Variety is vital for investment portfolios

May 23 2007 by Bill Gleeson, Liverpool Daily Post

Where is the clever money heading these days? Bill Gleesonreports

THERE was a time when wealthy individuals handed over their money to private fund managers and let them get on with it.

Increasingly, there is a band of wealthy individuals who take an interest in where their money goes. Some end up dealing regularly on their account and have invested in Reuters or Bloomberg financial news services to assist them with keeping abreast of events in international markets.

But, irrespective of who is managing it, where is the clever money heading these days?

As we approach the second half of 2007, we find ourselves well into the fourth year of an equity bull market and a stratospheric property market, raising the question: How best should I be investing money going forward?

One truism that has held good until now is that, over the long term, as is often correctly repeated, returns from equity markets are likely to exceed other asset classes, although given the strength of the residen-tial property market over the last decade, you could be forgiven for questioning this assumption.

But with the property market almost universally acknowledged to be in the classic grip of an asset bubble, while equity markets have almost entirely made up the ground lost follow-ing the 2000-2003 dot-com inspir-ed bear market, investment choices have quite possibly never been more important.

Carl Cross, a director at Liverpool based fund manage-ment firm Rensburg Sheppards, said: “At Rensburg Sheppards, diversification is the key. Yes, it is important, when considering a long-term investment horizon, to ensure a significant exposure to equity markets. Within this equity component, a balance between UK and international stocks is needed, and indeed, within the UK, a balance between large, medium and smaller companies will be critical, given their different characteristics and potential for growth.

“Due consideration should also be paid to index weightings, that is, the relative size of UK comp-anies, in order to ensure that a reasonably close correlation to the relevant index is maintained.

“But, in addition to equities, there should also be a moderate property component, perhaps currently more commercial and non-UK orientated; perhaps hedge funds in order to mitigate against the risk of an equity market downturn; possibly the use of structured products which can give exposure to worldwide equity markets but with varying degrees of downside protection (paid for usually by giving up the relevant market dividend yield); and of course fixed interest products.

“This latter component can sometimes appear as the poor relation of an investment portfolio since over the longer term, returns usually fall behind those of other asset classes. But in addition to providing an income stream at a variety of levels, dependent on the nature of the product invested (from secure government-backed gilts to sub grade 'junk' investment bonds) fixed interest exposure can also be used as an easy form of 'portfolio protection' if stormier equity or property markets are considered to lie ahead.

“A key issue, of course, is the make-up of client portfolios and to what degree each of these asset classes makes up the total at any one time.

“At Rensburg Sheppards, we are tending to reduce our expos-ure to smaller and mid-cap UK equities after a phenomenal run over recent years and are locking in gains in other UK and over-seas equities. Some reorientation into very large stocks is also tak-ing place as valuations here appear most attractive. The on-going strength of the property market has also induced us to take profits and perhaps skew exposure to more international markets. The consequence of this has been to see overall cash levels rising and an increase in fixed interest exposure as we adopt a more cautious approach after four years of strong equity market growth.”

Stephen Sington, a director of Duke Street-based stockbroker Blankstone Sington, warns that people should design investment strategies that take account of just how much wealth they can afford to put at risk.

He said: “To an individual with assets of £200,000, a capital sum of £50,000 is a fortune: for someone with £5m, £50,000 is almost an afterthought. However, if you are in the business of giving investment advice both situations require equal consid-eration, as each investment is part of the client’s wealth.”

But, where and how to invest in current market conditions?

The “how to invest” question is easily answered: by using proper- ly qualified and regulated ind- ividuals with whom you feel comfortable when listening to their advice.

“The ‘where to invest’ is more problematic. People need to look at the complete picture of their money and where they are in life.”

Mr Sington adds: “Assuming that property is adequately covered by way of the domestic home, is there a mortgage? If so, then reduce it or pay it off. Is your pension position secure – should it be increased thereby benefiting from income tax advantages? Is your financial position such that the creation of a Trust could protect the capital for your family? A complex pro- cess requiring specialist advice, but as IHT becomes more preval- ent it is a matter that needs consideration by more people than may initially be perceived.

“If, at this point, you feel ready for direct equity investment, then consider restricting your vision to quality blue chips, where – if the timing may not be perfect – the longer term prospects will protect the investment: HSBC, Royal Bank of Scotland, Royal Dutch Shell B, and Wolseley being a small selection of quality stocks with good potential for income and capital appreciation.

“A point worth remembering – where possible take advantage of annual tax allowances offered by HM Government, but never allow the tax “tail” to wag the investment “dog”.

Ian Cockbain, Senior Partner St James Place, Liverpool, said: “Almost without exception, Mer- seyside’s new wealthy individ- uals have been fuelled by the property boom. Making money through property has created the new rich in our society.

“It is not only property developers who are amassing wealth through property investment. However, there is a wealth spin-off throughout the entire property sector and all associated industries.

“The entrepreneurialism of the property developers has in turn created wealthy builders, con- tractors, architects, quantity sur- veyors and structural engineers. Also benefiting have been the property agents, lawyers and acc- ountants. The desire to reinvest and maximise their new-found wealth has created huge growth in the financial services sector which is turning Liverpool into a well respected financial centre.”

In the final analysis, all investors need to take account of is what money they can afford to lose.

If you are the sort who resents losing money through bad judgment, then maybe the markets are not for you at all. While it’s exceptionally unlikely that you could ever lose every penny invested in shares, you do have to accept the possibility of losing some of it.

While it is true that, over the very long term, say two decades, the markets usually pay a hand- some return to investors, over shorter time periods you can lose out. For example, somebody investing at the top of the market in 1999 and taking their money out in 2003, could have lost half of what they started with.

billgleeson