Buy BP shares?

Question
What do you think is going to happen to BP next..should one invest? Can the company go under?Answer
I’m sure arguments and court cases will rattle on for a few years before the total compensation bill for the oil spill is known. BP may not be liable for all of this if other parties involved (e.g. sub-contractors) are also held liable, but it’s fairly safe to assume it will end up paying a significant sum.

It’s too soon to guesstimate the impact of the oil spill on BP’s finances, but I think it’s highly unlikely BP will go under given it routinely posts pre-tax profits of around US$20-30 billion a year and holds about US$8 billion in cash. Perhaps at worst case BP might have to sacrifice profits (hence dividends) for a while, but unless the oil price plunges it seems plausible that BP should be able to shrug off the impact of this crisis within a few years, if not sooner.

Is now a good time to buy BP shares? Very difficult to say. Whether the shares are good value or not depends primarily on how much compensation BP ends up having to pay, which, of course, no-one knows. So buying BP shares now is a pretty big gamble. While I doubt you’ll lose your shirt, share price volatility could give you quite a few restless nights.

I suppose there is a moral and financial issue arising from this. As oil becomes progressively more difficult and dangerous to extract, you'd expect the likelihood of more catastrophic oil spills to increase - meaning more risk for both investors and the environment.

Read this Q and A at http://www.candidmoney.com/questions/question211.aspx

Why protected plans look bad value

During these volatile markets you’d expect capital protected plans to be selling like hotcakes. Yet those on offer look distinctly unappealing and are unlikely to seduce many investors. .

The plans that fully protect your money are struggling to offer potential returns of more than a few percent above cash, with the risk of delivering far less. While plans offering possible returns of up to 10% or more a year put your original investment at risk, so you may earn less or even lose money.

Of course, you never get something for nothing when it comes to investing. And protected capital plans are no exception.

The reason these plans are struggling to offer attractive terms at present is largely due to a combination of low interest rates and volatile markets.

In simple terms protected plans work something like this. You invest £100 in a 5 year capital protected plan. The manager takes, say, £80 and puts it in a fixed rate cash account to return £100 after five years – so they can return your initial investment if markets fall. Of the remaining £20, the manager pockets £5 - £10 to pay a sales commission and still leave them with a healthy profit. The balance is used to buy financial instruments, called derivatives, from an investment bank that provide some returns linked to a stockmarket index, e.g. the FTSE 100.

When interest rates are low the manager must keep more of your £100 in cash to ensure they can return it at maturity, whatever happens to markets, leaving less money to buy derivatives.

Derivatives also tend to be more expensive when markets are volatile, as there’s a greater chance they’ll have to payout. For example, suppose I buy a derivative that allows me to buy shares at 110p in a year’s time and the shares are currently priced at 100p. If markets are pretty flat the bank selling the derivative will probably take the view that it’s not that likely the share price will rise above 110p (meaning they’ll lose money). But if markets are up and down like a yo-yo then there’s a greater chance the share price could be higher than 110p after a year, so the bank will charge a higher price for the derivative to compensate for the extra risk of them losing money on the deal.

So with less money to buy derivatives and the derivatives themselves more expensive to buy, the protected plan manager can afford to buy less stockmarket exposure than in the past.

Despite this, plans that fully protect capital with a decent chance of returning just above cash do hold some appeal to higher rate taxpayers provided the returns are subject to capital gains tax and not income tax. If gains on maturity are within their annual capital gains tax allowance then it’s a reasonably safe way to enjoy tax-free returns. Trouble is, protected plans don’t generally mature for five to six years, by which time capital gains tax allowances could be a lot smaller than today – leaving the owner potentially facing a big tax bill.

Read this article at http://www.candidmoney.com/articles/article116.aspx

Jupiter shares a good buy?

Question
I noticed Jupiter is planning to float on the LSE this month. Do you think it's worthwhile buy shares?Answer
Your question arrived just before I posted this article discussing the Jupiter IPO. Take a read of the article for more detail, but in summary my view is as follows.

The business model for fund managers like Jupiter is really very simple.

1. Attract lots of assets under management (AUM).
2. Charge percentage annual management fees on those assets.
3. Watch the money roll in.

Of course, the hard part is attracting the assets (i.e. fund investors) in the first place. Fortunately for Jupiter it has some very capable fund managers in its stable and strong performance has, over the years, led to lots of investors putting money in Jupiter investment funds.

The problem with this business model is that falling markets really hurt. Not only does revenue from existing customers fall (remember, annual management fees are charged as a percentage of fund value), but there’ll likely be fewer new customers and some existing customers will decide to sell their fund holdings. This hits revenue, so unless a fund group can significantly reduce costs then profits are likely to take a heavy hit during a downturn.

