Weekly Market Outlook 02-08-21

In this Weekly Market Outlook 02-08-21, our analyst looks into the trading week ahead, possible market moving data releases across the globe and the technical analysis to accompany it!

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Where to find data on investment funds

In this column I cover a wide range of investment trusts and exchange-traded funds (ETFs), which might prompt some readers to wonder where I get my data from. I have access to fund research produced by established analysts such as Numis, Winterfloods, Liberum and Jefferies. It is not available to private investors. But don’t despair. There are some excellent sources of information out there, completely free and accessible to everyone.

Information on investment trusts

One of the newest sources of information on investment trusts is a website called Doceo.tv. It refers to the Latin verb meaning to teach, inform, or show. You will have to register for this site, but its biggest selling-point is that it features videos from hundreds of investment-trust managers. 

There have always been plenty of videos on fund managers’ websites but Doceo collects them all together on one website. Doceo also features useful data such as price returns, information on discounts and premiums, gearing, dividend history, performance data, and fees. You can also connect easily to monthly fact sheets form all the featured managers. I tend to focus on the most recent fact sheet for my own research. 

If you are looking for detailed and comprehensive data on investment trusts, the place to start is the Association of Investment Companies (AIC) website, notably their Interactive Statistics section. 

QuotedData offers a slightly more digestible alternative. On the home page, click on “data” in the top menu and then the sector you are interested in. You’ll soon reach the “snapshot key data”, which includes information on returns (short and long-term), discounts and risk. A useful feature here is that if you click on a single fund you’ll also pull up the relevant Morningstar fund report, which details everything from a fund’s top-ten holdings to its main shareholders. 

QuotedData also offers its own research-report portal, although it is worth remembering that these are usually paid for by the fund manager. Nevertheless, over the last few years the quality of this “independent” research has improved markedly and the main players in this area, such as QuotedData and Edison, now provide investors with interesting, detailed analysis. Coverage of funds is of course limited – to those that pay – but I especially rate analysis from Edison, Kepler (via its Trust Intelligence website), QuotedData and Hardman & Co in this context. In terms of running news and analysis, the hands-down winner for me – apart from MoneyWeek of course – is Citywire’s Investment Trust Insider, although Trustnet and Financial Express aren’t too far behind.

Exploring ETFs 

What about data on exchange traded funds (ETFs)? These are also listed funds traded on the stock exchange, and they provide a low-cost, passive index-racking alternative to the actively managed investment trust sector. 

The good news here is that nearly all the ETF providers provide incredibly detailed quantitative information on their funds – iShares’ ETF website is especially simple to use – but what happens if you want to compare a bunch of ETFs in a subsector– the dozens of different S&P 500 trackers on the market, for instance? 

Two websites stand out. The first is the German based JustETF.com. On their home page, head to its ETF screener and you’ll be able to launch a search for every ETF listed in Europe. The filters are on the left hand side and very easy to use. Within just a few clicks you’ll be able to compare multiple ETFs tracking individual indices. But in the filters section (look for the grey buttons on the left) make sure you select only ETFs listed on the London Stock Exchange. Otherwise you will be presented with Europe-listed alternatives. 

The big rival of JustETF.com is France’s TrackInsight. It is a much more colourful and concise way of tracking indices and ETFs and contains an enormous amount of information .

You’ll find lots of useful information not only on fees and performance data but also on tracking error: the degree to which an ETF’s performance diverges from the underlying index. I think that once you have selected a specific ETF to investigate, TrackInsight’s fund pages are much more colourful and concise, although I find JustETF easier when it comes to comparing a group of ETFs. 

The news website ETF Stream – which I founded – also has its own ETF search engine, which you’ll find via a link in the top right-hand corner (Screener). The service is based on a US platform called Logicly. The trick here is to click on the “quick filters” to find the ETFs you want. 

One useful feature is a button called Fund Overlaps, which tells you to what extent a particular ETF overlaps in its holdings with peers. Sticking with the ETF-news theme, I would also highlight ETF Express and ETF Strategy for analysis and commentary on the ETF market. 

