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Create personalised, tailored financial plans

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Ellis Bates Directors Ben and Alan discuss how Ellis Bates incorporate the principles of Consumer Duty into every aspect of our client responsibility to offer relevant and effective products and services.

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How the Ellis Bates in-house Investment Team help you create your personalised, tailored financial plans
How Ellis Bates independently select the products and services individually tailored to your financial plans
How Ellis Bates tailor the right financial products and services throughout your lifetime and its ever-changing circumstances
How Ellis Bates scan the whole of marketplace to carefully select the right products and services for you to achieve your financial plans
How the Ellis Bates in-house investment team create a suite of products and services geared specifically to your financial plans

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EB Retirement Income Strategies (EBRIS)

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EB Retirement Income Strategies (EBRIS)

In 2023, in response to client demand, we developed our EB Retirement Income Strategies (EBRIS). EBRIS is a combination of our Income and Growth portfolios:

Income Portfolios Growth Portfolios

Every fund focuses on a yield return.

A ‘slow and steady’ approach, usually with lower volatility.

Often more mature businesses than high growth options.

Return some profits immediately through dividends.

Mix of near- and long-term rewards with income and some capital growth.

More focus on capital appreciation in 5-10 years or more.

Businesses that can grow quicker by retaining profits.

Less emphasis on near-term rewards than long-term potential.

Will naturally hold more volatile investments.

No constraint on mandate of funds, other than overall return of the portfolio.

Returns can come from anywhere.

Our default EBRIS approach is an equal (i.e. 50/50) split between the Income and Growth portfolios. Depending on your individual circumstances and preferences, together we can personalise elements of the strategy – for example:

  • A greater allocation to one portfolio (e.g. Income or Growth) over the other.
  • Replacing the Growth allocation with our Socially Responsible Investing (SRI), Passive or Multi-Asset portfolio.
  • Investing in EBRIS alongside one of our Product Panel solutions.

Why the Standardised Approach?

Research shows that many individuals have not saved sufficiently for their retirement, so they are becoming increasingly reliant on stock market returns to maintain their lifestyle after they finish working. However, volatility in the markets post-COVID has raised concern over expectations of market returns in the years ahead. This leaves investors vulnerable to market shocks.

In these conditions, single solutions can present a heightened risk to investors, due to the possibility of a single solution focusing on a particular investment style.

EBRIS allocates investments across different asset Investment, investment styles, geographic regions, industries/sectors, fund houses and individual companies, among other categories, which helps to mitigate risk. At the same time, we believe that the combination of Income and Growth assets will give a higher probability of meeting your income requirements over the course of retirement, and avoid running out of savings (based on a 4% income requirement).

That said, there will be clear situations where a different mix of strategies, or even a single strategy, will be appropriate for you because of your unique circumstances. If you want to find out more about what would be the best solution for you, then please get in touch with your Financial Advisor.

What is an Annuity?

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An annuity is a financial product whereby an individual provides an upfront capital amount in exchange for regular income payments for a specified period of time.

The rate of income that an individual is paid (the annuity rate) depends on various factors including their age and state of health, the capital amount, the length of the term, and current market rates as measured by the 10-year gilt yield (i.e. a UK government bond that matures in 10 years’ time).

The Purchasing Power of 10-Year Gilts and Annuities

Consider the purchasing power of a 10-year gilt: if you wanted to hold one of the most secure types of investment possible, what return could you have expected over time?

In 2008, before the global financial crisis, the yield on a 10-year gilt was 5.45%. You could receive an income of £5,450 a year on a £100,000 investment, so in terms of making a retirement decision and income planning, this was a relatively straightforward position to be in.

As interest rates were cut in the years that followed to stimulate the economy, so too did bond yields fall. By 2021, the 10-year gilt yield had moved down to 0.54%. An investment of £100,000 now provided about £500 a year of income – a fall of 91% compared with 2008 levels.

Thus, if you wanted to generate a secure income of about £5,000 a year, you now needed £1,009,259!

In recent years, the Bank of England has been raising interest rates to bring persistently high inflation under control. In response, 10-year gilt yields have also risen, to over 4% for 2023 – and almost back to 2008 levels. Thus, if you want to generate a secure of £5,450 a year today, you now only need £133,252.

