Home » 2015 » October

Monthly Archives: October 2015

Look to fine wine for a rising investment

Look to fine wine for a rising investment

Many investors have a single simple demand of their investments: they just want them to appreciate. No messing about trading rising and falling markets, no complications of hedging, or switching into inverse ETFs. With property probably close to a peak, stockmarkets so volatile that you need to watch them all hours, and gilts paying nothing, where is there to turn? The spirit of diversification comes to the rescue. Literally. It may be time to take another look at fine wine. 

Strategic-thinking investors took in fine wine in the post 2003 recession period as they diversified assets over several classes. Returns were good, even through the 2008-09 market collapse, but after 2011 many had their fingers burned.

From 2005 the fine wine market started to increase in value, but it was being overheated by the new wealth of China which had money to burn, or drink, as the case may be. The finest first growths were snapped up, sending prices sky high.

But wine producers thought that this was to be the new way of the world, and moved their focus in favour of the Far East big spenders. This was the beginning of disastrous decisions by some chateaux that would change the look of Bordeaux wines forever.

They had failed to see that the hugely increasing demand for their best wines – just as China demands only the best of anything it buys – was because it was largely being given away as gifts: trinkets as acknowledgement of favours already rendered, or to be rendered in the future. Demand had been so high because the custom started at the very top, the Chinese government.

This coincided with some of the best Bordeaux wines ever produced, with 4 of the top rated vintages ever, further enhancing the reputations of the wine producers. They had the ultimate product in the best market. New vintages en primeur  were offered at vastly inflated prices. But after the very best vintages came some poor ones. 2011 and 2013 were ranked the lowest for over a decade.

But the problem was made worse during the intervening period, when French fine wine producers – envisaging their own crocks of gold overflowing – neglected those who had been the principal purchasers of their product prior to China’s interest. At some chateaux the majority of the growth was reserved for China, with a little held back for the French market. And they increased the prices for what were notably lesser wines. The result was that buyers in the US, chastened by the recession and deterred by the rampant profiteering, looked elsewhere for their investment quality wines.

Fine wine prices fell as buyers refused to pay the vast sums asked for later, and by comparison inferior vintages.

The final nail came in 2013, when the new prime minister took office in China, and pledged to clean up corruption starting with the government itself. Gifting was banned, and Chinese demand for Bordeaux slumped.

Bordeaux then succumbed further, with vineyards being sold to Chinese buyers. By 2015 over 100 domains were Chinese-owned. Their objective is to control the price in China, where they can inflate it to 10 times the price it would be in France.

A silver lining?

But through all that there may be a silver lining. The rising Chinese middle class acquired a taste for Bordeaux, and demand has put market growth in China back on track.

Interest in fine wines was renewed when the 2014 vintage was described as the best since 2010. The best-known wines are rising because of limited supply and the renewed interest of collectors keen to buy before values increase.

In early 2015 a consortium of UK wine brokers signed an open letter warning that investors from the UK and beyond have stopped buying en primeur as they no longer see any value in it. The brokers – including Berry Brothers & Rudd, The Wine Society and Farr Vintners – want to participate in, and maintain their support for the en primeur system, but blame high prices for declining consumer demand.

They argue that “the en primeur price should represent value for money in that the wine will not be available at a later date for a lesser amount. This has patently not been the case with the last four or five vintages.” They suggested a return to the 2008 level.

But the representatives of the Chateaux – the Union des Grand Crus – claim that demand is already substantial for the – so far – highly-acclaimed vintage.

Top class asset

Despite the turmoil seen over the last few years, fine wine remains one of the best-performing asset classes of the past 20 years. Some of the expensive poor vintages have seen big losses. 2011 bought at the top of the market may have lost 50 per cent or more.

In the same way as equity investors reappraised their continued involvement in the market after buying at the peak, fine wine investors considered the place for Bordeaux 1st growths in their portfolios. At the peak in 2008 a case of 1st growth Lafite may have cost £14,000. Now it is under £5,000.

The Industry benchmark Liv-ex 100 index of fine wine prices – Figure 1  – shows the trend towards increasing investment in wines from outside Bordeaux. It plots the price movement of 100 of the most sought-after fine wines. The majority are Bordeaux wines, although increasingly more wines from Burgundy, the Rhone, Champagne and Italy are included. There are even some from the US and Australia. In fact only 75 of the top 100 now come from Bordeaux.

