DBS

7 THE SEARCH FOR YIELD The extraordinary conditions that have prevailed since 2008 have starved investors of good value yield, with interest rates held at record low levels. This has coincided with banks’ greater reluctance to lend to smaller businesses and has created a high demand for good quality income-paying assets among mainstream asset classes. In its Asset Management Survey, 2015/16, the Investment Association stated that demand for income is still strong, “it is becoming increasingly clear that clients are looking outside of traditional fixed income securities towards other asset classes that can provide them with a reliable source of income. ” 1 So, the pressure is on for advisers to add value when it comes to fixed income allocations; according to a Nesta survey, close to two thirds of money invested into debt based securities within the United Kingdom (UK) alternative finance market 2 is money the respondent would otherwise have invested in a different scheme. This is evidence that debt based securities investors are not simply taking a punt with spare cash and suggests that they are looking for proper investments with proper returns. BENEFITS OF ELIGIBILITY FOR THE NEW INNOVATIVE FINANCE ISA In August 2016, HMRC announced that debt based securities available WHY NOW? IN CONTEXT RATIONALE FOR THIS REPORT Today’s investment environment poses a number of challenges to those looking for good quality propositions. It also needs to meet the changing demands of consumers. This report takes a look at how debt based securities can meet some of these challenges and demands. AVERAGE ANNUAL SAVINGS ACCOUNT RATES through regulated crowdfunding platforms may be held within an Innovative Finance Individual Savings Account (IFISA) with effect from 1 November 2016. Investors may now find investment in DBS available through crowdfunding platforms more attractive due to the tax advantages of the new ISA wrapper. For suitable, unlisted bond, loan note or debenture holders, those advantages are: No tax on interest earned on the DBS No CGT on profits if the DBS is sold at a profit. The IFISA arguably sits between Cash and Stocks & Shares ISAs in terms of risk, offering higher returns than cash, because the investor is putting their capital at risk, and less volatility (along with less liquidity) than listed bonds and shares. The inclusion of debt based securities as ISA eligible assets is a major indicator from the Government that it supports the growth of DBS as both a funding source for smaller UK businesses and retail investment. THE NEED FOR ALTERNATIVES / DIVERSIFICATION Rock-bottom yields from government bonds and destabilising bouts of volatility in equity markets have pushed more investors to look for uncorrelated investments outside of those traditionally classed as conventional – such as listed equity. And since the Retail Distribution Review (RDR), advisers have been increasingly using alternative investments with their clients, given the need to diversify and improve yield in today’s investment landscape. SOURCE: SWANLOW PARK 0% 2% 4% 6% 8% 10% 12% 14% 16% 1988 1990 1996 1992 1998 1994 2000 2006 2002 2008 2004 2010 1987 1989 1995 1991 1997 1993 1999 2001 2007 2003 2009 2005 2011 2012 2013 2014 2015 2016 BANK OF ENGLAND BASE RATE CHANGES SOURCE: BANK OF ENGLAND 0% 2% 4% 6% 8% 10% 12% 14% 16% 1988 1990 1996 1992 1998 1994 2000 2006 2002 2008 2004 2010 1987 1989 1995 1991 1997 1993 1999 2001 2007 2003 2009 2005 2011 2012 2013 2014 2015 2016 2017