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How will no-deal Brexit affect your investments?

How will no-deal Brexit affect your investments? post image

First let’s set out the terms of engagement. I’ll keep this one politically neutral. I’ve got an opinion like everyone else, but this post is about the practicalities and not how we got here. Let’s put the tribal warfare on hold for a few minutes.

I’m not going to BS you with 1,000 words on Brexit-proofing your portfolio either. The idea that we can take back control (of market volatility) with a quick shimmy into this fund or that is delusional.

What I am concerned about, as a passive investor, is whether I’ll still be able to buy and sell my ETFs and index funds as needed in the midst and aftermath of a no-deal Brexit.

Specifically, what are the chances that a UK-based investor who owns index trackers domiciled in the EU (mostly Ireland and Luxembourg) will experience some kind of disruption?

Could your investments be stuck in the financial equivalent of a lorry park outside Dover?

To stop asking questions for a sec and to start answering them, I’m glad I’ve looked into this because I’m much less worried now than I was.

The relevant authorities seem to have taken the steps necessary to ensure that it’s business as usual – even in the event of no-deal.

Just in case I misrepresent the scale of my expertise, I’d like to state upfront that I’m not a world expert in the dissolution of 47-year-old international treaties.

I’ve reached my conclusions by triangulating the announcements and actions of the various institutions and groups with direct control, influence, or interest in the outcome.

That list of party guests includes:

  • UK Government
  • The Financial Conduct Authority (FCA) – the UK financial markets and services regulator
  • European Securities and Markets Authority (ESMA)
  • Central Bank of Ireland – the Irish financial regulator
  • UK fund industry
  • Irish fund industry
  • UK financial media
  • UK mainstream media
  • UK and Irish law firms
  • Platform managers
  • London Stock Exchange

I expected to find plenty of cracks in the facade between those groups given their competing interests, but closer inspection of the Brexit timeline reveals a reassuring pattern:

  • Uncertainty is raised and speculated upon by the media.
  • Advice is issued by the law firms.
  • Industry stakeholders pressure their governments.
  • Governments wake up.
  • Regulators issue some fix or patch.
  • Media move on to the next concern.

It’s quite the civilised waltz when you view it over a few years worth of cached pages. The level of cross-Channel interdependence is unsurprisingly huge and nobody has an interest in screwing it all up.

Obviously, there are unknown unknowns and you can’t entirely discount the possibility of someone sticking a cosmic spanner in the works. But the loss of EU domiciled investments is no longer on my list of nagging concerns.

If you care to know why then let’s keep going…

The potential problem

If you own an ETF in your portfolio then it’s probably domiciled in Ireland. You may also own ETFs domiciled in Luxembourg.

(Your ETFs are overwhelmingly likely to be listed on the London Stock Exchange but this isn’t the same thing.)

Meanwhile your index funds are likely to be a mixed bag, predominantly domiciled in the UK or Ireland.

As a UK-resident investor I don’t need to worry about disruption to UK-domiciled funds, but Brits abroad may well be concerned.

European domiciled investments use ‘passporting’ rules to take advantage of the single market. The passporting rules allow any firm or fund authorised in one European Economic Area (EEA) state1 to conduct their business in any other EEA state without further hoop-jumping. Passporting enables EEA-domiciled trackers to be marketed at ‘retail’ investors (that is, the likes of you and me rather than institutions) across borders.

Passporting to and fro the UK goes up in smoke in a no-deal Brexit scenario.

ETFs are generally domiciled in Ireland and listed across the rest of Europe because the Irish regulatory regime is the easiest and cheapest for fund companies to navigate.

My immediate concern is that the end of passporting could:

  • Prevent trading in my investments until the regulatory log-jam is sorted.
  • Decimate my choice of investments. (For example, I’d be allowed to remain in my EU domiciled trackers but not to add to them.)

My longer-term concern is:

  • Costs go up due to an increased regulatory burden or lack of choice in the UK.
  • Some useful new trackers aren’t made available in the UK.

If you like dwelling on problems then enjoy this meaty list of Brexit-related investing issues.

The Temporary Permissions Regime ‘backstop’

Vanguard told me that it will be able to continue selling and marketing their Ireland-domiciled funds and ETFs in a no-deal scenario thanks to the UK Government’s Temporary Permissions Regime (TPR).