Year

Yield Income on £100,000 Difference in income vs previous Difference in income vs 2008

Amount needed to secure £5,450 “risk-free”

2008 5.45% £5,450 £100,000
2012 2.07% £2,070 -62% -62% £263,285
2016 1.66% £1,660 -20% -69% £328,313
2021 0.54% £544 -67% -91% £1,009,259
2023 4.09% £4,090 +657% -25% £133,252

Annuities have therefore become a viable retirement strategy once again, and are becoming a popular option for investors who want a dependable rate of return.

A variety of annuities are available, and additional features can be incorporated into annuity contracts based on your individual needs and circumstances. Should you wish to find out more information or discuss how an annuity would work for you, please get in touch with your Financial Advisor.

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Income in Retirement

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Put simply, an individual’s life can be split into two phases: the accumulation phase, and the decumulation phase.

Accumulation Phase Decumulation Phase
Most retirement planning advice focuses on the accumulation phase – that is, how large a pension pot will need to be; and, to achieve that size of pot, how much you will need to regularly save and in which assets you must invest those savings. During this phase, you start to rely on their savings to finance all or part of their living costs. Within this, there are two main objectives:

Ensure you enjoy the best quality of life possible.

Ensure you do not outlive your savings!

There are many uncertainties that can complicate your and your Adviser’s decisions when planning a long-term investment strategy.

  • Longevity Risk – you live longer than anticipated, so you could run out of money.
  • Inflation Risk – your money does not stretch as far as it used to.
  • Market Volatility – the value of your investments and the income generated by them can fall as well as rise, meaning you have less in your pension fund when you retire.
  • Withdrawal Strategy / Pound Cost Averaging – if withdrawals are made when markets are falling or low, more of the assets need to be sold to cover the withdrawal. This impacts the ability of the remaining portfolio to generate returns for the future.
  • Healthcare Costs – as people age, they are more likely to need healthcare, which can be costly.
  • Government Policy – changes in government policy can affect the spending power of your savings, the attractiveness of pension products, among other things.
  • Personal Circumstances – risks specific to your individual circumstances.

Many individuals will retire with a number of different assets and savings vehicles such as a pension, ISA, cash accounts and property. Each type is subject to different risk/return profiles, as well as different tax treatments with regard to income, capital gains and inheritance tax.

While some people may find that the income provided by external sources is sufficient to cover their day-to-day expenditure in retirement, others may want or need to draw on their EB portfolio – some may draw down the capital, while others may rely solely upon the income generated by the investments (the ‘natural income’) and seek to leave the capital intact.

Whichever approach is taken, a strategy that is suitable for you today may not be suitable in the years to come, due to factors such as inflation.

This is demonstrated in Figure 4 and Figure 5. These charts assume:

  • an initial portfolio value of £1 million
  • a withdrawal of 5% of the original invested amount (i.e. £50,000) a year
  • the amount withdrawn increases by inflation each year (0% in Figure 4, and 2% in Figure 5), and
  • the balance remaining invested in stock/bond markets to generate capital growth and income (i.e. a total return), growing at a steady rate of 4% a year.

No Inflation: How long will a client’s portfolio last?

Withdrawing 5%, inflation 0%, investment growth 4%

2% Inflation: How long will a client’s portfolio last?

Withdrawing 5%, inflation 2%, investment growth 4%

Sustainable Withdrawal Rates

A general rule of thumb is you can withdraw up to 4% a year if you do not wish to run out of money during your lifetime. This is based on average life expectancy, and accounts for 25 years of returns even without any growth in markets – in reality, the long-term average for portfolios is greater than this, and we would expect above-zero returns in most years over the long term.

That said, there may be circumstances when someone can withdraw more each year (say, 8% – for example, they have a short life expectancy, as shown in Figure 6) or less (say, 2% – for example, they wish to keep the capital value of their remaining portfolio intact).

Increased Withdrawal Rate: How long will a client’s portfolio last?

Withdrawing 8%, inflation 2%, investment growth 4%

Find out more

Whatever your investment experience, our teams are here to help and support you on your investment and retirement journey. Find out more about investing with Ellis Bates Financial Advisers, or alternatively please get in touch by filling out the form below.

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What is an Equity?

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What is an Equity?

An equity is a share of ownership in a company. An investor who owns the shares (a shareholder) is therefore a part-owner of the company, and confers upon them a number of rights, depending on the type of share they own.

