capital payments from the pre-matrimonial property of the husband and it was entirely practical to ascertain where the funds for the purchase of the matrimonial home came from. She therefore stated that it was clear that the greater proportion of the matrimonial home was acquired using the husband’s funds which derived from his own, non-matrimonial property, or were gifted to or inherited by him. Having said that she was not satisfied that the various orders sought by the husband, including the sale and subsequent unequal sharing of the value of the three heritable properties represented a fair sharing of the matrimonial property, she did conclude that the matrimonial property should be shared unequally. She therefore decided that the three items of heritable property should be sold and the net proceeds divided in proportion of one third to the wife and two thirds to the husband. The Judge also made orders regarding the husband’s pension and various other assets (which orders were opposed by the husband) to ensure a fair division was achieved at the end of the day.

In summary, this case simply reminds us of the need, where any couple are buying a property but are contributing unequally towards the purchase price or where the purchase of a property is funded by gifts or an inheritance received by one party, for these facts be recorded in an Agreement entered into between the parties to save the expensive, stressful and time-consuming Court cases which may result. Such agreements are not limited to events occurring before marriage or where a couple co-habit but can be entered into post marriage if for example one of the parties receives a substantial gift or an inheritance which is then used to acquire something either in that parties sole name or in the joint names of the parties and which may be deemed to be a matrimonial asset thereafter.

For further advice on this or other similar matters, please do not hesitate to contact Graham A. Garden on 01569 763555 or by email at g.garden@jgcollie.co.uk or any of our other Court Solicitors.