An Invitation to Our Wealth · PDF fileThis is akin to the reluctance of a person to accept a...
Transcript of An Invitation to Our Wealth · PDF fileThis is akin to the reluctance of a person to accept a...
January 2016
LE
TT
ER
N
ew
s
The Premier Partnership Limited Your Family Office
wwwpremierpartnershipcouk
We would like to start our New
Yearrsquos Newsletter with an invite
The Premier
Partnership Limited
Annual Wealth and Tax
Planning Symposium
Shortly after the Budget on 16
March we will be holding our
inaugural Wealth and Taxation
Symposium and would very much
like you our clients and our
professional connections to attend
In order to organise the correct
venue we need to have an idea of
the number of attendees Once we
know how many people will be
attending we can confirm exact
dates and times
We realise that for many knowing
the date and time will be crucial to
whether you can attend so we only
need an idea at present whether the
content of our symposium will
appeal and whether you may
attend so no commitment at this
stage just an idea
If you would like to register your interest in the first instance please contact Lewis Daniels here in the office or register via our website where Aaron has created some easy voting buttons for you It will be our intention to provide for you guest speakers from the world of taxation fund management legal and estate planning as well as our own contributions which will give you the opportunity to meet the staff as well Dependent upon timing suitable
refreshments will be served giving
everyone the opportunity to socialise
and meet old friends
So register now and we will confirm
the details as soon as possible We
look forward to seeing you then
Happy New Year
An Invitation to Our Wealth Symposium
Behavioural finance is in academic terms a
relatively new subject that really only started in
earnest in the 1950rsquos As a science it deals with the
ways in which behavioural issues can affect the
investment process because if these inhibiting
factors are not dealt with they can impair the final
investment decisions Behavioural finance is
focussed on seven or eight core theories although
Wikipedia list 91 cognitive biases and I shall
attempt to explain some of these in this article So
you can ideally make good rational decisions
understanding the pitfalls going forward
The two main types of behavioural biases
Cognitive Biases based on errors of perception
memory judgement or reasoning
Emotional The tendency to believe things that
give us a good feeling and disbelieve things that
make us feel uncomfortable
Why do they matter Well human beings exhibit
particular inherent errors in thinking when we
process information These errors are as result of
genetic predisposition that has arisen over time as
humans have evolved
The most common of the behavioural factors
are
Anchoring Becoming fixed on previous
information and using that information to make
investment decisions that are no longer
appropriate
Confirmation Allowing your preconceived
opinion to drive your analysis of an investment
Herd Behaviour The tendency to follow the
actions of a larger group of people because you
think that they must know something that you
donrsquot
Overconfidence The belief that you are better at
choosing investments than others
Prospect theory A loss hurts more than any
pleasure you take from an equivalent gain
Loss Aversion Refers to peoplersquos tendency to
strongly prefer avoiding losses to acquiring
gains Most studies suggest that losses are
twice as powerful psychologically as gains
An example of loss aversion is the TV game Deal or
No Deal
This is akin to the reluctance of a
person to accept a bargain with an
uncertain payoff rather than another
bargain with a more certain but lower
payoff For example A loss averse
investor might choose to put their
money into a bank account with a
very low but known rate of interest
rather than an investment that may
have the potential for higher expected
returns but also involves the chance
of losing value
The last couple of decades have
witnessed great advances in our
understanding of human behaviour
and decision making processes to
the extent that the UK Government
now has a behavioural finance unit
Many of these biases are counter
intuitive in that they often fly in the
face of what we have traditionally
believed influences an individualrsquos
decision making process Retailers
often use another behavioural bias
known as framing For example ldquoAt
pound350 the cost is less than pound1 per
dayrdquo
The purchase item is lsquoframedrsquo at a
cost the buyer will find attractive
Another well know retailer use of
behavioural bias is the use of
confirmation bias This is where an
advert offers you a lsquoCanrsquot miss
investmentrsquo a lsquoOnce in a lifetime
opportunityrsquo or the even more
overused DFS saying lsquoDiscounts
finish Sundayrsquo (and start again
Monday) All are examples of
confirmation bias We like to think we
all carefully gather and evaluate data
before coming to a conclusion ndash But
we donrsquot Instead confirmation bias
makes us reach the conclusion first
Only thereafter do we evaluate the
facts to see if those facts support our
pre-conceived conclusions Optimism
bias is another well-established
theme where we are only correct
80 of the time that we are lsquo99
surersquo and all the men are good
looking women are strong and all
children are above average
The most often one we see in the
investment world is probably
lsquoRecency Biasrsquo The recency bias
convinces us that our recent
experiences are the baseline for the
future In many situations this may
work fine but in financial markets it
can spell disaster
When we are watching investment
values rise we forget about the times
when values fell As far as recent
memory tells us the market should
keep going up ndash so we invest more
However the market then falls in
value and we all become
disappointed wondering why did we
not see this coming When the market
is down and is plumbing the depths
of very low values we know the
market is never going to go back up ndash
because recency bias tells us so The
effect is that portfolios are encashed
at the wrong time the money put
under the mattress and when the
markets and values do rise again we
are left laying on a very expensive
mattress thatrsquos earning nothing
Another word for mattress is a bank
Finally the herding bias is self-
explanatory and is where a group of
individuals can act collectively without
centralised direction Sporting events
religious gatherings episodes of mob
violence and generally Hedgefund
managers are all examples of the
herding bias
Behavioural biases affect us all We