In Jupiter’s case it has reduced costs in recent years, largely by paying staff lower bonuses, but there’s probably not much fat left on the bone to shave off. On the plus side the flotation will allow Jupiter to cut borrowing costs by repaying its most expensive debt, but falling markets could outweigh these savings and leave the company struggling to turn a profit shorter term.

Should you be nervous about markets? Well Jupiter’s financial stocks expert clearly is. Philip Gibbs currently holds nearly one third of his Financial Opportunities fund in cash – as clear a signal as you could get about his pessimism (although knowing his 6.37% personal stake in Jupiter could be worth over £40 million should cheer him up!).

Nevertheless, I think Jupiter is a well run company and should do well longer term provided it can hold onto its key fund managers such as Anthony Nutt, John Chatfeild-Roberts and Philip Gibbs. So if you do think markets will perform well over the next few years then buying shares in Jupiter could make sense.

Personally, I won’t be buying any Jupiter shares, at least not now. I think markets are just too volatile and uncertain, with the timing of the float appearing to suit Jupiter staff better than potential investors.

Read this Q and A at http://www.candidmoney.com/questions/question210.aspx

Does Nationwide Champion Saver deserve a medal?

Nationwide’s Champion Saver account is a branch based 60 day notice savings account which promises savers a consistently competitive rate of interest.

It does this by paying the average of the top five branch based instant access, limited access and notice savings accounts offered by eight high street rivals: Barclays, Halifax, HSBC, Lloyds TSB, Natwest, Northern Rock, Royal Bank of Scotland and Santander.

Only one account per bank can be used when calculating the average, so you could lose out if one bank has particularly competitive rates on several accounts as only one will be included. A less attractive rate from one of the other banks will then be used to make up the numbers.

The rate is calculated at 9am on the second Monday of each month assuming a balance of £10,000 (using rates compiled by Moneyfacts) and then applies from the first day of the following month. Interest is paid on 31 December each year.

The average rate for June 2010 is 1.71% gross and it had been stuck at 1.59% over the year before then. Nationwide is adding a bonus of 1.10% gross to this until 31 January 2011, so the headline rate being advertised at the time of writing is 2.81% gross.

You’ll need to give 60 days notice to access your money else lose 60 days worth of interest on withdrawals. Subject to losing this interest, you can withdraw up to £500 per day from a cash machine. Otherwise you can draw a cheque of up to £500,000 in branch or pay £20 for an electronic transfer.

Although you only need £1 to open the account Nationwide will pay a rather uncharitable 0.1% gross (at the time of writing) unless your balance exceeds £1,000, when it’ll qualify for the normal rate.

Is this an account worth using? Well, maybe.

On the plus side it should help ensure you don’t fall victim to the common bank/building ploy of gradually reducing rates on a ‘best buy’ account to almost nothing once you’ve become a customer.

However, Nationwide’s Champion Saver account is a poor relation to the Investec High 5 account, now closed to new customers.

By restricting its universe to branch based accounts from just eight high street banks Nationwide is severely limiting the average rate you can expect to receive. Many of the highest rates on the market are paid by other institutions and internet/postal accounts which, coupled with the averaging, means you’ll almost always fall well short of market leading rates. The fact Nationwide is having to pay a 1.1% bonus to make this account look appealing speaks volumes.

You might also find the hassle of a branch account a downside as Internet functionality is limited to viewing your statement online.

Bottom line, the Champion Saver account is not a bad choice if you’re a lazy saver who’s probably earning 0.25% or less on their savings at present. But you could probably do a lot better longer term if you’re prepared to seek out ‘best buys’ and switch when those rates become uncompetitive.

Read the full review at http://www.candidmoney.com/candidreviews/review30.aspx

Invest lump sum in an oeic?

Question
I have a lump sum to invest. Is it worth putting it in a OEIC and just leaving it there as I will not be able to add to it on a monthly basis?Answer
Maybe, but the key thing to consider is how your money is invested within the oeic.

Open-ended investment companies (oeics) are similar to unit trusts, i.e. they’re funds that combine your money with that from others and invest it according to an agreed objective.

There are lots to choose from and you’ll find oeics and unit trusts that invest in most areas, ranging from cash and corporate bonds to property, commodities and stockmarkets. So whether or not investing is worthwhile for you really depends on how comfortable you are owning the underling investments and the likelihood you’ll make more money versus leaving the cash in the bank.

The problem right now is that markets are so volatile and the outlook so uncertain I think the next year will be a particularly tough one in which to make money.

You should also bear in mind that the majority of fund managers who run oeics and unit trusts often struggle to beat the market, which gives rise to the argument for using index-tracking funds – although these don’t fare well in all markets.