This checks out.

The UK’s financial markets regulator, the FCA, states:

The temporary permissions regime will allow EEA-based firms passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation, if the UK leaves the EU after 31 October and there is no deal.

It will also allow EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK.

The key takeaways from the underlying detail are:

  • The temporary permissions regime solves the passporting problem for UK-resident investors in a no-deal scenario.
  • Temporary means the arrangement lasts for three years after Brexit.
  • Firms can obtain UK authorisation for their EEA-domiciled funds during that three year period.
  • The FCA says the temporary permissions regime is now law.
  • Firms must sign up to the temporary permissions regime and the FCA recently extended the deadline to Oct 30 2019.

I’m assuming that global corporate giants like Vanguard and BlackRock (the owner of iShares) have the wherewithal to get their paperwork sorted by the deadline.

I’m also assuming that this open door to the UK market won’t be closed by the EU. They’re no more likely to block your access to EU-domiciled trackers than to deny you a new BMW or a wheel of Brie.

I didn’t come across a scheme that waves UK-domiciled funds through EU passport control, but I wasn’t specifically looking for it, either. A few UK investment firms have commented and don’t appear concerned. More on that below.

One wrinkle to watch out for is if you own funds that aren’t labelled Undertakings for Collective Investment in Transferable Securities Directive (UCITS) or Alternative Investment Funds (AIFs).

The temporary permissions regime specifically states that it covers UCITS and AIF funds.

The vast majority of index trackers are UCITS but it’s possible you own stuff that doesn’t qualify.

  • Some fund-of-funds aren’t UCITS, though Vanguard’s LifeStrategy product is. (It’s also domiciled in the UK.)
  • Exchanged Traded Commodities (ETCs) aren’t UCITS. You may well own a gold ETC.

Look out for sneakiness like iShares labelling its gold ETCs as UCITS eligible. That doesn’t mean the ETC is a UCITS fund. It’s not. UCITS eligible means the ETC can be invested in by a real UCITS fund.

I couldn’t find out whether ETCs are somehow covered by the temporary permissions regime. The regulatory tenor is to minimise disruption but this is one doubt I couldn’t dispel.

Worst case scenarios

Perhaps you’re tiring of my optimism and would like some good ol’ reptilian brain food as brought to you by Project FearTM?

Let’s turn to the FakeNews media to undermine our faith in this great country of ours. What’s the worst Brexit nightmare they can conjure?

The Money Observer came up with this blood-curdler:

A worst-case scenario would be that UK investors face less choice when it comes to selecting funds.

The Investors Chronicle chilled my spine with:

Exchange traded fund (ETF) providers could face higher costs and investors might have less choice of ETFs if Brexit (a UK exit from the European Union) brought with it the end of single-market trading agreements whereby Ireland and Luxembourg domiciled funds are automatically granted access to the London Stock Exchange.

In a worst-case scenario, providers would have to list separately in the UK, an exhaustive process involving high fees and an administrative burden.

And some managers of EEA UCITS funds may not seek UK authorisation once the temporary permission regime expires, foretells law firm Allen & Overy.

Whatever you think of experts these days, it’s plausible that UK regulators will make it extremely simple to rebadge EEA UCITS funds as UK UCITS funds. If so then the ‘less choice, increased cost’ nightmare scenario shouldn’t come to pass. Fingers crossed that British administrators don’t replace red tape with red, white, and blue tape.

The lack of incentive for our government to create friction for UK plc’s financial services industry dovetails nicely with the incentive for companies like Vanguard and Blackrock to ensure their index trackers remain widely available, given that scale is a critical component of their business model.

What do the investment platforms say?

Remarkably little given you’d think they’d want to address any customer concerns. There’s plenty of ‘Hey, don’t stop investing because of a leetle bit of Brexit uncertainty’ but virtually no guidance from the major players on how no-deal could affect access.

The notable exception is AJ Bell who published a decent piece outlining the risks – though even that was written for financial advisors rather than consumers.