are surrounded by them and respond
to them every day in our normal lives
Understanding and addressing them
particularly in the financial world can
bring a major source of added value
and a properly planned financial
framework can help address biases
and create better returns Paying
attention to your portfolio on a day to
day basis is damaging to onersquos
financial wellbeing and leaves you
open to behavioural biases So agree
a plan set objectives and then
scrupulously avoid reading or
watching financial news articles And
of course leave it to your advisers
Do you know what algorithms
or Fibonacci numbers are
No Well l am not surprised
Although these are not new
words in financial circles we
see more and more such
jargon appearing in the
financial press on a daily
basis For your assistance
here is a little explanation
Fibonacci Numbers
You have probably heard of
Leonardo Da Vinci (born in Vinci
ndash a region of Florence) but you
have probably never heard of
Leonardo Da Pisa or to give him
his real name Leonardo Pisano
a mathematician born in Pisa
around 1175 Leonardorsquos father
Guglielmo Bonacci was a
customs officer and little
Leonardo travelled extensively
with his father around the
Mediterranean coast Here he
met many merchants who used
the lsquoHindu-Arabicrsquo system of
mathematics which was to
provide him with his lifersquos work
Fibonacci is a shortening of the
Latin lsquoFilius Bonaccirsquo used in the
title of his book Liber Abaci ndash
which means the son of Bonacci
It was in this book in 1202 that he
introduced the concept of the
Fibonacci sequence of numbers
In its simplest format the
Fibonacci sequence describes a
sequence of numbers where
each number is the sum of the
previous two numbers
So you have 1 plus 1 equalling 2
then 1 plus 2 equalling 3 the 2
plus 3 equalling 5 and so on
The initial sequence is
1 1 2 3 5 8 13 21 34 55 89
So we have a set of numbers
The truth is this sequence has
become so prevalent in the
financial world that many fund
managers and traders regularly
check what are known as
lsquoFibonacci Retracement
Levelsrsquo (FRL) to see if there is a
significant number offering
support or resistance to the price
level of an index or equity The
most popular FRL are marked at
618 and 382 of the
difference between the high and
the low of the asset you are
looking at If the price of the
asset retraces to one of these
levels then many fund managers
see this as an indication that the
price is going to reverse in
direction But these numbers are
not only used in finance The
Greeks used them to build their
fantastic buildings and believe it
or not a sequence known as the
Golden Rectangle appears in the
painting of the Mona Lisa
Liber Abaci translates as the
book of calculations and these
numbers and sequences now
drive many of the Algorithms
(see article) used by Hedgefund
managers and traders in Global
stockmarkets and are said by
many to be the cause of the
volatility we now witness in
stockmarkets due to the
automated nature of global
trading where the herd
behavioural bias rules Fibonacci
numbers also appear in plants
and flowers Check out
Sunflowers that clearly have 55
spirals going right on their outer
ring and 34 spirals of seeds
going left on the inner ring If you
divide a Fibonacci number by the
one before it the ratios produce
the golden number or ratio
1618034 well known to fans of
Albert Einstein Mozart also used
Fibonacci sequences in his
music as does Stephen Hawking
in his Black Hole calculations
So whilst you may not have
heard of them until now a bit
like behavioural biases they
are indeed all around you
Jargon
OK so letrsquos start again with a
definition
An Algorithm is a procedure or
formula for solving a problem
The word derives from the name of
the mathematician Mohammed Ibn-
Mus Al-Khwarizmi (780 ndash 850AD)
whose work was the source and
identification of Algebra
Algorithms have boomed in the last
50 years particularly with their use
in the financial world and largely
due to the exponential growth in
computer power The enigma
machine used during early World
War 2 to create encrypted
messages is an early example of
the use of Algorithms The
subsequent rsquoturning machinersquo that
deciphered the Enigma Codes was
created using Algorithms and is
known as the forerunner of modern
computers Algorithms are a well-
defined process or formula that are
followed to achieve a desired result
or expected outcome Perhaps you
may now see how these could be
extremely useful in investment
markets
As technology has progressed
Algorithms have become much
more sophisticated performing
millions (even billions) of
instructions per second Modern
Algorithms now adapt to the
constantly changing world of
financial markets creating trading
patterns using buy and sell
instructions that are used by banks
and stock exchanges across the
globe This technological
globalisation has considerably
reduced costs and increased
efficiency for investors making it
possible to trade stocks at the click
of your mouse Algorithms are
frequently used in passive
investment strategies because of
the match between the well defined
asset of the passive index and the
well defined process of the
Algorithm This can drive
investment managerrsquos tactical asset
allocation strategies giving optimal
asset allocations from an
optimization process Algorithms
can also drive diversity in portfolios
ensuring asset allocations are
maintained by constant rebalancing
of assets again to achieve optimal
returns (see article) It is not only
the financial world that uses
Algorithms dating sites and loan
companies also find them most
useful
In model portfolios Algorithms are
used to create asset allocations
driven by a systematically applied
mathematical model which takes
out of the equation the
lsquosubjectivenessrsquo of an individual
fund managerrsquos decisions In
essence this is the difference
between lsquoActiversquo ndash where an
individual or team of individuals
decide on an allocation process
and select and buy separate
investments on behalf of the
investors and lsquoPassiversquo where the
Algorithms rule and apply their
mathematical formulas in their
portfolios to achieve their expected
returns This lsquopassiversquo approach
removes human biases and
emotions in investment decisions
As a result of the big reductions in
the costs of investing due to the
creation of passive investments a
growing number of new investment
solutions are arriving that provide
investors with greater choice than
ever before for their portfolios -
Totally Active (which generally have
higher charges) or Totally Passive
(which tend to have the lowest
ongoing fees) or a mixture of both
Algorithms
