What are Sovereign Wealth Funds?

There are lots of stories circulating about Sovereign Wealth Funds. So what are they?

They are government funds from counties like the oil rich Arab countries & emerging markets like Singapore & China. The Chinese one is worth $1.46 trillion! ($1 460,000,000,000 ) The money is generated by the export of natural resources such as oil and gas in the case of the Gulf States and Russia and manufactured goods in the case of China. The Sovereign Wealth funds are buying assets to safeguard the financial future of their home countries these might include shares in large companies, government stocks or commercial property. One example in the news recently is Dubai International Capital owns budget hotel chain Travel Lodge and has been interested in acquiring Liverpool Football Club.

The funds have become increasingly important in Western financial markets, bailing out US banks hit by the credit crunch. British Banks such as Royal Bank of Scotland & Barclays have seen investment from Qatar and Singapore respectively.

An interesting issue is that will the funds demand a greater say in the running of companies perhaps based on political reason? Some of the US banks bailed out by Arab money have issued special share classes to accommodate the new money without the usual voting rights.

Revenue buys stolen information about tax haven

It has come to light, that the tax authorities (HMRC) have paid £100 000 for information about bank accounts in Liechtenstein. They aim to potentially get back £100 million in tax avoidance from UK residents who have stashed money there to avoid UK tax. They bought the disk with stolen data from a disgruntled former employee of the Liechtenstein Global Trust (LGT).

The German tax authorities previously had paid 5 million Euros for information about German tax payers. Tax inspectors there are going through the finances of 900 people based on the information they received.

Lichtenstein is a major financial centre with 75 000 registered companies but only 35 000 residents. The LGT offers “wealth management to individuals and companies with the promise of absolute confidentiality.”

HMRC have the power to pay informants for information and have been investigating offshore investment in tax havens like the Isle of Man & the Channel Islands. Whether the payments for the stolen data is legal will be a big question. Finally as Mickey Clarke of the Evening Standard noted, “hopefully they won’t lose the valuable disc!”

Spot the Dogs: Poor Investment Funds

Every year Bestinvest name & shame the worst performing (dog) investment funds ; those underperforming the benchmark in each of the last three years and down on the benchmark by 10% over the same period.

Scottish Widows were quoted as ‘gone to the dogs’, with over half the group’s funds underperforming.

The worst culprits in different categories were

• UK – £13m Marlborough UK Equity Growth, down 37%
• European – £355m Melchior European Opportunities, down 37%
• International – £60m UBS Global Optimal, down 14%
• North America – £9m Invesco Perpetual US Aggressive, down 27%
• Tech – £37m Jupiter Global Technology, down 11%
• Japan – £66m M&G Japan Smaller Companies, down 28%
• Emerging Markets – £59m Lloyd George Emerging Markets, down 19%
• Asia Pacific – £232m Invesco Perpetual Hong Kong & China, down 25%

Invesco Perpetual have star manager Neil Woodford but as you can see are home to 2 dogs.

Share picking, potentially dangerous for your wealth.

One area the Sunday newspapers love is share picking, it is also beloved of sites like the Motley Fool.

The problems include:

• Newspaper journalists are not investment professionals. There is no comeback on their “advice”
• They don’t consider attitude to risk or things like the need for emergency funds.
• Do you have the investment knowledge? Is the share a cheap because they company is a basket case or merely unfashionable? Can you predict Northern Rock style crises?

The solution

Invest in a good mutual fund, you eliminate a lot of the risk. A professional manager looks after your money and can taken action on your behalf in the event of a Northern Rock style crisis or take advantage of low market prices

Which ones? Speak to your financial adviser, discuss your needs, risk and how much you can realistically invest.

Northern Rock Nationalised

After 5 months, the government has finally taken action over Northern Rock. It will be nationalised after £51 billion has already committed to the ailing bank in loans & guarantees to savers.

Nationalisation become inevitable after the one potential bidder after another was rejected.

When the crisis arose, there were a number of alternatives

1 Let the bank go bust.

2 Let a high street bank like Lloyds TSB take over the bank, who were initially interested.

Probably the worst aspect of the crisis was the Chancellor being indecisive for so long & seemingly hoping the problem would go away, the delays have severely damaged the Northern Rock brand.

There is one glimmer of hope, the man put in charge Ron Sandler has a good record of previously running Lloyds & Nat West.

Norwich Union...windfall....generous?

Norwich Union have not been slow in trumpeting a £3 billion distribution of money to With Profits policy holders.

Is it a good deal for the consumer?

They actually have over £5 billion left over from fund re-organisation. This is actually customers' money. They are being coy why they can't distribute the other £2 billion ot customers

90% of the money distributed is going to policy holders with 10% going to Norwich Union shareholders. They originally wanted to give a lower figure to clients but then the government's Policyholder Advocate put pressure on them.

In context, a lot of these policies are held in underperforming endowment policies for which Norwich Union have had to pay compensation for misselling.

A final note, they aren't paying out the customers' money to customers straight away. They are doing it over a 3 year period!

New Star: fallen Star?

New Star are one of well known fund providers, they advertise heavily in the money sections of the broadsheet newspapers always launching a "new, exciting opportunity". They have a distinctive psychedelic multi-coloured logo, which apparently looks that way because the printers forgot to add any black to the printing proof.

They were founded by George Duffield, who previously built up Jupiter. He has been extremely generous in sharing his wealth by giving share options to his employees.

However things have started to come unstuck int he last year as Financial advisers have moved money out of under-performing New Star funds.

When the company was established in the early noughties, they brought in many highly paid star fund managers and continue to launch new Funds.

The perception now withing the industry is that they have concentrated too much on trying to grow rather than doing the basics of investing existing investor's money wisely. Some of the funds also have a novelty feel about them.

That said, they still have some very funds. Which ones? speak to your adviser ;).

Food & Fuel Inflation

For the last 50 years, the price of food has come down due to intensive modern farming techniques.
Why then has the price of bread increased quite significantly over the last year?

Production of wheat worldwide hasn't increased much recently, what has increased is demand from India & China with a combined population of 2 billion. This has caused much of the food inflation we have seen recently.

It's a similar story with oil & gas, there is greater demand from newly industrialising countries with production remaining level as market makers put up prices as compettion is greater.

Interest Rates fall 0.25% to 5.25%

As widely predicted the Bank of England reduced interest rates by a quarter of a percent to 5.25%.

It is a bid to stimulate the economy by putting more money in people's pockets. Is this a good thing? Not if it encourages people to borrow more money, as that it partly why economic problems possibly loom.

Interestingly the reason why the Bank of England put up rates several times last year before last summer's "credit crunch" was because of fears of inflation caused by borrowing. Fuel & food inflation is still around....