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  1. Wealth
  2. Wealth Management
November 20, 2008

How to Spend It

By Spear's

Forget tax havens and steer clear of commodities. If you’ve still got money to burn, put it in property and equities, says Josh Spero.

Surprisingly, the world kept on turning. After the period of panicking, screaming and breast-beating, those in the financial services and high-net-worth individuals themselves have realised that despite the changed (and still changing) financial landscape, business must continue, money must be protected, invested and indeed increased. Unless high-net-worth individuals would prefer to divest themselves of their worth and return to just being individuals, their attention certainly must be directed to the wiser options out there. There are still wise options, and the question of where money is safest is one that can be reasonably answered even in uncertain times.

Perhaps it is best to start with tax havens, where there is plenty of HNW money which may well be less safe, especially now that the OECD is calling for sanctions against those which refuse to commit to greater transparency. The principal problem, however, that large tax havens based in small countries face is one of imbalance: if local banks go under, they take with them more billions than the government could ever hope to cover, let alone repay.

Jersey is a fine example. The island is debating a deposit protection scheme but it would only be for residents, and even were it to extend to non-residents with accounts in Jersey, there would be a limit grossly insufficient for HNWs. It has £240 billion in trusts managed on the island, and an income of £764 million: should even one or two of the 48 banks on Jersey catch a cold and fall over, there is no hope of full recompense.

The arguments between local authorities and experts illustrate just why an HNW should not feel wholly secure in a tax haven. Geoff Cook, the chief executive of Jersey Finance, the non-profit organisation created to promote Jersey’s fiscal capabilities, denies that the imbalance is a problem, saying that banks are sufficiently insulated and that in the unlikely event of failure, customers are protected.

‘The risk-to-asset ratio for capital is 20 per cent higher than the Basel Convention requires; the strength of reserves is about 60 per cent higher,’ says Cook. ‘The liquidity pool is deep. [In the event of failure, the liability] moves upstream to parents, into London companies, and is protected by individual banks.’

This is not the case according to the Financial Services Authority, which issues a measured denial. Robin Gordon-Walker, a spokesman, says it’s ‘not right at all’ that protection would flow upstream. ‘The Channel Islands and the Isle of Man are separate countries for financial services,’ he says. ‘It’s rubbish — it always turns on who’s the local regulator. The Financial Services Compensation Scheme regulations apply for UK banks only.’

John Christensen, an economist and director of the anti-tax-haven Tax Justice Network, is more forthright: ‘Jersey is very cheekily looking to governments outside the island, saying: “We’d like you to extend your deposit protection scheme here for [your] residents who have Jersey accounts.” What bloody nerve! Why would anyone agree to that?’ Christensen is also dubious about Jersey’s claims only to have chosen ‘reliable’ banks. ‘Who would have thought that Lehmans would go under?’ he asks.

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There does not appear to be general confidence in the ability of tax havens to withstand shocks, or at any rate to help account-holders to recover from them. Patrick Hamlin, a partner in trusts and succession at Withers, says: ‘Apart from the [deposit protection] schemes, if an investor who holds deposits in an offshore bank loses those funds because of a bank failure, the only redress is to prove for the debt in the subsequent liquidation,’ although he adds that ‘this is not as bad as it sounds’. However, he is ‘not aware of any deposit-protection schemes in the offshore world’, meaning the Turks and Caicos Islands, or the Bahamas, or Andorra are in danger. This is not a cue to abandon tax havens altogether; as O’ar Pali shows on page 50, money is shifting to larger havens with deeper resources, such as Singapore.

If this is at best a negative answer, what are the positive ones? For all the jokes about mattresses stuffed with pound notes, dollar bills and crispy roubles, there is a definite short-term move to cash. After all, barring hyper-inflation, it ought to keep its value. No less an authority than Warren Buffett deprecates this as a long-term strategy
(he wrote in The New York Times that it ‘pays virtually nothing and is certain to depreciate in value’), but cash and cash equivalents cannot help but look like models of immediate stability. (As Spear’s was going to print, the interest rate was lowered to 3 per cent, presenting a new set of problems for HNWs sitting on cash.)