Figure 1 - Liv-ex Fine Wine 100 Index

Liv-ex Fine Wine 100 Index

Investing in fine wine does not require you to be an expert, though an interest is always an advantage, or a necessity if you want to create your own portfolio. Table 1 below demonstrates how choosing the right wines could have affected your investment. It may be better – at least initially – to use the expertise available in a collective wine investment, like the Wine Investment Fund run by Andrew della Casa since 2003. The minimum investment is £10,000, and can be made through their EIS fund. Use an established and reputable fund, as wine scams are rife. Before you invest, read the investdrinks website, where information on scams, fraudsters and bankruptcies are detailed.

Table 1 - Fine wine - the best and worst performers.

Fine wine – the best and worst performers.

Table 2 - Fine wine by growth

Fine wine by growth


The fine wine market went through the classic interest- investment-bandwagon-bubble cycle. But it had never before experienced 4 consecutive declining years. Timing was crucial: at a time of global recession investors were looking for something other than equities, and emerging markets were queuing up to spend. Now the market is more stable, healthy growth is forecast, and fine wine offers diversification and interest. At a time when stockmarkets move faster than the barometer, some relative stability may be a welcome alternative.

October 2015

Is increasing M and A sending you a warning

Is increasing M & A sending you a warning

Merger and Acquisition activity can be a useful guide to the health of the financial markets. 2015 looks set to be one of the best – if not the best – years since 2007. But does this signify as it did then that the markets were at their peak, the valuations were over frothy, and the wise would be turning their paper profits into cash?

The month of July set yet another new record, the strongest M&A figures since 1980. Figure 1 below shows that, according to data from Dealogic, if global M&A continues at the current rate then it will beat the previous record of US$4,290bn back in 2007, possibly reaching US$4,600bn.

The relationship between overvalued markets and M&A activity is entirely logical. Deals are made by companies seeking to boost their revenue and profits, or by those looking for natural affinities that might keep an aggressor at bay. And the confidence to do them comes from either bursting cash surpluses, the availability of cheap debt or a lowered perception of risk, or from a combination of all three. But often most important is a suspicion by the bidders that their shares are overvalued: but if they can use them for a paper transaction, or to tap their shareholders for cheap cash, why not?

Looking at the corporate fundamentals, all seems healthy enough. Companies have got expenses under control, keeping shareholders happy with buy-backs and rising dividends. Cost saving windfalls like the lower oil price are in the main not getting passed back as reduced prices to consumers – except by petroleum retailers – so adding to the cash pile.

When corporate cash balances earn little or nothing, the temptation to spend it on a competitor or complementary activity earning a half-decent return on capital can become irresistible. Sadly, sometimes M&As may be an apparently easy alternative to doing nothing.

They may also look a tempting route to reversing declining profit growth. Recently corporate revenue and profits growth have slowed. In 2014 S&P 500 profits grew 5.5 per cent. But in the first half of 2015 they grew by only 0.9 per cent, and second half profits are forecast to fall by one per cent. Mergers can seem to offer a route to growth that investors crave.

But M&A can take on a life of its own – a sort of keeping up with the corporate Joneses. As deals are done, more companies realise the potential, but also that the pool of possible partners is shrinking, spurring them to at least consider partners for a suitable tie-up. So other companies’ mergers beget mergers by their peers.

But there are risks attached. Most CEOs know that many possible partnerships fall before completion, and many fail to deliver the hoped for or promised benefits. There may be shareholder resistance, industry related regulatory hurdles and competition rules to overcome.

There are often unforeseen post-merger management incompatibilities. And sometimes it simply might just not work, because the industrial logic is wrong.

Bigger and maybe better?

But it’s not just more deals – they are bigger too. The numbers are becoming eye-wateringly huge. Humana Inc have agreed to pay US$34.1bn for Aetna, bringing together two huge health insurers; Heinz consumed Kraft Foods for US$45.4bn; Nokia merged with Alcatel-Lucent to exploit IP connectivity, for US$15.9bn. Shell think they can find US$2.5bn in cost savings as part of their US$82bn takeover of BG Group.

This is the biggest amount so far paid for a UK company, but RBS spent more as part of the consortium (with Fortis, bailed out by the Belgian government and Banco Santander) that bought ABN Amro for US$100bn in 2007. The deal crippled RBS even before credit dried up in the banking crisis, forcing the UK government to nationalise it to avoid it collapsing.

Record global deals

Bigger deals have been made, including Verizon buying out Vodafone’s 45% in its cellphone subsidiary Verizon Wireless for US130bn in 2014; Vodafone’s acquisition of Mannesman in 2000 also cost US$130bn; in 1998 AOL bought Time Warner for US$182bn; and the merger failed miserably. And in the same year ExxonMobil was formed at a cost of US$80bn. 2000 saw Pfizer merged with Warner-Lambert in a deal worth US$110bn.

