Emily Keenan

As the year draws to a close, 2024 truly has been the year of elections. This year, it was forecasted that more voters than ever, across 64 countries, would head to the polls to cast their votes on the future leadership of their countries[1].

The Presidential election in the US, as a significant global power and a dominant exposure in investors’ portfolios, naturally gathered a lot of attention. Donald Trump’s resounding victory saw him not only claim the White House but the coveted trifecta – the presidency plus both chambers of Congress (the House and the Senate). Regardless of one’s political or economic views, the world will be keeping a close eye on what comes next for the US.

In stock markets, investors are constantly casting their own ‘votes’ in anticipation of what they feel the future holds, some more optimistic, some more pessimistic. The aggregated view of all investors leads to a consensus in the form of the current market price. All known information has already been accounted for in today’s market prices, and these prices will only move further on the release of new information which is, by definition, random.

There are, of course, those that will disagree with today’s market price and try to reposition a portfolio to harness perceived opportunities. Unfortunately, the evidence suggests few possess any ability to do so successfully and consistently through time[2].

Diversification – that is, spreading eggs across baskets – is a central pillar to our investment philosophy. We ensure that diversification is not only achieved across countries but also within them. Exposure to any particular region, including the US, extends beyond the biggest companies in the market through the use of systematic tilts to smaller companies and value companies (those with low prices relative to their fundamental measures such as book value or sales).

Different areas of the market perform strongly at different times – unfortunately there is no way of knowing which will be next, in advance. In the US, the past decade has been dominated by large tech-based stocks. The next decade may be entirely different. Or it may not.

The ‘lost decade’ of 2000-2009 highlights this point well, known as a time period where the US stock market delivered little back to investors. The decade saw the S&P 500 deliver a period of negative returns, as highlighted in the chart below. The Dot-Com Crash of the early 00s, followed by the Global Financial Crisis meant for tough times.

That being said, it was not all doom and gloom. Those with incremental tilts to smaller and value companies benefitted from the diversification these exposures offered, as parts of the market that delivered materially positive returns. Those driven to omit large US companies from their portfolio on the basis of this poor performance would have missed out on the strong performance that has come to pass since.

Figure 1: The lost decade, where not all was lost

Source: Dimensional Returns web: US value: Fama/French US Value Research Index and US small: Fama/French US Small Cap Research Index. Morningstar: US equity: Vanguard U.S. 500 stk idx $ Acc. Returns in GBP.

Large US stocks are typically the dominant part of investors’ portfolios. The fact that this part of the market has delivered strong returns is therefore good news and has helped investors experience returns that lend well to being able to achieve one’s financial goals. Pining after more return on seeing strong stock market performance in regions such as the US is best avoided and can lead to wealth-destroying behaviour such as performance chasing.

No-one truly knows what the future holds. Keeping focused on the long-term, remaining diversified and having consistent exposure within each region continues to be the best line of defense – and provides the best opportunity – for whatever lies ahead.

Important Notes

This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.

Products Referred to in this Document 

Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.

[1] Time.com

[2] Albion’s latest GAME study highlights this point with only 3% of active managers managing to outperform their benchmark over the last 20 years. Albion Governance Update 28. Period of 20 years ending June 2024. Global equities asset class.

Another four years have flown by, and here we are again, on the morning of the 60th U.S. presidential election.

The U.S. president is often considered one of the world’s most powerful figures, wielding substantial influence over the world’s largest economy and one of its most formidable militaries, albeit limited by a system of checks and balances through Congress. Perhaps it is understandable that the media, politicians, celebrities and business owners alike wish to make their voice heard during campaign season… it is noisy time of year!

At the time of writing, the race remains extremely close. Former President Donald Trump is pursuing a second term for the Republicans, while Vice President Kamala Harris hopes to make history as the first female president for the Democrats. Polls and betting markets are sharply divided; predictive sources like The Economist and other major polls lean toward a Harris victory[1], yet many prominent bookmakers see Trump as the frontrunner[2].

It has been a roller coaster, what with President Biden’s withdrawal from the race, an assassination attempt that thankfully failed, Elon Musk coming in to bat for Trump and Taylor Swift for Harris, and the usual fierce partisanship from both sides. One way or another, we will soon wake to the news of the victor and the serving president for the next four years.

For investors, it is natural at times of political uncertainty to wonder whether they ought to act, perhaps altering their portfolio to position for a specific outcome, or to move money into cash deposits until things ‘settle down’. Some choose to invest this way, mostly at their peril, as very few managers possess the ability to consistently predict such events[1].