For those who are moving into cash, there are better and worse places to keep it. Almost no deposit-protection scheme in any developed country will be sufficient for HNWs; in Britain, the limit is £50,000, although Alistair Darling has made vague pronouncements about no one losing a shilling. In these circumstances, there could be nowhere safer than a nationalised bank or building society. If you can put your money into Northern Rock, or Bradford & Bingley, or Lloyds TSB/HBOS/RBS, it is protected by the government. Should one be divinely inclined, the Vatican bank — the Institute for the Works of Religion — is confident that its funds, 80 per cent of which are in government bonds, are safe, making it an attractive destination. (Eyes, needles and camels do rather come to mind now.)

There is a definite charm to government bonds at the moment for much the same reason as with the nationalised banks: what stands behind them ought to be unsinkable. If a G7 economy were sent into such a spin that it could no longer guarantee its bonds, there would be bigger problems. The downside, as with cash, is that returns may be low, in a trade-off between return and reassurance. US one-month bonds have a yield of 0.18 per cent at time of writing, which is better than the previous rate of 0.04 per cent, and British gilts for one month are 4 per cent.

Christensen says he has a friend ‘who has moved everything out of Jersey into London and is buying National Savings bonds. Interest rates are going to have to come down and bonds are going to look interesting.’ Given the debt that governments are now taking on, there will be a plentiful supply of bonds to buy.

Buffett, in the same article, gave voice to what many people are ignoring at the moment: it is best to buy equities when everyone else is shedding them. Companies still have profits, assets and worth, so just because their share price is depressed does not mean a company is unsound. As Buffett put it, ‘Be fearful when others are greedy, and be greedy when others are fearful. Most major companies will be setting new profit records five, ten and twenty years from now.’

This is not a cast-iron rule: very few people would suggest that the American automobile industry is a safe bet, just because it still makes things. Eventually, of course, once the recession has been worked through, people will return to buying, and technology companies will not cease innovating, making them attractive long-term prospects. If the chance arose at any other time to take stakes in non-financial companies, most people would jump. The trick, it seems, is to run in the opposite direction from the hordes. As Rome’s richest man knew, don’t flee a burning building — buy it.

Buildings — burning or otherwise — are another place the canny investor is seizing on, ‘safe as houses’ being the opportune cliché. As Ned El-Imad, a partner in property at Mishcon de Reya, believes, the market in residential real estate is providing handy opportunities. ‘Prime London residential properties have already been reduced, and vendors are inclined to accept offers sometimes far below asking prices,’ he says. ‘It doesn’t really matter whether properties are selling at £1,500 or £2,000 per square foot because in the medium to long term they are rock solid from an investment point of view — the investment is tangible.’

Much the same long-term principle applies as with Buffett’s advice. There are also upsides to the downside, if you are thinking of investing in property. Unlike government bonds, which you can’t bargain down except through the sort of trading strategies that got us here in the first place, the property market is more of a souk than an auction house, where prices can be talked down. Prime property in London may have lost 18 per cent of its value of late, and there is talk of it hitting 30 per cent by the end of the year, but this would only portend well for long-term investment.

As has been obvious from recent newspaper stories of queues to buy Krugerrands and American Eagles, gold has seemed safer than houses. There is no doubt that gold can keep its value; it has throughout history. However, it thrives on instability, and with global rescue plans gradually falling into place gold is falling in price, from near-record $900/oz to $750/oz. The problem with commodities in general is that, despite record prices for everything from nickel to wheat, a recession reduces demand and thus prices. In the short term, or at least until the recession passes, commodities are less safe.

While the desire to liquidate all one’s assets into crisp notes is presumably quite powerful in uncertain times, it ought to be resisted if any sort of return is wanted. Cash and cash equivalents were good moves to calm short-term panic, but they offer no enticement in the long term, and indeed face depreciation.

Commodities are falling in the face of a recession, whereas bonds and nationalised banks have the government behind them, but it is the classes that people flee — property and equities — which seem to hold out long-term promise. Houses will not disappear, nor will the powerhouses of global industry. 

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