Ordinary shares are the most common form of shares issued by companies. Among other rights, shareholders have the right to share in the company’s profits in the form of a dividend. If the company makes larger-than-expected profits, ordinary shareholders can participate in a higher dividend.

Preference shares are the second most common form of shares. One characteristic is that they pay a fixed rate of dividend. While preference shareholders do not participate in higher dividends like ordinary shareholders can, preference shares are often seen as a less risky form of investment than ordinary shares.

Dividends on equities are not guaranteed, though, and can be cut, suspended or cancelled entirely.

Figure 1 shows that the trend in global dividends by geographic region, as measured by the Janus Henderson Global Dividend Index (a long-term study of global dividend trends), and whether companies on the whole are paying out a rising or falling amount to shareholders over time.

Janus Henderson Global Dividend Index (by geographic region)

Figure 1: Janus Henderson Global Dividend Index (by geographic region). Source: Janus Henderson. Used with permission.

Dividends are generated when companies pay out a proportion of their profits to shareholders as cash, and this generally rises over time as cash flows improve and profitability increases. Hence, profitability is one internal factor (i.e. a factor that is specific to a company) that influences dividend policy.

However, as well as internal factors, company dividend policies are also influenced by external ones that are outside of a company’s control, such as the general state of the economy. One example is the COVID-19 (coronavirus) pandemic, during which time many businesses closed and consumers were unable to go out and spend. Janus Henderson estimates that the pandemic caused global dividend cuts of $220 billion in 2020, as companies sought to shore up their balance sheets to weather the financial impacts of the crisis (or, in the case of banks, required to do so by their respective regulators). The extent of these cuts is represented by the falling line in Figure 1.

The UK and Europe were the most severely affected regions, and Australia in the Asia Pacific ex Japan region. Traditionally, Income portfolios have a natural bias towards the UK and Europe on the basis that these developed areas of the market have provided high and attractive dividend yields historically (Figure 2).

Global Dividend Yields

Figure 2: Global Dividend Yields. Source: JP Morgan; data as at 31 July 2023. Used with permission.

In contrast, Japan and North America were very resilient in 2020 (as shown by the orange and purple lines in Figure 1).

Japanese companies are known to have high levels of cash and low levels of debt on their balance sheets, which helped to support dividend distributions during the pandemic. Corporate governance reforms in Japan (as well as Asia more broadly) have led to noticeable improvements in shareholder-friendly practices over the years, such as dividend pay-outs. Further, companies in Japan are more effectively using their capital to generate profits and, subsequently, returns to shareholders (Figure 3).

% of Companies with Net Cash

Figure 3: % of Companies with Net Cash. Source: Trustnet; data as at 31 May 2022. Used with permission.

In the US, share buybacks are a common practice as they can be more tax-efficient for companies than paying a dividend. This involves a company buying back its own shares from investors and subsequently cancelling the repurchased stock; as there are fewer shares in circulation, shareholders’ stake in the company (and the amount they are due from future dividends) increases. US companies typically spend billions of dollars a year in share buybacks.

On the whole, dividends have been reinstated since the COVID falls, as shown by the general upwards-moving line since 2020. From a geographic perspective, according to Figure 2, UK and European companies continue to offer attractive dividend yields. As with any portfolio, though, diversification is a key strategy as this helps to build resilience in an unpredictable global environment.

Find out more on how our expert in-house Investment team work hand in hand with your Financial Advisor.

What is a bond?

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What is a Bond?

Bonds are debt instruments issued by governments and companies, as a way of raising money for new projects, business expansion, or other expenditures.

Bonds are typically issued with a maturity date, at which point an investor receives a fixed amount of capital (called the nominal value). For UK bonds, this amount is invariably £100 per bond – this means that if the bond is held to maturity, investors will receive £100, regardless of what the market thinks of the price in the meantime.

Between now and maturity, the bond pays interest at a specified rate, generally every six months. The rate of interest that a bond pays is meant to reflect the risk of these issuers. For example, UK government bonds (gilts) and US government bonds (Treasuries) are considered to be ‘risk-free’, as these governments are unlikely to default on their financial obligations, hence they tend to pay relatively low rates of interest.

The rate of interest on corporate bonds (i.e. bonds issued by companies) will typically be higher than government bonds as they come with more risk, given that a company is more likely to default on their payments than a government. That said, this depends on the issuers in question.