At least back in October 2018, AJ Bell didn’t see a problem with trading ETFs on the London Stock Exchange:

ETFs are very rarely domiciled in the UK, however all our investments are in ETFs listed on the London Stock Exchange. Although the underlying fund may have to consider any regulatory effects due to not being domiciled in the UK, we will be able to continue to buy and sell our holdings through the secondary market, trading on the LSE.

Although it also speculated that costs could rise post-Brexit:

Announcements made to date by the FCA indicate temporary permissions would be put into place to allow existing funds to be held and traded after Brexit for a period of time. However it would create a cloud of uncertainty.

It is likely that fund groups will look to set up UK-domiciled vehicles and transfer investors across, which could incur costs for both the fund group and the underlying investor, depending on the mechanism used (such as a scheme of arrangement).

EU investors using UK domiciled funds

I came across a couple of UK investment firms who made reassuring noises about continued access to products for EU residents. Generally the information was scant and buried in Brexit FAQs but I ran out of time to pursue this angle.

There doesn’t appear to be an EU equivalent of the temporary permissions regime and the FCA advised back in February:

If the UK leaves the EU without a withdrawal agreement (a no-deal scenario), UK firms’ ability to continue to service EEA-based customers (including UK expats) remains a concern.

EEA-based customers (including UK expats) holding retail investment products serviced by UK providers could be affected if their UK provider cannot operate in the EEA after Brexit.

I don’t want to worry you unduly. The general thrust is that bridges are being lashed together rather than wired to detonate. There were some rumblings about EEA access to the London Stock Exchange a few months ago but the EU regulator seems to have rowed back on their intransigence since.

Interdependence creates workarounds and there’s a reason that both Vanguard and Blackrock have been busy expanding their European branch offices while maintaining their European headquarters in London.

Many other firms have been doing the same thing.

Nothing to worry about?

Obviously I can’t say nothing could go wrong. I’m personally reassured by the FCA’s moves but if you’re still nervous then:

  • You could switch your investments into a near-identical portfolio of index funds domiciled in the UK. There’s plenty of good, cheap funds available via the major index fund providers. Look out for the letters GB at the start of the fund’s ISIN number which you’ll find on its webpage, Key Investor Information Document or factsheet. GB means that it’s domiciled in the UK.
  • Or you could leave things as they are knowing you can always continue to pound-cost average into UK-domiciled funds if there is a no-deal Brexit interregnum.
  • It might also be wise to fatten up your emergency fund with extra cash to cover any extended period of disruption. I’m doing this right now but that’s more with an eye on the gathering clouds of global recession.
  • Go straight to the sources below for more reassurance (or worry-fodder!)

Aside from that, when it comes to no-deal Brexit, I’m making like a good passive investor and doing absolutely nothing.

Take it steady,

The Accumulator

Further reading: A no-deal Brexit linkfest for the fastidous

  1. EEA = EU member states plus Norway, Iceland, and Liechtenstein. []

Weekend reading: 75 not out*

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What caught my eye this week.

Just when you thought pensions had been rehabilitated with the freedom to spend your savings how you like in retirement – and the laudable success of auto-enrollment nudging you there – along comes a conservative think tank ready to bugger them up again.

Not content with his faction bringing us the thermo-nuclear bungle that is Brexit, former Tory ‘leader’ Iain Duncan Smith’s Centre for Social Justice suggest the government withhold the state pension until 75:

The SPA [State Pension Age] should better reflect the longer life expectancies that we now enjoy and be used to support the fiscal balance of the nation.

The SPA in the UK is set to rise to 66 by 2020 (Pensions Act 2011), to 67 between 2026 and 2028 (State Pension Act 2014) and to 68 between 2044 and 2046 (State Pension Act 2007).

We propose accelerating the SPA increase to 70 by 2028 and then 75 by 2035.

There’s a lot to be written about this. For one thing, my co-blogger The Accumulator might have to revisit his fear-de-mongering article on why your pension won’t be plundered.

(Oops! Lucky it’s a Bank Holiday @TA!)

More seriously, the CSJ report shows its workings, and it’s hard to come away from it without thinking Something Must Be Done. I also personally happen to like the idea of working indefinitely, in some capacity, professional damp squib to the FIRE brigade that I am. I believe it’s probably healthier for most of us.

