Foresight Capital Partners

The financial services industry (particularly fund management) is essentially a marketing operation. Because marketing is such a key aspect of such business they pay relativity high levels of reseller commissions. Whether you are buying a mortgage, taking out a loan and credit, you can (almost certainly) be assured that the person selling you the product will receive a sales commission for doing so. The sales commission on a mortgage will typically range between 400-1,000 GBP (depending on the type and size of mortgage). However, as is the case within unit trusts some brokers (see below) are more than happy to share their sale commission with the customer.

For (partial) sales commission refund on Mortgages see:

http://Mortgagegenie.co.uk (Good online tool for comparing total costs of mortgages)
http://Moneybackmortgages.com

For other financial products (loans, credit cards) see:

http://www.greasypalm.co.uk
http://www.quidco.com
http://www.rpoints.com

For more details concerning this topic and numerous other money saving ideas see:

http://www.moneysavingexpert.com/

after all a dollar saved is a dollar earned.

A managed account is owned by an individual and run by a third party investment manager. Since managed accounts are personalized investment portfolios they can be tailored to specific needs (tax, risk profile, income level etc) of the account holder. Since a managed account is always owned by an individual they offer complete security and access. Managed accounts are also offer high levels of transparency in terms of investment approach and complete transparency in terms of costs (such as brokerage fees) incurred by the account.

These features offer clear advantages over Pooled Investments such as Unit Trusts and Investments Trusts where the assets will be held by a custodian appointed by the fund manager. Moreover, transparency of investment approach and the costs can be difficult if not impossible to discern from the published materials.

A managed account set-up can be as simple as having a brokerage account where a third party Power of Attorney mandate to empower an Investment manager to operate the account on your behalf has been established. Alternatively you may wish to set up a company or trust structure (onshore or offshore) which holds the assets, in order to allow a family managed account and/or tax planning.

The Isle of Man government has recently published a report produced by Aquatera Limited on the viability of various forms on renewable energy for the Island. The report available at:

http://www.gov.im/dti/Energy/

broadly concludes that Wind Power is the only viable resource in the near term using existing technologies. Moreover, analysis of the economics of an offshore resource details that the resulting revenue from such a project would repay the initial set-up and running cost after 13.73 years. Hence, such a project would only provide an internal rate of return of 5.1756% over 13.73 years. With the 10 year Gilt yield being around 4.82%, such a project (in my view) is not financially justifiable since its return over gilts is not enough to justify the inherent risk of such a project.

What about Onshore Wind Farms?

The report unfortunately makes no real attempt to explain why the much more obvious options of an onshore wind farm were not considered. In fact, the option of an onshore wind farm seems to have been discounted from the start, with the rationale given on page 47:

Due to the structure of the Manx planning process, the possibility for commercial scale onshore wind turbines has already been discounted.

Moreover, within the 143 page report the only other reference’s on commercial scale onshore wind farms is on page 18, which reads:

Onshore wind was specifically excluded from this report at the request of the DTI, as previous studies have already looked at the opportunities for this technology.

and on page 15, I found:

In the case of the Isle of Man there are some specific legal protection mechanisms that make onshore development of renewables particularly challenging.

Financial case for Onshore Wind Farms

Though the figures where not worked out for an onshore wind farm, after doing I little digging I found within the article ‘Land- vs. Sea-based Wind Farms’, at:

http://www.pbs.org/newshour/science/wind/landvssea.html

the following guidelines:

Cape Wind itself has an expected energy output of 38 percent of capacity over the course of a year, compared to the mid-to-high 20s or low-30s for onshore wind farms, noted Cape Wind’s communications director Mark Rodgers…

But one of the main challenges to building offshore is cost. The price tag of installing offshore sites can reach 50 percent to twice that of land-based wind technology, Calvert said

Hence, as an estimate I would suggest the drop in power of an onshore vs offshore site would be around 18%, but the reduced cost on an onshore vs offshore farm would be between a 1/3–1/2. Therefore, the cost per KWH would be reduced by 21% - 41% over 13.73 years. Implying an internal rate of return of 6.26%-7.30%, which would provide a return over gilt yield’s in proportion to the level of risk taken by the investor.

