Eurobust inevitable?

As a Greek default looms large, will the Euro bite the dust?.

There seems to be a consensus now that the sewage is coming perilously close to contact with the revolving air conditioning system. The doubters who fretted about a currency without a Government, and were ridiculed by the Europhile mob, were right all along. I still haven’t heard the LibDems, or the Europhiles from the other parties, admitting their mistake.

France and Germany are still making solidarity noises in public, while in private they work out how to inflict least damage with an orderly Greek default.

Greece is insolvent. Greece is going to default because there is no way they can carry the burden of the debts they now have. Loads of banks in Greece and elsewhere in Europe are sitting on Greek Government iou paper which they have tucked away in their assets column. Those assets will shrink by at least half, more likely three quarters. Some of these banks will then be, technically, bust and require injections of capital from somewhere.

A United States of Eurozone Europe could solve the problem, because aggregate public debt across the Eurozone is not especially high. But a United States of Europe isn’t going to happen because the voters won’t have it. And even if they did want it, it would take too long to bring about. Eurobonds that would be backed collectively by all the Eurozone countries would buy some time, but they aren’t going to happen either, because the Germans will not countenance the idea of taking on, in effect, several more East Germanys. The Italians made loads of promises in return for a loan, pocketed the loot, and reneged on many of the promises within weeks. Would you lend them your life savings?

Quite what happens when the proverbial does hit the fan is anybody’s guess, but it won’t be a pretty sight, which is why the politicians have been kicking the Eurozone can down the road for so long.

Then again, I was wrong about interest rates going up this year.

'Helpful' banking

A year or so back I had cause to natter to the local NatWest. They had a neat wheeze going. Use their ‘Accelerator’ Mastercard and get a bonus rate on your savings account. You had to spend pretty freely on the card, but you got another 2% on the savings account.

No more, it seems. They have written to say they “are making important changes to simplify our range of accounts”. The Accelerator Credit Card is going to be simplified. It will no longer accelerate. I can have a new one that will get me some M&S vouchers.

I don’t want this, so I’phoned the given number to tell them. A computer answered, and the deed was done, signing off with a polite message to confirm that my card “will not be upgraded”.

Too right it won’t. It’s in pieces in the bin, and when I get home my decelerated savings will have to find a new home, because Natwest are going to pay a princely one tenth of one per cent. There is a word that was invented for banks paying nowt on deposits and charging double digit numbers to borrowers: extortion. Or in regulatory speak, treating customers fairly.

The eejits who ran the thing into the ground in the first place must still be in charge.

Read this article at http://www.candidmoney.com/articles/article245.aspx

Will debt stifle growth?

Is growing our economy out of trouble realistic given high levels of personal and government debt?.

No-one commented on my last piece, but somewhere out there 30 people pressed a button to signify that they found it helpful. I think that’s my best score, but I do of course realise that ten may have pressed the wrong button and that the one person who really found it helpful decided to press the button twenty times to make me feel better, or for the sheer joy of messing up the numbers. Raw scores, as we used to call them in research, are unreliable chaps.

This point is not lost on the economists at the Bank for International Settlements, who are properly tentative about their conclusions, even though they are based on some quite robust evidence. Here is the abstract of a recent paper:

"At moderate levels, debt improves welfare and can enhance growth. But high levels can be damaging. When does the level of debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is bad for growth. For government debt, the threshold is in the range of 80 to 100% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Up to a point, corporate and household debt can be good for growth. But when corporate debt goes beyond 90% of GDP, our results suggest that it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated."

Phew! Our 2010 figure for public debt is 89. So that’s OK. ‘Fraid not. Our numbers for corporate and household are 126 and 106 respectively. At some point, we really are going to have to cut public spending, rather than attempt to slow down the increase, which is what we are doing now. Growth is not going to pull us out of this mess.

Or the BIS economists are off their trolleys. Take your pick.

Now you see it...

Between the fiscal years ending April 08 and April 10 personal pension contributions fell by £2,200,000,000, and a million people stopped contributing altogether. But the Office of National Statistics points out that the figures don’t include self invested personal pensions – SIPPs. Back of fag packet calculations suggest that SIPP business might well have made up the difference. As I said: raw scores are trouble.

I’ll huff and I’ll puff...

There is much time and energy being spent writing on blogs by financial advisers convinced that their clients would much rather have them earn commission than fees. The regulator plans to introduce this simple idea: if you call yourself an adviser you must tell people what your advice will cost them.

So here is the killer question for the next ‘adviser’: “how will you demonstrate that the value added to me by your advice will at least equal the cost?”

Higher rate tax

There is a broad academic consensus. The 50p tax bracket will raise no money and might even reduce the overall tax take.

There is broad chattering classes consensus. Getting rid of said tax band is too unpopular even to contemplate. The Tories daren’t go for it because they don’t want to be tarred with a class brush. The Lib Dems would go along with the abolition as long as they got, in return, mad Vince’s Mansion Tax. The Labour lot are presumably in favour of increasing taxes all round and thus strangling whatever vestigial growth prospects might survive the debt overhang (see above).

