SURVIVING THE EUROSHOCK: Four ways to weather the raging storm
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UPDATED:
20:42 GMT, 19 May 2012
Comtrol: Philippa Gee says investors must allow professionals to react instantly
The eurozone panic is taking a heavy toll on the pensions, endowments and other investments of every saver in Britain.
The uncertainty has produced very different views on what lies ahead. ‘Some say we’re at the start of the biggest bull run ever, others that we face financial Armageddon,’ says Philippa Gee of Philippa Gee Wealth Management in Church Stretton, Shropshire. ‘And investors are torn, too. My clients don’t want to miss out, but they don’t want to be clobbered either.’
Against such a backdrop, investors must adopt new tactics to navigate uncertain waters. Financial Mail highlights four investment themes that can help you to weather the storm.
STAY FLEXIBLE
Markets are highly volatile, with prices and sentiment changing rapidly. Adrian Shandley of Premier Wealth Management in Southport, Lancashire, says: ‘I fear volatile markets are here to stay. The information flow is so rapid in this digital age that markets can move on a few postings on the web or some tweets.’
Such volatility means investors must think about giving some control to those who can react quickly. Gee says: ‘When things happen, they happen very quickly.
‘If a client is invested in a fund, and I think we need to move to react to markets, it may take a few days to get their approval and get a transaction done. And by then we may have missed the moment.’ So she increasingly uses funds where managers have the flexibility to react instantly to changing conditions.
One good example is bond investing. Bond funds are a popular source of income for savers, but at different times of the financial cycle various types of bond can come to the fore.
Government bonds, and particularly British gilts, have done well over the past two years, though many experts feel gilts are overpriced and that corporate bonds issued by companies may offer better prospects. But knowing how and when to switch is difficult.
Darius McDermott, chief executive of fund broker Chelsea Financial Services in west London, says: ‘Most investors want to buy and hold a fund. They don’t have the time or the expertise to analyse which part of the bond market is the strongest.’
He favours strategic bond funds, such as Legal & General Dynamic Bond and M&G Optimal Income. These funds can be flexible, with the managers able to move the money into different sectors according to market conditions.
MULTIPLE ASSETS CAN MAKE FOR BETTER RETURNS
Another way to stay flexible is to exploit multi-asset funds. Rather than being restricted to a single type of investment, for example shares, such funds can contain a range of assets, potentially including bonds, cash, property and commodities.
At different times, different classes of asset perform well. Emerging market shares, for example, were the best-performing sector in 2007 and 2009 and did reasonably well in 2010. But they cost investors dear in 2008 and 2011, according to recent research from Barings Asset Management.
International bonds were the top asset class in 2008, gold in 2010 and index-linked gilts in 2011.
So investors who want to capture the best gains – and avoid the worst losses – must be nimble and look beyond a single asset type.
In a multi-asset fund, a management team will set weightings to different types of assets – for example, 30 per cent to UK shares, 40 per cent to international shares and 30 per cent to bonds. These can then be adjusted in response to market conditions. Gee likes multi-asset funds that keep the costs for savers down by investing through passive index-tracking or exchange-traded funds that give exposures to different asset classes. She highlights Fidelity’s Multi-Asset Allocator funds and the HSBC World funds as good examples.
Ronnie Coutinho, 52, is one investor who likes the multi-asset approach. The former merchant seaman, who is married to Judy, 49, was left paralysed from the chest down after a crane collapsed on him at Liverpool docks 30 years ago.
After a period of rehabilitation, Ronnie, of Tarleton, Lancashire, trained as an accountant. He has since worked in finance and educational roles. He has also been a prolific fundraiser for children’s charities. Part of the money in his funds are the proceeds of compensation for his accident. This supplements other income and Judy’s earnings as a medical representative for a pharmaceutical company.
Ronnie uses Sandgrounder, a range of multi-asset portfolios run by Premier Wealth Management. Each has a different mix of assets depending on how much risk investors want to take, with the money again invested through passive funds to keep down the costs.