Before 2006, Trusts provided a good way for UK residents to pass wealth to the benefactors of their estate while retaining control. However, after the 2006 Budget changes using a trust now involves an immediate 20% inheritance tax penalty. For this reason is it now common practice to use a Company structure the hold assets where a proportion of the shares in the company are given to the benefactors. This allows wealth to pass to the next generation but at the same time allows some control to be retained via the rights in the company shares.

For UK residents with UK domicile typically a UK Company will be used since using an offshore Company structure will be subject to various anti-avoidance provisions. However, a UK Company though providing a long term solution for IHT planning does raise some problems. The primary one being Corporation tax where all gains on investments minus costs will be deemed profit. It is possible to mitigate this problem by setting up an Investment Trust (as some ultra HTW individuals have done) which does not pay Corporation Tax on investment gains, but for the majority of HNWs this strategy is just not practical because of the complexity and cost involved.

Isle of Man Solution

There are a number of offshore jurisdictions which can be used to mitigate these problems but the solution I detail below is particular to the Isle of Man. The Isle of Man does not impose any capital, wealth or estate taxes, and hence is an ideal location for those wishing to manage CGT and IHT exposure.

The approach involved first moving offshore to the Isle of Man, which is very simple for UK nationals since they have no residency restrictions, after obtained residency an IOM Company should be establised. Since the IOM Treasury does not levy any capital taxes, the capital gains which the IOM Company makes on its investments will not be taxed however the investment income generated will be taxed at a rate of 18%. Saying this, even the income can be set against some `Allowable Expenses’ as detailed at:

http://www.gov.im/treasury/incometax/technical/practice/PN68-97.xml
http://www.gov.im/treasury/incometax/technical/practice/PN74-99.xml

There may be instances when the structure may involve a trust where the typical structure in such instances is having, a Trust which owns IOM Company which owns UK Assets. Note that when a Trust is introduced into the equation you will nearly always raise more interest with authorities and introduce complexity into the set-up and administration process which will most likely result in additional costs. My personal view is that even if you want Trust like features within the proposed structure then in nearly all instances the easiest approach is to use Company constructs (with special conditions in the articles of association) to mimic the desired effect.

Now the investment decisions of such a IOM (Holding) Company will need to be undertaken by the nominated directors who will typically be the parties who established the holding structure. Though the Company is a distinct legal entity from the directors and hence to director’s are arranging and dealing in investments for a third party, if the arrangement is private (i.e. not marketed) and has a maximum of 50 shareholders then it will typical be deemed an Exempt International Scheme and be exempt from Finance Regulation as detailed at:

http://www.gov.im/fsc/policy/regcollective.xml

in particular,

Exempt International schemes are not subject to the provisions of section 11 of the FSA. They must have less than 50 investors and their relevant constitutional documents should expressly prohibit the making of an invitation to the public to subscribe in any part of the world. Such schemes are regarded as private arrangements and are not subject to regulation. The manager of more than one exempt scheme must be licensed.

One final point I wish to make is that UK assets (such as UK stocks, UK real estate etc) held within an offshore company will not form part of your UK estate with regard to UK IHT. If on the other hand the assets are held for example within a UK stockbrokers nominee account (which will be domiciled in the UK) then the assets will form part of your UK estate and be liable to UK IHT irrespective of your domicile or residence. But by holding the same assets within an IOM Holding Company which has a nominee account at the same UK stockbrokers the underlying assets will not form part of your UK estate, and hence if you are deemed IOM domiciled then these assets will be omitted from your estate for UK IHT purposes.