There is no one definitive
solution but your adviser will
help guide you to the one that
it right for you
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
Behavioural finance is in academic terms a
relatively new subject that really only started in
earnest in the 1950rsquos As a science it deals with the
ways in which behavioural issues can affect the
investment process because if these inhibiting
factors are not dealt with they can impair the final
investment decisions Behavioural finance is
focussed on seven or eight core theories although
Wikipedia list 91 cognitive biases and I shall
attempt to explain some of these in this article So
you can ideally make good rational decisions
understanding the pitfalls going forward
The two main types of behavioural biases
Cognitive Biases based on errors of perception
memory judgement or reasoning
Emotional The tendency to believe things that
give us a good feeling and disbelieve things that
make us feel uncomfortable
Why do they matter Well human beings exhibit
particular inherent errors in thinking when we
process information These errors are as result of
genetic predisposition that has arisen over time as
humans have evolved
The most common of the behavioural factors
are
Anchoring Becoming fixed on previous
information and using that information to make
investment decisions that are no longer
appropriate
Confirmation Allowing your preconceived
opinion to drive your analysis of an investment
Herd Behaviour The tendency to follow the
actions of a larger group of people because you
think that they must know something that you
donrsquot
Overconfidence The belief that you are better at
choosing investments than others
Prospect theory A loss hurts more than any
pleasure you take from an equivalent gain
Loss Aversion Refers to peoplersquos tendency to
strongly prefer avoiding losses to acquiring
gains Most studies suggest that losses are
twice as powerful psychologically as gains
An example of loss aversion is the TV game Deal or
No Deal
This is akin to the reluctance of a
person to accept a bargain with an
uncertain payoff rather than another
bargain with a more certain but lower
payoff For example A loss averse
investor might choose to put their
money into a bank account with a
very low but known rate of interest
rather than an investment that may
have the potential for higher expected
returns but also involves the chance
of losing value
The last couple of decades have
witnessed great advances in our
understanding of human behaviour
and decision making processes to
the extent that the UK Government
now has a behavioural finance unit
Many of these biases are counter
intuitive in that they often fly in the
face of what we have traditionally
believed influences an individualrsquos
decision making process Retailers
often use another behavioural bias
known as framing For example ldquoAt
pound350 the cost is less than pound1 per
dayrdquo
The purchase item is lsquoframedrsquo at a
cost the buyer will find attractive
Another well know retailer use of
behavioural bias is the use of
confirmation bias This is where an
advert offers you a lsquoCanrsquot miss
investmentrsquo a lsquoOnce in a lifetime
opportunityrsquo or the even more
overused DFS saying lsquoDiscounts
finish Sundayrsquo (and start again
Monday) All are examples of
confirmation bias We like to think we
all carefully gather and evaluate data
before coming to a conclusion ndash But
we donrsquot Instead confirmation bias
makes us reach the conclusion first
Only thereafter do we evaluate the
facts to see if those facts support our
pre-conceived conclusions Optimism
bias is another well-established
theme where we are only correct
80 of the time that we are lsquo99
surersquo and all the men are good
looking women are strong and all
children are above average
The most often one we see in the
investment world is probably
lsquoRecency Biasrsquo The recency bias
convinces us that our recent
experiences are the baseline for the
future In many situations this may
work fine but in financial markets it
can spell disaster
When we are watching investment
values rise we forget about the times
when values fell As far as recent
memory tells us the market should
keep going up ndash so we invest more
However the market then falls in
value and we all become
disappointed wondering why did we
not see this coming When the market
is down and is plumbing the depths
of very low values we know the
market is never going to go back up ndash
because recency bias tells us so The
effect is that portfolios are encashed
at the wrong time the money put
under the mattress and when the
markets and values do rise again we
are left laying on a very expensive
mattress thatrsquos earning nothing
Another word for mattress is a bank
Finally the herding bias is self-
explanatory and is where a group of
individuals can act collectively without
centralised direction Sporting events
religious gatherings episodes of mob
violence and generally Hedgefund
managers are all examples of the
herding bias
Behavioural biases affect us all We
are surrounded by them and respond
to them every day in our normal lives
Understanding and addressing them
particularly in the financial world can
bring a major source of added value
and a properly planned financial
framework can help address biases
and create better returns Paying
attention to your portfolio on a day to
day basis is damaging to onersquos
financial wellbeing and leaves you
open to behavioural biases So agree
a plan set objectives and then
scrupulously avoid reading or
watching financial news articles And
of course leave it to your advisers
Do you know what algorithms
or Fibonacci numbers are
No Well l am not surprised
Although these are not new
words in financial circles we
see more and more such
jargon appearing in the
financial press on a daily
basis For your assistance
here is a little explanation
Fibonacci Numbers
You have probably heard of
Leonardo Da Vinci (born in Vinci
ndash a region of Florence) but you
have probably never heard of
Leonardo Da Pisa or to give him
his real name Leonardo Pisano
a mathematician born in Pisa
around 1175 Leonardorsquos father
Guglielmo Bonacci was a
customs officer and little
Leonardo travelled extensively
with his father around the
Mediterranean coast Here he
met many merchants who used
the lsquoHindu-Arabicrsquo system of
mathematics which was to
provide him with his lifersquos work
Fibonacci is a shortening of the
Latin lsquoFilius Bonaccirsquo used in the
title of his book Liber Abaci ndash
which means the son of Bonacci
It was in this book in 1202 that he
introduced the concept of the
Fibonacci sequence of numbers
In its simplest format the
