Maryrose Fison takes a look at some of the more esoteric investment options available to those planning for their retirement
For a year which has seen unprecedented growth in the number of funds available, the area of niche investing remains stubbornly elusive. For years, the term has baffled and confounded financial planners and stock pickers alike, with new definitions emerging only to be supplanted by the next as investments change shape or enter the mainstream.
For Robert Lockie, a certified financial planner at London-based IFA firm Bloomsbury Financial Planning, the definition of niche, or exotic, investments is a subjective one.
“What is one man’s view of what is exotic is not necessarily someone else’s,” he says. “I have heard property described as an alternative investment and I am not sure I would regard property as alternative in the way that wine or some of the slightly more esoteric areas might be regarded as alternative.
“It would be exotic to start buying shares in small companies in some parts of the emerging markets [but] if on the other hand you bought those shares as a part of a fund that was holding 1,300 stocks across a number of emerging markets then maybe it would not be quite so exotic.”
Niche investments are by their nature not for everyone; the complex and sometimes highly favourable tax conditions tied to some mean they should not be dismissed either.
Over the years, niche investments have come to encompass a multitude of funds, from commercial property to emerging markets funds, fine art collections, antiques, vintage cars, pork bellies and gun collections.
A veil of mystery hovers over many such investments, not least because of the practicalities of investing in obviously limited markets, but for the discerning high net worth investor – the clientele of many successful financial planners – investments of this ilk can occasionally provide unparalleled advantages not just in yield but for mitigating punitive tax charges.
Enterprise investment schemes
Smith &Williamson director of tax Richard Mannion, has seen clients double their money within five years through enterprise investment schemes (EIS), but has seen others lose the whole hog after start-ups bombed or lost approval status.
Designed to help small, often family-owned, businesses raise capital by providing attractive tax incentives to investors – pubs and gardening centres are the traditional preserve of these schemes. Inherently high risk, success is not a science and Mannion says it comes down to a mixture of potluck, entrepreneurial flair and the ability to identify companies most likely to make a profit.
“I have seen the whole spectrum,” he says describing clients’ investment yields on EIS. “The ones that have worked best have been the ones where [the investor] has been sophisticated, been in business before, known the ropes and known an entrepreneur in need of money to get his venture off the ground. He puts some money into it and it flies and that is fantastic. But I have also seen a number [of EIS] which have been dead in two years.”
Investors with a strong business track record who know how to spot a good opportunity can sometimes provide a degree of steer in company decisions, heightening their chance of return by passing on their pearls of wisdom.
“The key client is really someone who is approaching retirement, has been there and done it themselves and has money that they can afford to lose if it all goes belly-up,” adds Mannion.
“Quite often [the EIS director] would be somebody they knew who would be starting off this new venture.”
While such investments are high risk, the limits of tax mitigation can also be substantial, although subject to timing. EISs offer two main options – capital gains tax (CGT) deferral and income tax relief. The former, Mannion says, have been particularly attractive to investors looking to defer CGT to avoid the previous 40% tax with the flat rate of 18%. The option of crystallising investments with a tax rate that had been more than halved was highly appealing, however with a new government in Number 10, uncertainty reigns once again on whether the current rate will be reversed, or raised even higher than before, resulting in a potential increase for those deferring now.
“The Liberal Democrats, for example, want to align the rate of CGT with the rate of income tax to avoid leakage,” says Mannion. “If they have a say in it then that [is] conceivable. I don’t think it will be 18% the year after, I think it will be more”.
Venture capital trusts
The venture capital trust (VCT) is another option for niche investors although it is not for the faint-hearted. Like EISs, VCTs invest in risky start-up businesses like health clubs and children’s nurseries, but rather than investing directly in a single company, they invest in a range of companies somewhat reducing the risk, although still remaining high risk investments.
In the last tax year, £340 million was raised by the VCT sector, according to figures from the Association of Investment Companies (AIC) – more than double the amount raised in the previous year and the fourth highest level since VCTs were introduced in 1995.
There are some similarities with EIS; the underlying companies must have assets that do not exceed £7 million before shares are issued, and not exceed £8 million afterwards. Individuals can receive capital gains exemption and dividend relief on newly issued shares but conditions apply, such as holding the shares for a minimum period of time, often five years, minimum investment thresholds are usually in place at around the £3,000 or £5,000 mark and clients will not be allowed to invest more than £200,000 in any given tax year.
But as VCTs gain in popularity, others have fallen somewhat by the wayside. Forestry was once a highly popular niche market, Mannion recalls, but today interest in it has diminished in spite of its continuing tax advantages which allow investors to receive inheritance tax relief on woodlands and exemption from capital gains tax on the trees themselves.
Another area of investment, sometimes classified as niche encompasses ethical or socially responsible investing (SRI). The Ethical Partnership in Southampton is an IFA firm which offers specialist advice on these types of investments alongside a host of holistic financial planning services.
Jeremy Newbegin, director of the firm, believes many of his customers are motivated to “put their money where their morals are”. And as more consumers become aware of the destructive consequences of Western decadence, investments which seek to avoid damaging people or the planet are seeing a rise in popularity. Yet the distinction between SRI and ethical investing is sometimes blurred, and there is a prevailing perception that such investments are both complex and unlikely to produce the same level of returns other funds might. Yet evidence suggests returns on such investments can be equally impressive as similarly classed counterparts that do not use screening during stockpicking.
Newbegin defines SRI as investments as those which “actively seek out firms making a positive contribution to society”. This could be through conservation of energy and natural resources, having a good equal opportunities record, maintaining high employee welfare standards or simply having a clear openness about their activities.
By contrast, he says ethical investments tend to concentrate on negative criteria, avoiding investing in companies that are, for example, involved in environmentally damaging practices, trading with oppressive regimes or countries that have poor human rights records or the unnecessary exploitation of animals.
“[Our clients] are motivated by wanting to do something more with their money rather than just make a profit. They are motivated partly by ensuring that they are not doing any ‘harm’ with their money and also that they are doing something ‘positive’ with their money,” says Newbegin.
“Obviously what is ethical to one person may not be to another. Most clients want to go the whole hog once they understand what ethical investment means. Others wish to dip their toe and still invest partly in mainstream funds,” he adds.
Strengthening client relationships
Lockie of Bloomsbury Financial Planning says he is not asked to invest clients’ money in niche areas very often, although he has had the odd request to do something unusual with an individual’s money.
One case involved a 49-year-old client who wanted to purchase a bench in the Wimbledon Tennis Courts. As a high net worth businessman with an amount of cash at his disposal, Lockie was able to research the option and put in place the means to make it happen. Although not an investment per se, it helped a valued client realise a personal goal while keeping stock of his finances.
“He is the only person who has ever asked us to do it so it was something we thought we would investigate to see how feasible it was and whether it would be terribly complicated.”
But he is pragmatic when it comes to considering the implications of investments that promise the earth but may in fact deliver little if any return.
“You should always be careful before investing in anything because the interest of the people who might be trying to persuade you to buy it are not necessarily going to be aligned with yours and as always if it sounds too good to be true, it probably is.”
Maryrose Fison is a freelance journalist
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