Marginal Gain – July 2022

The heat has definitely been on this month with record temperatures and a new prime minister to find! With this in mind we have asked Waverton to give us a view on the markets and Jonny has looked at how to combat a tough market by using structured products. John has written about claiming tax relief for working from home during Covid and John D has looked at when to draw from your pension and the impact that it can have on the long term performance.

Although the risk of recession is material, it is not a given

Waverton recently hosted a breakfast seminar for financial advisers, providing an update on our current views and opportunities that we see. Three of the most senior members of our investment team spoke, delivering an overview on how things are changing.

Global Outlook

CIO Bill Dinning set the scene, highlighting that, although inflation has been elevated, in recent weeks the market’s mood seems to have shifted focus and become more worried about the policy response to the inflation. Headline inflation is still running at 40-year highs – over 8% in US, UK, and Europe – but expectations of future inflation have fallen back lately. Five-year inflation swaps – a market measure of expected average inflation over the coming years – seem confident that inflation will head back towards 2%. Indeed, longer term inflation expectations appear less concerned about elevated inflation than they were in the wake of the global financial crisis.

Although inflation is still a problem, markets are now anticipating that the Federal Reserve will finish hiking rates in the first quarter of 2023 and will need to start cutting them again shortly after that. This shift in expectations has come about due to worries that rising interest rates, coupled with inflation, will cause an economic slowdown, or even a recession. Although there is plenty of worrying data that supports this premise, if the Fed are able to effect a few more hikes then they have actually got some flexibility to try and prevent too much damage. Their abilities are enhanced by the fact that they are now engaged in Quantitative Tightening. Not only are they raising interest rates, but they are also tightening monetary policy by reducing the size of their balance sheets. If they wish to adjust their policy stance as they seek to steady the economy, then they can alter the rate at which they reduce their balance sheets. They have more options than in recent years. Although the risk of recession is material, it is not a given – the Waverton Asset Allocation Committee gave it a 40% probability at their end-June meeting.

Source: MSCI, Factset, Waverton as at 01.07.22

It is not all bad news though; the fall in equity and bond prices has provided some interesting investment opportunities. The Price Earnings ratio for US equities has fallen back to its long-term average, and the global ex-US average is now below its historic mean. There are concerns that earnings may begin to disappoint in coming months, but there are attractive valuations appearing. We are currently neutrally positioned on equities but, as things stand, it is perhaps more likely that our next step is to increase our equity allocation rather than reduce it.


Head of Fixed Income and Fund Manager Jeff Keen spoke next, highlighting the difficult backdrop that bond investors have endured so far this year – in the UK, government and corporate bonds are both down more than 14%, their worst starts to a year for several decades. There have been no hiding places. In some regards, the combined bond and equity damage in 2022 is similar to the economic slowdowns following the dot-com bubble and during the global financial crisis.

If a recession is on the cards, then it might be that bonds, particularly longer-dated government bonds, are able to offer some protection. As the chart below shows, in the US there has been a recent disconnect between the 12-month change in the ISM Manufacturing Purchasing Managers’ Index and the equivalent change in the 10-year Treasury yield. If the relationship is to hold then we would expect one of the two to adjust. An improvement in the ISM is perhaps less likely given the current macro backdrop, suggesting that a fall in the 10-year bond yield might be realistic. The Waverton Sterling Bond Fund has been increasing its duration accordingly but, given the active manner in which it is managed, this can be quickly adjusted should the data or convictions change.

Although the rise in yields has been negative for fixed income returns, it has provided some good value propositions in the credit markets. The shift up in yields has been particularly pronounced in the short end, meaning that it is now possible to buy some low-duration, investment grade bonds with appealing yields. We are not confident enough in the strength of the economy to be broadly increasing credit exposure but are being opportunistic when value presents itself.

Source: Institute for Supply Management, Bloomberg, Waverton. Data as at 30 June 2022.

Real Assets

Luke Hyde-Smith, Co-Head of Multi-Asset Strategies and Fund Manager, spoke on the opportunities in alternative assets. As with bonds and equities, alternatives have had a volatile start to the year, but they are able to play an important role in a portfolio. As the chart below shows, when inflation is elevated, historically we have seen a positive correlation between bonds and equities – meaning bonds and equities have tended to fall together. We have seen this in recent months, even though the correlation is still negative on a three-year basis. If bonds are not reliably protecting against equity market falls, then this has major implications for portfolio construction. Alternatives can be part of the solution.

Alternative assets can broadly be grouped into two categories: absolute return, which are diversifying strategies seeking to protect capital in weak markets, and real assets, which tend to be long-only and return-seeking. These assets not only offer diversification but can provide attributes such as volatility dampening and inflation-linked returns. There has been a widening of discounts within the investment companies sector and certain areas of commodities appear attractive – both of which fall into the alternatives bucket.