A better strategy, as is adopted in your portfolio, is to outsource this guesswork to the market itself, relying on the millions of daily participants to come up with their expectations and reflect them in prices. Thankfully, given both democrats and republicans support capitalism and believe in personal freedom and property rights, this strategy is a tried and tested approach to investing.

The chart below shows the Global equity market return over the last century or so, where the colours represent whether the sitting US president was Republican (red) or Democratic (blue) at the time. There is little to draw from the red and blue sections, both parties have resided over some fantastic periods, and some not so fantastic ones. However, the ability of capitalism to create wealth despite the ups and downs is evident, with $1 invested in 1926 becoming nearly $10,000 by 2024.

Figure 1: Democratic (blue) and Republican (red) Presidents and equity market returns

Source: Dimensional Returns. Index: Albion World Stock Market Index[1]. Date: 07/26-09/24. Returns in USD.

The challenge is that it is not enough to know what the outcome of this election will be, one also needs to know – without the benefit of hindsight – how the market will react once the event occurs. Would a Trump victory be good or bad for markets? What about a Harris win? Answering these questions is akin to guesswork, despite what some of the financial press might have us believe.

Whilst guessing against randomness is impossible, taking on the known risk that equity returns are far less certain than holding cash rewards investors who ignore this short-term noise and focus on the long-term.  The choice of the US President is important to some, but to the long-term investor it is largely irrelevant.

“He who lives by the crystal ball will eat shattered glass.”

Ray Dalio, CIO of Bridgewater Associates

Important Notes

This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.

Products Referred to in this Document 

Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.

[1] The Economist (2024). https://www.economist.com/interactive/us-2024-election/prediction-model/president

[2] Oddschecker – US Presidential Election. https://www.oddschecker.com/politics/us-politics/us-presidential-election/winner

[3] Albion GAME^TM 24.5 – 90% of US equity fund managers were beaten by the MSCI USA IMI Index 20Y to Jun-24.

[4] https://smartersuccess.net/indices

National Insurance 

On an employer level (class 1 NIs) the rate will increase from 13.8% to 15% from 6^th April 2025. This will apply on employee earnings above £5,000 (rather than £9,100 at present) with this level frozen until 6^th April 2028.

Employers with an NI bill of less than £100,000 can get £5,000 relief from the charge. From 6^th April 2025 this will be replaced by a flat £10,500 allowance for all businesses.

In practical terms this means a company will not pay class 1 NIs where the total remuneration bill is £75,000 or less.

Class 2 and Class 3 NI rates will also see changes from 6^th April 2025. The Lower Earnings Limit (LEL) and Small Profits Threshold (SPT) which underpin these rates will increase by 1.7% from 6^th April 2025.

Capital Gains Tax (CGT)

The rate of CGT will align with the rates currently applied to property. Effective immediately (and so on transactions from 30^th October), the rates will be:

• 18% for gains within the basic rate tax band (up from 10% currently)
• 24% for gains above the basic rate tax band (up from 20% currently)

There is to be no change to the annual exemption of £3,000.

Pensions 

Pension funds will become subject to Inheritance Tax (IHT) from 6^th April 2027. This will mean that funds left in a defined contribution pension on death will form part of the estate for IHT purposes.

For deaths after the age of 75, the income tax charge will continue to apply so funds being inherited in this way will potentially be subject to IHT, first, and income tax when accessed thereafter.

These changes do not affect Defined Benefit (DB) / Final Salary pensions in terms of the spouse/dependent pension provided on death. Lump sums paid out would potentially be subject to IHT, as would lump sums paid as part of a death-in-service plan.

Inheritance Tax (IHT)

The thresholds, allowances and tax rates are all unchanged. This means the Nil Rate Band (NRB) remains at £325,000 and the Residential Nil Rate Band (RNRB) at £175,000 unless tapering applies.

Business Relief (BR) and Agricultural Property Relief are being reformed with only the first £1 million being eligible (from 6^th April 2026) for full IHT relief. Amounts above £1 million are only relievable at 50% (which gives an effective IHT rate of 20% on these assets).

Shares in Alternative Investment Market (AIM) companies only receive IHT relief on 50% of the amount held (again from 6^th April 2026).

Pensions, as mentioned above, are brought into IHT from 6^th April 2027.

Tax and Saving Allowance 

All tax and saving allowances will remain frozen until 5^th April 2030. This means no changes to:

• Personal allowance
• Personal savings allowance
• Starter rate for savings allowance
• Dividend allowance
• CGT exemption
• ISA allowance
• LISA allowance
• JISA allowance

The British ISA will be scrapped.