One final thought: if you are looking for a powerful data-driven platform that tracks both investment trusts and ETFs, consider SharePad. This is an outgrowth of the technical analysis-driven ShareScope software. The developers behind the SharePad product have spent a vast amount of time upgrading their funds data, and it is really very powerful indeed. I use it all the time. The only drawback, however, is that it is not cheap at £30 a month.

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Inheritance tax planning: how a pension can shield your estate from inheritance tax

Today, we come to one of the most potentially useful inheritance tax planning tools – the humble pension.

Most people know that private pensions are highly tax efficient. But their inheritance tax advantages are less widely recognised. This is a shame – the fact that your pension savings fall outside your estate for inheritance tax purposes means they can be a great way to pass money on to heirs, and even to mitigate a potential tax bill.

The bottom line is that pension pots are not subject to inheritance tax when you die – they do not count as part of your estate. That said, not all pension savings can be passed on to heirs. 

If you have a defined benefit or final salary pension, where your employer guarantees a set amount of pension in retirement, you will not have a fund of savings to bequeath; your heirs may receive benefits such as dependants’ benefits, but they will not inherit any of the savings you have made.

By contrast, defined contribution or money purchase pension savings can be passed on in certain circumstances. These include savings you have made through a workplace defined contribution pension scheme and savings in individual plans such as self-invested personal pensions (Sipps) or stakeholder pensions.

How a pension can help you to plan your legacy

In a defined contribution plan, once you reach retirement and want to start drawing an income, you have a choice to make. You can use the pension fund you have saved to buy an annuity – guaranteeing a set amount of pension for life – or you can opt for an income drawdown arrangement, where you leave your fund invested and take income directly from it. (Or you can do a bit of both). 

Money spent on an annuity is gone for good (though you can arrange for a contract with dependants’ benefits). However, unused savings in an income drawdown arrangement can be passed on to heirs. So too can your defined contribution pension fund if you have yet to choose between an annuity and drawdown. 

Either way, if you die before age 75, whoever inherits your savings pays no inheritance tax and can also draw on the money with no income tax to pay. If you die after 75, your heirs still pay no inheritance tax, but there will be income tax charges on withdrawals.

The exemption of pensions from inheritance tax gives rise to several types of planning opportunity. Most obviously, if your non-pension assets (such as the cash in your Isas) are likely to leave your heirs facing an inheritance tax bill, it may make sense to prioritise pension plans for your future savings. You may even be able to move existing savings and investments into your pension plan to take them out of the inheritance tax net.

Equally, if you reach retirement with significant savings and investments outside of your pension plan, it may make sense to draw on these before you cash in your pension fund. That way, you will be reducing the size of your estate for inheritance tax purposes before you start using up savings that fall outside of your estate.

Be aware of the risks

However, it is important to consider inheritance tax in the context of your broader needs and circumstances. Contributing too much to a pension, for example, can leave you with a tax headache, since there are strict limits on how much you may invest tax-efficiently in pensions both each year and over a lifetime (the so-called lifetime allowance – another tax threshold that seems unlikely to rise much in the next few years). 

Similarly, while income drawdown plans make it easy to leave savings to heirs, you need to manage them carefully to ensure you have enough income to live on and that your money lasts for as long as you need it.

For the majority of people, it therefore makes sense to take professional advice on how to plan your retirement savings from every angle, including potential inheritance tax liabilities. 

This definitely applies if you are considering transferring money out of a defined benefit pension scheme. Some people are so keen to pass pension savings on to an heir that they are prepared to give up a guaranteed pension in a defined benefit scheme – even if this means receiving less pension income themselves from a defined contribution arrangement. 

This is not a step to take lightly. Financial regulators advise against such transfers in most circumstances and there is a legal requirement to take professional advice on transfers of funds worth more than £30,000. 

In most cases, individuals will be far better off sticking with the defined benefit scheme.

One final point. Since your pension is not legally part of your estate, it is not covered by your will. You therefore have to make separate arrangements with your pension provider to specify who you want to inherit pension savings. You will typically need to complete a form – this may be described an “expression of wish” form or a “nomination of beneficiaries” form, or something similar. 

