Letters to MoneyWeek: Are we biased against portfolio bonds?

MoneyWeek replies to a selection of readers' comments and questions.

I was quite shocked upon reading the article by David Prosser about portfolio bonds (MoneyWeek issue 828), which showed a complete bias. While I agree with him on the subject of many expat advisers being commission hungry, his advice to all expats that they should not consider portfolio bonds is very alarming and dangerous.

He hasn't mentioned that some advisers may sacrifice their initial commissions (as I used to when I worked off-shore). He didn't mention that portfolio bonds may allow investors to access 30,000-plus funds, many not available through any other means. He did not mention other tax-planning opportunities, such as the 5% per year tax-deferred income option for up to 20 years. He did not mention the deemed gain rule, which can be a huge tax benefit. He did not mention the ability to assign the portfolio bond to a lower-tax-rated spouse.

He did not mention the ability to use time-apportionment tax relief. He did not mention inheritance-tax planning and trust planning opportunities. He did not mention clustering. As for opting for pensions instead, in many expat destinations pensions are not available. Even if they are, that may not help someone in their mid-30s who wants their money for school fees in ten years' time.

All in all, a very poor article, very biased, and a one shoe fits all approach dangerous! As a long-term reader of MoneyWeek, this makes me question your independence. Less chip on the shoulder, and more impartiality please.

SB

We entirely stand by the recommendation that expatriates should avoid portfolio bonds. While you point to a long list of features (some might say complications) that these products possess, investors should be concerned about outcomes, not features. Most of these features aren't relevant to the typical expatriate. They don't need a choice of 30,000 funds they just need a few good ones (or, as a sensible starting point, a cheap diversified ETF portfolio). Equivalent or better tax outcomes can usually be replicated with sensible planning around a simple portfolio. Popular expatriate destinations that don't have some form of pension often have minimal taxes on investments anyway.

As for the idea that portfolio bonds are good for medium-term saving, their flaws become even more evident over shorter holding periods. Take an example of a proposal for a six-year portfolio bond, provided to us by one expat. If the underlying funds had returned 5% per year, the investor would have earned just 1.7% per year after all fees were deducted. They would have got back less than they invested if they'd surrendered within 4.5 years. There can be no defence of a product so expensive, inflexible and stacked against the investor's interests.

The MoneyWeek portfolio

I'm really surprised that Finsbury Growth & Income investment trust was removed from the MoneyWeek portfolio (MoneyWeek 830). I know it hasn't grown as much as some other funds,but MoneyWeek is always so supportive of Nick Train. Merryn interviewed him and specifically recommended that trust for uncertain times. Other MoneyWeek writers have recommended the trust too. Can you give any more information please?

ML

The Finsbury Growth & Income trust has performed very well over time, even though it's lagged the market recently, and we don't have major long-term concerns about how it's run. But after a long period in which value strategies have underperformed, it seems likely that we are heading into an environment where value may do better. So we concluded that it makes sense to swap a more value-focused fund into the portfolio, which meant that one of the existing holdings had to make way.

We already have a decent mix of growth-focused funds (Scottish Mortgage) and those with a more defensive bent (Personal Assets and to a lesser extent RIT Capital Partners), so Finsbury was the obvious candidate to remove, especially given that the counterpart to stronger performance of value stocks is likely to be weaker performance for the kind of high-quality firms that Lindsell Train favour. We'll continue to watch Finsbury Growth & Income and write about it in the magazine even though it's no longer part of the model portfolio.

Does the MoneyWeek investment trust portfolio represent your view of a balanced portfolio (ie, a mix of UK, US, European and Far East shares plus bonds and cash)? Do you assume a sixth of the portfolio is allocated to each investment trust, or do you allocate different amounts to each in order to fine-tune the allocation between different assets?

TW

Our model portfolio assumes the same amount (one-sixth) is initially allocated to each trust. Each trust has a good deal of flexibility in how it allocates its portfolios, so the overall asset allocation of the underlying investments will not be constant, but should be well balanced.

Trump's big bang

I was highly amused by what I hope was your intentionally ironic front cover (MoneyWeek 828), which shows:

Donald Trump trying to jumpstart a 1960s American gas guzzler that should have been scrapped or at best put in a museum. Presumably suggesting that he wants to create industries that are obsolete and will not compete in the modern world.

Worse, he is attaching positive red leads to both ends of the battery. That is likely to cause a nasty bang and certainly will not jumpstart the car showing that he has no concept of science or how to run the economy.

Finally, one can only suppose when the bang comes he will jump up and bang his head on the hood.

Given my view of Trump, I am afraid that this may turn out to be an accurate portrayal of his presidency. I would be interested to know if you intended the picture to be ironic?

PA

We had more letters about the cover illustration on this issue of MoneyWeek than any other cover we can remember. We're gratified to hear that it was so well-received. Yes, it's fair to say that we think there are plenty of unanswered questions about how well Trump will manage the US economy. We think that his overwhelming confidence in his own abilities may get a few shocks along the way, as our illustrator subtly hints in the picture.

Writing to MoneyWeek

MoneyWeek welcomes letters and emails from readers, but unfortunately we are not able to publish or reply to all of them. We may edit letters prior to publication. All responses are for information only and should not be relied upon in making investment decisions. Our staff are unable to respond to personal investment queries, as MoneyWeek is not authorised to provide individual investment advice. Please email us at editor@moneyweek.com, or write to us at Editor, MoneyWeek, 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London, SE1 8NZ.

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