Tag Archives: financial planning

New appointments and a fresh new look

NW Brown is delighted to announce the appointment of Oliver Phillips as Chief Executive. Oliver, who joined the Group in 2005 as an Investment Manager, takes over from Marcus Johnson, who will continue to serve as Deputy Chairman.

Oliver said of his appointment “I feel extremely honoured to be taking on the mantle of leading what I know to be an outstanding group of people, in a company which in many ways is in the best shape it has ever been”.

Other developments within the Group include the appointment of Paul Fox as Deputy Head of Financial Planning and Director of the Board of NW Brown & Company, and the launch of a new website https://www.nwbrown.co.uk/ 


Stocks in Focus: Next

This week I am writing about Next, the fashion retailer that provided a disappointing trading update last week. Next is often regarded as a bellwether for fashion retailers, many of which will provide their own trading updates later this week. Next had hoped to improve on the poor sales it had in the run up to Christmas 2015, which were hampered by understocking of popular items. However, it announced a modest fall in sales for the equivalent Christmas trading period in 2016 and a fall of 7% in the post-Christmas sales promotion period.

As with the rest of the retail sector, Next has had to contend with unusual weather patterns that have made stocking relevant seasonal items challenging. The British consumer is also moving away from spending on fashion, with data indicating people are spending more on leisure and experience activities than high street retail.

Looking forward, management guided towards ‘an even tougher sales environment for the retailers’ in 2017 and suggested a further fall in profits of between 2% and 14% for the year. Uncertainty over rising inflation eroding earnings growth and putting a squeeze on consumer spending were cited as challenges the company faces in the coming year. In an attempt to reassure investors, the group have adjusted its return of surplus cash to four quarterly dividends of equalling amounts.

The consideration for investors is now to assess whether Next is suffering from self-inflicted, company specific issues, or whether their figures are indicative of the wider fashion retailer landscape. It will be interesting to see whether other retailers’ announcements over the coming days shed any further light on this as we move into a very uncertain year for the UK retail sector.


Points of View: UK interest rates

Another week on and we continue to face more surprises following the UK’s vote to leave the European Union. Last Thursday the Bank of England (BoE) decided to keep interest rates on hold at 0.5%, despite strong expectations of a 0.25% cut.

No one knows the precise impact that Brexit will have on the UK economy, but the BoE has highlighted that business and consumer confidence has fallen significantly both before and since the vote. Specifically, data suggests that many businesses have frozen investment decisions and the fear is that this will lead to an economic slowdown and possibly a recession.

The rationale for an immediate cut in interest rates is that this would in theory mitigate any slowdown by encouraging spending and investment. So why has the BoE decided against such action? Essentially, it is on the basis that that the loss of confidence could prove temporary as the Brexit shock recedes. Nevertheless, the BoE has stated that it will do everything within its power to reduce the downside risks facing the UK and, unless there is some evidence that confidence is rebounding, a 0.25% interest cut seems likely in the coming months.

It remains difficult to predict how the economy will be affected by the Brexit vote, but unless rising inflation becomes a greater concern, the BoE looks set to keep interest rates “lower for longer” in the face of uncertainty. From an investment perspective, we would again highlight the importance of creating robust, diversified portfolios that are not overly sensitive to any one scenario in an uncertain environment.


Points of View: The Impact of Brexit

The UK has voted to leave the EU, surprising many in global markets who had expected a narrow win for the “Remain” camp. In the short term this has triggered a fall in the pound and weakness in global markets as investors digest the political and economic ramifications of this momentous decision.

The market was not expecting a Leave vote and so we are now in a state of flux and heightened volatility. Thus far the biggest moves have been seen in the currency markets with the pound falling significantly against both the dollar and euro. In contrast, UK equities have initially been quite resilient compared to other global equity markets – not least because the large, international companies that dominate our market derive a large proportion (c75%) of their earnings from abroad, and a weak currency means that these overseas earnings will now translate into markedly higher sterling earnings. Having said this, certain sectors and businesses have of course been more volatile than others. Within the UK market the biggest fallers have been the housebuilders, property companies, retailers and financial services companies with domestically-focused businesses.

In the UK gilt market, long-term government bond yields have thus far edged downwards (meaning prices have edged up). So long as the question marks about sterling do not turn into questions about the creditworthiness of the UK government, the prospect of an interest rate cut and further quantitative easing from a supportive Bank of England may now keep bond yields “lower for longer”.