Here we detail our Investment Process which roughly speaking consists of an ongoing investment research effort, with all known investment ideas working within a competitive flux for capital. The research process consists of the following three consecutive stages which form an investment complex:

Investment Research Process

• High Level Ideas: Select Top-down Investment Themes with a likely duration of ideally 2-5 years.
• Medium Level Research: Systematic research of all LSE listed assets which allow the expression of the ‘High Level’ Theme, and the selection of the assets (or basket of assets) which allow the most efficient expression of the ‘High Level’ Theme.
• Low Level Quantitative and Trading Techniques: Once the asset(s) have been selected suitable structures and trading approaches will be developed in order to gain exposure to the required assets.

Flux of Investment Complexes

The competitive flux for capital is created when there are more known investment complexes than sufficient capital to cover these complexes. By continuously under-taking fundamental research in order to select ‘High Level’ Investment ideas, construct asset(s) to represent these ideas and investigate the technical and trading aspects of entering such investments. At all times all such discovered investment complexes (invested and un-invested) are in a competitive flux and the fund will switch between investment complexes if and when a un-investment complex is deemed to provide a sufficiently strong argument over an invested complex.

We aim to be fully invested at all times.

Detailed description of the Investment Research Process

The investment process consists of the following three consecutive stages:

1) Generation of High Level Ideas: Macro, stylistic/sector specific or thematic Investment Ideas

The key driver of the out performance of the investment process is the identification of top-down, stylistic/sector specific or thematic investment ideas. The managers are seeking to identify investment ideas which will play themselves out within financial markets over a 2-5 year time frame. The mangers believe that through continuous systematic research and lateral thinking, they will be able to identify on average 2-4, such ‘High Level’ investment ideas per year. The managers also strongly support the view that it is not the number of such ideas which will determine the over-all performance of the fund but the quality of these ideas. For this reason the managers are highly selective in there acceptance of any such ‘High Level’ investment idea and numerous investment conjectures will be considered during any one year. Note that a ‘High Level’ investment idea will generally be formed from multiple underlying investment conjectures.

2) Medium Level Research: Value Oriented Fundamentally based, contrarian Research approach to select particular securities which efficiently express the ‘High Level’ investment ideas.

Once the ‘High level’ investment ideas have been identified by the managers, the managers will systematically undertake a search for securities which first allow these ideas to be expressed, and secondly offer the best risk/reward profile within the context of how the managers believe the high level idea will play out within financial markets. Though the fund managers would broadly agree and apply much of the traditional value investment methodology as detailed within the writings of Benjamin Graham and Warren Buffet, in particular the works:

• The Intelligent Investor, by Benjamin Graham.
• The Essays of Warren Buffett, edited by Lawrence A Cunningham, 2000.

The managers have developed a certain variant of this approach which is compatible with their own mental frameworks which they have applied within the various investment activities and markets in which they operate.

The managers have often found that the most efficient means in which to express a given ‘High Level’ investment ideas is by taking positions within under researched small cap (or even fledging) securities. The managers believe that the rationale for such findings is that these sectors are often the least covered by the research community, and in many cases are just to illiquid to be considered by institutional investors, and as a result the greatest inefficiencies often occur in such sectors. It is anticipated by the managers that investment companies and associated assets (many of which are fledging) will form a significant portion of the investment portfolio. Though such securities themselves are often small-cap the underlying securities which they hold are generally a well diversified collection of blue chip securities, and hence such investment companies do not pose a high level of risk to the investor. It should also be noted that due to the fact that over the past 10 years the managers have often found the greatest opportunities within this sector the managers have build up an expertise within the investment company and associated sectors.

Note: The investment process is not in any way either a small-cap or fund-of-funds approach. Any selection of either small-cap or investment company investments is taken purely because it is believed to be the most efficient means (i.e. best risk/reward profile) in which the express a given ‘High Level’ investment idea.

3) Low Level Techniques: Scalping/market making/technical trading, relative value quantitative techniques and the leveraging of the technology foundation of the fund managers.