If you’re happy to invest for 10+ years you’ll probably do better than cash, but you’ll need to be comfortable with the possibility of losing money, especially in the shorter term. If this will give you sleepless nights then consider a good fixed rate savings account or National Savings Index-Certificates instead.

Should you decide to invest then think carefully about how much risk you’re comfortable taking and do some homework to help pick a fund manager that’s likely to be successful, or opt for a tracker fund if available for the type of investment you choose. You could also consider drip feeding your money into a fund over a period of time to lessen the pain should markets fall just after you invest.

Finally, unless you need advice then using a discount broker should prove cheaper than buying direct from a fund manager. Take a look at our ISA Discounts Action Plan for more details.

Read this Q and A at http://www.candidmoney.com/questions/question206.aspx

The price of Krugerrands?

Question
What's the price of a 1 once Krugerrand in Sterling please? Answer
South African 1 ounce Krugerrand coins are 22 carat gold rather than 24 carat – they contain a small amount of copper to harden the coin. However, they weigh more than 1 ounce to compensate, so that they contain 1 ounce of pure (24 carat) gold.

At the time of writing the price of 1 troy ounce of pure gold was about £837 (US$ 1,222).

However, you’ll normally find that dealers build in a 5-10% margin on the buying and selling prices they offer versus the actual price of gold. For example, current dealer prices seem to be about £900 if you’re buying Krugerrands and £800 if selling.

It’s worth shopping around a few dealers on the web to find the best price as their margin is your loss. You’re also likely to get a better deal when dealing in several coins rather than one.

Read this Q and A at http://www.candidmoney.com/questions/question207.aspx

Broken NEST egg?

I've finally received a reply to my letter urging Alistair Darling to amend the proposed NEST pension rules to allow transfers..

There follows the text of the letter I sent to Mr Darling, when he was still in No 11.

"I welcome the NEST proposals, although I do not believe for one moment that the charges will cover the costs. Whatever assumptions are being made in this regard are in my opinion on the optimistic side of heroic. My opinion is supported, by the way, by the USA experience with 401(k).

I am however especially concerned about the decision not to allow transfers in or out of NEST. This seems to run counter to everything that has been done to create flexibility for savers. I guess any employer running a Stakeholder will simply switch to NEST. This will leave the members with mostly trivial pension pots charged at 1.5% or 1% of the fund value annually. There will also be a significant number of self employed people with fairly small Stakeholder funds. The fund resulting from an investment growing at 5% for 20 years, charged at 0.3%, is 14% greater than if the charge had been 1%.

This situation arises because the not altogether irrational dislike of front end loaded charges drove the Treasury to the not altogether rational opposite of back end loaded charges.

While I agree that allowing free for all transfers in could be massively disruptive, I think the Government has a duty to the people in the original Stakeholder target market. It would be fairly easy to allow anyone enrolled in NEST to transfer in up to say £20,000 from a Stakeholder or any other personal pension.

It would be equally easy to recognise that circumstances change, and that NEST members may subsequently become much better off and want to manage their growing pension savings in, for example, a SIPP.

Transfers in would help the NEST finances in the early years. Transfers out would not happen for some time, and their impact on NEST finances would then be negligible.

Will you ask NEST to reconsider this part of the rules?

Even if NEST declines to change the rules on transfers, will you ensure that Stakeholder schemes are obliged to inform their members that staying in Stakeholder for the long term will almost certainly damage their wealth, and that they should take advice about the alternatives open to them?"

I thought this was all quite reasonable. After a two month delay I have a response from a jobsworth in the DWP that could have been written by Humphrey Appleby himself.

We spent decades getting to the point where pension savings could be moved around. Millions of people have now brought all their pensions bits and pieces together in SIPPs. Transferability works. Thus, a clear case for knocking it on the head. We are ruled by fools.

Capital gains tax

I’m much more bothered about the prospects of a flat rate of CGT at 40%, with no indexation relief. £100,000 invested over five years with the portfolio (ex dividend, which is taxed anyway) growing at 5% per annum delivers £127,628. If all the gain is taxed at 40%, and inflation over the period has been 2.5%, what comes out is, in real terms, more or less what went in. In other words, it simply isn’t worth taking the risk.

Taxes have to rise, even though any tax rise will weaken demand in the economy and so prejudice growth prospects. Then again, savage public spending cuts will weaken demand in the economy, and so prejudice growth prospects. Savers have already been hammered by an awful ten year run on the stock market, and rotten interest rates. Hammering them again with CGT is perverse, and it won’t work, because we’ll only incur the tax in extremis.

Common sense might yet prevail, but I wouldn’t count on it.

Read this article at http://www.candidmoney.com/articles/article114.aspx