Each quarter, the fund is automatically rebalanced to its target asset mix, so if shares have done well, a portion of the holding is sold and the cash reinvested in other assets that have lagged. This ensures savers are guaranteed to lock in a portion of gains and such funds can actually thrive in a more volatile market.
Ronnie says: ‘I’ve been investing since 1989 and have tried various brokers and advisers. But I like the process and the discipline of the multi-asset approach. Returns seem a lot less volatile so you know where you are. I can’t afford to take too many risks, but need a fund with the potential to grow my income and at least keep pace with inflation.’
STAY IN FOR THE LONG HAUL
Investors looking for growth might need to find managers who identify companies with the potential to thrive, and then back their bets with conviction.
Such ‘best ideas’ funds often have fewer holdings than other funds, but also rarely resemble any index or benchmark.
Ben Yearsley at fund broker Hargreaves Lansdown says high conviction managers include Anthony Cross and Julian Fosh of Liontrust Special Situations; Richard Buxton, who runs Schroder UK Alpha Plus; and Nigel Thomas, manager of Axa Framlington UK Select Opportunities.
Growth plan: Alec Clark saves 50 a
month for grandchildren Sean and Mhairi
Yearsley says: ‘You have to stick with this type of manager. There will be periods where their performance looks poor, but over the long term their convictions should pay off.’
James Anderson, who manages the 2.2 billion Scottish Mortgage global growth investment trust, says: ‘It is much more important than it used to be to pick the winners and be invested in the right companies.’ He runs Scottish Mortgage as a concentrated portfolio, with about 80 companies from around the world.
His focus is to back his chosen firms strongly. For example, he feels that healthcare is one of the sectors where technology will soon be transformed and invests in companies such as Intuitive Surgical, which specialises in robotic surgery, and genetic sequencing specialist Illumina.
A concentrated or best ideas investment strategy is not for everyone. It is likely to be more volatile than a conventional fund and savers must commit for at least five years. But over time, if the manager picks right, it could produce better returns.
Alec Clark, 76, has invested with Scottish Mortgage for almost 20 years.
He and his wife Helen, 70, reinvest their dividends, accelerating growth on the fund. In the past ten years, total returns have been almost 140 per cent. He says: ‘I like pretending the market is closed for further business so you just have to forget about all the short-term movements and hold on to an investment for years.’
His returns have inspired Alec, who lives near Stirling, to take a similar long-term view in saving for his two grandchildren, Mhairi, 12, and Sean, 7.
He and Helen contribute 25 a month into a savings plan for each grandchild, which buys shares in Scottish Mortgage.
Alec, who managed a building firm, says: ‘In the ten years we’ve been saving for Mhairi there have been more ups than downs.’
GO GLOBAL FOR INCOME
Equity income funds have been a mainstay for many savers. These funds buy shares in companies that pay above average dividends and aim to provide a growing income.
Adapting: John Ingham has added overseas exposure to his portfolio
Most investors focus on UK equity income funds, but with the British economy in the doldrums and interesting opportunities elsewhere in the world, it is worth broadening your horizons. There are solid income-paying companies in the US, Asia and elsewhere.
Darius McDermott, chief executive of fund broker Chelsea Financial Services in west London, says: ‘If you hold three UK equity income funds, you’re going to find a wide overlap between the shares in these funds.
‘There is a much better and diverse choice of stocks when you take on a global perspective.’
Barbara and John Ingham, both 76, are hoping that global income funds can help them keep their retirement on track.
John, a former solicitor who unfortunately invested his pension with troubled insurer Equitable Life, says: ‘I’ve got to do my best with other savings to make up for the disappointing pension.’
He and Barbara, who live in Woolton, Liverpool, have invested in funds through Chelsea Financial for more than 20 years, but they have recently diversified into global income with M&G Global Dividend and Newton Global Higher Dividend.
John, a keen golfer, says: ‘It is important to spread the money around and not be too reliant on one region or any one fund for income. The world has moved on so we have to move with it.’