General

The additional dwellings surcharge on Stamp Duty Land Tax (SDLT) will rise from 3% to 5% from 31^st October 2024.

Minimum wage increase from £11.44 to £12.21 from 6^th April 2025, and an increase from £8.60 to £10.00 for 18-20 as part of a plan to phase this rate with the main rate.

“Man has the hardest job of all, the job of making decisions on incomplete data.”

Henry Kuttner

When market returns are kind, as they have been in recent times, it can be too easy to forget that bad times in investing will come along at some stage, leading to large and/or protracted falls in value. We hope markets are kind, but without a crystal ball no investor possesses any ability to accurately forecast the ‘whats, whens and hows’ of such downturns.

As your adviser, part of our role is to stress test your financial plan – using what we understand about markets – to ensure that your ability to achieve your financial goals is built on reasonable expectations. We recognise that markets give and take.

One important element of planning for the future is building a reasonable understanding of what a portfolio of investments can deliver. We follow a logical framework to achieve this, illustrated in the graphic below. Following such a framework helps us form central case expectations of future returns. The words ‘central case’ are important here – these assumptions sit at the centre of a wide distribution of possible outcomes.

Figure 1: A logical framework for setting sensible expectations for investment returns

Source: Albion Strategic Consulting

To illustrate the point that returns from stock and bond markets are not expected to come in straight lines, consider the figure below. We take the average calendar year return of global stock markets[1] from the past 30 years (1994 to 2023) – which was an impressive 9.4%, before inflation – and the volatility (a measure of how bumpy the ride was) over the same period of 18%. The figure shows one hundred 10-year simulations with the same average return and same volatility as inputs – perhaps the futures of one hundred alternative universes!

Figure 2: One hundred 10-year return simulations, growth of 100,00

Source: Albion Strategic Consulting. One hundred 10-year Monte Carlo simulations using arithmetic average return of Albion World Stock Market Index (https://smartersuccess.net/indices) from 1994-2023 (9.4%) and standard deviation of annual returns (18%), priced in USD in nominal terms.

Ultimately, an investor won’t know which one of an infinite number of possible paths they are on until after the fact. This is why it is important to make sensible expectations about the future returns markets could deliver, and crucially meet with your adviser on a periodic basis to see which path markets could be taking.

During tough times, this might mean curtailing spending or saving more – part of the role of your financial planner is to advise if and when this might be necessary. The longer one remains invested, the greater the opportunity for shorter term noise to subside and longer term expected outcomes to prevail. A financial plan built on sensible assumptions and maintained through time gives investors the best chance of achieving their financial goals.

Important Notes

This is a purely educational document to discuss some general investment related issues. It does not in any way constitute investment advice or arranging investments. It is for information purposes only; any information contained within them is the opinion of the authors, which can change without notice. Past financial performance is no guarantee of future results.

Products Referred to in this Document

Where specific products are referred to in this document, it is solely to provide educational insight into the topic being discussed. Any analysis undertaken does not represent due diligence on or recommendation of any product under any circumstances and should not be construed as such.

By its very nature, the investing industry is full of differing views on how one ought to invest their hard-earned cash. One of the more polarising debates is whether an investment in gold, physically or synthetically via an investment fund, makes good sense. The debate tends to flare up each time gold experiences a rapid growth in value, such as in the last couple of years.

The Pros

Gold is believed to form during cataclysmic events like supernovae, when massive stars exhaust their fuel and explode, or during the collision of two neutron stars – ultra-dense remnants of supernovae. Due to its lustre and durability, gold has long been prized for jewellery; however, its uses go beyond being just a desirable accessory. It is an excellent conductor, highly malleable, stable at high temperatures and inert, meaning it does not rust. These properties make gold invaluable in industries like electronics, medicine, and aerospace.

Perhaps it is no wonder that humanity has coveted gold for well over 6,500 years[1]. This enduring demand is where the value of gold comes from, and its attractiveness to investors. One impressive quality of gold is that it has retained purchasing power across the centuries. For example, in gold terms a Roman centurion of 2,000 or so years ago was paid broadly the same as a US army captain today[2]. It is this that leads some to propose physical gold as a long-term hedge against the collapse of fiat currency and global capital markets.

Other positives are that gold offers uncorrelated returns to traditional assets such as bonds and equities, providing potential diversification benefits. Unlike many investment opportunities, gold is a relatively simple concept – being a lump of metal with a market value – and is easily accessed via physical purchase or low-cost open-end funds.

