This year could prove to be a historic one as on the 18th September, voters in Scotland will vote on whether they want to be independent from the UK.
While recent figures suggests it won’t happen, if the majority say yes, it will undoubtedly have far-reaching consequences across British Isles, and no more so than within the business and investment communities.
For instance, whether an independent Scotland would have its own currency, whether it would be eligible to join the EU and how it would affect companies’ ability to operate cross-border are all issues that have been left relatively unanswered, and all could affect UK investors’ portfolios.
On top of that, according to a recent poll, more than a third of Scottish companies would consider relocating if Scotland were to leave the union.
Certainly, a number of the countries’ largest financial services companies have warned about the implications independence will have on their costs and credit ratings. For instance, it was reported earlier this year that Standard Life could move its multi-billion pound operations south of the border.
Then there is the potential nightmare situation regarding RBS, which is of course headquartered in Edinburgh, but is 80 per cent owned by the UK tax-payer.
Many of these issues seem to be more macroeconomic factors rather than those which may affect advisers or private investors, but is this true?
We asked the experts what practical implications an independent Scotland would have on an investor’s portfolio.
What would happen to your funds?
There are a number of UK fund groups, such as Standard Life, Baillie Gifford, Kames and Aberdeen that are based up in Scotland.
While certain off-the-record conversations suggest that a number of Scottish-based fund groups are working on contingency plans to move south if the vote is “Yes”, none of them have pinned their colours to the mast, so to speak. If they were to relocate to England, Mike Deverell (pictured) – investment manager at Equilibrium and member of the AFI Panel – says it would have little impact on investors who hold units in their funds as they would continue to be part of the UK, and therefore regulated by the UK authorities.
However, he says that if Scottish fund groups don’t relocate there are a number of issues investors need to keep in mind.
“Most people do seem to be saying, “Oh we will have to wait and see”, but most UK funds sit within the UCITS framework, and therefore fit the European regulatory criteria, so there shouldn’t be too much of an issue there.”
“However, the major questions are how will regulation change and who will be actually be regulating these groups and making sure they are doing things the right way? What sort of compensation schemes will be in place? And then, should there be any need for compensation, can they afford it?”
“It’s also difficult because we don’t know what will happen to the currency. If it isn’t sterling, how will Kames’ funds be denominated, for instance?”
While Deverell says that currency is a potential issue, it is one that can be easily managed.
For instance, he points out that he uses Irish and Norwegian-domiciled funds. He says the groups would probably keep the current GBP share class and create a new one for whatever the new currency will be.
What about investment trusts?
Given their closed-ended structure and there historic link with Scotland, it is a slightly different issue for investment trusts.
“From our universe of listed closed ended funds, we have identified that there are 41 investment trusts incorporated in Scotland, with aggregated assets of £21bn,” Simon Elliott (pictured), research analyst at Winterflood, said. “This includes some of the largest funds in the sector such as Scottish Mortgage Trust, Alliance Trust as well as others such as Finsbury Growth & Income Trust and Troy Income & Growth, which have a Scottish legacy.”
Elliott says that if these investment trusts were to stay in Scotland, the issues that shareholders would need to consider include the nature of financial regulation in Scotland and the impact of a different taxation regime.
If some of those 41 trusts were to move away from Scotland, he says there is one particular way in which the boards could do it.
“We would imagine that it would work in a similar way as when UK domiciled investment trusts have moved to the Channel Islands, such as Henderson Far East Income and City Merchants High Yield,” he explained.
“For all intents and purposes, shareholders would still have their certificates, but the board would effectively wind-up one company and create a shell to flip a new one into. There are clearly going to be costs involved with that, as one chairman of a Scottish incorporated trust recently said it would cost around £100,000.”
Elliott says this would affect shareholders as they would have to pay, but it would have far more impact on Trust’s NAV if the company is small. However, he also says shareholders could benefit.
“There could be issues with the revenue account and so shareholders could see a one off special dividend as the pattern has been in the past that the board cannot move those reserves offshore,” Elliott added.
What impact would it have on your funds’ holdings?
David Jane (pictured), manager of the TM Darwin Multi Asset fund, says that while the vast majority of the UK’s commercial and industrial companies wouldn’t necessarily be affected by independence, he warns that the financial services and utilities/infrastructure sectors would be two of the most affected areas of the market.
“Industrial and commercial business can operate across Europe, for instance, as they can move goods and services cross border quite easily. Where that doesn’t work is within the financial services sector,” Jane said. “For instance, we can’t just go and sell units in our fund in Germany. You have to separate operations per jurisdiction which hits costs,” he added.
He says that utility and infrastructure companies, such as within the energy and rail network sectors, could well be hit by having to “duplicate bureaucracy” if an independent Scotland were to come into existence.
Rob Jukes, global strategist at Canaccord Genuity, agrees with Jane about financial services companies as, given Scotland doesn’t have a regulator; those businesses may have to foot the bill.
Jukes also agrees that the outlook for energy and rail companies, let alone oil and gas companies, looks turbulent.
“The issue for utility companies surrounds the infrastructure because laws could change. For instance, rail companies may have to change the way in which they operate north and south of the border,” Jukes said.
“There are way too many question marks, like ownership of the rail track? The then there is the question of the provision of electricity. Who owns the pylons? This is all before you get into the nitty-gritty if who owns the oil?”
Jane added: “This will ultimately hit shareholders, but it takes a huge amount of costs. Unfortunately, the market hates uncertainty and until we know what is going to happen, the outlook looks difficult.”
Ed Smith, also a global strategist at Canaccord Genuity, says that investors shouldn’t be making any wholesale changes to their portfolio yet, but should bear in mind that it could affect those companies’ earnings growth.