Make sure you keep paperwork up to date as your circumstances change – and that you have made arrangements for each of your pension pots if you have a number of different plans.

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Daily Market Outlook, August 3rd, 202

Daily Market Outlook, August 3rd, 2021 Overnight Headlines RBA Sticks With Taper Plan Even As Economy Expected To Contract China Quietly Sets New ‘Buy Chinese’ Targets For State Companies NZ To Further Limit Mortgages Amid Relentless Housing Boom Tokyo Shows An Inflation Pulse For The First Time In A Year Korea’s Inflation Quickens As Central Bank Mulls Rate Hike Fed's Waller: Sees Reduction In QE Possibly Starting In October IMF Allocates $650Bln To Boost Pandemic-Hit Economies German Warships Heads For South China Sea Amid Tension With Beijing Dollar On Back Foot Vs Safe-Haven Peers As Delta Virus Spreads U.S. Treasury Cash Pile Fell To $459b Before Debt Cap Return Asian Stocks Slip As Global Delta Spread Spooks Investors Chinese Media Brand Online Games ‘Spiritual Opium’ Fanning Crackdown SocGen Raises 2021 Forecasts On Lower Bad Loan Provisions Amazon Union Vote Should Be Re-Run, U.S. Labor Official Says The Day Ahead Today’s data calendar is light with nothing of note in the UK. In the Eurozone, the June PPI will provide an update on inflationary pressures. July CPI data for the region were mixed as annual headline inflation rose by more than expected to a near 9-year high of 2.2% but the ‘core’ measure seemed to indicate that underlying inflation is still relatively tame. Nevertheless, Eurozone companies are complaining about the same sort of cost increases that are being seen elsewhere, so another rise in producer prices seems likely. The US factory sector has looked strong of late and another rise in orders is expected for June. However, already released durable goods orders were weaker than expected, which suggests that the increase in overall orders may be much slower than in May. That may be a sign that demand is waning after an initial post-lockdown surge but could also be an indication that supply chains issues and other bottlenecks are having an impact. US Federal Reserve policymaker Bowman is scheduled to speak today although she may only talk briefly at the start of a conference. Her previous statements suggest that she is one of the Fed officials that wants to take a cautious approach in reining back on the high degree of support that monetary policy is currently giving to the economy. In Congress this week, the Senate seems set to have a final vote on the President’s infrastructure package. Overnight Australian retail sales data will be watched for a negative impact form the latest lockdown measures imposed as a result of the rise in Covid-19 cases. Meanwhile, after other July PMI measures for China pointed to a slowdown in activity, it is hoped that the unofficial Caixin services indicator may provide more positive news.G10 FX Options Expiries for 10AM New York Cut(Hedging effect can often draw spot toward strikes pre expiry if nearby) USDJPY - 110.00 875m. EURUSD - 1.2000 869m. 1.1880/90 790m. 1.1840/50 1.66bn (1.08bn P). AUDUSD - 0.7330 591m. USDCAD - 1.2540 468m. 1.2480 1.28bn (845m P). USDCHF - 0.9050/60 470m. USDCNH - 6.50 1.54bn (1.05bn P). 6.47 505m Technical & Trade ViewsEURUSD Bias: Bearish below 1.1950 Bullish above EUR/USD opened 1.1871 and traded in a narrow 1.1869/78 range Option strikes around 1.1860 and 1.1880 helped contain the price action Support is found at the 10-day MA at 1.1828 and 21-day MA at 1.1823 Sellers are tipped ahead of 1.1900 with resistance at Friday's 1.1907 high A break above 1.1910 targets the 38.2 of 1.2266/1.1752 at 1.1948 EUR/USD starting a short-term trend higher - valid while 1.1820 holdsGBPUSD Bias: Bearish below 1.40 Bullish above. +0.05% in the middle of a tight 1.3885-1.3899 range with only light flow Summer holiday season in full swing in the UK and Europe weighs on interest Charts; 5, 10 & 21 daily moving averages climb - momentum studies crest Net bullish signals, but 1.4000 test needed soon to sustain bullish view 1.3846 10 DMA is initial support - 1.3820 21 DMA is the pivotal level 1.3985 upper 21 day Bollinger and 1.3991 61.8% June July fall cap at present 1.4000 break would initially target 1.4090 76.4% of the June-July fall No significant data of scheduled BoE activity today- USD, risk to lead cableUSDJPY Bias: Bullish above 109 Bearish below USD/JPY heavy in Asia, 109.19-34, mostly below 109.29-110.12 Ichi cloud Managing to hold above 109.00 - 109.07 EBS low July 19, Japanese bids Offers from Japanese exporters, others eyed from @109.50 now Few large nearby option expiries today - 109.25 $332 mln, 110.00 $775 mln Soggy US yields weigh, Treasury 10s @1.181%, after 1.151% low yesterday Risk off in Asia too, Nikkei -0.8% @27,559, AXJ mostly in red, E-minis +0.1% JPY crosses heavy, EUR/JPY 129.68-82, GBP/JPY 151.66-90, AUD/JPY 80.37-56 Tokyo Jul core CPI weak, +0.1% y/y, overall -0.1%AUDUSD Bias: Bearish below .75 Bullish above AUD/USD pushed to 0.7400 from 0.7368 after the RBA decided not to delay taper Market was expecting RBA to delay tapering bond purchases as of September RBA statement upbeat on prospects of bounce back after lockdowns end AUD/USD was holding up despite global growth concerns and Sydney COVID spread Speculation of AUD-positive M&A flows helping to underpin AUD/USD for now AUD/USD resistance is at the 21-day MA at 0.7406

