Jeff Salway: Equities retain appeal despite investor jitters

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Forecast for next 12 months has implications for the IFA of the Year, finds Jeff Salway

THE final weeks of the year offer an excuse to look ahead to the next 12 months – an opportunity for sweeping statements and leftfield forecasts that few people can resist.

There are two things of which you can be certain as we ask the experts what they see in the stars for 2013.

One: that the opportunity won’t be passed up. Every fund manager and adviser worth their salt will over the coming weeks be asked for their predictions for the year ahead, and they’ll be more than willing to oblige. They know predictions are likely to make fools of them, but they enjoy doing it. It’s part of the job.

Two: few will be brave enough to predict a robust economic recovery, yet many will confidently forecast a positive year for markets.

That last statement isn’t as contrary as it sounds. One of the easiest traps for investors to fall into is to equate economic performance with stock market performance.

The competitors in our IFA of the year competition will doubtless have spent hours trying to convince clients not to panic even as the economic malaise deepens.

In times of adverse headlines, the instinct for savers and investors is to take the flight to safety, which in many cases means getting their money out of stock markets.

Advisers will either urge them otherwise or, if the prospect of market volatility means sleepless nights, help them do so without unwittingly leaving themselves open to even greater risk.

The recent investment
conference hosted by The Scotsman heard more than one expert talk of the opportunities currently offered by equities. They’re bound to, in one sense, as they’ve got funds to sell. But Jim Wood-Smith, of Investec, came armed with statistics showing that while markets have been volatile over the past four years, they’ve also rewarded those who have stuck with them.

America’s S&P 500 index is up 104 per cent since the markets reached their post-financial crisis nadir in March 2008, while the FTSE 100 is up 63 per cent.

Many investors will have missed out on that growth and will continue to miss out over the coming year, if economic sentiment holds sway over market performance.

Keeping your powder dry when things are uncertain and markets are prone to volatility can be a sensible strategy, of course. But where else do you invest? This is where the problems really begin. Gilt yields are plunging, corporate bond prices are approaching bubble territory and cash accounts are failing to keep pace with inflation. All that has paved the way for fund groups to invent and promote so-called solutions, often claiming to give investors the benefit of market exposure without any of the risks.

Absolute return funds are a classic example. They promise to provide returns regardless of the prevailing climate – and invariably fail to live up to that promise. Many structured products – such as the guaranteed equity bonds flogged by high street banks – are similarly ineffective. Then you’ve got what used to be cautious managed funds (now grouped together in the Mixed Investment 20-60 per cent Shares sector), which expose investors to far more equity risk than they’re led to expect by the label.

Millions of investors have turned to these so-called volatility managed solutions when they’ll have been better off staying in equities. As our IFA of the Year competitors will tell you, there’s no substitute for a balanced and well-diversified portfolio, regardless of the outlook for next year.