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12 Businessupdate Isle of Man Examiner, March D;2006 FINANCE Where to put Everyone wants to invest their money profitably but some are more risk-averse than others. BUSINESS UPDATE takes advice from the professionals on how to get the best from your capital without losing the shirt off your back. Investing directly into the stock market can be a difficult proposition for most of us. Unless we are happy to invest in blue-chip stocks with a fairly low volatility, keeping track of the day-to-day, even hour-to-hour movements is almost impossible. The best way to take advantage of equity markets is to invest in a fund, with knowledgeable managers whose job it is to track the market and buy and sell shares to maximise value. There are many and varied funds out there ranging from basic FTSE trackers to more exotic-focused funds investing specifically in Japanese equities, or Eastern European property. The levels of risk tend to fluctuate, with the general rule being, the greater the chance of gain, the greater the chance of loss. Some of the best opportunities to make a quick buck in the UK exist in the Alternative Investment Market (AIM). This secondary London market lists smaller, fledgling companies with less of a proven track record. Peter Robertson, of stockbrokers Capital International, says the choice of investment depends largely on attitude to risk. He says: ‘For clients with relatively small amounts of money to invest, it is not possible to spread risk across a wide range of individual holdings, so it would be better to use collective investments such as unit trusts and invesment trusts. ‘These vehicles provide a much more efficient means for clients with smaller amounts of money available to gain access to stock market investments. They now cover a wide range of different asset classes and provide access to international markets and sectors which would be expensive or difficult to access directly.’ A balanced portfolio of investments is usually the way forward for people who don’t have large amounts of money to throw at opportunist investments. Mr Robertson adds: ‘The majority of people do not have the luxury of having a significant lump sum available to invest but can still make provisions for the future through regular savings schemes and pension contributions. For people who do have lump sums to invest for the long term, they probably have the ability to accept more risk when they are younger, because it is unlikely that they will need to call on that money for some time. ‘As people approach retirement, it is generally more sensible to lock into gains made in previous years and to tilt their portfolio into lower-risk assets.’ It’s all very well to talk about investment strategies, but what investments are performing at the moment and where should you be putting that hard-earned cash to get maximum returns Andy Finch, director of Collins Stewart, says some of the UK blue chip companies represent solid investment potential. He says: ‘UK large caps do look the best value and we are buyers of Barratt Developments, Glaxo, BAE Systems, G4 Securicor, BHP Billiton and Vodafone to name a few. ‘We like the oil / gas as well as drugs and some telephone companies such as Vodafone. We also like the house builders and the banks with HSBC, RBS and Barclays being our top picks. Investors need to be overweight to these areas.’ If it’s a star you want, looking towards the Alternative Investment Market (AIM) could be the way forward, but it also comes with high risk. Mr Finch adds: ‘Because the stocks here are smaller stocks they are under-researched and hence there is a greater chance of making higher returns. However, also due to the lack of research and also liquidity prices are a lot more volatile than larger companies ... tread carefully!’ What about further afield There has been much talk about booming economies in the East, with big returns, but are we missing out Mr Robertson gives this advice: ‘The China/India long-term growth story does look compelling, although investors should be wary that these are still essentially emerging markets and that their stock markets will remain prone to short-term volatility. ‘One of the latest fashions in the funds industry is the launch of so-called “BRIC” funds, offering investors access to the markets of Brazil, Russia, India and China. High risk but potentially good returns for longterm investors.’ It seems clear that investors should not risk the emerging markets by going it alone and should access them through an approved fund. Mr Finch adds: ‘There is fantastic long-term potential, but it has risen far enough now, so we’d probably discount too much good news. Prices need to come back a little. For a very long term investor both areas are very attractive but only use a fund to invest in these areas. ‘We are still bullish on Japan and would be big buyers on any further consolidation. The other emerging markets have done well as US rates have fallen but with US rates now rising and values having risen significantly it will pay to be cautious to emerging markets short term.’ In times of uncertainty most investors pull out of equities and put their money into the relative security offered by bonds and property, but is this the best cause of action at present ‘Bonds are not cheap, interest rates are rising and equities look much more attractive now. Property is fully valued but is unlikely to fall significantly. Given fund flows Eastern European property will continue to perform well but again the best way to access this is via a fund. We have recently launched such a fund’, says Mr Finch. His views are largely echoed by Capital International, which says: ‘Demand for long dated bonds by institutional investors has pushed the yields on these investments down below 4 per cent, and the real [net of inflation] yield to below 1 per cent. There will always be a home for bonds in any balanced portfolio because of their low risk attributes but at current levels, they do not look fantastic value. ‘So far the majority of commercial property funds have been concentrated in the developed economies of the UK, USA and Continential Europe, but there are some new funds coming to the market which offer exposure to these emerging economies. As with investing in the equity markets of these regions, they are higher risk and therefore it is best to approach them with a degree of caution.’