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Dollar Edges Lower; U.S. Economic Recovery Key

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Market Update – August 3 – USD, Equites & Yields Pressured on weak data & Virus surge

Market News Today – USD pressured again (USDIndex struggles @ 92.00) on weak data yesterday, and virus surge in Southern low-vaccination rated states. JPY & CHF benefit – Yields lead – down again; 10yr 1.74%. Equities flat into close (USA500 4387). Oil dumps -3.5% (CAD sinks). 

RBA more Hawkish than expected – AUD rallied – September taper looks set. Although cautious undertones remains and concerns over housing market and virus & vaccination situation. Chinese & Asian stock markets very mixed after more Chinese clampdowns this time on Gaming and virus surge in China. Fed’s WALLER (Hawk) suggests taper announcement in September. Overnight data mixed better CPI for Tokyo weaker Housing approvals for AUD. Gold holds at 1808 but USOil also down significantly to test 70.00, yesterday 30 cents higher now. 

European Open – The September 10-year Bund future is fractionally higher, US futures marginally lower, while in cash markets the 10-year Treasury rate is struggling at 1.176%. The real 10-year Treasury yield remains close to a record low. DAX and FTSE100 futures are down -0.2% and -0.1% respectively, US futures up 0.2-0.3% after a largely weaker session in Asia. With little on the European calendar to distract markets those will likely also be the themes for the European AM session, alongside earnings reports. The BoE decision tomorrow is also coming into view with the UK expected to join Fed and ECB and signal cautious patience for now.

Today – US Factory Orders, Fed’s Bowman, – Earnings: Generali, Societe Generale,  BMW, Infineon, BP, Standard Chartered, Alibaba, Phillps 66, Eli Lilly, ConocoPhillips.

Biggest FX Mover @ (06:30 GMT) NZDCAD (+0.19%) Has moved up from 0.8680 (14 day low yesterday) as Oil prices tumbled and NZD got a lift from Hawkish RBA. Significant breach of 21 EMA yesterday, Faster MA’s aligned higher, MACD signal line & histogram over 0 and moving higher, RS 78 and well into OB zone. H1 ATR 0.0011, Daily ATR 0.0060.