In truth, none of them are worth a vote. They are either stupid, or craven, or both. Depressing, isn’t it?

Read this article at http://www.candidmoney.com/articles/article244.aspx

Alternative energy investments?

Question
I'm looking for a unit trust (or maybe an ETF) with a focus on alternative energy investments. Too many in the energy field seem to have a focus or at least a strong bias towards "traditional" oil-based companies. Any ideas for funds which look at non-oil alternatives?Answer
The potential issue with alternative energy investments is that they tend to be heavily influenced by the oil price shorter term - when the oil price is high alternative energy looks attractive and vice versa.

Longer term alternative energy should deliver returns based on its own merits and the likelihood we'll all be compelled to use more of it - the UK government has committed to 15% of our total energy use being from renewable sources by 2020 (it's currently about 3%).

So well worth considering, but be prepared to invest for the long haul.

Funds investing in alternative energy companies include ETFX DAXglobal Alternative Energy ETF, Osmosis Climate Change ETF, Blackrock New Energy Investment Trust and the Guinness Alternative Energy Fund. Take at look at my article here for more details.

Read this Q and A at http://www.candidmoney.com/questions/question567.aspx

Investment grade or high yield bonds?

Question
I have a number of Strategic Bond Funds in my ISA. I created a considerable amount of liquidity selling equities recently. Would this be an appropriate time to also buy -

Corporate Bond Funds

High Yield Bond Funds

Index Linked Funds.

Answer
Strategic bond funds can choose from pretty much the whole fixed interest universe. That means they might hold investment grade bonds, higher yielding bonds and index-linked bonds. The relative split between these different types of bond will depend on the manager's views on where interest rates, inflation and markets are headed.

For example, investment grade bonds tend to be more sensitive to changes in interest rate and inflationary expectations than higher yielding bonds, while the latter tends to move more in-line with stock markets. Index-linked bonds are unsurprisingly very sensitive to changes in inflationary expectations - 5 year UK Index-Linked gilts are priced (at the time of writing) assuming average inflation of 2.66%, rising to 2.84% on gilts redeeming in 2024. If you expect average inflation to be higher than this you might profit from index-linking versus the equivalent conventional gilts.

Given you probably have a fair mix of the above via the strategic bond funds you already own, the main difference if buying specific investment grade, high yield and index-linked funds will be that you rather than a fund manager can decide the relative mix.

One thing I'd be wary of is having too much exposure to fixed interest in your overall portfolio. In these volatile times it's probably safer to be overweight in bonds than the stock market, but placing an excessive bet on bonds leaves you exposed if bond markets struggle. Having said that, the for as long as stock markets endure difficult times the safer end of the bond market should remain robust, with demand propped up by investors flocking to safety and interest rate rises unlikely.

On balance, if you're pessimistic about stock markets and want to increase bond exposure I'd focus on the safer end of the market, just don't expect exciting returns in the current climate.

Read this Q and A at http://www.candidmoney.com/questions/question566.aspx

Hargreaves Lansdown trail commisison rebates?

Question
I have just read a review on Cavendish Online and am interested in trail commision discounts. I deal with Hargreaves Lansdown and wondered whether they give a discount on their trail commision?Answer
Hargreaves Lansdown (HL) does give generally give trail commission rebates on funds held either directly or within ISAs, but not those held within its SIPP (i.e. pension).

The rebates are called a 'loyalty bonus' and typically amount to about half the annual trail commission. So if a fund pays trail commission equal to 0.5% of the fund value, HL would likely rebate 0.25%.

By comparison, Cavendish Online rebates all the trail commission, so 0.5% in our above example, in return for a one-off £25 fee if the funds are held via the Cofunds or FundNetwork fund supermarkets.

There's no doubt Cavendish Online is cheaper for the vast majority of investors, but they simply offer a no-frills transaction service. If you actively use HL's fund research and information you might feel it's worth the extra 0.25% a year but, there again, you might not (views seem to be divided based on feedback via this site).

You can view a comprehensive list of discount brokers in our Guide to ISA Discount Brokers, so take a look and try and gauge which blend of discounts and service would best suit you.

Personally I'd be very happy using Cavendish Online, as given my background I don't feel much need for fund research and marketing bumf (in any case, there's plenty of freely available fund information on the web - see my answer to this question). But if I were a novice investor I might feel differently and opt for a discount broker offering more information and hand-holding, albeit with lower discounts.

Read this Q and A at http://www.candidmoney.com/questions/question568.aspx

Do fund prices vary between brokers?

Question
In the recent stock market dips, I've made multiple investments and I've noticed that I seem to get better deals through some companies that others...

* Buying Unit Trusts through Hargreaves Lansdown, I always seem to buy at the lowest price of the day ( or lower! )

* Buying Investment Trusts through Halifax, sometimes I buy at a low price for the day, but sometimes it's near the high point for the day.