Fibonacci sequence describes a
sequence of numbers where
each number is the sum of the
previous two numbers
So you have 1 plus 1 equalling 2
then 1 plus 2 equalling 3 the 2
plus 3 equalling 5 and so on
The initial sequence is
1 1 2 3 5 8 13 21 34 55 89
So we have a set of numbers
The truth is this sequence has
become so prevalent in the
financial world that many fund
managers and traders regularly
check what are known as
lsquoFibonacci Retracement
Levelsrsquo (FRL) to see if there is a
significant number offering
support or resistance to the price
level of an index or equity The
most popular FRL are marked at
618 and 382 of the
difference between the high and
the low of the asset you are
looking at If the price of the
asset retraces to one of these
levels then many fund managers
see this as an indication that the
price is going to reverse in
direction But these numbers are
not only used in finance The
Greeks used them to build their
fantastic buildings and believe it
or not a sequence known as the
Golden Rectangle appears in the
painting of the Mona Lisa
Liber Abaci translates as the
book of calculations and these
numbers and sequences now
drive many of the Algorithms
(see article) used by Hedgefund
managers and traders in Global
stockmarkets and are said by
many to be the cause of the
volatility we now witness in
stockmarkets due to the
automated nature of global
trading where the herd
behavioural bias rules Fibonacci
numbers also appear in plants
and flowers Check out
Sunflowers that clearly have 55
spirals going right on their outer
ring and 34 spirals of seeds
going left on the inner ring If you
divide a Fibonacci number by the
one before it the ratios produce
the golden number or ratio
1618034 well known to fans of
Albert Einstein Mozart also used
Fibonacci sequences in his
music as does Stephen Hawking
in his Black Hole calculations
So whilst you may not have
heard of them until now a bit
like behavioural biases they
are indeed all around you
Jargon
OK so letrsquos start again with a
definition
An Algorithm is a procedure or
formula for solving a problem
The word derives from the name of
the mathematician Mohammed Ibn-
Mus Al-Khwarizmi (780 ndash 850AD)
whose work was the source and
identification of Algebra
Algorithms have boomed in the last
50 years particularly with their use
in the financial world and largely
due to the exponential growth in
computer power The enigma
machine used during early World
War 2 to create encrypted
messages is an early example of
the use of Algorithms The
subsequent rsquoturning machinersquo that
deciphered the Enigma Codes was
created using Algorithms and is
known as the forerunner of modern
computers Algorithms are a well-
defined process or formula that are
followed to achieve a desired result
or expected outcome Perhaps you
may now see how these could be
extremely useful in investment
markets
As technology has progressed
Algorithms have become much
more sophisticated performing
millions (even billions) of
instructions per second Modern
Algorithms now adapt to the
constantly changing world of
financial markets creating trading
patterns using buy and sell
instructions that are used by banks
and stock exchanges across the
globe This technological
globalisation has considerably
reduced costs and increased
efficiency for investors making it
possible to trade stocks at the click
of your mouse Algorithms are
frequently used in passive
investment strategies because of
the match between the well defined
asset of the passive index and the
well defined process of the
Algorithm This can drive
investment managerrsquos tactical asset
allocation strategies giving optimal
asset allocations from an
optimization process Algorithms
can also drive diversity in portfolios
ensuring asset allocations are
maintained by constant rebalancing
of assets again to achieve optimal
returns (see article) It is not only
the financial world that uses
Algorithms dating sites and loan
companies also find them most
useful
In model portfolios Algorithms are
used to create asset allocations
driven by a systematically applied
mathematical model which takes
out of the equation the
lsquosubjectivenessrsquo of an individual
fund managerrsquos decisions In
essence this is the difference
between lsquoActiversquo ndash where an
individual or team of individuals
decide on an allocation process
and select and buy separate
investments on behalf of the
investors and lsquoPassiversquo where the
Algorithms rule and apply their
mathematical formulas in their
portfolios to achieve their expected
returns This lsquopassiversquo approach
removes human biases and
emotions in investment decisions
As a result of the big reductions in
the costs of investing due to the
creation of passive investments a
growing number of new investment
solutions are arriving that provide
investors with greater choice than
ever before for their portfolios -
Totally Active (which generally have
higher charges) or Totally Passive
(which tend to have the lowest
ongoing fees) or a mixture of both
Algorithms
There is no one definitive
solution but your adviser will
help guide you to the one that
it right for you
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
This is akin to the reluctance of a
person to accept a bargain with an
uncertain payoff rather than another
bargain with a more certain but lower
payoff For example A loss averse
investor might choose to put their
money into a bank account with a
very low but known rate of interest
rather than an investment that may
have the potential for higher expected
returns but also involves the chance
of losing value
The last couple of decades have
witnessed great advances in our
understanding of human behaviour
and decision making processes to
the extent that the UK Government
now has a behavioural finance unit
Many of these biases are counter
intuitive in that they often fly in the
face of what we have traditionally
believed influences an individualrsquos
decision making process Retailers
often use another behavioural bias
known as framing For example ldquoAt
pound350 the cost is less than pound1 per
dayrdquo
The purchase item is lsquoframedrsquo at a
cost the buyer will find attractive
Another well know retailer use of
behavioural bias is the use of
confirmation bias This is where an
advert offers you a lsquoCanrsquot miss
investmentrsquo a lsquoOnce in a lifetime
opportunityrsquo or the even more
overused DFS saying lsquoDiscounts
finish Sundayrsquo (and start again
Monday) All are examples of
confirmation bias We like to think we
all carefully gather and evaluate data
before coming to a conclusion ndash But
we donrsquot Instead confirmation bias