However I’d certainly expect to be easing up into my 60s. Perhaps a day or two a week by 70. I’d want to have options. I wouldn’t want politicians forever moving the goalposts away from me like some demented version of football devised by the Greek philosopher Zeno.

More darkly, as The Guardian points out there are pockets of the country such as Glasgow where male life expectancy doesn’t even hit the 75-year old mark. And life expectancy isn’t the same as healthy life expectancy, anyway.

An additional fear for the likes of us is that the age when we could access private pensions could also leap.

It’s already set to rise to 57 by 2028. Perhaps you’d be barred until 65 under the CSJ’s regime?

The alternative – wealthy types retiring in their 50s en masse to be served lattes on weekday afternoons by bitter septuagenarians – sounds almost worse.

Existential diversification

Of course this is only a proposal. It carries exactly zilch formal weight. Even Duncan Smith has said it’s not his policy, and he’s a Magneto for nonsense.

But I do think it’s a reminder that the rules of the game can and will change again and again.

In just the life of this blog we’ve seen it with everything from the pension lifetime allowance to the taxation of dividends to those who came here from the EU in good faith and lived here for decades being ordered to pay up for the right to stay.

Change is constant, which is why I’m as bemused when I hear people explain their entire strategy is 100% based on pensions as I was when old-time investors told me they eschewed using ISAs because their dividends were tax-free.

Political risk is hard to avoid unless you’re ready and able to move (and let’s not mention expats again this week, eh? 😉 )

But there are pragmatic approaches you can take, such as using various investment vehicles together (ISAs and pensions, at a minimum, and probably also property), keeping your hand in at earning to preserve your human capital, and trying to stay healthy for as long as possible.

As someone should have trademarked: Not everything that can be modeled to two decimal places on a FIRE spreadsheet matters. And not everything that matters can be modeled.

*If only Joe Root could say the same.

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How to invest as an expat

A classic old oil painting of a man studying a globe

This thought-provoking guest post is by Andrew Henderson, the author of Nomad Capitalist.

Even when you have discovered the freedom of expat life, chances are that you will still need to process the transition.

It can feel a bit like a home-country detox.

This is more than just dealing with cultural shock. In many cases, you are learning to adopt an entirely new perspective and approach to life.

Living and traveling abroad has a way of changing the way you look at the world because you are suddenly exposed to a thousand different ways to do things that are done only one way at home.

It can be tempting to ask why something is done differently because what you know is all that you’re used to.

But when you detox yourself from the one-country, one-way-of-doing-things mindset, you will discover a world of possibilities full of better solutions, better lifestyles, and better options.

Investing is no exception to this rule.

Global potential

Learning to invest as an expat can change your entire investment strategy for the better. But only if you let it.

There are funds and companies in other countries that do things somewhat similar to what you’re used to, but as someone who has left my home country and fully given myself to investigating the entire spectrum of investment opportunities abroad, I know that there are better options.

In fact, there are so many options that it takes a bit more work to know which investments best fit into your personal strategy, especially compared to the ease of simply handing your money over to a mutual fund. If you’re not opposed to figuring that out, you can easily enjoy much higher returns.

Before deciding where and how to invest overseas, I find it helpful to ask the following four questions:

  1. How committed am I to continue investing in my home country?
  2. Where am I going?
  3. What options are available to me?
  4. How will my expat journey affect my views on investment and risk tolerance?

It is important to answer the first question because many investment options are only available to residents of certain countries.

For example, in the US you can invest in everything from mutual funds to LendingClub. These companies often have offices in Europe and accept customers from countries like the UK, Germany, Singapore, and Hong Kong.

However, they may not allow you to invest if you do not have resident status in those countries.

Because of this, your expat lifestyle may be limited if you want to continue investing in your home country.

In contrast, you will not limit your investment options if you choose to be an expat. As you ask yourself the four questions above, it becomes easier to realize that if you are able to live somewhere else, why not invest somewhere else as well?

I call this geographic diversification.

On the ground diversification

One of the basic principles of a strong investment portfolio is to avoid putting all of your eggs in the same basket.

If you wouldn’t invest all of your funds into one stock issued by a single company, why would you make all of your investments in a single country?

Not only can you spread your risk through geographic diversification, you can also increase your investment options.

