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Guarding your assets

31 Dec 08

We asked a panel of financial experts to consider some of the questions worried investors are asking in the current financial turmoil. As Robert Outram reports, their overall message is “Don’t panic!”

by Robert Outram

What are the main considerations for anyone looking to preserve assets in the present state of markets?

Andy Green: In a cash fund intended to preserve capital value, investors should typically look for an emphasis on credit risk management and liquidity management – investors can suffer if other investors pull their money out and the manager is left with less liquid assets that may fall in value.

Neil Clark: It is important to spread investment across asset classes. Safety is a prime consideration for investors at this time! Capital stability has come right into focus. People previously took it for granted. Some people see opportunities in the market but most are going fairly cautiously.

Bryan Johnston: No-one should ever be invested in equities using funds over which they have any anticipated claim. Assuming, however, that we are looking at funds that might be available to be put away for at least five years, bear markets offer much better opportunities for investment than their bullish counterparts.

Alistair Lindsay: Keep sufficient money on deposit to meet short-term needs and diversify your investments across the asset classes – you should do very well. Our investments have to last us a long time and if investors can afford to stay invested then they should.

Justin Urquhart Stewart: The same investment rules apply as before the crash – broad asset allocation and diversification, not just over assets but also geographically. I see far too many portfolios concentrated too heavily in equities and in the UK. If property, equities and commodities have been dreadful, surely you should have exposure to other areas and assets – currencies for example.

Alan Steel: Any investor who hasn’t retreated into cash must guard against joining the panicking herd of forced sellers. This is why there is so much volatility and irrational behaviour in the markets at the moment. They should sit tight – so long as they are satisfied that the world as we know it is not in fact coming to an end.

How has the crunch affected investors’ appetite for risk? Are there bargains to be picked up?

Steel: Are there bargains? Of course. UK shares are cheaper than at any time since 1974 and internationally since 1933.

Take an example: Johnston Press, where you could buy 10 shares at 7p for the cover price of its flagship Scotsman newspaper.

Urquhart Stewart: If risk appetite were a slimming programme then most clients would be size zeros by now. But ask yourself the question – is it going to be better in five years?

The answer is likely to be yes – in which case not only should we hold hard but also consider drip feeding money back into portfolios. Regular tranches will mean you can average out your risk.

Sue Hussin: Investors probably now have a better understanding of risk, having seen how all asset classes, including cash, have been affected by the turmoil. There may be bargains, but there could be falls in value still to come.

Brian Steeples: Our most optimistic forecast is mid-2009 for the start of any sustained recovery in equity markets, even although the economy itself is unlikely to be in growth mode until 2010 at earliest.

The problems experienced by banks around the world have made investors nervous. Can we now say that some savings in bank accounts can be considered safe? What do investors need to know and what do they need to avoid?

Johnston: It is unlikely, now, that any mainstream retail bank will go bust. However, for many there is little prospect of paying much of a return on cash deposits.

For UK banks which have been rescued by the government, there is little prospect of any dividend for at least two years, until the preference shares, issued at pretty punitive interest, have been repaid. I believe bank shares may prove quite cheap at current levels but investors will need to be patient, selective and aware of the risks.

Savers should be wary about considering any deposit account which appears to offer a premium return.

Steeples: For all bank accounts, you need to look at who is offering the guarantee. Government-backed bank accounts are more attractive than guarantees from a commercial bank.

Alistair Mackenzie: Fifteen months ago, we would not have hesitated to say that a deposit held onshore with a recognised institution was safe. Now of course we have revised our knowledge of the UK Financial Services Compensation Scheme, but are cognisant of the government’s wishes that depositors’ assets will be protected. An online, offshore account with a foreign bank is more risky, but is dependent on the quality of the bank and the jurisdiction.

Lindsay: My guidance would be to invested with a bank protected by the Financial Services Compensation Scheme, up to the protection limit of £50,000 per bank where possible.

Paul Willans: It is vital for investors is to know where their investments are held. Banco Santander owns Abbey, Alliance & Leicester and Bradford & Bingley. If you hold funds with Abbey and B&B, these are aggregated. However, A&L has retained its registration and has its own £50,000 limit. Asda and Cahoot are also under Santander, so funds held in these would be aggregated with those at Abbey and B&B.

Some jurisdictions, such as Jersey and Guernsey have no compensation scheme.

Hussin: The Irish government is guaranteeing all deposits until September 2010. One of the safest homes for deposits is Northern Rock, as it is now backed by the UK government.

If I have shares in one of the banks being recapitalised by the UK government, what should I do now – sit tight and hope that they recover?

Lindsay: Many of my clients are employees of HBOS and RBS, relying on share save schemes and dividend income from shares. With most clients losing 90 per cent of the value in their shares they have no option but to keep their holding until it grows again.

Willans: When a share hits rock bottom, there is little point in crystallising loss – particularly if there is a strong expectation the UK Government will not allow it to fail.

Urquhart Stewart: I would rather deploy assets into other areas. I quite understand the feeling that people don’t want to crystallise their loss or reduced values, but why not take half and redeploy it?

