I see Halifax, the bank that brought us Howard the singing clerk – and brought to its shotgun suitor Lloyds a load of duff Irish property loans – is now offering spread betting.

Previously, spread betting has been the preserve of companies like IG Index and City Index. Large firms, sure, but hardly household names.

As I write, Halifax is devoting a key spot in its share dealing home page to promoting its spread betting product. I don’t know how many share dealing customers Halifax has, but its service – which I use and like – has regularly won awards, and given the size of the parent I’d imagine it’s significant.

I think we can therefore say that spread betting has hit the mainstream.

What is spread betting?

When you spread bet on a company’s shares, you speculate that their price will go up or down.

The more the price rises or falls in line with your bet, the more money you make – and vice versa.

Invariably spread betting firms enable you to ‘gear up’ your position if you want, so the same amount of money can go further than if you had bought (or sold) shares in the firm the traditional way.

• This increases the potential reward you make from a correct bet, without the need for more money.

• But it also greatly increases the risk, since you can easily lose more than your initial deposit if your bet goes wrong.

You don’t explicitly pay commission when you spread bet, but to cover its costs and make a profit, a spread betting firm defines a price ‘spread’ that the share price must move above or below before your bet begins to pay out.

The chief benefit of spread betting – besides the ability to borrow to bet on shares, for those who want that – is that spread betting gains in the UK are currently free of capital gains tax.

What then is ‘spread trading’?

You won’t find the words ‘spread betting’ featured prominently on Halifax’s site.

Instead, the company calls its new service ‘spread trading’, rather than ‘spread betting’.

The bank might argue that it’s a more understandable term for its customers. But I’d cough and suggest ‘trading’ is probably also a rather more respectable-sounding term for a bank to be associated with than ‘betting’.

The Inland Revenue isn’t confused, though. Spread betting is exempt from Capital Gains Tax precisely because it’s judged to be gambling, not investing.

Presumably Halifax ran the term ‘spread trading’ by the authorities before launching its service. But it will still be interesting to see what name it uses in the long-term.

There may even be existing spread betters who would be drawn to opening an account with a financial giant like Halifax.

It’s important to note, though, that Halifax’s spread betting service is provided by City Index – and I presume it runs a version of that company’s own platform.

More importantly, the bank also states that: “Halifax Spread Trading is provided by City Index Ltd and therefore your contractual relationship is with City Index.”

Risky business

Halifax is also offering the same encouragement you see in most adverts for spread betting in the media: free credit to get new customers started.

It’s widely quoted that something like 80% of spread betters lose money, so I’ve always presumed the credit offers were there to hook people into the habit.

But perhaps the bank will be spinning its £100 of free credit as more of an introductory bonus type affair.

To give Halifax its due, the bank does state very clearly and multiple times that spread betting is not for everyone.

The website frequently states it is “for the more experienced trader”.

The bank also states prominently on its “What is spread trading?” page beneath ‘Understand the risks’ that:

Spread Trading is a high risk product. Please remember that it’s possible to quickly lose substantially more than your initial deposit and you may be required to make further deposits at short notice to maintain open positions. Spread Trading is not for everyone so please ensure you understand the risks.

The follow-up page on those risks is pretty clear, too:

Halifax Spread Trading is a product which you can use to speculate on the price movement of an investment, whether it’s rising or falling. It is important to remember that Spread Trading is designed for experienced traders and carries a high level of risk to your capital. You should only trade with money you can afford to lose. It is possible to quickly lose substantially more money than your initial deposit.

There then follows a long list of the various things that can go wrong with this type of service.

I haven’t signed up for this service, so don’t know if any vetting is applied to ensure only “experienced traders” are given accounts.

When I opened a spread betting account with a different firm in the past, the chief requirement appeared to be a credit card.

What would you bet on?

I am not adamantly anti-spread betting, unlike many old school investors.

Back in the good old days when making big capital gains was still a problem (little joke), experienced investors with fairly large portfolios could use spread betting accounts to avoid accruing taxable gains, even while running fairly traditional portfolios – as opposed to the typical day trader betting on the value of the FTSE.

Properly explaining how they do this would require an article in itself!

But to simplify, you take small, leveraged positions of the companies you want to hold in your portfolio in your spread betting account, and keep the bulk of your money in cash to offset the ongoing costs of leveraging up your positions.

You must also have cash available to meet margin calls.

Like this, you can theoretically replicate how a ‘normal’ portfolio of shares would rise and fall, without incurring a tax gain (or loss) – although at today’s low cash deposit rates I think it would be difficult to offset all the costs of borrowing.

