Appointing an Investment Manager - a risky business?? 17 th November - - PowerPoint PPT Presentation

Appointing an Investment Manager - a risky business??

17th 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

• utsource 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

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Cash 10% Equities: DM 45% Equities: EM 25% Government Bonds 20% Generic Private Client Asset Allocation

Er, which asset do you mean exactly ?

9 Cash 10.0% Equities: DM 45.0% Equities: EM 25.0% Government Bonds 20.0%

Newton Real Return Fund Conclusion 1: Share class issues can be complex Tax requirements need to be integrated into trading and risk systems

Share Class Curr. Reporting 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 6 Euro No Retail Accumulator Non -UK 7 Euro No Institutional Accumulator Non -UK 8 Euro Yes Institutional Distributor Non -UK

A hard rule approach can create its own problems

10 Cash 10.0% Equities: DM 45.0% Equities: EM 25.0% Government Bonds 20.0%

First State Asia Pacific – UK Situs

Share Class Curr. Class Type Situs 1 GBP Institutional Accumulator Non-UK 2 EUR Institutional Accumulator Non-UK 3 USD Institutional Accumulator Non-UK

Conclusion 2: There is no substitute for knowing and understanding each asset well MW Gavekal Asian Opportunities

Even cash and bonds can be tricky...

11 Cash 10.0% Equities: DM 45.0% Equities: EM 25.0% Government Bonds 20.0%

Accrued Interest for government bonds

• Can you separate capital from

income?

Money Market Funds:

• Do they have reporting status?

Margin for (say) FX hedges

• Who is the hedge

counterparty?

Conclusion 3: Sometimes you’ll need specialist help

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

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Sample client input information for the IPS ART system:

Tax Status Reporting Status Needed? Institutional

• r Retail

Share Class? Accumulator

• r

Distributor Non-UK Situs? Annual Cash Needs Cash Need Date Payment Frequency Min Cash balance 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

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

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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

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Biographies – Stuart Skeffington & Chris Brown

15 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. 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

• ffshore 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. Chris Brown CIO, IPS Capital Stuart Skeffington Partner, Stevens & Bolton Telephone: 0207 469 6830 Email: cbrown@ipscap.com Website: www.ipscap.com Telephone: 01483 406 952 Email: stuart.skeffington@stevens-bolton.com Website: www.stevens-bolton.com

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

• pinions in this document and these may change. The material is not intended to provide, and should not be relied on for, accounting, legal
• r 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

• r 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

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