The Cons 

As a commodity, gold prices are simply a function of supply and demand. Investors in gold assume that others will desire it even more avidly in the future, with each new buyer hoping that others will follow. If this sounds quite speculative, it’s because it is!

Estimating what to expect from an investment in gold, even over extended periods, is a difficult task. Unlike traditional asset classes, gold produces no income stream[1], it does not pay dividends and usually costs owners to store and insure it. As a result, many assume its long term expected return to sit somewhere near cash, which is underwhelming from a growth perspective compared to sensible alternatives.

The chart below shows the increase in value of 1 ounce of gold from 1926 to August 2024, rising from around $20 to just over $2,500. Investing the same $20 in global equities during this period would have delivered a substantially superior outcome, nearly 50 times the cumulative gain. It’s also important to note that this time frame includes extended periods where government policies, such as the Bretton Woods Agreement, influenced gold prices.

Figure 1: Annual gold spot prices against global equities: 1926-2024

Data Source: Gold.org. Inflation: US CPI. Albion World Stock Market Index. https://smartersuccess.net/indices 

As an Armageddon hedge, investors face a dilemma. Due to its bulk, weight, and the associated costs of storage and management, many opt for synthetic products like gold-backed funds or ETFs instead of owning the metal directly. If the goal is to hedge against a collapse of the financial system, relying on that system to achieve exposure to gold makes little sense. Owning physical gold comes with its own challenges too, such as storage and risk of theft.

Gold proponents may point to inflation hedging as the main attraction, but the evidence is unconvincing. While gold has maintained its value over millennia, across more useful time horizons to investors the results are less impressive. The table below shows that, after inflation in USD terms, gold has yet to get back to its February 1980 high nearly 45-years ago. It also suffered an 83% fall in value over the subsequent two decades – hardly a reliable inflation hedge!

Table 1: Real gold price declines 

Data Source: Gold.org. Inflation: US CPI.

The Portfolio

Like any investing decision, gold has its pros and cons. Assessing whether it belongs in your investment portfolio is the job of our investment committee. Each asset class must fill a specific role in your portfolio and is weighed up against the alternatives. Gold has some favorable characteristics, but you must take something out to put another thing in. Superior options exist, such as shorter-dated high-quality bonds and inflation-linked bonds on the defensive side and developed and emerging market equity as well as commercial property on the growth side.

Table 2: Assessing the role of gold in your portfolio 

As Warren Buffet succinctly puts it:

“If you own one ounce of gold for eternity, you will still only own one ounce at its end.”

(Warren Buffet, 2012)

Risk Warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. 

[1] Whilst gold itself does not produce an income stream, financial institutions may try and claw back some of the storage costs through gold lending revenues.

[1] Smithsonian (2016) https://www.smithsonianmag.com/…

[2] Erb, Claude B. and Harvey, Campbell R., The Golden Dilemma (May 4, 2013). Available at SSRN: http://ssrn.com/abstract=2078535 or http://dx.doi.org/10.2139/ssrn.2078535

Rebalancing is the practice of realigning the components of a portfolio of investments back to a target allocation from which it has drifted away. Naturally, the process is a contrarian and results in selling the things that have done well and buying more of what has done less well. To some, this may feel painful, but it is good practice and sensible behaviour your adviser can certainly support you with.

Left unrebalanced, a portfolio comprising 60% global equities (‘growth assets’) and 40% short-dated global bonds (‘defensive assets’) would have drifted to nearly 80% in growth assets over the past 10 years. This is a material change in risk exposure.

Figure 1: Drift in growth/defensive asset exposure of 60/40 portfolio from Sept-14 to Aug-24

Source: Albion Strategic Consulting. Data Source: Morningstar Direct © Growth Assets: Vanguard Total World Stock Index Fund Admiral VTWAX, Defensive Assets: Vanguard Global Short-Term Bond Index Fund VGSTBGA. Monthly returns in GBP. 

The figure above illustrates the primary need for rebalancing i.e., to prevent unwanted asset allocation drift. Evidence supports that this is the main role of rebalancing[1]. It is a process which encourages good investor behaviour and helps one avoid falling foul of biases. Rebalancing helps systematic investors maintain a well-diversified solution through time, enabling them to benefit from exposures to imperfectly correlated assets.

“Investors hoping to profit in the short-term from rebalancing trades face certain long-run disappointment. The fundamental purpose of rebalancing lies in controlling risk, not enhancing return.”

David F. Swensen, Pioneering Portfolio Management (2000)

Figure 2: The process of rebalancing requires selling what has performed best.