Overall, we expect volatility to continue for some time until the political and economic implications are better understood.  At NW Brown we are confident that our portfolios are well placed for surviving and prospering post Brexit – something we expand in a fuller commentary that can be found on our website at http://www.nwbrown.co.uk/document/June2016MarketReview.pdf

Points of View: Inflation

Consumer prices in the United Kingdom increased 0.3 percent year-on-year in May. At this low level, and after years of falling headline numbers, investors may be forgiven for not giving this too much thought. However, despite the historically low inflationary environment, the longer term effects and the power of compounding cannot be ignored – the value of £100 ten years ago, for example, is worth less than £80 today.

Einstein once said “Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it.” Inflation can be seen as a compound interest which we are all forced to ‘pay’, and by understanding it we should seek to find assets which consistently protect against it in the long term.

Equities, property, inflation-linked bonds and commodities are often championed as hedges against inflation, but none of these are perfect; property is illiquid and vulnerable to prolonged periods of depressed values; inflation-linked bond prices are influenced by inflation expectations, which are only loosely correlated with changes in actual inflation; and commodities can be volatile and do not provide an income. Equities are also volatile in the short term but are arguably the most reliable source of real returns over the long-term, not least because the underlying companies buy and sell products at prevailing market prices. In any five year holding period over the last 30 years, for example, UK equities produced a real (above inflation) return 80% of the time.

It is this relatively reliable ability to generate attractive real returns over time that leads us to build long term portfolios around a dominant core of equity exposure.


Lifetime ISAs

In the March 2016 Budget we saw first details of the new Lifetime ISA (LISA).  Due to be introduced in April 2017, it is designed as a way for those aged 18-40 to save for both retirement and their first house.  It is understood that the LISA will have an annual contribution limit of £4,000, which will be topped up by the government by a further £1,000.  If you take out the LISA by age 40, you can continue to invest in it until age 60, however, only contributions made up to age 50 will qualify for the 25% government bonus.  The accumulated pot can then be used towards purchasing your first property, or held until age 60, at which time the money can be taken out tax-free.  Be careful though, as if you withdraw the money at any other time, you will lose your government bonus and pay an additional 5% penalty.

It is intended that this will ultimately replace the Help to Buy ISA, but with similar tax relief and a greater contribution limit, this shouldn’t cause too much upset.  If you already have a Help to Buy ISA, this can continue in addition to a LISA, but you will only be able to use the bonus from one of them towards a house purchase.  Alternatively, your Help to Buy ISA can be transferred into a LISA. Whichever ISAs you hold, the overall ISA allowance will be restricted to £20,000 from April 2017.  Just like other ISAs there will be the option to invest into cash or stocks and shares.

It is suggested that the introduction of the LISA is the first step on the path to turning the pension system on its head, but there are already questions being raised as to whether young people will continue in their auto-enrolment pensions, with the availability of the LISA.


Stocks in Focus: Interserve

This week I am looking at Interserve, the UK-based support services and construction company that operates predominantly in the UK but also has international exposure, including substantial operations in the Middle East. Having begun primarily as a construction and equipment services company, the business has gradually transitioned to focus on support services in recent years and this division now accounts for roughly 64% of operating profit.

Of late, Interserve has fallen out of favour with investors due to concerns over its exposure to the Middle East, where decreasing oil revenues seems likely to put pressure on spending budgets and the construction industry. In addition to this, management credibility has come into question following a £70m exceptional provision made on a mispriced construction contract in the UK.

Despite this setback, management continue to focus on the transition towards what is now the core part of the business – UK support services.  Drivers of this division seem favourable as more customers want to specialise in their core activities and outsource the likes of cleaning and security in order to reduce costs. With contracts lasting multiple years the business also enjoys relatively good earnings visibility. Furthermore, management have announced a strategic review of the equipment services division, which designs, builds, sells and hires specialist scaffolding equipment for major infrastructure projects. This seems likely to result in its sale and would allow management to simultaneously reduce their Middle East exposure whilst raising funds for reinvestment into the UK support services division.

Investors must consider whether the depressed valuation offers a good entry point into a business that is becoming ever more focussed on UK support services. If this transition can be successfully managed then the shares should earn a significant re-rating from their current valuation. However, investors cannot ignore the potential for deterioration in the Middle East and/or the risk of other contracts becoming unprofitable.