I’m concerned that falling interest rates mean a bad deal for savers. Is it time to start getting back into equities or other investments?

Johnston: Alternative asset classes should be considered, perhaps corporate bond funds, which have been behaving almost as badly as some equities and which offer potentially quite rewarding dividends, provided the risk is accepted. There are also high-quality equities securing attractive yields, provided investors can be patient. Taking advice is essential.

Willans: Getting back into equities or other investments as part of a diversified portfolio would be sensible on a long-term basis. Phased over a period of time, the average price paid for investments will be reasonable and will protect against short-term drops.

Steeples: A number of funds look attractive in terms of relatively stable returns in excess of cash interest rates. It is still too early for equity-based funds.

Lindsay: You should have a diverse investment portfolio. No one should rely on just one thing to provide them with an investment return. Recent events have proved this is a risky strategy that could leave an individual very exposed.

Hussin: Investors should always have some money on cash deposit as part of their portfolio but there will be opportunities in the coming months to invest in well-run companies where the share prices are perceived to be good value.

Steel: With interest rates falling, it makes no sense to let money languish on deposit. Corporate bond yields are at a lifetime high. The potential returns are unprecedented in decent funds – names such as Invesco Perpetual and MG spring to mind.

Willans: Investors could be forgiven for believing that stockmarkets are heading in only one direction. A number of companies see an improvement in underlying profitability during difficult times. Other companies’ share prices may be affected, although their fundamental asset values and worth are unaffected.

Mackenzie: Our forecast is for interest rates at an average of around 1 per cent for 2009. After tax, though, the effects of inflation will diminish.

Equities do not appear expensive. For long-term investors, beginning a programme of investment, employing pound-cost averaging over a period of 12 to 18 months may bear fruit.

Index-linked gilts offer an interesting alternative to strategic cash balances for private investors, as there is the opportunity of locking in historic high real returns, and they are particularly appealing for higher rate taxpayers.

Clark: Equities and many other forms of instruments have a higher short-term risk profile but in the long term, things tend to even out.

Are there specific issues for pensions?

Steel: For most people, there is time to let pensions funds which had exposure to equity markets recover. If you are approaching 75, but you believe that interest rates are falling and equities will recover, it is worth having the courage to take out the 25 per cent tax-free lump sum and invest it.

That leaves the fund, from which you have to take an income. But you can have the fund invested as well. You don’t have to crystallise it at this bad time.

Willans: The pre-Budget report contains proposed legislation to hold the pension lifetime allowance at its 2010/11 limits. This will only affect a small number of pensions, but its impact could be significant. The window of opportunity to protect pensions will remain open until 5 April.

Hussin: If you are withdrawing income you may need to reassess the amount in the light of the likely reduction in the capital value of your pension plan. Changes may also be needed to the asset allocation and investments within the pension plan, depending on when you plan to take benefits from a self-invested pension plan and how much income you require.

Finally, with drastic action being taken by governments around the world, what are the chances that we’ll see signs of an upturn some time in 2009?

Green: The capital markets continue to suffer from the unwinding of leverage and the need for corporates and funds to refinance short-term debt. It is difficult to get too optimistic about 2009. Inevitably attractive valuations will appear at some point and markets will overshoot on the downside. This will create opportunities for investors.

Mackenzie: It is probable we will see some stability return to the economy late in 2009, but not without it falling further first.

Willans: There is a strong possibility that we will start to see economic recovery by the end of next year. Stockmarkets tend to recover some six months prior to economic recovery. When they do, it will be smaller capitalised, growth stocks that will outperform. Investors need to be constantly reviewing their holdings to optimise their portfolios when markets do finally turn for good.

Urquhart Stewart: It is going to take at least a year in my view after which we may start to see the first green shoots – but beware – Lord Lamont kept seeing green shoots at the end of the last recession but they turned out to be advanced mould. We cannot afford to wait to invest until it is over – but care, please, as the economic recovery is likely to be muted.

Steeples: Our most optimistic forecast is mid-2009 for any sort of sustained upturn in equity markets. The fixed interest market would normally be two to three months earlier so we are looking at end of first quarter in 2009 for fixed interest/bond markets.

Hussin: The Chancellor is expecting recovery in the economy in 2010 so there may be an upturn in stock markets towards the end of 2009. It is very difficult to time the market, which is why investing in the stock markets is for the medium to long term. Until such time as the problems in the banking system are resolved and liquidity returns, there is a possibility of falling deeper into recession.

Steel: What we are experiencing now is wholly and radically different from the Great Depression of the thirties. The Fed created the foreclosures and the unemployment which fed the Depression.

This time, the Fed has acted sensibly. It has thrown money at the system, increased money supply, introduced measures to prevent foreclosures and dropped interest rates – and it has made it clear that if more needs to be done, it will be.

My instinct is that the tipping point will be on 20 January, when the new president is sworn in.

Johnston: If the spring company results season can be navigated without any major disasters, and if the tone of the accompanying statements suggest some improvement over 18 months or so, stockmarkets may respond positively well before the recovery gets under way.

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