* Buying Unit Trusts through Cofunds seemes to get me near to the best price of the day.

Is there a difference between different companies trading policies, or is there a difference in the markets between ITs and UTs? They all seem to claim to get 'best price' but some seem to be better at doing so than others - or will it even out once I've made hundreds of transactions?Answer
Ignoring any initial charge discounts, unit trust prices shouldn't vary between brokers. That's because most are only priced once a day - the fund publishes its buying and selling prices, typically at a fixed time between 10am and 3pm, and these are the same for everyone. Trading is normally on a 'forward' basis, which means your trade will be carried out at the next published price, so you can't be certain of the price you'll get when you place the deal.

So buy a fund via Hargreaves Lansdown and Cofunds and the price should be the same, unless Hargreaves Lansdown gives a bigger initial charge discount on that fund, in which case you'd expect the buying price to be lower.

A quick example helps to explain this point. Suppose a fund has a buying price of 100p and a 5% initial charge, you'd expect the selling price to be 95p (in practice it'd be slightly less due to other costs such as stamp duty within the fund, but let's ignore these to keep things simple). If there's no initial charge discount you'd buy units at 100p, but assuming a full initial charge discount you'd buy the same units at 95p - much better!

Investment trusts are different as they're priced in real time, just like conventional shares, so the price can vary throughout the day. Stockbrokers are under an obligation to attain the best price they practically can when buying and selling shares.

In practice this means the prices of more popular investment trusts should be very similar, if not identical, across all stockbrokers. When it comes to less frequently traded investment trusts it can be harder to find buyers and sellers, potentially giving rise to a variance in prices - it may be that one stockbroker uses a market maker (basically a middle man) offering more favourable prices than another.

Read this Q and A at http://www.candidmoney.com/questions/question565.aspx

Good time to buy corporate bonds?

Question
As UK interest rates now look like they will remain at their current level for the next 6 to 12 months I wondered if you felt corporate bonds were worth considering as an alternative to the volatility of the stock market and the poor rates of interest paid by bank accounts ? I would intend to trade out of them when interest rates look like going up.Answer
Higher quality corporate bonds aren't a bad place to be during volatile stock markets and your approach sounds sensible. However, there are issues to be aware of:

Bond yields to redemption (i.e. annual equivalent income including interest payments and any gain/loss on the redemption price versus current price) are only around 2-5% for companies at the safer end of the scale. Given you can earn around 3% variable annual interest or 3.5% fixed for a year via 'best buy' savings accounts it begs the question are corporate bonds worth the extra risk when the extra return might be small?

Let's look at a couple of example bonds issued by Severn Trent Water - which should be fairly safe in the scheme of things.

Their 5.25% 100p bond redeeming in December 2014 is trading at around 110p. This means an income yield of about 4.8% (you receive 5.25p on a 110p investment), but given you only receive 100p at redemption you'll lose 10p if you hold until then, which reduces the redemption yield to 2.2% - less appealing.

Severn Trent also has a 6.125% 100p bond redeeming in February 2024, trading at around 115p. This gives an income yield of 5.3% and a yield to redemption of 4.5%.

The income yields are fairly similar, but there's a big difference in redemption yields. That's because bonds with longer periods until redemption are more susceptible to high inflation and interest rates. If inflation is high long term you'd be more concerned over the impact it'll have on the 100p being redeemed in 2024 than in 2014 - so markets price such expectations into bonds accordingly.

The reason I mention this is that short term corporate bond investing is generally safer when bonds are redeeming sooner than later. But then the possible returns currently look lower. Suppose you buy the above 2014 bond at 110p. You collect the 5.25p annual interest, which is nice, and sell in a year's time. Assuming markets think little has changed, you might expect to sell for 110p. But as we're another year closer to the 2014 redemption it might be that markets are only willing to pay 107p to ensure the yield to redemption remains attractive. In that case you've received 5.25p of interest but lost 3p of capital, giving a total return of 2.25p on 110p, equal to about 2% annual interest - not great.

The long dated bond is less likely to suffer in this respect, but a sudden change in future inflationary or interest rate expectations will likely have a greater impact on price (for better or worse) than the short dated bond (it also depends on how much interest a bond is paying - a stat called 'duration' incorporates all this to predict sensitivity to interest rate movements). So if markets predict rising interest rates before you do you might end up having to sell at less than the 115p purchase price, hurting returns.

I don't want to talk you out of buying corporate bonds, but just bear in mind the above risks and be fairly confident you can predict when the tide turns re: interest rates before markets do, so you can (hopefully) get out with a nice profit.

Bonds issued by banks are trading at lower prices (which means higher yields) following the recent downturn, so worth a look if you're comfortable with the risk. But of course, if things really blow up then banks are likely to be on the receiving end which increases the likelihood they'll default on their bonds - which is why markets are currently pricing them lower.

A good place to look at bond prices and yields (aside from a copy of the FT) is www.bondscape.net - click on closing prices under features.

Good luck!

Read this Q and A at http://www.candidmoney.com/questions/question564.aspx