Click here to access our Economic Calendar

Stuart Cowell

Head Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Dollar Down, Falls Against Yen Over Growing COVID-19 Recovery Concerns

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Dollar on back foot vs safe-haven peers as Delta virus spreads

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Dollar Flat, but Bullish Bets Continue Ahead of Jobs Data

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US Yields are About to Bottom Out

The dollar starts off the week on a weaker footing, however there is a great chance that bearish pressure will ease as we get closer to Friday. At the meeting last week the Fed left the door open for rumours about a hawkish policy shift in August and the key missing piece that may boost the odds of such an outcome is an upside surprise in the NFP report this Friday.The number of new jobs created in the economy (aka Payrolls) has taken center stage in the post-pandemic period in terms of impact on the Fed decisions. It is expected to post decent 900K gain. Stronger-than-expected Payrolls reading will likely fuel speculations that the Fed will hint about QE tapering during Jackson Hole Conference in August. In this case, the market will start to price in decreasing demand in the Treasury market (as a result of slowing Fed purchases) and given the passage of Biden infrastructure plan, which will be financed with new debt, investors may start to quit Treasuries en masse.Recall that long-term Treasuries saw a strong rise in demand over the past two months (yield-to-maturity slid from 1.75% to 1.20%), however, neither weakening of global economic expansion, nor increased covid-10 risks, which were cited as primary catalysts of the move, didn’t started to materialise. According to JP Morgan, investors continue to fit bearish narratives into the Treasury bond rally similarly to the situation when they explained the Treasury sell-off caused by the actual rebalancing of Japanese investors before the end of the fiscal year (when the 10-year Treasury yields rose from 1.0% to 1.75% in 1Q) by sharply increased inflation expectations and growing risks of economy overheating. The investment bank points to the interesting fact that the latest slump in bond yields was not accompanied by a corresponding increase in open interest in Treasury futures, that is, investors did not make new bets on the deterioration of economic situation, but only adjusted the previous ones.The sell-off in long-dated Treasuries earlier this year was accompanied by rebound in the dollar index from 89.5 to 93 points. The new wave of Treasury bond sales will most likely also provide strong support to the dollar.Preparations for this week's NFP report kicks off with today's ISM and Markit Manufacturing indices of activity. It is especially interesting to look at the dynamics of the sub-indices of employment and prices - the first will tell you what to expect from the NFP in the production sector, the second - whether the effect of delays and supply bottlenecks, as well as excessive strong demand, which slow down the economy, are disappearing. The key indicators of the report are expected to extend rise, i. e. the rate of expansion of activity in the sector remained positive in July. A weak report, in my opinion, will have a material impact on the market and will likely fuel more USD downside.The ADP report and non-manufacturing PMI from ISM are due Wednesday. This time ADP lays down a more conservative estimate of job growth - only 700K (versus 900K NFP). Also pay attention to the hiring component of the ISM index - last month it was in the depressed zone and it is essential to see a rebound to expect strong NFP figure. The greenback are risk assets are expected to post pronounced reaction on release of the reports.

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CVS Health: Estimated Q2 2021 Revenue Report

American Pharmaceutical giant CVS Health Corporation (CVS) is scheduled to announce earnings reports on Wednesday, August 04, 2021 prior to the market opening. The report is for the fiscal quarter ending June 2021.

In 2021, CVS Health will be on the Fortune 500 , a list of companies based on gross income that Fortune magazine makes each year. This year CVS Health was ranked 4th with revenues of around $268,706 million, profits of $7.179 million and total assets of $230.715 million.

http://s2.q4cdn.com/447711729/files/doc_financials/2021/q1/Q1-2021-Earnings-Presentation-(1).pdf

For the fiscal first quarter ended March 31, 2021, CVS reported a 3.5% increase in total revenue over the previous year driven by growth across all segments. Revenue to $69.1 billion from $66.8 billion a year earlier; adjusted earnings per share $2.04 ; The health care and drugstore chain reported net income of $2.22 billion, or $1.68 per share, up from $2.01 billion, or $1.53 per share, over the previous year. The effective income tax rate is 25.1% for the three months ended March 31, 2021. For this second quarter earnings report estimate, the consensus EPS forecast from Zacks Investment Research, based on 9 analysts’ estimates, was $2.07. The reported EPS for the same quarter last year was $2.64.

