BV Services Investment & Tax Advisers

May 2024

What Sort of Adviser is your Adviser?

You want to choose an adviser and want an Independent Financial Adviser.  There are many ways of choosing an adviser but an important point to note is that there is a big difference between:-

*          Model Portfolio Advisers;

*          Bespoke Portfolio Advisers.

Model Portfolio Advisers

Probably 90% of advisers use model portfolios.  In this case your attitude to risk is assessed and you are placed in the appropriate risk portfolio.  There may be 5-10 such portfolios plus 1 possibly for green/sustainable investors.  There is nothing inherently wrong with this approach to providing investment advice but it is rather restricted.

It is rather restricted because:-

1.         The investor has little control over his investments once they are in a model portfolio. That may not be a problem for many investors but some like to have a more individualistic approach to investing their own money.

2.         In most cases the investments bought will be only unit trusts and only accumulation units of unit trusts.  This approach is rather restrictive because it means that other collective investments such as investment trusts and Exchange Traded Funds are excluded.  Many larger IFA firms need to control what their advisers recommend and this is the way they usually do it.  And there is nothing wrong with this approach when investment markets are quite healthy and the investor wants growth primarily.

3.         The problem comes when investment markets are poor and investors want an “income” from their money invested.  In that situation an awful lot of units can be sold awfully quickly to produce the necessary level of “income” which comes from the sale of units not natural income.  The problem has been compounded by the substantial reduction in the annual Capital Gains Tax allowance.  Two years ago it was £12,300 per person, last tax year it was £6,000 per person and it is now just £3,000 per person.  So if somebody wants to receive a reasonably large “income” from the sale of units then there can be an increasingly likelihood of a Capital Gains Tax charge at the end of the tax year.

Bespoke Portfolios

BV Services runs bespoke portfolios.  Of course there are often a lot of common investments in a portfolio but we try to individualise each portfolio to meet investors growth and income aims.  So:-

a)         For income investors we like to invest in investments which produce “natural” income from interest and dividends.  Normally we can obtain a natural income of 5% a year which means that units don’t have to be sold to meet income requirements.

b)         There is no problem in terms of so-called “decumulation” which essentially means that there is always a fear that if you sell a lot of units you will run out of money before death.  If you take the natural income then there is much less of a risk of decumulation ending in disaster.

c)         A bespoke approach to portfolio investment also means that BV Services can invest in (as indicated earlier) investment trusts and Exchange Traded Funds.  In some sectors investment trusts offer a better deal.  For example in terms of green energy, there are a wide range of investment trusts offering good dividend returns. I admit they can be found also in specialist green energy unit trusts but if you invest via the unit trust the investors incurs double charges.

d)         In the same way Exchange Traded Funds offer cheap index-linked stockmarket tracker funds and are also a good way to invest in commodities such as gold and silver.

            So overall a mixture of unit trusts, investment trusts and Exchange Traded Funds may be a better proposition than just investing in unit trusts.

Green Energy Funds

Why did green energy funds perform so poorly in 2023 and why might they improve their performance in 2024?

An important factor about green energy funds and indeed infrastructure funds which have medium to long term and often inflation-linked contracts is that they try to put a current value on this stream of future income.  To do this they make use of so-called discounted cashflow models.  Unfortunately, one of the main ingredients of those models is interest rates.  So 5 rises in UK interest rates in 2023 meant an increasingly large discount in terms of the current value of a stream of future income.

But we now have an expectation of falling interest rates later in 2024.  So that negative factor should become a positive one.  In the meantime the share prices of green energy funds are standing at a discount to their Net Asset Value per share: defined as total assets less total liabilities including debt divided by the number of shares in issue.

In this situation it is very difficult for these companies to issue new shares to buy new projects.  So what do they do with cashflow?  What they can do is:-

• Increase dividends.So, for example, Greencoat UK Wind (the only all UK wind fund) has increased its 2023 dividend by 14% while NextEnergy Solar has raised it by 11%;

• Buy back shares at below Net Asset Value.So again Greencoat UK Wind has embarked on a £100m share buyback programme while Foresight Solar is buying back shares on a weekly basis and has been doing so for some time;

• Reduce debt.

• Improve the performance of existing assets

There have been some problems in terms of supplying green energy to the National Grid and, as a result, many green energy companies are looking to invest abroad.

On a general note, the key to demand for green energy and in fact all types of electricity will, I believe, be the growth of data centres to try to cope with the development of artificial intelligence.

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