Setting a benchmark for inheritance tax portfolios

People should to be able to measure the performance of any type of investment, writes Scott Longley, as he takes a closer look at the Inheritance Tax Portfolio Index launched by ARC in February last year

Given the long-term demographic and investment backdrop in the UK – an aging population with assets that, come the day, they may wish to shelter from the taxman – the popularity of inheritance tax (IHT) portfolio offerings looks set to continue.

Still, while the ultimate goal of any tax mitigation service is to preserve wealth, it remains the case that it is the performance of any portfolio that will determine the absolute value of what gets passed on.

As with most other areas of investment, the choice comes down to picking a winner among the proliferation of offerings available. Happily, in the case of IHT services, a little over a year ago a benchmarking effort came to the rescue of anyone struggling to see the wood for the trees.

In February 2018, Asset Risk Consultants (ARC) announced the launch of the ARC Inheritance Tax Portfolio Index or ‘AIP’. ARC has been in the business of tracking private client and charity investment performance since the mid-2000s. Both of these offerings are based on tracking the performance of real portfolios as supplied by participating investment managers.

The IHT version launched with 10 – now 11 – participating managers and is similarly based on real performance, net of fees. ARC assesses all the portfolios anonymously and then ascertains the average return.

The picture painted by the data is of a sector that has historically displayed robust results. Or at least that was the case until the last quarter of 2018 when, in succession, the average performance for October (down 10.14%), November (down 3.4%) and December (down 6.04%) yielded three of the worst months in the six-years’ worth of data.

It meant that 2018 was the first negative year since 2013, with a negative average annual return of -15.21%, compared with an average annual rise in the previous five years of 19%. This clearly hurt the cumulative returns, with the one-year figure standing at -5.9% compared with returns of 23.8% over three years, 45.9% over five years and a 110.9% return since inception in December 2012.

The index has also bounced back somewhat in the first quarter of this year. According to the figures released at the start of May, the average quarterly return came in at 6.7% with January, in particular, providing a healthy average return of 5.29%.

Suitable yardsticks

“The AIP provides investors with the confidence that data has been collected in the same rigorous manner for all the data contributors,” says ARC director of research Daniel Hurdley. “What people like about the indices is they are based on the actual returns that investment managers are producing for real client portfolios.”

The list of contributors includes some of the biggest names within the IHT portfolio service sector, including Blankstone Sington, Cazenove Capital, Investec Wealth and Investment and Stellar Asset Management.

According to Blankstone Sington business development director Neil Blankstone, the point of inclusion is to provide reassurance to clients that any claims of performance can be tested against their peer group. “We can use this benchmarking as a marketing tool,” he explains. “It helps show we are not afraid of scrutiny and that we welcome being judged against the performance of our peers.”

More than that, Blankstone suggests, giving support to the efforts of ARC to produce recognised performance yardsticks can help the sector broaden its appeal. “It provides further legitimacy in the eyes of advisers and intermediaries,” he continues. “Benchmarking is about more than simply performance – it is about being able to say we are happy put our portfolios up for scrutiny. I believe that is a strong message to send out.”

Hurdley agrees, saying: “The AIP relies on participating firms being prepared to commit to a high degree of transparency, which should give investors’ confidence that they are dealing with a trustworthy and diligent establishment.”

Of course, not all providers have opted to take part in the benchmarking exercise but Hurdley stresses ARC is always open to adding new names. “Peer group indices benefit all stakeholders – the managers, client advisers and the ultimate consumer of investment solutions,” he says. “All parties also benefit from a deepening pool of data. ARC would be very happy to speak with any other providers of IHT portfolios to understand what data they might be able to contribute.”