makes us reach the conclusion first
Only thereafter do we evaluate the
facts to see if those facts support our
pre-conceived conclusions Optimism
bias is another well-established
theme where we are only correct
80 of the time that we are lsquo99
surersquo and all the men are good
looking women are strong and all
children are above average
The most often one we see in the
investment world is probably
lsquoRecency Biasrsquo The recency bias
convinces us that our recent
experiences are the baseline for the
future In many situations this may
work fine but in financial markets it
can spell disaster
When we are watching investment
values rise we forget about the times
when values fell As far as recent
memory tells us the market should
keep going up ndash so we invest more
However the market then falls in
value and we all become
disappointed wondering why did we
not see this coming When the market
is down and is plumbing the depths
of very low values we know the
market is never going to go back up ndash
because recency bias tells us so The
effect is that portfolios are encashed
at the wrong time the money put
under the mattress and when the
markets and values do rise again we
are left laying on a very expensive
mattress thatrsquos earning nothing
Another word for mattress is a bank
Finally the herding bias is self-
explanatory and is where a group of
individuals can act collectively without
centralised direction Sporting events
religious gatherings episodes of mob
violence and generally Hedgefund
managers are all examples of the
herding bias
Behavioural biases affect us all We
are surrounded by them and respond
to them every day in our normal lives
Understanding and addressing them
particularly in the financial world can
bring a major source of added value
and a properly planned financial
framework can help address biases
and create better returns Paying
attention to your portfolio on a day to
day basis is damaging to onersquos
financial wellbeing and leaves you
open to behavioural biases So agree
a plan set objectives and then
scrupulously avoid reading or
watching financial news articles And
of course leave it to your advisers
Do you know what algorithms
or Fibonacci numbers are
No Well l am not surprised
Although these are not new
words in financial circles we
see more and more such
jargon appearing in the
financial press on a daily
basis For your assistance
here is a little explanation
Fibonacci Numbers
You have probably heard of
Leonardo Da Vinci (born in Vinci
ndash a region of Florence) but you
have probably never heard of
Leonardo Da Pisa or to give him
his real name Leonardo Pisano
a mathematician born in Pisa
around 1175 Leonardorsquos father
Guglielmo Bonacci was a
customs officer and little
Leonardo travelled extensively
with his father around the
Mediterranean coast Here he
met many merchants who used
the lsquoHindu-Arabicrsquo system of
mathematics which was to
provide him with his lifersquos work
Fibonacci is a shortening of the
Latin lsquoFilius Bonaccirsquo used in the
title of his book Liber Abaci ndash
which means the son of Bonacci
It was in this book in 1202 that he
introduced the concept of the
Fibonacci sequence of numbers
In its simplest format the
Fibonacci sequence describes a
sequence of numbers where
each number is the sum of the
previous two numbers
So you have 1 plus 1 equalling 2
then 1 plus 2 equalling 3 the 2
plus 3 equalling 5 and so on
The initial sequence is
1 1 2 3 5 8 13 21 34 55 89
So we have a set of numbers
The truth is this sequence has
become so prevalent in the
financial world that many fund
managers and traders regularly
check what are known as
lsquoFibonacci Retracement
Levelsrsquo (FRL) to see if there is a
significant number offering
support or resistance to the price
level of an index or equity The
most popular FRL are marked at
618 and 382 of the
difference between the high and
the low of the asset you are
looking at If the price of the
asset retraces to one of these
levels then many fund managers
see this as an indication that the
price is going to reverse in
direction But these numbers are
not only used in finance The
Greeks used them to build their
fantastic buildings and believe it
or not a sequence known as the
Golden Rectangle appears in the
painting of the Mona Lisa
Liber Abaci translates as the
book of calculations and these
numbers and sequences now
drive many of the Algorithms
(see article) used by Hedgefund
managers and traders in Global
stockmarkets and are said by
many to be the cause of the
volatility we now witness in
stockmarkets due to the
automated nature of global
trading where the herd
behavioural bias rules Fibonacci
numbers also appear in plants
and flowers Check out
Sunflowers that clearly have 55
spirals going right on their outer
ring and 34 spirals of seeds
going left on the inner ring If you
divide a Fibonacci number by the
one before it the ratios produce
the golden number or ratio
1618034 well known to fans of
Albert Einstein Mozart also used
Fibonacci sequences in his
music as does Stephen Hawking
in his Black Hole calculations
So whilst you may not have
heard of them until now a bit
like behavioural biases they
are indeed all around you
Jargon
OK so letrsquos start again with a
definition
An Algorithm is a procedure or
formula for solving a problem
The word derives from the name of
the mathematician Mohammed Ibn-
Mus Al-Khwarizmi (780 ndash 850AD)
whose work was the source and
identification of Algebra
Algorithms have boomed in the last
50 years particularly with their use
in the financial world and largely
due to the exponential growth in
computer power The enigma
machine used during early World
War 2 to create encrypted
messages is an early example of
the use of Algorithms The
subsequent rsquoturning machinersquo that
deciphered the Enigma Codes was
created using Algorithms and is
known as the forerunner of modern
computers Algorithms are a well-
defined process or formula that are
followed to achieve a desired result
or expected outcome Perhaps you
may now see how these could be
extremely useful in investment
markets
As technology has progressed
Algorithms have become much
more sophisticated performing
millions (even billions) of
instructions per second Modern
Algorithms now adapt to the
constantly changing world of
financial markets creating trading
patterns using buy and sell
instructions that are used by banks
and stock exchanges across the
globe This technological
globalisation has considerably
reduced costs and increased
efficiency for investors making it
possible to trade stocks at the click
of your mouse Algorithms are
frequently used in passive
investment strategies because of