The company has raised its guidance for the year expecting 2021 earnings to be between $6.24 and $6.36 per share and after adjustment between $7.56 and $7.68 per share. This reaffirms that full-year cash flow from operations is projected to range from $12 billion to $12.5 billion. This is understandable given that COVID-19 vaccines and testing help increase revenues and offset a weak cold and flu season. Vaccines and testing, on the other hand, also attract foot traffic. About 9% of new customers who receive tests via CVS also fill out new prescriptions at pharmacies. But all of this also relies heavily on pharmaceutical sales to drive revenue growth, as the pandemic-related sales boom may not last forever.

The company has become a major provider of Covid-19 vaccines (Covid-19 vaccines, tests and prescriptions). The service has helped drugstore chains attract customers. CVS takes up a larger percentage of the prescription drug market and its healthcare benefits segment is now growing at a fairly strong pace. In fact, the company has turned some drugstores into HealthHubs, a store model that includes more services like sleep apnea testing and mental health appointments with clinical social workers.

In the first quarter of 2021, CVS is fully integrated with health insurance company Aetna after a massive $69 billion acquisition, generating more than $69 billion in revenue. In 2020, revenue grew by $12 billion over the previous year. This integration brings together various parts of the CVS business into the healthcare ecosystem. This will strengthen the company’s fundamentals going forward.

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Technical Level

#CVS stock has surpassed its 4-year average high of 84.00 in May 2021 by printing a fresh peak at 90.59 right around the 61.8%FR retracement level (pull from 113.65 peak to 51.77 low). ). Total 2021 H1 equity price growth hit +21% more at the June close ( 83.45 ) around the 50.0% retracement, back below its yearly high average price. ATH price printed in July 2015 at 113.65 . For July 2021, the price was still slightly corrected before closing at 82.29 .

#CVS, Daily

After scoring an annual high of 90.59the value of this asset is overvalued and has since been corrected by -9%. The long-term return on its shares is likely to be lower than its business growth, which averaged 4.3% over the last three years and is forecast to grow 4.38% annually over the next three to five years. But overall these equity positions are still technically consolidating, in the area of ​​the average yearly high within the Kumo. This is reinforced by the validation of the RSI which has been flat in the 50 area for some time (currently at 46.96); MACD histogram is thinning towards neutral levels, but equity prices are still above the 200-day moving average in an ascending aisle. A price move above the resistance at 84.26 will target 87.27 and a top of 90.59. As long as the resistance holds, the price bias is likely to form a corrective wave for 79.

https://www.tipranks.com/stocks/cvs/forecast

Tipsrank provides a strong buy rating based on 19 analysts who rated CVS Health’s shares in the last 3 months. The average price target is $97.06 with a forecast high of $108.00 and a forecast low of $83.00. The average price target represents a 17.85% change from the last price of $82.36. Meanwhile, Zacks Equity Research gave a rating of #3 hold for CVS Health.

Click here to access our Economic Calendar

Ady Phangestu

Analyst – HF Educational offfice – Indonesia

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Inheritance tax planning: using Aim shares to cut your inheritance tax bill

Business Property Relief (BPR) was an important survivor of chancellor Rishi Sunak’s spring Budget in early March. The tax break can be a valuable tool in planning for inheritance tax, but had been tipped for the chop. 

Yet as it turned out, the chancellor made no mention of BPR, leaving people free to continue using it, at least for now.

The basic idea of BPR is that if you leave business assets to your heirs – such as a business you have started, or its assets – these should be treated differently from an inheritance tax perspective to the rest of your estate. In practice, the rules relating to businesses and inheritance tax can get quite complicated, but one aspect of BPR is valuable to a potentially wide audience, including people who have never started a business in their lives.

This is because unquoted shares in a company fall within the remit of BPR. Crucially, “unquoted” has a broad definition – it includes companies listed on the Aim market, the junior market of the London Stock Exchange. 

