July 2007

Welcome to the 7th edition of our Financial Connection e-bulletin.

We hope that you enjoy these e-bulletins. If you have any queries, or would like to discuss any of the issues raised with one of our consultants, please call us on 0845 788 9933 and quote EM-4489.

JS&P becomes Towry Law

You will hopefully be aware that JS&P merged with Towry Law in May 2006.
Since that time we have been integrating the two businesses and are delighted with how smoothly this has gone. Both businesses now operate along the lines of the JS&P proposition, where the emphasis is on charging fair transparent fees, providing superior wealth management services and always endeavouring to put the client first at all times.

As both companies are now working in an identical manner, we no longer have the need to continue with two different brand names. We have undertaken extensive research of clients, potential clients and professional and industry contacts and, following this, have made the decision to use only the Towry Law brand going forwards.

We have therefore re-branded JS&P Limited, and the other JS&P companies such as JS&P Investment Management Limited and JS&P Pension Trustees Limited, under the Towry Law name.

Clients and contacts of both JS&P and Towry Law will not notice any difference following these changes. They should still be working with the same people, in the same locations and in the same manner. The only change will be that those that previously received correspondence from JS&P will now receive the same correspondence from Towry Law.

Patrick Connolly
PR & Marketing Manager

Proposals to change the financial advisory industry

In June 2006 the Financial Services Authority (FSA), the industry regulator, launched an initiative called the Retail Distribution Review with the specific aim of identifying and addressing the problems related to how consumers buy investment products. One significant concern is that many people are advised to buy financial products in order to generate commissions for the adviser and not because it is in the clients' best interests to do so.

Wednesday 27th June 2007 saw the publication of the FSA Retail Distribution Review Discussion Paper. This paper is a prelude to a consultation period that runs until the end of the year.

The Discussion Paper attempts to reclassify different types of financial advisers so clients have a better idea what service they can expect. It also puts the emphasis on fee-based, transparent charges and improving knowledge levels of advisers. This is very sensible, as any profession should provide clearly defined services to clients, charge transparent fees and have highly qualified and knowledgeable staff.

The Discussion Paper implies that financial advisers will need to choose between being fee-based professional advisers or product sellers. However, the Discussion Paper's proposed definition of fee-based includes remuneration that would currently be considered as commission-based. If the adviser needs to sell a product to get paid and the remuneration is paid by the product provider to the adviser, then, however you dress it up, that is commission and not fees. The biggest single step that could be taken to improve the professionalism of the industry would be the abolishment of all commissions, initial and trail. Advisers would then have no financial incentive other than to do what is best for their clients.

While key issues are covered in the Discussion Paper, there are other areas, important for the professionalism of the industry, that are not. Related to commissions is the issue of 'soft' commissions; product providers giving other financial support to financial advisers. This can involve paying for marketing costs, adviser training and company events, conferences and parties. This issue, which has not been addressed yet, is a factor that can lead to provider bias. It would be sensible to abolish all 'soft' commissions, or at the very least compel advisers to publish a list of all services and financial contributions received from product providers.

Other areas that need to be highlighted include advisory firms not adequately investing in technical resources to ensure they can offer comprehensive financial planning, lack of transparency where advisers work as self-employed agents giving their own advice under the pretence of an established company name, and a need to address the independence of advisory firms where they are owned by product providers.

So, while it is extremely positive that the FSA is looking to address the problems that have blighted the financial advisory industry for years, and we are fully behind their efforts to do so, we urge them to take decisive action now to improve the integrity of the financial advisory industry. The alternative is doing half a job that still leaves significant issues, and having to come back and address these at a later date.

Towry Law has produced a document, 'Independent Wealth Advice in the UK - A campaign to improve the integrity of the industry' which goes into greater detail on the major industry problems and suggested remedies. This can be read at www.towrylaw.com.

Patrick Connolly
PR & Marketing Manager

Global Equity Income: Marketing gimmick or investment opportunity?