the match between the well defined
asset of the passive index and the
well defined process of the
Algorithm This can drive
investment managerrsquos tactical asset
allocation strategies giving optimal
asset allocations from an
optimization process Algorithms
can also drive diversity in portfolios
ensuring asset allocations are
maintained by constant rebalancing
of assets again to achieve optimal
returns (see article) It is not only
the financial world that uses
Algorithms dating sites and loan
companies also find them most
useful
In model portfolios Algorithms are
used to create asset allocations
driven by a systematically applied
mathematical model which takes
out of the equation the
lsquosubjectivenessrsquo of an individual
fund managerrsquos decisions In
essence this is the difference
between lsquoActiversquo ndash where an
individual or team of individuals
decide on an allocation process
and select and buy separate
investments on behalf of the
investors and lsquoPassiversquo where the
Algorithms rule and apply their
mathematical formulas in their
portfolios to achieve their expected
returns This lsquopassiversquo approach
removes human biases and
emotions in investment decisions
As a result of the big reductions in
the costs of investing due to the
creation of passive investments a
growing number of new investment
solutions are arriving that provide
investors with greater choice than
ever before for their portfolios -
Totally Active (which generally have
higher charges) or Totally Passive
(which tend to have the lowest
ongoing fees) or a mixture of both
Algorithms
There is no one definitive
solution but your adviser will
help guide you to the one that
it right for you
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
Do you know what algorithms
or Fibonacci numbers are
No Well l am not surprised
Although these are not new
words in financial circles we
see more and more such
jargon appearing in the
financial press on a daily
basis For your assistance
here is a little explanation
Fibonacci Numbers
You have probably heard of
Leonardo Da Vinci (born in Vinci
ndash a region of Florence) but you
have probably never heard of
Leonardo Da Pisa or to give him
his real name Leonardo Pisano
a mathematician born in Pisa
around 1175 Leonardorsquos father
Guglielmo Bonacci was a
customs officer and little
Leonardo travelled extensively
with his father around the
Mediterranean coast Here he
met many merchants who used
the lsquoHindu-Arabicrsquo system of
mathematics which was to
provide him with his lifersquos work
Fibonacci is a shortening of the
Latin lsquoFilius Bonaccirsquo used in the
title of his book Liber Abaci ndash
which means the son of Bonacci
It was in this book in 1202 that he
introduced the concept of the
Fibonacci sequence of numbers
In its simplest format the
Fibonacci sequence describes a
sequence of numbers where
each number is the sum of the
previous two numbers
So you have 1 plus 1 equalling 2
then 1 plus 2 equalling 3 the 2
plus 3 equalling 5 and so on
The initial sequence is
1 1 2 3 5 8 13 21 34 55 89
So we have a set of numbers
The truth is this sequence has
become so prevalent in the
financial world that many fund
managers and traders regularly
check what are known as
lsquoFibonacci Retracement
Levelsrsquo (FRL) to see if there is a
significant number offering
support or resistance to the price
level of an index or equity The
most popular FRL are marked at
618 and 382 of the
difference between the high and
the low of the asset you are
looking at If the price of the
asset retraces to one of these
levels then many fund managers
see this as an indication that the
price is going to reverse in
direction But these numbers are
not only used in finance The
Greeks used them to build their
fantastic buildings and believe it
or not a sequence known as the
Golden Rectangle appears in the
painting of the Mona Lisa
Liber Abaci translates as the
book of calculations and these
numbers and sequences now
drive many of the Algorithms
(see article) used by Hedgefund
managers and traders in Global
stockmarkets and are said by
many to be the cause of the
volatility we now witness in
stockmarkets due to the
automated nature of global
trading where the herd
behavioural bias rules Fibonacci
numbers also appear in plants
and flowers Check out
Sunflowers that clearly have 55
spirals going right on their outer
ring and 34 spirals of seeds
going left on the inner ring If you
divide a Fibonacci number by the
one before it the ratios produce
the golden number or ratio
1618034 well known to fans of
Albert Einstein Mozart also used
Fibonacci sequences in his
music as does Stephen Hawking
in his Black Hole calculations
So whilst you may not have
heard of them until now a bit
like behavioural biases they
are indeed all around you
Jargon
OK so letrsquos start again with a
definition
An Algorithm is a procedure or
formula for solving a problem
The word derives from the name of
the mathematician Mohammed Ibn-
Mus Al-Khwarizmi (780 ndash 850AD)
whose work was the source and
identification of Algebra
Algorithms have boomed in the last
50 years particularly with their use
in the financial world and largely
due to the exponential growth in
computer power The enigma
machine used during early World
War 2 to create encrypted
messages is an early example of
the use of Algorithms The
subsequent rsquoturning machinersquo that
deciphered the Enigma Codes was
created using Algorithms and is
known as the forerunner of modern
computers Algorithms are a well-
defined process or formula that are
followed to achieve a desired result
or expected outcome Perhaps you
may now see how these could be
extremely useful in investment
markets
As technology has progressed
Algorithms have become much
more sophisticated performing
millions (even billions) of
instructions per second Modern
Algorithms now adapt to the
constantly changing world of
financial markets creating trading
patterns using buy and sell
instructions that are used by banks
and stock exchanges across the
globe This technological
globalisation has considerably
reduced costs and increased
efficiency for investors making it
possible to trade stocks at the click
of your mouse Algorithms are
frequently used in passive
investment strategies because of
the match between the well defined
asset of the passive index and the
well defined process of the
Algorithm This can drive
investment managerrsquos tactical asset
allocation strategies giving optimal
asset allocations from an
optimization process Algorithms
can also drive diversity in portfolios
ensuring asset allocations are
maintained by constant rebalancing
of assets again to achieve optimal