Although bonds can offer fairly reliable returns, issuers can default on their loans just like any other borrower. Generally, coupons on investment grade (high quality) bonds are more secure than on high yield bonds, and on government bonds versus corporate bonds (again, dependent on issuer).

As with all investments, bonds carry risk, and prices can go down as well as up. In particular, bonds are sensitive to inflation and interest rates, and expectations thereof, since most bonds pay a fixed rate of interest. If inflation is rising, central banks will likely increase interest rates, to encourage people to borrow less and save more – the theoretical reduction in demand for goods and services could then slow inflation.

Consequently, investors no longer prefer the lower rate paid by the bond, resulting in a decline in its price. The converse is true if inflation and interest rates are falling, or expected to fall. Some bonds are more sensitive than others in this regard.

Our Investment Services

Our expert Investment team are in-house and work hand in hand with your Financial Advisor on a daily basis and whether you are new to investments or want to re­-evaluate your portfolio, we can help you.

Find out more about our investment services and how we can support you on your investment journey.

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Invest for income

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What is Investing for Income?

Income investing is often thought of as a way of creating an income in retirement. It is also a valid strategy to generate an ongoing stream of income at any stage of an investor’s life – whether that’s to boost your existing income, to accommodate for unexpected life changes, or to cover a known expense such as a holiday.

Investing for income involves investing a capital sum, from which you then make withdrawals at regular intervals (e.g. monthly or quarterly). These withdrawals may be for

  • a fixed amount – a set monetary amount that doesn’t change over time, or
  • variable – for example, taking the ‘natural income’ generated by the investments depending on your requirements. Depending on the amount you withdraw and market conditions, the original capital sum may be left untouched or reduced over time.

Ellis Bates Financial Advisers Income Portfolios

At Ellis Bates, we appreciate that every client is different, and as such you need a portfolio to meet your individual circumstances. We provide a range of portfolios to suit different attitudes to risk and objectives, whether it is for capital appreciation, income generation, or a combination of the two.

If you require a regular income, our Income portfolios may be an ideal investment strategy.

Our Income portfolios are invested in a diversified range of assets (e.g. bonds and equities), by geography/region, company size, investment style and fund house, among many other considerations, to ensure that the income generated by your portfolio is not reliant on any single area of the market.

We seek stable investments that are paying out relatively reliable dividends on a regular basis.

That said, in our view, it is important to look beyond the yield. This is because companies generally set their dividend as a monetary amount.

Example:
If a company is paying £1 in annual dividends and its share price is £25, then its dividend yield is 4% (i.e. £1 / £25).

However, if the share price falls to £10 for whatever reason, the dividend yield is now 10%.

If this share price fall relates to something fundamentally weak with the company, then this may not bode well for the dividend, which the company may need to cut or suspend entirely in order to shore up its finances until conditions improve.

One key consideration is debt levels (also called gearing or leverage). Companies with higher levels of debt may struggle to keep paying a dividend over the long term, particularly if that debt is being used to pay the dividend. As interest rates rise, the debt may become much more expensive to service, which could put the dividend under pressure.

Each of our funds must make distributions every six months or more frequently (e.g. quarterly or monthly), so that we can pass these payments onto you on a regular basis, as needed. If you choose to withdraw the natural income from your investments, the amounts may fluctuate over time due to these differences in the distribution frequencies.

As well as paying a dividend, our blend of funds has the potential to deliver capital growth over the medium to long term.

Our Investment Services

We put you, and what you want your money to achieve, at the very heart of everything we do. The most important part of our investment philosophy is listening to your dreams and aspirations. Find out more about our investment services and see how our in-house Investment Team can help you.

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What is ESG investing?

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What is ESG Investing?

ESG investing is a criteria used to screen potential investments.

  • EnvironmentalAssessment of the impact companies are having on the planet today and in the future.
  • Social: Assessment of the social impact companies are having on people in the world.
  • Governance: Assessment of the structure, procedures and practices that control and direct a company.

Read more about ESG Investing and how we use ESG principles to screen our Socially Responsible Investment (SRI) funds.

How can I invest in green pensions?

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Sustainable investing is growing ever more popular due to the impact of climate change. Financial Advisor, Gary Davies, outlines the growing popularity and availability of investing in green pension funds.

Read more about Ethical Investing at Ellis Bates.