But I don’t think this is how most spread betters behave.

Rather, they make short-term bets on anything from the gold price to the Dow Jones Industrial Average to the price of Shell to how many runs England will make in their next Test Match.

And they leverage up those positions without a cash reserve, which means they are wiped out by small moves against them.

It is therefore probably only a matter of time before a tabloid paper finds someone made into a pauper by spread betting and publishes a “Should our taxpayer-owned bank be supporting this gambling?” type story.

That might be unfair, like most tabloid sensationalism.

Yet I would question whether this is really a sensible product for a mainstream bank to be getting into.

Average investor: Not a hedge fund genius

Another thing to consider is what the evident appetite for spread betting tells us about the psychology of investors today.

It seems you can hardly open an investing magazine or newspaper without finding an ad or pullout supplement for one of the big spread betting firms.

The ability to go short (i.e. bet against) companies and the indices seems to be very appealing to the many who are sick of losing money as the markets bounce around.

But remember, the average investor is very poor at timing the market.

Therefore, as with so much else since 2008/2009, I see this evident desire to short the market as probably a pretty bullish contrarian indicator, suggesting that markets are more likely to go up than down from here.

Good investment articles from around the Web.

This week saw Morningstar introduce a new ‘qualitative’ rating system for investment trusts – ranking them as Gold, Silver, or Bronze.

Its analysts have so far rated 32 of the 100 trusts in its universe, and have already highlighted their first six favourites:

• BlackRock Smaller Companies Trust
• BlackRock World Mining Trust
• City of London Investment Trust
• Murray International
• Perpetual Income and Growth
• Scottish Mortgage Investment Trust

You can watch a video to hear Morningstar explain its rating procedure.

I’m not mentioning this because I think the ratings will be in any way predictive. It will take many years before we can say for sure if Morningstar’s analysts got it right – and by then it will be too late to follow them.

As an investor in investment trusts, though, I’m always happy to read informed research about these companies, so equally I’m not complaining.

The real reason I’m pointing to the new ratings is I suspect we’ll be hearing a lot more about investment trusts in the 12-months leading up to the Retail Distribution Review and beyond.

[continue reading…]

What would Scottish Independence mean for your investments?

It’s not something I’ve heard much discussed, even as the political accent has turned decidedly Scots recently.

Other consequences of Scotland doing a bunk – such as perpetual Conservative rule over the remains of Blighty, or what the Scottish would do with the US nuclear deterrent – get a lot of airtime.

But there could be far-reaching effects for UK investors that stretch beyond what to call RBS or Scottish Widows south of the border afterwards.

Your investments in Scotland

RBS (aka Royal Bank of Scotland), Scottish Widows, and HBOS (Halifax Bank of Scotland) are just a few of the big names associated with the large Scottish financial sector.

Scots hoarding their money may be a myth, but it’s been happily taken to heart by generations of fund managers and bankers.

No offence to any Welsh readers, but the departure of the Principality Building Society and the car insurer Admiral from the ranks of UK PLC wouldn’t be anything like as wrenching as a change of domicile for Scotland’s financial sector.

According to the Fundwatch website, some 14% of total assets under management – about £550 billion – are managed in Scotland. What’s more:

There are also six FTSE 100-listed companies headquartered in Scotland (Aggreko, Cairn Energy, Royal Bank of Scotland, SSE, Standard Life and Weir Group) and a further 15 in the FTSE 250 (Aberdeen Asset Management, Aberforth Smaller Companies Trust, Alliance Trust, AG Barr, British Assets Trust, Devro, Edinburgh Dragon Trust, Firstgroup, Monks Investment Trust, Personal Assets Trust, Scottish Investment Trust, Scottish Mortgage Investment Trust, Stagecoach, Templeton Emerging Markets Investment Trust and Wood Group).

According to the London Stock Exchange, there are 116 companies listed on the main exchange and the Alternative Investment Market in total (including a number of investment trusts and investment companies) that call Scotland home.

This does not include other companies with significant business in Scotland or those owned by other companies, such as HBoS.

I’m personally in Caledonia Investments, which is the family vehicle of a colourful bunch of Scots and also in the FTSE 250, but which seemingly doesn’t count (perhaps they all live in Mayfair?) There’s also the Edinburgh Investment Trust, which presumably escapes inclusion on the grounds it’s run by a sassenach, Neil Woodford.