returns (see article) It is not only
the financial world that uses
Algorithms dating sites and loan
companies also find them most
useful
In model portfolios Algorithms are
used to create asset allocations
driven by a systematically applied
mathematical model which takes
out of the equation the
lsquosubjectivenessrsquo of an individual
fund managerrsquos decisions In
essence this is the difference
between lsquoActiversquo ndash where an
individual or team of individuals
decide on an allocation process
and select and buy separate
investments on behalf of the
investors and lsquoPassiversquo where the
Algorithms rule and apply their
mathematical formulas in their
portfolios to achieve their expected
returns This lsquopassiversquo approach
removes human biases and
emotions in investment decisions
As a result of the big reductions in
the costs of investing due to the
creation of passive investments a
growing number of new investment
solutions are arriving that provide
investors with greater choice than
ever before for their portfolios -
Totally Active (which generally have
higher charges) or Totally Passive
(which tend to have the lowest
ongoing fees) or a mixture of both
Algorithms
There is no one definitive
solution but your adviser will
help guide you to the one that
it right for you
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
OK so letrsquos start again with a
definition
An Algorithm is a procedure or
formula for solving a problem
The word derives from the name of
the mathematician Mohammed Ibn-
Mus Al-Khwarizmi (780 ndash 850AD)
whose work was the source and
identification of Algebra
Algorithms have boomed in the last
50 years particularly with their use
in the financial world and largely
due to the exponential growth in
computer power The enigma
machine used during early World
War 2 to create encrypted
messages is an early example of
the use of Algorithms The
subsequent rsquoturning machinersquo that
deciphered the Enigma Codes was
created using Algorithms and is
known as the forerunner of modern
computers Algorithms are a well-
defined process or formula that are
followed to achieve a desired result
or expected outcome Perhaps you
may now see how these could be
extremely useful in investment
markets
As technology has progressed
Algorithms have become much
more sophisticated performing
millions (even billions) of
instructions per second Modern
Algorithms now adapt to the
constantly changing world of
financial markets creating trading
patterns using buy and sell
instructions that are used by banks
and stock exchanges across the
globe This technological
globalisation has considerably
reduced costs and increased
efficiency for investors making it
possible to trade stocks at the click
of your mouse Algorithms are
frequently used in passive
investment strategies because of
the match between the well defined
asset of the passive index and the
well defined process of the
Algorithm This can drive
investment managerrsquos tactical asset
allocation strategies giving optimal
asset allocations from an
optimization process Algorithms
can also drive diversity in portfolios
ensuring asset allocations are
maintained by constant rebalancing
of assets again to achieve optimal
returns (see article) It is not only
the financial world that uses
Algorithms dating sites and loan
companies also find them most
useful
In model portfolios Algorithms are
used to create asset allocations
driven by a systematically applied
mathematical model which takes
out of the equation the
lsquosubjectivenessrsquo of an individual
fund managerrsquos decisions In
essence this is the difference
between lsquoActiversquo ndash where an
individual or team of individuals
decide on an allocation process
and select and buy separate
investments on behalf of the
investors and lsquoPassiversquo where the
Algorithms rule and apply their
mathematical formulas in their
portfolios to achieve their expected
returns This lsquopassiversquo approach
removes human biases and
emotions in investment decisions
As a result of the big reductions in
the costs of investing due to the
creation of passive investments a
growing number of new investment
solutions are arriving that provide
investors with greater choice than
ever before for their portfolios -
Totally Active (which generally have
higher charges) or Totally Passive
(which tend to have the lowest
ongoing fees) or a mixture of both
Algorithms
There is no one definitive
solution but your adviser will
help guide you to the one that
it right for you
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
Many of our clients have income from rental
properties and many more are looking at the
potential for creating income in retirement from
property so has the Chancellorrsquos latest
tightening of buy to let taxation changed the
game
As is always the case when the Treasury want to
release (or bury) an announcement they have
released the latest consultation documents of the
Additional Property Rules on 28 December 2015
(Nice) This consultation lasts only 5 weeks which
is not really a long period meaning give or take
what we have seen so far is going to be the broad
brush of the rules
What we do know is the additional property Stamp
Duty Land Tax will be plus 3 across all bands on
purchases
The new rates will apply for completions on or after
1 April 2016 ndash unless exchange occurred on or
before 25 November 2015
The starting point to determine whether the higher
rates apply is how many properties an individual
owns If the answer is more than one the higher
rates of SDLT will apply to the purchase transaction
- unless the purchase is replacing the main
residence which has been sold If there is a bridging
position across two main residences ie the new
one is bought before the old one is sold then the
higher rate of SDLT will be applied to the new main
residence purchase but there will be an 18 month
window during which the excess SDLT can be
reclaimed Married Couples and Civil Partners will
be dealt with as a single person (ie only one main
residence allowed) unless they are separated under
a Court Order or formal Deed of Separation
executed under seal
A big problem of this new rule is if a home-owning
parent buys a property jointly with a child (eg
Student Accommodation or first property) then this
will be deemed an additional property of the parent
and the higher rate of SDLT will be charged
However if the parent were merely to act as
guarantor to the child for mortgage purposes then
the new rule will not apply as the parent will not
own a second property using this route These rules
also affect ownership of property abroad eg Spain
France etc So someone with a main residence in