This portion of the investment process will generally supplement and run in conjunction within the fundamental research (item 2 detailed above) which is undertaken. The portion of the investment process results from the particular technical skill set which the fund managers bring to the investment process. The technical skills can be divided into two sections: trading (scalping, MM strategies, TA), and quantitative/software. Below we provide further details:

• Trading: Overlay the application of short term trading techniques such as scalping, various market making strategies and acting as a provider of liquidity. In addition, analysis of market internals and trading considerations from a technical analysis stand-point will be considered. The aim of this process is to provide more opportune entry and exit points within our fundamentally selected investment opportunities. In should also be noted that these techniques may also be applied during the period when a given investment idea is being expressed within financial markets. Where we envisage taking a general stance with appropriate holdings over an extended period, however within this period we either switch between associated assets on a relative value or market internals motivated based, and/or scale in/out of the position in order to increase the risk adjusted return profile.
• Quantitative Techniques and Software Platform: Since 1999, we have undertaken firstly the research of quantitative finance, and secondly the development of financial and mathematical software components (see http://www.webcabcomponents.com). These components offer a wealth of financial and mathematical functionality which is leveraged within our internal research systems. In addition, we have developed a proprietary data archive and quantitative financial research platform. This system can apply a variety traditional and state-of-the-art statistical and quantitative finance techniques including regression and time series analysis; pricing and risk (Greeks/global VaR methodology) analysis (for virtually all equity and equity derivative contracts in accordance with a number of price/volatility/interest rate model assumptions).

Milton Friedman

Free To Choose - TV Series by Milton Friedman the Nobel Prize-winning economist on the interrelationship of personal, political and economic freedom.

An interview with Milton Friedman in 2006

Warren Buffet

Charlie Rose’s 3-part interview:

Part 1: Tha Man
Part 2: The Business
Part 3: The Gift

Central Banking

Money, Banking and the Federal Reserve by Ludwig von Mises Institute: History of central banking from the point of view of ’sound money’.

Collection at the Hoover Institute

Uncommon Knowledge - Contains 300 half hour discussions on a wide range of public policy issues by leading economists. Note that the collection can be searched by topic.

Lectures of Joseph E.Stiglitz (See homepage)

Fair Trade for All: How Trade Can Promote Development, Carnegie Council
The Roaring Nineties by Joseph Stiglitz, World Bank
Joseph Stiglitz and Kenneth Rogoff discuss: Globalization and Its Discontents, World Bank
Information and the Change in the Paradigm in Economics - Nobel lecture, Nobelprize.org
Rewriting history, Kellogg School of Management, Northwestern University
The Future of Globalization: Lessons from Cancun and Recent Financial Crises, Globalization research group, Duke

To be continued…..

Though this book is worth buying just for the 37 page second chapter written by Anthony Bolton about his investment approach, the book over-all does fall along way short of what it could have been. This chapter gives a good first hand account of the philosophy and process of Mr Bolton, and re-affirms for the reader many age-old rules such as do your own research, do not follow the heard, and be systematic. The real short coming of the book is that this chapter only represents 37 pages of the total 177 pages. The other material contained within the book is either written by Jonathan Davis and is a reproduction of earlier reports and industry analysis, and as far as I can tell is essentially just padding in order to allow the publisher to publish a book rather than a 37 page article.

Anthony Bolton is definitely an outstanding investor and this is precisely why such a book has been produced. Moreover, this is the reason why everyone excluding his immediate friends and family have brought this book. Saying this, a large portion of the book namely chapters 3-4, just endlessly repeats this statement in numerous numerical and linguistic forms without providing almost any insight into the investment process by which this investor works. Unfortunately such material fails in the primary aim of any investment text which surely is to make the reader a better and more informed investor.

Saying this, I did learn one or two new facts such as the interesting fact that Mr Bolton uses sell side analysts, rather than just his (large) in-house analyst team. Also the point concerning how central the use of charting is to Mr Bolton’s over-all approach. But I was also very much left wishing to learn more and hopefully when Mr Bolton leaves Fidelity he will get the chance to write a follow up on chapter 2, with a full 200+ page book detailing not only his investment philosophy but also numerous worked examples detailing particularly investments which illustrate the application of his philosophy.