At a time when Trumpian trade policies have jolted the world’s basic materials industries, you have to hand it to the government’s Nest workplace pension scheme for its latest bold venture into the turbulent world of raw commodities. As Adrian Mole might have said, whatever can it mean? Aren’t pensions supposed to be about stability, then?
The Financial Times has the answer. It’s all about achieving a balanced overall return, obviously. While also exerting just a little bit of pressure on the commodity producers to clean up their respective acts.
Nest, of course, is the state’s fallback destination for auto-enrolment pension contributions (although there are countless private-sector alternatives available.) The FT says that the Nest funds attract £200 million every month from about 7 million subscribers. And that the Nest people have recently entrusted a mandate of up to 5% of total assets (around 200 million) to the US-based CoreCommodity Management group ($4 billion FUM) to run the commodity funds on its behalf.
The FT quotes Mark Fawcett, chief investment officer at Nest, as saying:
“While markets have been benign since auto-enrolment kicked off six years ago, we’ve had a turbulent start to 2018 and volatility looks set to rise…..Commodities offer good value protection as inflationary pressures rise.”
Well, indeed, but how are we to handle the many ethical questions that arise from dodgy mining corporations or from palm oil farmers who are ploughing up the world’s virgin forests? Surely this shouldn’t be where ethically-hungry pension funds ought to be going?
It seems that Nest has got this question sorted. It says the new fund “will exclude producers whose main activities are in palm oil, thermal coal, uranium and tobacco. It will also exclude companies that mine cobalt in the Democratic Republic of Congo.”
Or, in other words, Glencore, which mines 70% of the world’s cobalt in the DRC, and which is coincidentally going through a rough patch of its own. Instead, says the FT, 80% of the commodities portfolio will be vested in derivatives based on crude oil benchmarks, and on natural gas, sugar, cotton and wheat. The remainder, it says, will be open to direct equity investments.
The FT’s article has more detail on Nest’s past interactions with the dodgier side of commodity production, and on its use of its shareholder power to try and force (for example) Shell to honour its greenhouse gas commitments. Recommended reading.
Which insurance claims are least likely to be paid out? In an article in Telegraph Money this weekend, Aviva has revealed that income protection and travel insurance are the least likely claims to be paid – with 89% claims paid in 2017, compared with the average payout rate across all claims of 96pc. The article reports insurer’s claims that income protection claims are most likely to be rejected because customers’ illnesses were not serious enough for the policy to pay out. Such claims are often turned down because customers do not tell the whole truth about their lifestyles when taking out the policies.
How worried should we be about international trade? The Sunday Times Business section headline reads “an all-out trade war risks “meltdown in the market”. It is based on economic analysis from UBS which, the article explains, has modelled the impact of a spiralling of trade barriers, including global car tariffs if America follows through on its threat to hit automotive imports with hefty levies. In that scenario, UBS claims that GDP would be 1% lower, with inflation picking up sharply around the world. As for markets, the article quotes from the report that “Equities are not yet discounting a trade war scenario and we see [the potential for] a 20%-plus decline.” The UBS report has modelled this larger hit – compared to that which has been predicted by others – through disruption of global supply chains along with a hit to economic confidence.
Declaring gains made upon the sale of second homes is the latest area to come under the HMRC microscope, according to Ali Hussein’s article in The Sunday Times Money section. He reports that HMRC is to write to 1500 people it has identified as having sold a property in 2015/16 yet not declared a profit on which CGT would potentially be paid. Hussein asks the question whether this crackdown might have been prompted by a surge in sales of buy-to-let properties after tax changes reduced the appeal to investors. The article goes on to say that HMRC selected those to contact as they have sold properties of “substantial value” although apparently they will get chance to explain themselves before a formal inquiry would be launched. It is highly unlikely that clients of professional advisers will be caught up in this but it shows the continuing actions of HMRC against tax evasion in whatever guise that may be.
Ian Cowie’s Personal Account column is always an entertaining read. This week he suggests that income seekers might do well to take a look at investment opportunities overseas – Japan in particular – although historically it has not been a region typically associated with generating strong dividend yield. Partly due to corporate governance changes, it’s a region where there has been a step change in payouts over the past few years. Cowie quotes figures from Janus Henderson which shows that UK dividends grew by 74% over the period since 2010. However American dividends advanced by an average of 148% and Japanese payouts by 144% over the same period – although part of this will be due to the fall in the value of the pound. Cowie rounds of with some sensible advice which will not come as any surprise to advisers “international diversification is the best way to reduce risk while Brexit unfolds…” Wise words.
Investment trusts are a regular favourite in the Financial Mail on Sunday’s Fund Focus column. This week is no exception as Jeff Prestridge turns his attention to the Edinburgh Worldwide Trust managed by Doug Brodie. It’s not the headline grabbing return in excess of 48% over the past year which he dwells on however.
Instead, the focus for the article is the investment process that underpins the team which is applied to Edinburgh Worldwide and a sister investment fund Baillie Gifford Global Discovery. As the title suggests, it reports that ‘discovery’ is all about finding companies that are likely to deliver long-term returns – a result of a clearly defined growth strategy adopted by management and often an intention to reshape the industry they are part of. Only businesses with market capitalisations of below $5 billion (£3.8 billion) are considered, although once a stake is bought, the discovery team runs with it. There is no top slicing – selling small parts of a stake to crystallise profits. Long term, not short term, is the name of the discovery game – as is patience – and Brodie’s team are quite happy scouring the world for opportunities. Currently, Edinburgh Worldwide holds just over 100 stocks.
Prestridge also explains that the trust has recently issued more shares to cope with demand and the manager intends to issue more before the year is out.