In countries like the US, regulation from the SEC gets in the way of some of the best investment deals. In the UK, the market is so developed that people have to get creative to invest and find cash flow, especially in today’s low-yield environment where you can no longer make money just parking your cash in the bank.

As a result, people turn to investment deals like student housing rentals that may sound great upfront – invest £100,000 a year and get 9-11% back – but then how do you sell that? How do you sell one room in a student apartment in an area that would lose its value if there weren’t any students?

Rather than struggle to find creative options to get mediocre yields in your home country, why not simplify things and just look elsewhere… especially if you are an expat?

Living somewhere else allows you to see the flaws in how people invest where you are from – even the flaws in what you’ve been doing.

You’ll begin to see that many people invest where they do simply because they think that those are their only options. And if you are not comfortable investing anywhere but the UK, those just might be your only options.

Fear of doing anything beyond what is right in front of you can leave you choosing between an HSBC bank term deposit or a student housing development.

Fear keeps you from seeing the possibilities.

But those who have embraced the expat life have already shown that they are comfortable outside of their comfort zone.

So let’s look at the possibilities that open up when you look beyond your home country.

Georgia on my mind

To begin, I recently opened a US dollar bank deposit account in the country of Georgia and I am making 4.5% just by parking my cash there.

In countries like Cambodia, you can make 6% doing the same thing. And in other places, you can make even higher returns.

For instance, bank deposits in Armenia are currently about 10%. I ran a recent comparison over the last four-year period on the Armenian dram and the currency fluctuation was less than 1% against the US dollar.

Imagine that you were to put your money in at 10% interest in a foreign currency. Suppose you lost less than 1% converting to the new currency and less than 1% converting it back and you lost less than 1% against your base currency. You would be down roughly 2.5%.

However, after four years, you would get 40% interest (10% x 4 years) by simply putting your money in a foreign bank account.

If you want to invest in real estate, things get even better.

If you were to stay home in the UK, you would easily pay £15,000 or more per square meter for a property in the city center with a yield of 4.5% max.

In cities like Tbilisi, Georgia or Phnom Penh, Cambodia, you can buy property in the city center for $1,000 or less per meter and make much higher returns.

These properties may not be perfectly renovated, but they are in great locations and are as much as 1/25th the price you would pay in London, 1/20th of what you would pay in Singapore, and 1/15th the prices in New York.

That is dirt cheap when it comes to international real estate.

You can find these low prices and higher returns in numerous places around the world. Even Colombia has deals like this; you won’t find them in the capital city of Bogota, but because Colombia is a much bigger market, it is still a great investment.

Market timing

In many instances, timing is key.

For example, you won’t find these prices now, but in the summer of 2018 you could find properties for $1,400 per meter in Istanbul. At the time, the Turkish lira was crumbling and many people were just walking away. Properties that were normally $3,000 per meter went down to $1500 per meter and people started panic selling.

That was the time to jump in.

Turkey has strong fundamentals – including a large population that reproduces – which means that even if some of your rental income is in lira for a couple of years and the lira gets battered, you will eventually come out on top.

Some might see an investment like this as a risk, but my personal expat journey has shown me the difference between perceived risk and actual risk. People often question my wisdom for even recommending real estate investments in a place like Cambodia, but my investments there made over 20% ROI in the last year.

Don’t take this as personal financial advice, but try getting that in the US!

There are some properties in Australia and the UK that have had their total yield go down because they made 2% yield and their property price went down 5%.

I made 20% in Cambodia. I have had deals in Georgia that were in the double digits.

How much lower can these prices go for countries that are experiencing huge booms of tourists? Their markets are just starting to take off while developed countries like the UK leave investors scrambling for creative ways to make even a small return.

See the bigger picture

As an expat, if you can get over the fact that you’re investing in markets that you’re unfamiliar with, you can go back to the basics and buy core properties in amazing locations for low prices and wait while collecting some income.

Most people won’t do it because they are afraid. They think that the UK and the US are the only safe places in the world.

That is obviously not true.

Most people just don’t know how many possibilities are waiting for them out here in the rest of the world. Where I come from, many people have never left the United States. Almost 60% of Americans don’t even have a US passport, disqualifying themselves from international travel.

