“The big theme we are likely to see play out during 2016 in relation to platforms is profitability or, in many cases, lack of profitability.
Platforms - Andy Bell, chief executive of AJ Bell:
“The big theme we are likely to see play out during 2016 in relation to platforms is profitability or, in many cases, lack of profitability.
“Too many platforms are chasing the mirage of profitability without adequately managing their cost base. With platforms now accounting for over 50% of retail sales, I think the commercial models are going to come under greater scrutiny from advisers, the regulator and platform shareholders.
“The FCA clock is ticking for platforms that operate hand-to-mouth and we may even see the amount of regulatory capital required to be held by platforms increase further.
“We have already seen evidence of the patience of deep-pocketed shareholders running thin and I think this is set to continue. There are plenty of platforms for sale at the moment but very few firms who have the appetite or ability to buy them. Widespread consolidation in the platform market is therefore unlikely in 2016 or in fact beyond next year.
“That is not to say we won’t see selective deals where it makes sense but I think these are more likely to be companies buying into the platform market rather than platforms consolidating. Vertical integration is a horrible phrase but I think it is a trend we will see more of, with platforms looking to extend the services they offer and fund groups looking to wrestle back distribution, which is where we may see some acquisition activity.”
Pensions - Andy Bell, chief executive of AJ Bell:
“There is no doubt that the big announcement everyone is waiting for is the outcome of the consultation on pension tax relief. The fact that the Government did not rush through an announcement in the Autumn statement is a positive sign. The pension freedoms have done a lot to put pensions back in to the public consciousness and care must be taken not to derail that by announcing significant changes to the system without properly thinking through the unintended consequences.
“There has been a lot of public support for a flat rate of pension tax relief, with many attracted to its headline simplicity. However, when you start to look into the practical application to defined benefit schemes or employer contributions, it would not be as simple as some people think.
“Whatever the outcome to that particular conundrum, there are a couple of changes that I’d like to see to the pension system in 2016. Firstly, the need for the Lifetime Allowance now seems negligible and I’d like to see it removed. The cost of pension tax relief to the exchequer needs to be controlled but this is done via the annual allowance and the lifetime allowance therefore just penalises investment growth.
“Secondly, I’d like to see the Government ban early exit penalties that get in the way of the pension freedoms. The ability to withdraw money from a pension without constraint has revolutionised pensions and reinvigorated customer engagement. Anything that gets in the way of savers being able to benefit from that change should not be allowed.
“The main reason given for early exit penalties is to cover initial costs but it is debateable whether some exit penalties really do relate exclusively to initial set up costs or whether they are actually about on-going provider profitability.
“There does need to be an element of pragmatism to this issue so limiting the ban to penalties beyond the age of 55 where there is no access to the new pension rules seems sensible.”
Investment – Russ Mould, investment director at AJ Bell:
“Three themes in particular look set to dominate in 2016:
1.“Deflationary headwinds will persist and companies with true pricing power are likely to offer best returns.
“Global indebtedness is higher now than it was in 2007, according to a report from the McKinsey Global Institute and paying off these liabilities is inherently deflationary. Demographic trends in the West and the price-crushing transparency of the internet are also both deflationary by nature so companies with true pricing power are going to be rare and highly valued, for their cash flow and dividend-paying potential. This still speaks loudly in favour of tobacco stocks, as they are managed for cash, and also well-run income funds, with a UK or global mandate, which are managing the reach for yield and avoid taking excess risk to generate income.
Good examples here are Mark Barnett’s Invesco Perpetual Income, Michael Clark’s Fidelity UK Moneybuilder Dividend or the JOHCM UK Equity Income portfolio run by James Lowen and Clive Beagles.
2. “Policy divergence from the central banks.
“The November non-farm payrolls number left the US Federal Reserve with no excuse not to raise interest rates on 16 December. Meanwhile, the European Central Bank continues with looser policy, not tighter, in the form of extended QE and further interest rate cuts and the Bank of England continues to dither, perhaps concerned by the strength in sterling. Those investors who believe the US will again offer the best economic growth in 2016 (albeit against an uninspiring set of competition) leads us toward the US and investors looking for exposure to that market could consider a low-cost tracker fund like iShares Core S&P 500.
“However, US markets could be described as expensive on some metrics and so contrarian investors with a long term time horizon may look to Europe for buying opportunities. On the active side, Gavin Launder of L&G European Trust has positioned his fund for a recovery in the eurozone’s economic fortunes while a lower-cost tracker option could be the Vanguard Developed Europe ex-UK ETF.
3.“The dollar bull market could continue to run.... and run.
“The buck has already surged from 76 to 106 on the Bank of England’s trade-weighted basket but this index peaked near 160 in 1985 and at 125 in 2001, so the greenback could go a lot higher, especially if the Fed hikes interest rates and everyone else stands pat. Dollar strength has tended to be bad for commodities as it makes them more expensive in other currencies and emerging markets, owing to the percentage of their borrowings that are made in dollars rather than local currencies. However, emerging markets have had a run of four straight years of underperformance relative to developed stock markets and patient, risk-tolerant investors prepared and able to sit out some lumps and bumps along the way may look at this as an opportunity.
“Well-run funds with broad exposure and solid performance track records here include the Utilico Emerging Markets investment trust (an infrastructure specialist), the Fidelity Emerging Markets OEIC and the UBS MSCI Emerging Markets Exchange-Traded Fund.”