Making plans for growth

Investment Masterclass

Friday 13 August 1999 18:00 EDT
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Graham Newsome. Age: 42. Occupation: Architect

Graham Newsome. Age: 42. Occupation: Architect

Graham Newsome set up his own architectural/ design company two years ago, and its success has led to an increase in income andthe need for him to reconsider his circumstances.

He and his wife have a house valued at approximately £180,000 on which there is a pension-linked mortgage of £106,000. Mr Newsome has been funding his pension since 1985 but the fund is only worth around £ 20,000 to date. The recentmaturity of a property investment has given him £30,000 to invest and he has a further £15,000 in a director's account.Aside from this, the only other monies he has invested are in a Tessa account.

Mr Newsome's primary objective is to expand his business and because of this he needs to retain as much flexibility within hisinvestment planning strategy as is possible. He has also expressed concern over the size of his mortgage and his pension fund.

The adviser: Tim Cockerill, managing director at Whitechurch Securities, independent financial advisers in Bristol (0117 9442266)

The advice: Mr Newsome's main dilemma is whether to keep the £45,000 he currently has as cash or to make a longer-termcommitment and invest some of it. Given that he wishes to expand his business over the next five years and part of this plan would beto move house/business premises, then there is great sense in simply maintaining the £45,000 as cash. The rates of return onbuilding society accounts aren't fantastic, but the flexibility this gives means that he can use that money when he needs it.

If Mr Newsome were to look at stockmarket-based investments then he will need to take at least a five-year view. He therefore needsto decide how much of the £45,000 is going to be used over the coming years for the business/house move. If he feels therewould then be a spare £5,000-£10,000 this might be used. In this case I would suggest that he considers an ISA(Individual Savings Account) because of its tax-free status. Mr Newsome has expressed an interest in higher-risk type investments. Ifeel that the Fidelity ISA would be suitable and through this he could select its South East Asia, UK Special Situations and AmericanSpecial Situations funds to build up a more aggressive portfolio.

He shouldn't pay back part of the mortgage because that would mean spending capital which couldn't then be used to build thebusiness. What he may wish to consider is a flexible mortgage. This would mean that the available cash could be put into a "mortgageaccount", reducing the outstanding mortgage by that sum. However, the actual mortgage is maintained at £106,000 and themoney is still available if Mr Newsome decides to use it for business expansion.

The benefit is that the interest charged on the outstanding loan is reduced. It would rise if he took the money out to buy a property, butit is a means by which the mortgage could be reduced and flexibility retained.

Mr Newsome has a personal pension into which he makes a regular contribution and lump-sum payments as and when the monies areavailable. This obviously gives him the flexibility that he wishes. As he becomes a higher-rate taxpayer, the tax advantage of thepension contributions gets greater and therefore becomes a more efficient investment. For the present, I would leave the pension as itis and concentrate on the business.

As the business expands, Mr Newsome will have more money to invest and he could look at regular savings plans or accumulatecapital and then make lump-sum purchases. The key to building a portfolio in this manner is to ensure that it remains structured. Forexample, the first £1,000 is used to buy into the Henderson Technology investment trust. With the next £1,000 he couldpurchase Martin Currie Japan unit trust, and so on.

If, in due course, Mr Newsome really wanted to "spice up" his portfolio, then he could consider capital shares, which are "geared"investments that exaggerate movements on the market in both an upward and downward direction. Consequently they have enormouspotential to do very well; they do not provide an income and, because of their risk, are not suitable for everyone, but they areparticularly attractive investments.

One particular favourite is Jupiter Split which is available via a savings plan and lump-sum investment and whose performance hasbeen quite impressive this year, rising 17 per cent, whereas the FTSE100 index has returned 3.7 per cent. These are not for thefaint-hearted, but may suit Mr Newsome quite nicely in due course.

In summary, I would suggest that Mr Newsome considers the business expansion plans carefully and tries to ascertain how muchmoney is going to be required. Then look at holding that money in a flexible mortgage account. Scottish Widows offers an idealflexible mortgage.

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