One area of alternatives that is of particular interest is assets that are associated with the energy transition. Between January 2020 and November 2021, the number of countries with net-zero commitments rose 7x, from 21 to 140. Over the same time, the number of companies rose 5x and financial commitments rose 26x, from $5 trillion to $140 trillion. This growth can increase demand for some metals like nickel and lithium and some energy companies are likely to benefit too: the energy sector is only 4% of market capitalisation of the S&P 500, far below its historical average. Alternative investments are able to benefit a portfolio with thematic investments such as these.

Source: Bloomberg, Minack, Waverton. As at 30.06.22.

Risk warning

The views and opinions expressed are those of Waverton Investment Management Limited and are subject to change based on market and other conditions.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security.

All material(s) have been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy of, nor liability for, decisions based on such information.

Past performance is no guarantee of future results and the value of such investments and their strategies may fall as well as rise. Capital security is not guaranteed.

Author: Waverton


Why Structured Plans should be considered now more than ever

We have been strong advocates of structured plans over the past 10 years and their validity becomes even stronger in the volatile investment markets we are currently experiencing.

What is a Structured Plan?

A structured plan is normally linked to an index such as the FTSE100 Index. The plan typically has a fixed term of 5 or 6 years, and the returns are based on the performance of the Index over that period.

However, it is the ability to achieve a positive return even if the index falls that is the most attractive feature of these plans. The Defensive Kick Out plans that are proving most popular potentially provide an annual return that depends on the level of the Index each year. As an example, below, the first opportunity for the plan to mature early is year 2 and the coupon (return) of 8.25% is annualised

As long as the FTSE100 Index is above the trigger level at the anniversary date, your capital is returned plus the growth so you know exactly what you may get back. However, as you would expect there are risks:

  • The institutions that underwrite these plans must be financially secure and are normally investment banks with a high credit rating.
  • These “capital at risk” plans are not covered by the FSCS (Financial Services Compensation Scheme)
  • Typically, capital can be lost if the FTSE100 Index falls by 35%, so in the example above – 4,712 and fails to recover by the end of the term.

An alternative to cash deposits

For those who do not want to take any investment risk, there are Deposit structured plans that are akin to a bank account, but the returns are based on the FTSE100 Index not interest rates. These plans are covered by the FSCS, and the returns are generally higher than cash deposits.

These are available in tranches, so please ask your adviser for up to date information on current availability.

Our research in the structured plan market

The recent Structured Product Annual Performance Review 2020, compiled by, continues to provide the most comprehensive analysis of structured products in the UK which goes to re-inforce why they should be considered only as part of a well-diversified portfolio.

The huge advantage of structured plans is they can be back tested, and the results are binary as they either work or do not, for example:

  • In the last 12 months, the 459-maturing capital-at-risk plans collectively produced an annualised return of 6.82% over an average duration of 3.19 years
  • 70 deposit plans matured in 2021, 55 of which were linked solely to the FTSE 100 Index. The 70 collectively produced an average annualised return of 2.13% over an averageduration of 4.69 years.

We have full access to the market and can provide independent research on all the plans that may be suitable. It is possible to hold these plans directly or invest in structured plans through your self-invested pension and your ISAs, meaning the returns are not only attractive but can be tax efficient.

Structured plans are not for everyone, but as an agreed proportion of a portfolio they can provide diversification and a different method of achieving long term sustainable returns which can include capital growth or monthly income.

Should you wish to receive further information, please contact your usual planner in order that we can prepare a recommendation based on your specific requirements.

Author: Jonathan Howard

Tel: 01438 345767


Have you been forced to work at home due to Covid?

Did you know you can claim tax relief for this change?

You can now backdate your tax relief claim if you worked from home during the coronavirus pandemic. People who worked from home during the pandemic could be eligible for tax relief of up to £125 a year (for higher rate taxpayers) even if they only did so for one day.

Employees returning to the office can still claim for household expenses for this tax year, says HM Revenue and Customs (HMRC), whose figures revealed nearly 800,000 have claimed tax relief since April 2021.

Myrtle Lloyd, HMRC’s Director General for Customer Services, said: “More people are getting back to office working now, but it’s not too late to apply for tax relief on household expenses if they’ve been working from home during the pandemic.”

Are you eligible for working from home tax relief?

You can claim the full year’s tax relief entitlement of £125 if your employer told you to work from home even if it was only for one day! It doesn’t matter if you have returned to the office since early April; you can still get the full amount for the 2021/22 tax year. It’s OK if you work from home for just some of the week.

However, you cannot claim tax relief if you choose to work from home. Nor can you claim tax relief if your employer covered your expenses or paid you an allowance. If you complete an annual tax return, you will be able to apply for the tax relief via your Self Assessment.

How can I apply for working from home tax relief?