Source: Albion Strategic Consulting 

In some cases, contributions to and withdrawals from your portfolio can be used to nudge the allocation towards the target to keep risk in line. Keeping a watch on how far your portfolio drifts from its target is something your adviser will help with. At times of market turmoil, the issue of a potential rebalance may be considered – in order to realign risk – and don’t be surprised if we raise this with you at such a time.

Do you really need to rebalance? The answer for most investors is likely to be ‘yes’ when the time comes. If we feel a rebalance is necessary, we will be in touch to discuss this with you.

Risk Warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particular security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated. 

[1] E.g. Albion, (October 2023). ‘Governance Update 26: Assessing rebalancing strategies’

It is a simple statement that the decision to invest in the first place provides an opportunity to protect hard earned savings from inflation, and perhaps grow further. It is not easy, however, to have the foresight, as well as the discipline to deny oneself spending today for the opportunity of a better tomorrow. It is also not easy to work out how much one might want, need and be able to invest in stock markets to help fund future spending goals. Getting this right is key and where good financial advisers can add value.

It is simple that stock markets act as a core driver of returns in an investor’s portfolio, and that a good place to start for stocks is the structure of the global markets, which defines the basic country, sector and company weights and offers broad diversification.

It is also simple that high quality bonds act as protection from economic turmoil and help to smooth returns.

It is, however, not easy to know what evidence to look for in order to gain an understanding about what types of long-term investments typically improve a portfolio’s structure. This comes with the need to build an understanding of the risks one wants to be exposed to through time.

It is also not easy to decide which bonds are deemed to be defensive enough in nature to be considered an insurance policy against the uncertainty inherent in stock markets.

Finally, it is a simple concept that a low-cost fund structured to capture the target strategy gives investors a better chance of achieving their investing goals relative to a high-cost one.

It is, however, not easy to regularly screen for which funds might be best positioned to capture the returns of each part of the market, or to understand the trade-off between the management costs of a fund and the opportunity cost (i.e. what could have been) of omitting an investment. It is harder still to implement a thorough and regular investment oversight process, which is required to maintain confidence in the approach.

Figure 1: Investing can be simple, but that does not mean it is easy to do

Source: Albion Strategic Consulting

We can consider a simple formula to describe what we expect from an investment outcome, shown in the figure below.

Figure 2: A simple formula to describe an investing outcome

Source: Albion Strategic Consulting

Starting with taking on sensible risks, such as owning a diversified portfolio of investments, we expect a market rate of return.

Depending on how different a portfolio is to the broad market, the portfolio return will come in higher or lower than that of the market. This is what is known in the investment industry as ‘alpha.’

To achieve a return above that of the market portfolio (a positive alpha) an investor must own a portfolio of stocks and bonds that returns higher than the corresponding market. This can be done through picking stocks, timing markets – neither of which are expected to deliver reliably positive outcomes – or it can be more reliably achieved by overweighting areas of the market the academic evidence would suggest reward investors for owning them over the long term, such as tilting to value and smaller companies.

Next, the financial cost of accessing the desired solution is taken away from the outcome achieved. Controlling financial costs makes good sense.

Finally, there is also a cost associated with bad investing behaviour, such as falling foul to biases, illusions or acting on inadequate information. Good process and discipline, as well as having a good financial adviser for additional support, can ensure such a cost is eliminated.

Investing using a well thought-out, evidence-based and systematic investment process helps to reduce the emotional pressures involved and deliver investors with the highest probability of a successful investment outcome. It does not guarantee that the outcome will always be favourable; it cannot, given the uncertainty of the markets. What it does do is to help us make strong, rational decisions and to avoid the silly mistakes that prove to be so costly, so often. In particular, chasing markets and managers in search of market-beating returns and being sucked into the latest investment fad by recent trends, plausible marketing stories and press coverage. Bad process, or a lack of process, has an upside outcome that is down to luck rather than judgement.

Wise words to leave you with:

Perhaps reflect a while on these wise words written by Charles D. Ellis on his excellent book ‘Winning the Loser’s Game’ (Ellis, 2002):

“The hardest work in investing is not intellectual, it’s emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus at market highs or market lows and staying committed to a sound investment policy. Holding on to sound investment policy at market highs and market lows is notoriously hard and important work, particularly when Mr. Market always tries to trick you into making changes.”

Simple but not easy. A systematic process and a guiding hand from your adviser are the keys to success.

Risk Warnings

This article is distributed for educational purposes only and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily the Firm and does not represent a recommendation of any particularly security, strategy, or investment product. Reference to specific products is made only to help make educational points and does not constitute any form or recommendation or advice. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.