Figure 2 opposite shows that deals really are a global phenomenon, with roughly one third coming from US and Europe and another third from the rest of the world, dominated by Asia.

And figure 3 uses numbers from Deloitte that show how investment from  “growth markets” – see panel – into G7 nations continues to exceed that going the other way: investment from G7 countries into growth markets. The trend from 2014 has continued into 2015, though the value for 2015 could end up much higher.

On a sector basis, as shown in figure 4 overleaf, technology media and telecoms have the highest value of deals so far in 2015, 50 per cent higher than the next largest, life sciences – comprising healthcare and pharmaceuticals. Energy companies constitute the next highest contributor: PWC report that in the US 9 of the 10 deals announced in Q2 that were worth more than US$50m were for renewables, the one exception worth US$281m was in power transfer. “YieldCos” – see panel below – accounted for 85 per cent of transactions in the energy sector, part of the attempt to drive growth and returns.

One thing that merger announcements certainly do is move markets. But it can be hard to tell which party will get the thumbs up. When rumours break there will likely be significant movement in one share price, and a little in the other.

A look at the portfolio listings at Gurufocus.com reveals how big investors and hedge fund managers approach takeovers; they buy both. The other smart adage here is “buy the rumour, sell the news”. Once the hype dies down, so do the share prices.

But investors need to watch the structure of the deals. Those involving the issue of high numbers of shares by the acquiring company should be a warning, especially if they are at the top of their value range. All-cash deals are declining, at 47 per cent of completed deals, the lowest level since 2001.


The connection between highly value markets and increasing takeovers is logical. As the value of shares increases, it becomes easier to create bigger deals using company shares to make the purchase; hence, a lot of takeover deals are made when markets are higher.

What may be more significant is the increase in share deals and decrease in all-cash deals. If markets do have a sustained fall then entities whose value was created out of overvalued paper will tend to suffer disproportionately compared with those created with “real money”.

Your choices when bequeathing a pension

Your choices when bequeathing a pension

The small print of the government Taxation of Pensions Bill clarifies just how much more important a role pensions will play in estate planning.

Not only can you now pass on your pension fund to designated beneficiaries, but they in turn can bequeath it to their heirs or chosen beneficiaries while maintaining its tax-free status.

This is effectively a way of cascading family wealth with the potential to provide a tax-free income while allowing the capital to keep growing tax-free.

These new freedoms and benefits sadly come with a proliferation of new jargon that can bewilder.

Here’s our SPI jargon buster:

Crystallisation: When money from your pension pot is designated for drawdown or used to buy an annuity. 25% of it can be taken tax free, the rest drawn more slowly in the most tax efficient way. You don’t have to crystallise all the available money at once. Each time money in the pension pot is designated for drawdown, or is used to buy an annuity, it is crystallised, and is called a Benefit Crystallisation Event, or BCE: When a BCE occurs, the value of the uncrystallised fund is assessed to make sure it does not exceed the Lifetime Allowance. Every time you do this the amount is deducted, so if you have on two occasions crystallised £100,000 then you would have used £200,000 from the current £1.25m limit.

Your pension can be passed to a beneficiary without inheritance tax – outside your estate – to a Dependant that you have nominated with your pension provider. This is your spouse, or your children or grand-children. You can also name a Nominee, someone who is not a dependant, who you wish to receive your pension fund. A dependant and a nominee can in turn pass whatever remains of the fund they inherit on to a Successor. Each of these categories has its own type of drawdown plan.

There are some small complications, but how tax is paid on these inherited pensions centres on two key points:

  • whether the pension holder is aged more than or less than 75 years, and
  • whether funds are crystallised or not.

These two points in turn generate four combinations of possibilities:

  • aged under 75 funds crystallised
  • aged under 75 funds uncrystallised
  • aged over 75 funds crystallised
  • aged over 75 funds uncrystallised.

If you inherit a pension from someone who has died under the age of 75, you may withdraw as much or as little of it as you wish whenever you wish, completely free of tax. If, on the other hand, they were over 75, the beneficiary will pay tax at their marginal rate in 2015-16. Either way, the pension pot is normally exempt from inheritance tax, though there are a couple of minor exceptions. The most important is:-

The two year rule: This requires that funds passed on must be assigned for drawdown within two years; if not, the tax-free status is removed. So if a member aged less than 75 dies after 3rd December 2014, and the beneficiary is entitled to the fund on or after 6th April 2015, and within two years of the administrators reasonably knowing of the death, the fund is crystallised for drawdown, the fund will pass tax-free, not subject to a BCE.