Let’s leave aside whether it’s likely that Scotland will overturn the Act of Union with the aplomb of a distant relative down from Kilmarnock for a Home Counties wedding who upends a table after one too many whiskeys/snotty jibes.

What are the issues for investors that could arise from Scottish independence, for investors on either side of the border?

Stock market listings

The good news is I don’t see any immediate problem in owning Scotland-based companies now on the London market. Scotland might want to resurrect the Glasgow Stock Exchange someday, but at first Scottish companies would surely continue to trade alongside the many Chinese, Russian, and Kazakstanian companies listed in London. So neither Scottish or ongoing British (let’s call them British from here) would be left with hard-to-shift holdings.

Currency

The prevailing view is Scotland would stick with Sterling in the short-term, although before the Euro became as popular as a Greek at a plate factory, many Scottish Nationalists sang its praises. Whether the two countries using the pound would work is arguable, but there’s a grander experiment going on over the Channel. In the long-term, if Scotland was to adopt the Euro, Scottish-based investment trusts and OEICs might offer a choice of currency-denominated shares, as some other multinationals already do with say dollars and pounds.

Taxes on dividend income

If Scotland won the right to tax and spend on its own account after so many years, I don’t see why foreign investors in Scottish companies would be let off the hook. Presumably, withholding tax would become liable for UK owners of Scottish investments, and vice-verse. Hopefully, our shared history would encourage brokers and other platforms to make managing the tax far more straightforward, or even automatic.

Regulation

Scotland won’t be able to properly police its financial services from day one. Though the UK hardly does a perfect job either, I’d guess Scotland would ‘rent’ the services of the FSA and others, for a few years at the least. It would be important to keep an eye on where and how your investments (including cash accounts) were being regulated, who would stand behind compensation claims, and so forth.

North Sea Oil

Ah, the black gold that will have Peak Oilers decamping to Aberdeen at the first sign of Scotland becoming a commodity economy! How exactly the oil reserves would be divvied up would be crucial. If Scotland got a per-capita allocation to rights to the oil, then with less than 10% of the UK population it would hardly be a bonanza. However, if the SNP and others got their way, it could receive over 90% of the reserves according to geography, which Reuters estimates is worth about £13 billion a year. Useful, given some argue Scotland is receiving a £16 billion or so subsidy from the rest of the UK today.

UK debt

Despite wanting most of the oil, the SNP only wants its population’s share of the UK’s enormous national debt. And who can blame it? We’d be getting into the realms of politics here, but needless to say neither country – or its investors – is going to get a treasure-filled settlement as a result of the divorce.

The UK state-backed banks

Another thing the SNP apparently doesn’t want a share of is the UK State-backed banks RBS and Lloyds, or the £66 billion bill for investing in them. It says the banking crash is London’s problem. Former chancellor Alistair Darling disagrees, saying that the RBS and HBOS fiasco was made in Edinburgh, and that they only survived because the whole country supported them. The Scottish economy is only worth £140 billion, so it would be even less able to shoulder the £1.5 trillion or so in assumed liabilities of the banks than the UK.

As a Londoner, I’d personally be happy with Scotland leaving these debts and assets to us. I think British taxpayers will eventually make a profit on our by-then foreign owned banks.

The UK gilt market

Another elephant in the room. Dividing up the UK gilt issuance by population on a roughly 8:92 basis between Scotland and the ongoing UK would be nightmare, and would trigger a credit event in bond market terms. It’s more likely the new governments would create some kind of debt facility that the Scots would have to pay-off in lieu of their share of gilts.

Scotland’s credit rating

According to the specialists at M&G’s Bond Vigilantes blog, Scotland would be unlikely to get a AAA-rating for its debt, mainly on account of its spindly GDP growth. The UK might still warrant a AAA rating on fundamentals, but the turmoil merely hinted at above of splitting Scotland from the UK could see our debt downgraded anyway on sentiment grounds.

A re-rating for England and Wales?

Still, I wonder if the remaining UK would actually enjoy an upgrade in the wake of Scottish independence? The markets might react favourably to perma-Tory government (even if many citizens wouldn’t) as well as the loss of the drag from the heavily public sector-weighted Scottish economy and its liabilities.

The loss of the UK’s oil reserves wouldn’t be the disaster they’d have been 20 years ago, and I’m not some oil groupie anyway. Give me the more vibrant and creative South East over a bunch of black gloop that’s boiling the planet.

These are just some of the issues for investors that might emerge from Scottish independence – please do share your own thoughts in the comments below!