Ethical Investing

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By Kim Holding, Portfolio Manager

The world of ethical, responsible and sustainable investing is very fast moving and becoming increasingly complex. Not a day seems to go by without a new regulation or piece of legislation being proposed or enacted, to further promote sustainable practices, and hold businesses accountable for their impact on the environment and society.

How, then, can investors successfully navigate the landscape, and make sense of the information overload?

At Ellis Bates, our Investment Team has been managing Socially Responsible Investing (SRI) portfolios since 2008, demonstrating our deep roots in this area. To keep up to date with developments and filter out funds most worthy of our clients’ investment and trust, our investment process has naturally evolved over the years, more recently with the development of our SRI Framework. This Framework is a highly detailed tool that allows us to carry out an in-depth analysis on many factors including a fund’s alignment with the latest standards, investment philosophy, experience of the management team and engagement policies, to ensure the fund really is as ‘good’ as it says it is. As a living, breathing document, the Framework has undergone many developments and refinements since its implementation, and further revisions will be necessary as the landscape continues to evolve.

Utilising our Framework has allowed us to pinpoint several funds requiring further assessment. The most effective approach to clarify this information is to engage in discussions with the management teams – our well-established relationships with these teams significantly improves our access to valuable insights, enables constructive dialogues, and keeps us informed about their strategies and decision-making processes.

By way of illustration: this summer, our Framework brought attention to a fund in our SRI portfolios that exhibited notable exposure to UK water companies. Investors are no doubt aware that these companies have faced scrutiny in recent months due to their involvement in polluting rivers with sewage, and we recognise that addressing such negative environmental impacts is of utmost importance.

From our interactions with the fund’s management team, we established their beliefs and perspectives: a combination of events including outdated infrastructure (much of which dates to the Victorian era) and population growth (thus putting increased demand on this infrastructure) have contributed to these events. This can raise questions among observers as to why infrastructure dates back several decades, when investment in the industry has doubled since privatisation in 1989[1].

One area of criticism is that directors have allowed larger pay-outs to investors than on infrastructure investment. In economics, capitalism and socialism are opposing schools of thought: when capitalism is left unchecked, this can lead to inequalities and social injustices stemming from firms’ pursuit of profit. On the other hand, an anti-profit culture can result in a lack of dynamism in an economy, while failure by directors to make investor payments could violate their legal obligations under the Companies Act (which says, among other things, that they must act in shareholders’ best interests).

When capitalism or socialism is taken to an extreme, from an economic perspective, it can become necessary to restore balance. Indeed, water companies, regulators and government are responding positively to feedback from the Industry and Regulators Committee[2] who, following an investigation, have recommended measures to tackle these concerns. One example is providing new powers to regulator Ofwat, to closely monitor investment by the industry, and to hold firms to account[3].

Meanwhile, the fund’s management team is engaging with water companies to issue ‘use of proceeds’ blue bonds, where money raised is dedicated to specific projects such as upgrading infrastructure. The team – and we – continue to monitor the situation regarding pollution, while holding what they consider to be the most impactful names within the water sector, all of which should improve water security, and deliver better environmental and social outcomes.

We are reassured by the amount of time and research that the team has clearly dedicated to understanding this issue. Further, they have experience of engaging with companies on Environmental, Social and Governance (ESG) matters, thus fostering positive change and promoting sustainability.

Is it time to build a more ethical portfolio?

As awareness and interest in ESG factors continue to grow, the trend towards responsible investing will only strengthen. Starting a portfolio and filling it with environmentally, socially and governance-minded investments doesn’t need to be difficult. To find out more, please speak to us today.

Sources
[1] Ofwat, March 2022. Investment in the water industry. Retrieved from https://www.ofwat.gov.uk/investment-in-the-water-industry/ (Accessed: August 2023)
[2] UK Parliament, March 2023. Failures of regulators, water companies and Government leaving public and environment in the mire. Retrieved from https://committees.parliament.uk/committee/517/industry-and-regulators-committee/news/194330/failures-of-regulators-water-companies-and-government-leaving-public-and-environment-in-the-mire/ (Accessed: August 2023)
[3] GOV.UK, March 2023. Government supports new Ofwat powers to tackle water company dividends. Retrieved from https://www.gov.uk/government/news/government-supports-new-ofwat-powers-to-tackle-water-company-dividends (Accessed: August 2023)