Mark Estcourt, executive director, London & Capital, examines recent proposals by the Migration Advisory Committee, a group advising lawmakers on reform, to shake up the investor visa programme.

In recent months, the UK, along with a number of its peers, has sought to reform visa systems aimed at high net worth investors and entrepreneurs. Countries are battling to attract wealthy individuals with the proviso that they invest money locally and create jobs – a twist designed to assuage voters concerned about issues such as red-hot house prices and employment. In this article, Mark Estcourt, executive director, London & Capital, examines recent proposals by the Migration Advisory Committee, a group advising lawmakers on reform, to shake up the investor visa programme. London & Capital has offices around the world, including Asia.

This publication is pleased to print these views and as ever, stresses that it doesn’t necessarily agree with all the views expressed here. It welcomes readers to respond with their insights on this important issue. (To see some previous comments on the matter, click here and here.)

If ratified, the proposed changes to the investor visa programme by the UK government’s Migration Advisory Committee will likely alter the way investor visas will be used by investors. Ignoring for a moment the proposed auction process, which we believe requires further refinement, we prefer to concentrate on the investment side, specifically increasing the investment threshold to £2 million, removing the £5 million and £10 million criteria and the fact that residency is no longer threatened if the value of portfolio falls below the initial amount.

Overall, we believe the proposed changes are positive. Investors have generally received a blunt investment instrument and increasing the threshold provides several benefits for clients which we will explore in this piece.

Strategic use of an investor visa portfolio
We have long advocated for clients to apply a more strategic approach to their investor visa portfolio. To date most clients have used the investor visa in a limited way, purely as a means of obtaining residency and an accelerated route to citizenship. Moreover the fact that the majority of investor visas are at the £1 million level with investors wary of falling below the threshold, it has created mass conservatism in the investments used across the sector. We believe investors are better served if they view this portion of their wealth more strategically, not as lifeless money that provides a means to an end but a functional part of their investment portfolio.

The proposed changes will likely encourage investors to expand their investment horizons, looking to different investment styles with the potential for higher rates of return. A mind-set shift towards effective use of capital rather than purely capital management is likely. 

Removing the cash lag
We have historically advised clients at the £1 million level, to hold a buffer of between 5 per cent and 7 per cent in cash in order to ensure that the portfolio does not drop below the £1 million limit. Cash is essentially a return-free asset in the current environment. At best, investors will receive around 0.5 per cent per annum, well below the current rate of inflation. The current rules create an opportunity cost for investors, who could be achieving stronger capital growth on a significant portion of their assets. Removing the need for a cash buffer minimises the return lag on the portfolio. 

Greater diversification
Increasing the threshold to £2 million creates the opportunity for greater diversification. With a £1 million portfolio, fixed income managers will typically be able to invest in around 10-12 names. A £2 million portfolio can be spread across 20-30 names. This is a result of a smaller tradeable pool of bonds in the market since the credit crisis, as investment banks have moved away from providing a large inventory (liquidity) of these investments. Diversification is clearly good practice. Every investment carries risk and spreading those risks across a range of names is more desirable than concentrating on a few.

A focus on corporate bonds
In general, we advocate focusing on high-quality companies with a credit rating of BB and above. A £2 million corporate portfolio provides us the flexibility to allocate more strategically across sub-asset classes (such as high-yield bonds, financial bonds and investment grade corporate bonds) depending on where we see best value, rather than being narrowly focused on the lower risk end. In particular, it is difficult to get a meaningful allocation to high-yield bonds for smaller portfolios due to liquidity constraints in the market.

For larger portfolios, this flexibility reduces a portfolio’s sensitivity to interest rates. There will be times in the economic cycle when it is right to keep interest rate sensitivity lower: if there is economic expansion, interest rates are likely to rise and inflation to pick up, investors will suffer in longer-dated bonds. In contrast if deflation were a risk, then longer-dated bonds may be a more prudent allocation. Either way, larger portfolios provide flexibility to manage a portfolio’s exposure to the interest rate cycle.

Also, investors have historically not looked to the visa programme to generate a supplementary income to their lifestyles. (At the £1 million limit, managers are restricted to relatively low yielding assets; at £2 million the ability to generate a more meaningful long term income stream is increased.)
In summary, a threshold increase provides greater investment efficiency and the chance to achieve a lift in returns through a longer term horizon to their investment planning.