You can use the HMRC working from home tax relief portal, where you will be asked a series of questions to check if you are eligible or not. To progress with your claim, you will need a Government Gateway user ID and password, which you can create if you don’t already have one. This should take about 10 minutes to create.

Here are the documents you need to make a claim.

To create a Government Gateway ID, you will need your National Insurance number and a form of ID such as a recent payslip or P60, or a valid UK passport. If you are claiming an exact amount for costs then you will need evidence such as receipts, bills or contracts.

How much tax relief can I claim?

Each employee can claim up to £125 per year. This is made up of either £6 a week from 6th April 2020, or the exact amount of extra costs incurred above the weekly amount, for which you will need the evidence mentioned above.

Tax relief is based on the rate at which you pay tax, so if you pay the 20 per cent basic rate of tax and claim tax relief on £6 a week you would get £1.20 per week in tax relief (20 per cent of £6) which would result in £62.40 a year. Higher rate taxpayers can claim £2.40 a week (40 per cent of £6 a week), which would result in £124.80 a year.

What can I claim tax relief for?

You may be able to claim tax relief towards bills including gas and electricity, metered water, business phone calls and internet costs. You may also be able to claim tax relief on equipment you have purchased such as a laptop, chair and desk or mobile phone, for example. You cannot claim for the whole bill — just the part that relates to your work.

How will I get the money?

Once your application has been approved, your tax code will be adjusted for the 2022/23 tax year and you will receive the tax relief directly through your salary.

How can I backdate a claim?

If you were required to work from home during the 2020/21 tax year but did not claim for the tax relief, it’s not too late. You can backdate claims for up to four years and will receive a lump sum payment if you are successful. Some workers will be able to claim for the current tax year 2022/23 but many people won’t be eligible for this tax year as it is no longer a legal requirement to work from home.

Author: John Merrifield, Chartered Financial Planner


Margin Gain: Cost of living crisis impacting rash pension decision

Britain is facing the highest rates of inflation since the early 1980s, with households suffering the biggest hit to their incomes since modern records began. Energy bills are soaring, as is the cost of petrol. Food inflation is at a 13-year high, running at 8.3%. Some clients who are still working and able to access their pensions (over age 55) may be considering withdrawing money from their pensions to top up their existing income.

Most people hate to accept a downturn in their lifestyle and will often strenuously oppose the idea that they could do without some of the things that support it. The inescapable fact is that spending more now almost certainly means spending less later.
Many clients have received very strong investment returns in recent years and it may be tempting for them to assume that future returns will restore their fund values even after more money has been withdrawn.

A key element of our advisory role is to help clients consider the impact of sequencing risk, so-called ‘pound cost ravaging’. Using tools such as cash flow forecasting, we can show the impact of increased spending and also model alternative scenarios such as ‘what if I spend less?’ to bring a focus on longevity and income sustainability.

A fund value that is reduced in value now will have to work much harder in future. Even if returns improve, the return will be made on a smaller fund and it may never catch up with the overall growth it might have achieved. An extreme example to illustrate the point is that, if a fund reduces by 50%, it needs to grow by 100% to recover!

Clients who have already survived a few years of income drawdown will have built up larger funds, but may still need to review core and discretionary expenditure. The discretionary expenditure such as holidays, socialising etc could be reduced to ensure their lifestyle can be maintained long term.

Offsetting increased energy bills by reducing other expenditure, if possible, will almost certainly deliver a better result.

Clients working towards retirement should also be made aware that drawing taxable income will also impact on their ability to save more into their pension. Taking income from a pension triggers a cap on future pension contributions, which can be exceeded through ongoing personal and employer pension contributions though this incurs an annual tax charge.

In addition, HM Revenue & Customs has still not seen fit to alter the position with regard to emergency tax on these income payments and clients very often get a shock when they see how much has been deducted. The excess can of course be reclaimed, but this will not help if the client has an essential bill to pay immediately.

Since the introduction of pension freedoms in 2015 annuity sales have plummeted, partly because annuity rates have been at their lowest level for some time due to ultra-low interest rates and increased life expectancy.

With the onset of inflation, central banks around the globe have been increasing interest rates as their defence mechanism. As a result, annuity rates have started to rise and the option of a guaranteed income has become more attractive. This could suit clients who have been in drawdown and who would like to reduce their exposure to investment risk in exchange for some security against longevity risk. These clients may well benefit from another look at full or partial annuitisation in the next few months to cover core household expenditure.

In summary, the expectation is that inflation will fall in 2023 and in 2024, before settling around the Bank of England’s target of 2% for CPI (Consumer Prices Index). Clients should be mindful of core and discretionary expenditure, to ensure withdrawing pension income earlier than planned does not incur an unnecessary tax liability and put the sustainability of their retirement at risk in reaction to short-term pressures.

Source FT Adviser 12.07.22

Author: John Diaz, Chartered Independent Financial Planner