HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

ADVISER KNOWHOW THE WEEKLY TV PROGRAMME FOR ADVISERS BY ADVISERS

The Bank of England has kept interest rates at record low levels for five years. However, as the recovery is picking up speed, it has become increasingly apparent that we are approaching the beginning of the end of ultra-low rates. But how should advisers prepare their clients’ portfolios for a rate hike?

ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

KEY POINTS

KEY POINTS FOR THIS WEEK’S ADVISER KNOWHOW FEATURING AN INTERVIEW WITH ANDREW MERRICKS, HEAD OF INVESTMENTS AT SKERRITTS CHARTERED FINANCIAL PLANNERS.

¬ Look beyond traditional long-duration gilt funds, which could be sensitive to an interest rate hike. Short-dated bonds are set to suffer less when rates go up.

¬ A larger proportion to equity income could be appropriate.

¬ Fixed income investors could face a capital loss if government bond yields go up, but fixed income is mainly about income and not capital gains.

¬ The last five years have been exceptional and expectations need to be monitored. Things have changed and what worked it the past 25 years may have to be revised.

¬ Proceed with caution and don’t overact, especially not to forecasts.

ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

PROGRAMME TRANSCRIPT

“Proceed with caution and don’t overreact to what may happen; don’t overreact to forecasts whether they’re doomster forecasts or optimistic forecasts.”Andrew Merricks, Head of Investments, Skerritts Chartered Financial Planners.

Max Skjönsberg, New Model Adviser®

The Bank of England has kept interest rates at record low levels for five years. However, as the recovery is picking up speed, it has become increasingly apparent that we are approaching the beginning of the end of ultra-low rates, but how should advisers prepare their clients portfolios for high rates? Let’s hear what some of them have to say.

What type of clients do you provide help for?

Darren Lloyd Thomas, Thomas and ThomasI think actually it could be some way off and the reason I say that is because in the US we know that the Federal Reserve is not looking to increase rates there until quarter four of this year which does sort of set the tone for the globe. In the UK, we’ve got something of a dichotomy going on, it’s a little bit like a mini Europe I suppose, essentially two different worlds. Inside the M25 we probably desperately do need an interest rate rise because we’ve got an overheating property market and things look good, but on the outside of the M25, the whole of the UK is actually a lot more sluggish.

Keith Penny, PennymattersAbsolutely no idea, I always think there are two types of investors in the world, those that know that they don’t know what’s coming in the future and those that don’t know that they don’t know and without having a crystal ball, I’m firmly in the former camp I think.

Have you taken any steps to position client’s portfolios ahead of a potential rise in interest rates?

Richard Hansell, Chetwood Wealth ManagementOver the last two years, we’ve been very mindful of the fact that rates will rise after historically low levels, down at 0.5% the Bank of England base rate, but we don’t know when it’s going to happen. A month ago the news was reporting that it may even be at the end of this year, but certainly it affects fixed income investors, fixed interest investing predominantly. So, the last two years we’ve been moving away from investing in pure guilt funds and longer duration investments and preparing certainly our lower risk client portfolios for a rise in interest rates, yes.

Keith Penny, PennymattersNot really, I think our portfolios are positioned for rising interest rates, but it’s not something that’s designed to be in place for rising interest rates as a permanent position, in our portfolios, we tend to hold short dated bonds which are precisely the sort of asset that will be harmed less when interest rates do go up, but we’re not calling that rise in interest rates. It’s purely a permanent position because typically speaking, shorter term bonds seem to work better in a portfolio.

Max Skjönsberg, New Model Adviser®

With me in the studio I’ve Andrew Merricks from Skerritts in Hove. So, Andrew, welcome, it is anyone’s guess

when rates will go up, when do you think?

Andrew Merricks, Head of Investments, Skerritts Chartered Financial Planners You’re right, it’s anyone’s guess, I’ve had a little wager internally at Skerritts, one of my co-managers thinks that rates will rise before Christmas, I’m an old cynic and I think that they’ll probably go up after the next election despite, of course, the Bank of England being independent from politics. I just think the government will really want to try to not see rates rise before the election.

Andrew, have you taken any steps to prepare your clients for the first hike?

We have to, again it was about a year ago wasn’t it that we first heard about tapering in the States, the first signs rates would be going up. We’re still talking about it, still waiting for it, I think you have to pay attention to it and so, we’d go lower duration, shorter duration, we’re probably increasing the equity income side of the portfolios.

It’s mainly for income investors that this could be a problem?

For income investors, rates rising, that should be a good thing at long last, but that’s where you have to be quite, we have to educate investors and their client’s as to expectations, bearing in mind in the bond market, bonds can only ever do one of two things, they either mature or default. If they don’t default they’ll mature and if they mature you’re

ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

going to get paid your coupon when it’s due. So, if you’re an income investor, the most important thing is to receive your income. Sure, but you could see a capital loss if the government bond yield starts to rise?

Absolutely and that’s where you need to explain to investors that if they’re in it for income, don’t worry too much about the capital falling because it will, it will fluctuate, we’ve got used to capital gain and income within income portfolios. That’s where bonds are going back to what they should be, which is boring, they don’t do a lot and they certainly don’t give you much in the way of capital return, but the last what, four years or so has been very different and expectations need to be monitored.

What’s your key message then to investors?

Proceed with caution and don’t overreact to what may happen, don’t overreact to forecasts whether they’re doomster forecasts or optimistic forecasts, change as you go because, if we learned anything over the last five or six years is that things are different, I know you’re not meant to say that things are different, but they have changed and the models that were formed in the previous 25, 30 years are being tested and they’re being revised and progress is quite slow. So, don’t make big calls, what was it Bill Gross said, was it 3

years ago. “Guilt’s are lying on a bed of nitro-glycerine.”

Bill Gross from Pimco?

Yes. Managers went short guilt’s, they got really burned by doing that. Yes, the old rules didn’t work in the new roles so, you need to adjust and amend as you go, but not taking any big bets either way I’d say.

Thank you very much Andrew.

You can download the crib sheet from this week’s edition at citywire.co.uk/adviserknowhow or bnymellonam.co.uk/adviserknowhow or you can find the link and add your views @AdviserKnowHow or Twitter.

“In the UK, we’ve got something of a dichotomy going on, it’s a little bit like a mini Europe I suppose, essentially two different worlds.”Darren Lloyd Thomas, Thomas and Thomas

ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

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ADVISER KNOWHOW EPISODE 68 2 MAY 2014 HOW TO PREPARE CLIENT PORTFOLIOS FOR RISING INTEREST RATES?

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VIDEO Past performance is not a guide to future performanceThe value of investments and the income from can fall as well as rise so you may get back less than you originally invested. This document is issued in collaboration with Citywire.For Professional Clients only. This is not intended as investment advice. Any views and opinions contained therein are those of the individual as at the date of issue, are subject to change, do not represent the views of BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA, formerly named BNY Mellon Asset Management International Limited) and should not be taken as investment advice. BNYMIM EMEA and its affiliates are not responsible for any subsequent investment advice given based on the information supplied. This video may not be used for the purpose of an offer or solicitation in any jurisdiction or in any circumstances in which such offer or solicitation is unlawful or not authorised. This video is issued in the UK and in mainland Europe (excluding Germany) by BNYMIM EMEA, BNY Mellon Centre, 160 Queen Victoria Street, London EC4V 4LA. Registered in England No. 1118580. Authorised and regulated by the Financial Conduct Authority. CP12032-05-05-2014(3M). Issued as at 05-02-2014

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