Traditionally equity income investors would have looked no further than UK equities for a decent and potentially rising yield; and there have been a number of excellent funds and fund mangers to choose from.

However, recent years have seen a stealthy rise in the dividend yields of some international markets, to the extent that there is now a rash of Global Equity Income funds being launched by investment houses. These funds are aiming to attract the attention of the typical equity income investor. However, there is a question over whether these investment houses are ahead of the curve or being marketing-led, and as such whether investors should be excited by this 'opportunity'.

Well, the UK remains the pre-eminent yielding market, and has a strong culture of dividend paying. But one can construct a very decent portfolio of income stocks in Continental Europe right now, and featuring blue chip names such as Total, UBS, BNP Paribas, and Deutsche Telekom. Even more surprising is that Asia has become a yield market, and indeed there are now some specialist Asian Income funds available. The US, as ever, is a bit of a disappointment to the yield investor, bar the odd stock, and the Japanese market has a small yield, as per its bond market, although it should be stressed that yields are growing, which might be attractive to these global funds.

So, clearly it is possible to construct a Global Equity Income portfolio, but should you? At the base level it will offer more diversification than a UK constrained fund, and perhaps more capital growth prospects too. So far so good... but, there are downsides as well.

The culture of dividends is still quite new to many overseas markets and companies, and one wonders how committed they will be to the premise when the economic tide turns, as it surely will. Paying out dividends four years into an equity bull market, which has been driven by the first genuinely synchronised global boom, in 150 years of capitalism, and when balance sheets are strong and cash flows high, might seem like a fine idea. However, there has to be considerable uncertainty that this will be sustained at the time of the next economic downturn. For example, if there were another event similar to the Asian currency crises of 1997/98, can we really expect Asian companies to still be cheerfully churning out a decent and rising dividend?

Perhaps more importantly, investing in global equity funds should actually be much more a function of asset allocation and portfolio construction, and needs to be viewed as such, rather than simply chasing a yield. For example, while it may be possible to find a fund that yields 3.5% per annum, the value of this yield is likely to pale into insignificance when considering the overall gains or losses from the relevant stock market. This is particularly likely to be the case in more volatile regions such as the Far East and Japan. Therefore the decision to invest in global markets is likely to be swamped by overall market performance, for better or for worse. Furthermore, those fluctuations are quoted in local currency terms. Most Global Equity Income funds are not hedged back into sterling.

It would appear, therefore, that the risks of investing into Global Equity Income funds are that investors, while achieving more diversification than a typical Equity Income investor, may actually be taking on additional risks. The informed investor should realise that it is far more important to get the overall asset allocation right, in order to effectively manage risk, than to chase potentially ephemeral yields.

Despite their shortcomings, expect to see the latest batch of Global Equity Income funds coming to an advert near you soon.

Andrew Wilson
Head of Investment management

Global Markets Commentary Annual Review

Equities and commercial property have been the key drivers of portfolio performance over the past year, while bond markets struggled as yields rose on the back of actual (and perceived future) interest rate rises and unexpected increases in inflation. Gold has also been disappointing, as it has consolidated in the $620 to $660 region after a strong run.

There has, however, been plenty of volatility along the way, with a sharp equity market sell-off at the end of February, and then, more recently, gyrations in June. Some investors are becoming quite nervous, as we are now more than four years into an equity bull market, while the full effects of the sub-prime housing debacle in the US are arguably yet to play out. The latter point could lead to a widening problem involving loans, leverage per se, and speculative investments bought on margin. However, it would be wrong to try to speculate on possible end-games to this. One result of some of this pessimism is record short positions on various US stock market indices. Nevertheless, markets are famous for 'climbing a wall of worry' and it should be remembered that corporate news flow has been excellent, and many overseas economies continue to forge ahead.