Isle of Man Examiner, March 2006 Businessupdate 13 your money Business Update approached an independent financial adviser (IFA) with three different lifestyle scenarios, in search of advice. STEVE BURDETT of Douglas-based MBL provided the following. SCENARIO ONE Young single professional without a mortgage or children — who has £5,000 to invest, is willing to add to that on a monthly basis and is happy to be fairly high risk, with hopes of making substantial growth. THE ADVICE: Skandia Multifund for the lump sum and monthly savings. This is a unitised investment plan with no fixed term, it offers access to a very wide range of funds and has a very competitive charging structure. Monthly savings can start from £100 a month, can be increased, stopped and started again or cashed in at any time without penalty. Both the lump sum and monthly contributions can be invested 50 per cent in the Threadneedle Latin America Fund, which returned over 300 per cent more than three years, SCENARIO TWO A married couple in their 30s with two small children and a mortgage. They want to invest £20,000 plus monthly contributions — they want some growth, but are more riskaverse. 77.52 per cent over last year and in the last six months has grown by 51.09 per cent. This is a high-risk fund, which suits the clients’ attitude to risk. The remaining 50 per cent could be invested in Merrill Lynch UK Special Situations Fund, which has returned 116.19 per cent over three years, 32.93 per cent over the last year and 18.37 per cent over the past six months. This is a medium-risk fund. Both funds combined would make up a medium to high-risk investment. It is possible to invest in additional funds and to switch into other funds, which will be important as the client gets older and wants to reduce the exposure to risk or if market conditions change and the client wants to protect the investment from any slumps in the equity market. SCENARIO THREE An older retired couple, no dependants, who own their own home — they want to invest their money (possibly from equity release) to enjoy life a little better (say £50,000) — looking for income and relatively risk-averse. THE ADVICE: Norwich Union Portfolio investment bond, with monthly income option. This bond could be used to provide £312.50 per month (max 7.5 per cent a year). As mentioned earlier this bond has a low charging structure and offers great flexibility with the choice of investment funds. Choice of funds is important when taking an income from a bond, as the income withdrawals will reduce the capital value of the bond, so maximum growth is key, not forgetting the clients’ attitude to risk. I would suggest for a low risk investor a mix of the Norwich Property 70 per cent, Defensive Managed 15 per cent and Cautious Managed 15 per cent. This combination would have returned around 11 per cent per annum over the past few years, meaning that the effect of the income on their bond would be minimal. This is becoming a more attractive option than purchasing an annuity as the clients can still have access to their capital (after the initial five-year period), unlike an annuity where the lump sum is exchanged for income, also annuity rates are only around 5 per cent at the moment, whereas the income from a bond can be up to 7.5 per cent. THE ADVICE: Norwich Union Portfolio Investment Bond — £20,000. This is a single premium investment bond that offers tax efficient growth and access to a wide range of funds. The minimum investment period is five years, but, the plan has no fixed maturity date, so it can be kept for as long as the clients want it. Norwich Union offers some very good Guaranteed Funds and other low-risk funds. This bond has a very simple, competitive charging structure of 1.5 per cent a year for the first five years, reducing to 1 per cent a year thereafter (charges for investments into non-Norwich Union funds will vary, typically 0.5 per cent pa more). For this client, I would suggest 60 per cent into the Norwich UK Property fund, this fund invests in commercial property in the UK and benefits from rental income and capital appreciation of the properties that it buys and sells. This fund has averaged around 11 per cent growth over the past 10 years, which, in my opinion, is very good. Definitely a more attractive option than low-performing With Profits. The remaining 40 per cent could be invested into one of Norwich Union’s Guaranteed funds, offering a capital guarantee after five years, less any withdrawals taken from the bond. This fund returned 10 per cent last year. Access to capital is permitted throughout the term of the bond, up to 7.5 per cent, or £1500 a year in this case. Regular withdrawals could be liable for Manx income tax. This bond currently has a special offer of an additional 1 per cent of the amount invested, this will be applied to the bond when invested, but removed if the client surrenders the bond during the initial five-year period. Friends Provident Premier savings plan — £100 a month. This is a regular savings plan that offers both tax-efficient growth and flexibility. They could also benefit from tax relief on the monthly contributions, up to 50 per cent of the total annual contribution. The couple could invest £100 per month initially and increase in the future if they wish. They can also take withdrawals, freeze contributions and add lump sums into the plan at a later date. This plan also offers access to a range of funds, I would advise investing the total contribution into the Investec Cautious Managed fund. Contributions can be switched to alternative funds throughout the term of the plan and the client can invest in several funds at the same time. They could also consider saving for their children, plans can be taken for as little as £25 per month a child.
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