This two year period is called the “relevant period”.

Benefit Crystallisation Event at age 75

Anyone with a pension alive at age 75 faces an automatic BCE, even if their funds are completely in drawdown, as well as every time benefits are taken from the uncrystallised pension pot, assessing the money being withdrawn against the lifetime allowance.

Funds are crystallised if you have taken them as a lump sum, or designated them to provide a drawdown facility. Not all of your pension pot has to be crystallised. You can crystallise funds as and when they are needed, but the funds can continue to grow either way. The charges for doing this may force a practical timeframe, for example, every year or two years. Funds that are crystallised, but not drawn, may also grow, but won’t be subject to a BCE again until age 75.

Any funds that are crystallised in excess of the LTA are subject to the LTA charge. So if the value of your fund exceeds the lifetime allowance, then you are charged on the excess; 55% if taken as a lump sum, or 25% if you draw it as income, PLUS income tax at your marginal rate.

When Inheritance Tax applies, and when it doesn’t

This is determined by whether the pension provider has been told who your beneficiary is. If no nomination has been made the pension provider will liquidate the fund and pay it into your estate, which would make it liable for IHT. It is therefore essential to clarify who is the intended recipient of your pension fund.

The new rules mean that there are now three different types of beneficiary:

  • Dependants,
  • Nominees and
  • Successors.

The fund can be split between as many beneficiaries as you wish or is practical. You can even pass some on to your grandchildren – or anyone else’s. Each beneficiary will have their own drawdown fund, so long as the pension scheme is able to provide it. Dependants’ and Nominees’ Flexi-Access Drawdown funds can subsequently be passed tax free. to a successor, as a Successor Flexi-Access Drawdown.

In this way accumulated pension wealth can be passed tax free, cascading to successive generations without incurring inheritance tax, making pensions even more critical in inheritance planning. A Nominees Flexi-Access drawdown is available for those who are not “dependants”, meaning funds can be left outside your immediate family.

Each of these accounts makes the recipient a “member” for the purposes of passing the accounts on themselves, with their age – above or below 75 – the governing criteria in determining its tax status.

The critical assessment for tax

When the member dies aged less than 75, the monies paid out are tax free, but any uncrystallised part of the fund is assessed against the LTA. Any excess will be subject to tax at 45%. This is due to change from 2016, when excess will be subject only to tax at the marginal rate, which means that in some circumstances it may be worth waiting, and assessing the cost of the LTA charge against the cost of income tax incurred in withdrawing cash early and the loss of the tax free growth while sheltered in the pension fund.

If you die after the age of 75, funds withdrawn by your beneficiaries are taxed at their marginal rates, but no BCE occurs. As currently defined, that means the fund can accumulate infinitely and not be assessed again until the beneficiary is aged 75. In the event of a bequest to your grandchildren this just seems too good to be true.

Some important conclusions follow from all this.

  • Each crystallisation reduces the amount of the LTA available. The LTA is £1.25m in 2015-16, but decreases in 2016 to just £1m. But you have until 5th April 2017 to preserve the previous £1.5m limit, and if you fail to do that, there will be opportunity to protect your limit at £1.25m when it changes.
  • The reduction in the LTA to £1m from 2016 means if you have – or are likely to have – funds over that amount you must apply for protection from HMRC.
  • Capped drawdown retains its benefits, including the ability to continue contributing up to £40,000 a year to your pension scheme or schemes. No new capped drawdown accounts may now be opened.
  • Everyone – regardless of earnings – may contribute up to £3,600 to a pension. Any contributions over £3,600 are measured against income, with a maximum of £40,000. The annual allowance is reduced to £10,000 as soon as drawdown commences.
  • If you have taken a tax-free lump sum – the pension commencement lump sum or PCLS – then you can only invest £7,500 back into your pension fund. Any surplus would be regarded as an excess contribution and possibly subject to the final punitive pension tax.


The progressive clarifications to the small print accompanying this new huge potential IHT benefit mean that some decisions you may already have made have to be constantly reassessed to ensure that the best solution for passing on your family wealth is achieved. Circumstances will vary for each pension contributor and their dependants.

It is most important to keep your pension provider up to date with who you want to be your nominated beneficiaries. You may also want to check that your provider can indeed provide the drawdown facilities as you envisage them. You are entitled to free advice on your pension options: in reality you won’t be able to undertake these changes without it.

May 2015