But as an expat you are already out in the world. You are different.

If you’ve been enjoying the expat life for a while now, you may have begun to notice the opportunities already. If you haven’t, just switch on your investment mindset wherever you go.

Good investments do not exist in a vacuum back home. For the globally-minded citizen, the best investments are just waiting to be found.

Portrait of Ander Henderson, Nomad CapitalistAndrew Henderson lives by five magic words: “go where you’re treated best”.  The founder of Nomad Capitalist helps people to find the best places to live, bank, invest, incorporate, start a business, hire, date, and more. You can also read his book.


Weekend reading: Airpods and moon tix

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What caught my eye this week.

There was something (else) notable about the first TV interview with the three lads from Manchester who restrained a knife-wielder run amok in Sydney earlier this week.

In the initial broadcast, I noticed two were wearing Apple Airpods whilst talking to the camera.

I thought this pretty striking. The wireless headphones are popping up all over London in the same way the iPhone’s once iconic white earbuds did a decade ago.

Nevertheless I was surprised to see them in the TV interview. Mancunians have their own inimitable sense of self-presence, but still – wouldn’t you take your Airpods out before a once-in-a-lifetime appearance on live TV?

That was my first thought. But then Airpod users often say they forget they’re wearing them.

And unlike, say, the ill-fated Google Glass, people love to be seen wearing them. Even when being broadcast around the world!

This trivial observation suggests to me that wireless headphones are going to become ubiquitous. Even your gran in the Highlands will be wearing them within a few years.

And that’s relevant around here because it means a £169 purchase – and that’s with a £30 discount – every couple of years has been conjured up by Apple out of nothing.

Put that in your spreadsheet

Yes, yes, a couple of you will tell me you’re still getting by with a Tesco mobile on a £5 contract and a pager.

There are always outliers or laggards.

But the bigger point is that a lot of today’s silly luxuries become tomorrow’s essentials.

The iPhone of course is the ultimate example of this kind of household expense that nobody really saw coming.

An early retiree at the turn of the century might have budgeted for a mobile phone, sure, but not one that cost £1,000 or more.

And just a few years earlier in the mid-1990s there would have been no annual mobile bill in the forecast at all.

Of course, there might have been a car in the budget – whereas today’s young urban corporate escapee might make-do with Uber – and perhaps a video tape recorder to capture that round-the-world retirement trip at the cost of a couple of grand.

Swings and roundabouts.

Tomorrow’s world

When I first started reading personal finance forums 20 years ago, I was amused by all the inflation conspiracy theorists that abounded, and I still am. Tracking inflation is difficult enough without introducing a nationalised swindle.

However I now see that those who argued we all have our own personal inflation rates made a really good point.

Broadly, stuff (iPhones and Airpods aside) is getting cheaper while services are getting more expensive.

But guessing what stuff and what services you specifically will want to use in 20 years time is harder than it looks.

It’s another reason why personally I wouldn’t want to follow a ‘spending down all my capital’ plan in early retirement (though I accept many feel they have little choice).

Using your current spending is a decent proxy for a decade or two, but what if you’re retiring at 40? Do you really want to miss out on the space travel, the personal teleportation, and the by then-mandatory weekly enemas with your personal gut flora therapist?

Well, okay. But surely not the space travel and the teleportation?

On the other hand, perhaps the robot revolution will lead to super-abundance and a century of deflation.

Tough call.

Inflating expectations

In this context, the news that inflation is currently running a little over target

Annual consumer price inflation rose to a three-month high of 2.1% in July from 2.0% in June, the Office for National Statistics said, bucking the average expectation in a Reuters poll of economists for a fall to 1.9%.

…seems neither here nor there, especially as anything could happen come 31 October.

With a sensible Brexit deal the pound could rally overnight and imported inflation fade away. Alternatively, with a bonkers no-deal, we might see a run on sterling and all kinds of craziness. Or perhaps just a damp squib either way.

So the Bank of England does face a bit of a dilemma.

But in the longer-term, in a world of accelerating change, we all face a bigger one.

Further reading:

  • What is the UK’s inflation rate? – BBC
  • How inflation is costing you more than you think [Search result]FT

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