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Adviser Fund Index

On September 9, the FTSE 100 hit 5,000 for the first time in 11 months, buoyed by a combination of positive figures on UK exports and manufacturing and investment banks welcoming ‘the return of the deal’ as Kraft bid £10bn for Cadbury. But is this the beginnings of a recovery or merely a market rally? Adviser fund index panellists are sceptical.

Brian Dennehy, managing director of Dennehy Weller, describes the FTSE’s return to 5,000 as “meaningless”.

“No one knows if this is a new bull market or a bear-market rally. The range of possible outcomes remains extremely wide,” he says.

Killik head of research Mick Gilligan agrees the 5,000 barrier has little real value beyond being “psychologically important for retail investors”. And AWD Chase de Vere investment research manager Justine Fearns warns: “Just because the FTSE reached 5,000 last week, we should not get carried away.”

So how do the AFI panellists view the market outlook for retail investors?

Fearns is cautious. “British investors should probably still be wary of the market,” she says, and anticipates “a slow and painful recovery”.

Gilligan says the market will be driven by capital flows as investors head back into equities and expects it “to get higher as money returns”. However, he fears markets could be overpriced: “The economic fundamentals show there is a lot of ‘hope value’ priced in.”

Dennehy says the current situation presents significant challenges for retail investors. “Advisers and investors need to remain on their toes like never before.

“Investors must help their clients understand this. If they are concerned about levels of uncertainty, they should have a portfolio of lower-risk funds made up of a mix of absolute return, corporate bond and global bond funds,” he says.

Fearns agrees that “investors should use a diversified approach, looking towards long-standing fund management teams and funds with a good track record”.

She adds that funds investing in “good quality franchises with big brand names and companies with different revenue streams from across the globe” are also attractive.

Gilligan favours high quality, broadly-based funds “that are not too overweight in any one area”. He also likes “the growing number of absolute return funds, where the manager can protect his returns by holding short positions”.

Fearns adds that small caps offer new opportunities for investors. “They are still under a lot of pressure as debt issues are sorted out, but are beginning to look interesting,” she says.

The overall message from the AFI panellists is that while the FTSE’s landmark figure of 5,000 means little, opportunities remain. Investors should neither be deterred or overconfident but approach the market with caution.

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