UK based investors will have been particularly affected, in the short term at least, by the ongoing strength of sterling. Currency diversification can reduce risk and volatility in a portfolio, and sometimes enhance returns. However, an unusually powerful spell for sterling has meant that overseas returns have translated into smaller gains, sterling adjusted, for the time being. There are sound reasons to suspect that we have seen the best of sterling for now, however. The UK interest rate cycle is probably more advanced (i.e. nearer a peak) than many others. Britain now has the highest labour costs in the developed world, and yet productivity that significantly lags the US, and even France. It is reckoned that the average British family has 10% less discretionary income than four years ago, and, frankly, the outlook for the economy is simply less rosy than for many of its contemporaries. Therefore it is easy to see why sterling may drift back from these levels (although currency forecasting is an impossible task). This would, of course, result in asset price appreciation without the underlying investment actually having to move.

So, a little more detail on those asset classes. Equities were the top performers, and were led by the Asian and Emerging Market sectors. The Brazilian and Mexican indices appreciated by 54% and 49% in sterling terms, while the smaller Asian markets were also strong; the Philippines was up 89%, Indonesia 54%, and Malaysia 45%. India gained 48%, while the MSCI China index 66%. There is much less perceived risk in emerging markets these days, and companies are certainly better managed. Therefore there has been an ongoing process of re-rating prices and valuations in these areas. That said, they have also continued their historical role of being the whipping boys in equity market downturns, and that is the next milestone i.e. being able to decouple from developed markets.

Western equity markets also made good progress over this period. FTSE All-Share appreciated by 18%, the S&P 500 in the US by 21% (but only 11% in sterling terms), and Germany 36%, even for sterling investors. The market in Japan remains 'pregnant with possibility', according to one commentator, but continues to lag the rest of the world for the time being. The Topix index appreciated by 12% over this period, but severe weakness in the yen, combined with sterling strength, meant that UK investors were actually left nursing a 4% loss.

Commercial Property has surprised commentators, on the upside, for a number of years now. Returns have slowed down from unsustainably high levels, but are still reasonable, and a mix of income and capital growth. Offices, and in particular London offices, have been especially strong and have produced capital growth as well as increasing levels of rental growth. The Retail sector has been less positive, and indeed has the smallest yield. Fund managers are generally taking an underweight stance, where possible, on this sector, if only because of concerns about the UK consumer at a time of rising interest/mortgage rates.

Bricks and mortar property has an excellent track record as an asset class, and has actually, on a historic basis, provided greater runs than the equity market and with less volatility. It has also shown a propensity to recover quickly from any downturn, although such an event has not been seen since the early 1990s. It is an excellent diversifier, and, unlike some other asset classes, even in a worst case scenario for the economy, one is still left with something; in this case land and buildings. This is where the value is of course, and in future cash flows from tenants. These cash flows are in leases with an average length approaching ten years, and one would need to see a significant number of companies go bust, simultaneously, to seriously harm this cash flow. That said, were this to happen, it would be a fairly safe bet that the equity market would be suffering to a much greater extent.

Andrew Wilson
Head of Investment management


This Global Markets Commentary is solely for information purposes and is not intended to be, and should not be construed as investment advice.

Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The opinions expressed are those of Towry Law Investment Management Limited on behalf of Towry Law Financial Services Limited and are made in good faith, but are subject to change without notice.

IMPORTANT NOTICE: Towry Law Financial Services Limited. Registered in England No. 607039. Towry Law Investment Management Limited. Registered in England No.793636. Towry Law Trustee Company Limited. Registered in England No. 1151146. Towry Law Pension Trustees Limited. Registered in England No.781047. All of the above firms are authorised and regulated by the Financial Services Authority. Towry Law Holdings Limited. Registered in England No.4773122. Towry Law Nominees Limited. Registered in England No.2988101. Towry Law Services Limited. Registered in England No. 5169111. The Registered Office of all these companies is Towry Law House, Western Road, Bracknell, Berkshire, RG12 1TL. Telephone 01344 828000.

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