Appointing an Investment Manager - a risky business?? 17 th November 2011 By IPS Capital and Stevens& Bolton
Introduction • Finding a good investment manager – definitely not the end of the story… • Getting the tax “right” is critical – small error can lead to a long enquiry / large tax bill • Managing costs also critical to ensure beneficiaries see value in the structure • Tax and cost risk will increase unless effective communication and collaboration in place with investment managers – dangerous simply to outsource investment management • So how should trustees protect themselves?
Formulating and preserving the right investment tax strategy – some background • Pre 2008 – Typical RND client = offshore trust + keep income separate from capital • Post 2008 – No “one size fits all”, very much dependent on client circumstances – Tax benefits restricted from pre-2008 position – Makes risk and cost management much more difficult
Formulating an investment tax strategy (1) • Many tax considerations to address, particularly since FA08 – How will investment strategy affect settlor(s)? – Have you considered tax status of funds added to trust? – Domicile position of beneficiaries – Need to avoid UK assets? – Capital gains v income return? – Separate income from capital/capital gains? – Use of “wrappers”?
Formulating an investment tax strategy (2) • Distilling tax related ideas into an investment tax strategy – Do you really know what you are asking for, and what the practical implications may be? e.g. separate income where possible v separate all income at all cost – Do you understand the range of investments offered by the manager in tax terms? – Have you properly addressed the cost/benefit position e.g. tracking tax pool numbers complicated by non- sterling currencies but spreading currency risk may be important
Appointing an Investment Manager Communicating the strategy • Be specific! Do not say something is “preferable” unless that is what you really mean • Discuss who will be identifying whether a proposed investment fits the desired parameters • Remember that an investment manager is paid to produce a return, so that may be prioritised Minimising risk • What level of comfort/evidence do you have that the preferred manager can keep within the defined parameters? • Trade offs may be necessary – do you need to have discussions with the settlor / beneficiaries?
Key points • Offshore trusts have less tax benefits, more tax risk and more costs to manage – risk of unhappy beneficiaries increased • Simply outsourcing investment management function with a few vague tax parameters is not sufficient • Need quality thought around what the parameters should be, what practical implications these have and whether they can be delivered by the investment manager • Be aware that tensions may exist and be prepared to address these head on at the outset – must be able to show appropriate consideration of cost v benefit • Monitor performance, both in investment terms and tax parameter terms, once a strategy has been agreed
I am contractually obliged to include this slide Generic Private Client Asset Allocation Government Cash Bonds 10% 20% Equities: Equities: EM DM 25% 45% 8
Er, which asset do you mean exactly ? Newton Real Return Fund Government Cash Bonds 10.0% 20.0% Reporting Share Class Curr. Status Class Type Situs 1 GBP Yes Retail Distributor UK 2 GBP Yes Institutional Accumulator UK 3 USD No Retail Accumulator Non -UK 4 USD No Institutional Accumulator Non -UK 5 USD Yes Institutional Distributor Non -UK Equities: EM Equities: DM 6 Euro No Retail Accumulator Non -UK 25.0% 45.0% 7 Euro No Institutional Accumulator Non -UK 8 Euro Yes Institutional Distributor Non -UK Conclusion 1: Share class issues can be complex Tax requirements need to be integrated into trading and risk systems 9
A hard rule approach can create its own problems Government Cash First State Asia Pacific – UK Situs Bonds 10.0% 20.0% MW Gavekal Asian Opportunities Share Curr. Class Type Situs Class 1 GBP Institutional Accumulator Non-UK 2 EUR Institutional Accumulator Non-UK Equities: EM Equities: DM 3 USD Institutional Accumulator Non-UK 25.0% 45.0% Conclusion 2: There is no substitute for knowing and understanding each asset well 10
Even cash and bonds can be tricky... Accrued Interest for government bonds • Can you separate capital from Government Cash income? Bonds 10.0% 20.0% Money Market Funds: • Do they have reporting status? Margin for (say) FX hedges • Who is the hedge Equities: EM Equities: DM 25.0% 45.0% counterparty? Conclusion 3: Sometimes you’ll need specialist help 11
Implications for IPS Tax requirements need to be integrated into the investment and trading process 1. Do not rely on people remembering to remember 2. Due diligence and understanding exactly what you are buying is key Sample client input information for the IPS ART system: Reporting Institutional Accumulator Non-UK Annual Cash Cash Need Payment Min Cash Tax Status Status or Retail or Situs? Needs Date Frequency balance Needed? Share Class? Distributor Client 1 UK Res non- dom Yes Institutional Distributor Yes - - Client 2 No Tax Preferences Retail 50,000 30/06/2012 Annual - Client 3 UK tax-payer Yes Retail Distributor - - Client 4 No Tax Preferences Retail 30,000 30/09/2012 Annual - Client 5 No Tax Preferences Retail - 150,000 Client 6 UK Res non- dom Yes Institutional Distributor Yes - - Client 7 UK tax-payer Yes Retail - - 12
Implications for IPS: 2 Be very clear with Trustees and advisers on the requirements for mandate • For example: is separation of capital and income essential or to what extent is it acceptable? • There can be a trade off between tax and investment optimisation 13
Implications for IPS: 3 You will often need expert help 1. We use Stevens & Bolton as an integral part of our investment process 2. As examples, they provide a roadmap to decide whether: • an asset is UK-Situs • The asset lends itself to income and capital segregation 3. When in doubt, we seek their specialist advice 14
Biographies – Stuart Skeffington & Chris Brown Stuart joined Stevens & Bolton LLP from Withers in 2008, where he previously ran the European division of one of their wealth planning teams focusing upon 'new money' clients including entrepreneurs, business owners, senior executives and fund managers/proprietors. Stuart has extensive experience of all aspects of tax and trusts, including complex onshore and offshore trust structures, tax planning for business owners (including exit events and corporate reconstructions), employee incentivisation strategies, investment taxation, family offices and succession planning. Stuart is a member of STEP and speaks regularly on the conference circuit, both in the UK and abroad. Telephone: 01483 406 952 Stuart Skeffington Email: stuart.skeffington@stevens-bolton.com Partner, Stevens & Bolton Website: www.stevens-bolton.com Chris Brown is responsible for formulating investment strategy and allocations across all client portfolios. Prior to joining IPS in 2009, he was a credit specialist at several financial institutions, including Goldman Sachs. Chris was also the founding partner of Cinnamon Capital, a credit hedge fund. His extensive experience is matched by prominent qualifications. Chris is a Fellow of the Institute of Actuaries. He also holds a first class degree in Economics from the University of Bristol and a masters in economics from the University of Cambridge. Telephone: 0207 469 6830 Chris Brown Email: cbrown@ipscap.com CIO, IPS Capital Website: www.ipscap.com 15
Important Information This presentation is intended to be for information only and it is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. IPS Capital LLP (IPSC) has expressed its own views and opinions in this document and these may change. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. Information herein is believed to be reliable but IPSC does not warrant its completeness or accuracy. No responsibility can be accepted for error of fact or opinion. This does not exclude or restrict any duty or liability that IPSC has to its customers under the Financial Services and Markets Act 2000 (as amended from time to time) or any other regulatory system. Past Performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Issued by IPS Capital LLP 4 Eastcheap London EC3M 1AE Telephone: 020 7469 6830 Fax: 020 7469 6831 Authorised and regulated by the Financial Services Authority 16
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