As a result, in the right circumstances, Aim shares will not count as part of your estate for inheritance tax purposes; no tax is thus due on these assets, even if your estate exceeds the threshold at which your heirs would normally have to pay 40% tax.

Don’t buy Aim stocks just for the tax breaks

The first important point to make here is that not allowing “the tax tail to wag the investment dog” is a golden rule of financial planning. In other words, it never makes sense to invest simply for tax reasons. Aim shares, after all, carry their own risks – there is not much point in investing in the hope of securing a 40% tax saving if you lose 100% of your capital.

This caveat aside, however, where you own Aim shares as part of an investment portfolio carefully structured according to your attitude to risk and your financial goals, they can be a useful way to plan for inheritance tax. Aim shares are usually also eligible for individual savings accounts (Isas), within which income and capital gains are tax-free too.

Just make sure you understand the rules. First, BPR comes with a two-year qualifying period – you must have held qualifying Aim shares for two years before your death for the assets to fall out of your estate for inheritance tax purposes. 

There is a wrinkle here: they do not need to be the same Aim shares. If you owned shares in one qualifying company for 18 months before selling up and reinvesting the proceeds in another qualifying company, the latter would get BPR after six months.

Second, not all Aim shares qualify for BPR. Certain sectors of the market, including financial services and property, typically don’t. HMRC publishes a guide to what qualifies and what doesn’t, but you’ll need to check each share to be certain, or take professional advice. Roughly two-thirds of Aim shares currently qualify, but the list changes all the time as companies come and go, or change their activities.

How to build an Aim portfolio

How you make use of the Aim BPR tax break in practice depends on your personal circumstances and how hands-on you want to be. It is certainly possible to build your own portfolio of Aim stocks, but you will need to be confident in your ability to choose investments wisely and to stay on top of the tax rules. 

The alternative is to pay a stockbroker or financial adviser to do the job on your behalf, or to work with a firm that specialises in building tax-efficient investment portfolios. Firms such as Octopus, Unicorn and Wealth Club, for example, offer specialist inheritance-tax portfolio services.

Either way, the normal rules apply when seeking professional advice. Only work with fully regulated firms – those authorised by the Financial Conduct Authority. And do your due diligence – look into firms’ specialist qualifications, compare their charges (they can be steep, even by financial industry standards, for this particular service), and make sure you feel comfortable with them before handing over your money.

Remember that the government could change the rules at any point

More broadly, you should also be mindful of the potential for tax reforms in the future that torpedo any strategy you devise today. The fact that the chancellor let BPR off the hook in March does not mean he will not change the rules in the future. Given that the Office for Tax Simplification has recommended reform of inheritance tax, BPR remains a likely candidate for an overhaul.

One final point to make is that BPR is not the only inheritance tax relief available on investments. The Enterprise Investment Scheme (EIS) also comes with an inheritance tax advantage: investments in the EIS of up to £2m a year achieve exemption from the tax after two years. 

However, the EIS is an initiative designed to boost investment in small, early-stage companies; the tax benefits on offer reflect the elevated risk profile of these businesses, so you must be prepared for the possibility of losses. 

As with Aim shares, never invest in companies with EIS status just to get a tax break – and if you do decide the EIS is for you, think about how to build a portfolio of qualifying companies.

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Improve your odds of investment success with these three stocks

How much should you allocate to a great investment idea? Over 60% of the Large Cap Active Global Equity portfolios in a popular fund database have more than 50 stock holdings. That implies an average investment of around 2% of the portfolio and, say, 3% for the best ideas. 

Almost 40% of the database is made up of funds holding more than 80 stocks, which tend to invest even less than 2% in individual investments. This seems quite low, especially for a best idea, which is where John Kelly comes in. 

Kelly was a scientist working on noise reduction in long-distance telephone signals at the famous Bell Labs in the 1950s. But it turns out that his algorithm was useful for sizing gambling bets appropriately for a given set of probability-weighted outcomes. The “Kelly criterion” calculates the portion of funds you should place on a bet, with probability-weighted win/loss outcomes, to maximise your long-term return. 