Spain would pay a higher rate on any further
purchase in the UK
There are more tweaks to these rules to come
following the end of the consultation period
(January 2016) so we will report any further
changes as they arise Watch this spacehellip
Band Property Value
pound
Main Residence
SDLT
Additional Residence
SDLT
0 - 125000 0 3
125001 - 250000 2 5
250001 - 925000 5 8
925001 - 1500000 10 13
Above pound15 Million 12 15
New Buy
To Let
Rules
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
Well whether this is done via a discretionary fund
manager or a model portfolio quite simply the
returns are better over time The latest Barclays
Capital Data incorporated in their Annual GiltEquity
Performance Study proves the point of re-
balancing
These results show the value of rebalancing The
table shows lsquoNo Rebalancingrsquo which means that a
50 equity and 50 fixed interest portfolio is
created day one - and no subsequent adjustments
are ever made lsquoRebalanced Annuallyrsquo means that
every year the portfolio is returned to its original
investment strategy basis of 50 equity and 50
fixed interest irrespective of which sector produced
the best returns
It can be seen that the rebalancing route
produces an enhanced return year on
year It is well documented that asset
allocation is responsible for 80 of a
diversified portfoliorsquos return pattern over
time proven in a seminal investment
study in 1986 by Brinson Hood and
Beebower
Just as important as rebalancing is the combination
of assets that are used to construct a portfolio For
example over the history of capital markets since
1900 equities returned an average 89 annually
and Bonds 53 Over the same period a 50
equity and 50 bond portfolio would have produced
a 74 average return with a fraction of the volatility
of a 100 equity portfolio
Asset allocation diversification and rebalancing are
powerful tools for achieving investment returns A
portfolios allocation among asset classes will
determine a large proportion of its return ndash and the
majority of its volatility risk Broad diversification
reduces a portfoliorsquos exposure to specific risks while
providing opportunity to benefit from positive market
movements
Because investing evokes emotions investors need
to be disciplined in their decision making
Abandoning a planned investment and rebalancing
strategy can be costly over time and as research
proves the most significant derailers of performance
are behavioural via the failure to rebalance the
temptation of trying to time the market and the allure
of choosing performance Being realistic is
essential to the investment process and investors
must always recognize their constraints and fully
understand the level of risk they are prepared to
take
Year No
Rebalancing
Rebalanced
Annually
2010 1175 1175
2011 874 900
2012 811 845
2013 583 665
2014 914 975
Overall 5174 5462
Rebalancing a
Portfolio
Security selection and
market-timing
Asset allocation
Note Calculations are based on monthly returns for 294 balanced funds from January 1962
through December 2011 Source Vanguard calculations using data from Morningstar
Why do we always advocate that your portfolio
employs a system to automatically rebalance
your investment strategy regularly during the
year
The Make Up of Investment Returns
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money
Although The Premier Partnership Limited attempts to ensure that the information contained in this Newsletter is accurate and up-to-date we
accept no liability for the results of any action taken on the basis of the information it contains
The Premier Partnership Limited is authorised and regulated by The Financial Conduct Authority
The Premier Partnership Limited is entered on the FCA Register under reference 209446
Vicarage Hill Farm Vicarage Hill Middleton Tamworth Staffordshire B78 2AT
T 01283 711222 F 01283 711444 E enquiriespremierpartnershipcouk W wwwpremierpartnershipcouk
Registered Office Court Green Eden Road Tunbridge Wells Kent TN1 1TS
Putting the correct tax wrapper around your
investments can save you considerable sums of
money by saving tax you do not have to pay
Taxation dictates what part of an investment return
actually ends up in an investorrsquos pocket Spending
possibilities may be constrained by taxation issues
and achieving great capital fund performance but in
a tax inefficient manner may nullify that performance
completely
Despite these facts much investment planning
remains almost completely blind to the issues of
taxation In real life the type of return received be
that dividends interest growth of capital values or
some other from of payment such as pension
income are fundamental to the individual investor
and with each of the above being taxed in a different
way it is easy to see why people shy away from
fully considering the effect of tax on their
investments One of the reasons for this is that
many of the portfolio modelling services used by
advisers and indeed modern portfolio theory itself
does not incorporate any lsquobuilt inrsquo tax planning and
so can sometimes be lost in the theories of portfolio
construction
For example if your tax rate is 40 (or even 45)
then any interest receivable will be taxed at that
rate Dividends receivable will be taxed at 325 or
375 Receive the same interest or dividend into
an ISA and then draw your income from that ISA
pot and magically your personal tax liability is
removed The correct use of the ISA wrapper can
radically change the effect of personal tax
From April 2016 we shall see the introduction of a
dividend tax allowance and a savings allowance
These will operate alongside the normal personal
allowance the annual Capital Gains Tax allowance
and the existing 0 (zero) band for those within the
income threshold So fundamentally there will exist
some form of tax free allowance for most forms of
investment return be that dividends interest or
capital growth The sum of these allowances can
amount to a not insubstantial pound33100 per annum
When you then add in the annual personal Isa
allowance and the pension contribution allowance
you start to create a most tax efficient picture
indeed
Investors who plan to ensure they suffer less tax on
their investment return will undoubtedly enjoy more
of that return so when they accumulate - they will
accumulate more When they start to de-cumulate
(such as drawing pension income) that income will
last longer or they may be able to take a higher
income
Developing such a strategy is not an academic
nicety itrsquos about real money needed by real
people - and its one that we can develop for you
Use your adviser today - You know it makes
sense
Make
More Of
Your
Money