Playing with probabilities

We know that investments can be winners (or not) and we can estimate the degree and probability of the win. So the Kelly criterion is useful for investment decision-making as well as Las Vegas. 

Let’s say we have a great investment idea with a 75% chance of 30% upside, but a possible 10% downside. Kelly suggests you invest two-thirds of your available funds with an expected return of 20%. 

Interestingly, by working the Kelly criterion backwards, we can infer what a portfolio manager thinks of his or her best ideas given the amount invested. For example, a 3% position (roughly 2.5 times the average weight in an 80-stock portfolio) implies that the manager sees the idea as having equal upside and downside but with an upside probability of 51.5%. This does not sound very convincing, and of course the manager is unlikely to agree with that range of outcomes and probabilities. So why not concentrate the portfolio on the few best ideas and forget about the rest? That is what we do. Here are three stocks that we hold with real conviction:

Growth potential in the cloud

Alphabet (Nasdaq: GOOGL) is a well-known internet service provider; the search engine and YouTube form the foundation of the company. Alphabet’s ability to continue to grow its share of advertising revenue is underappreciated, while you might not realise that it has a large cloud- computing business, an area that offers long-term growth.

DaVita (NYSE: DVA), provides dialysis treatments for patients suffering from end-stage renal disease (ESRD). Costs and a rise in client mortality owing to Covid-19 have been a problem, but the market does not appreciate the likely margin improvement as costs normalise. The transfer of patients from Medicare to Medicare Advantage (under the US healthcare system) also offers the potential for margin improvement.

Consider also NVR (NYSE: NVR), a housebuilder in the US with a geographically focused operation (some rivals spread themselves too thin) and a policy of not buying land. This allows it to benefit from economies of scale in construction and minimise the capital employed in the business, improving returns on capital, an important gauge of profitability. It is an unusually shareholder-friendly company.

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Premium Bonds: a better bet for savers when interest rates are low

Cash is a crucial part of a portfolio. It provides you with reserves to draw on for large planned or unplanned expenses, and it allows you to take advantage of any major buying opportunities in the markets. How much cash you hold as part of your investments – as opposed to what’s in your current account to cover routine outgoings – will vary depending on the size of your portfolio, the level of your regular, reliable income and whether you are expecting any major outlays in the next couple of years, but many people keep between 5% and 10% of their assets in cash.

Unfortunately, cash also seems dull. The interest you can earn is usually modest compared to the potential returns on other assets. At present, with inflation likely to stay high and interest rates firmly on the floor, you are guaranteed to lose money in real terms: UK inflation was 2.4% in June, compared with a best rate of about 0.5% on an easy access account and 1% if you lock your money up for a year. So the temptation today to move your cash into higher-yielding investments is huge. The problem is that investments with a higher potential return carry more risk to your capital, and the point of cash is to have complete security and easy access. 

Popular, but normally not attractive     

However, there is one popular investment that probably looks better in today’s conditions than usual: the government-backed National Savings & Investments Premium Bonds. These don’t pay interest – instead they run a monthly prize draw, with an annual prize rate that varies over time to reflect what’s available on savings accounts. This rate is now 1%, down from 1.4% last year. The tax-free prizes range from £25 (where each £1 Premium Bond has a roughly one in 35,000 chance of winning) to £1m (about one in 55 billion). You can save up to £50,000 and there’s no notice period for withdrawals.

That 1% prize rate doesn’t represent the typical return, because it’s skewed by the handful of large prizes. Your expected return depends on how many bonds you hold. A saver who has £1,000 is unlikely to win anything in a year. One with £35,000 will average one £25 prize each month (an annual rate of 0.85%) – but around half of savers will do worse.

Lumpy returns like this make Premium Bonds fairly unattractive in normal conditions. But with interest rates so low relative to inflation, even the unlucky won’t end up much worse off than with a savings account. The capital is safe and there is a tiny probability of a bigger payoff. Very few investments that have that risk profile. So long as the prize rate stays competitive against savings, Premium Bonds can be a simple way to make cash a little more exciting without adding risk.

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