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Autumn almanac

IFAs are scanning the markets to see how equities will perform over the next six months.

The FTSE 100 index continues to trundle along,with no significant moves, making it difficult for advisers to judge how to balance client portfolios. So what is the view on equities as we head towards autumn?

Bates Investment Services head of investment strategy James Dalby says that alth-ough the FTSE 100 seems to be struggling to make headway, he believes the finances of some of companies within the index are looking distinctly healthy.

He says: “One of the most important aspects of holding shares in the UK market is the twice-yearly dividend. The boards of companies know this and are always under pressure to increase or at least maintain dividend levels.”

Dalby says it is essential for finance directors to make sure that what is paid out as a dividend is affordable and dividend cover is used to assess this.

In March last year, share dividend cover from UK companies was around 1.5 times earnings but company finances have since recovered, allowing dividend cover to be built up, the average for all the companies in the FTSE 100 index now standing at 1.91 times earnings.

Dalby says this is good news for investment funds such as unit trusts and Oeics which are classed as equity income funds. These funds typically aim to deliver both a rising income and capital growth over the long term.

Dalby rates Invesco Perpetual manager Neil Woodford as one of the most competent players in this sector. He says: “In a recent update on his fund, his two most disliked sectors were banks and oil and gas. These two sectors combined make up nearly one-third of the index which this fund is judged against but Woodford does not hold a single bank or oil and gas share.”

He says this means that as far as Woodford is concerned, some of the UK&#39s big-gest companies such as BP and HSBC are not currently worth investing in.

Dalby says he tells his cli-ents that one of the main benefits of having some exposure to equity income funds is that they provide the potential to beat inflation. In today&#39s low inflationary environment, people tend to think that inflation is not a problem but even if inflation remains constant at 2.5 per cent a year, it reduces the purchasing power of money by around 12 per cent over five years, 24 per cent over 10 years, 32 per cent over 15 years and 40 per cent over 20 years.

Dalby subscribes to the view that for long-term investors, exposure to a wide range of different investments, including shares, fixed-interest bonds, property and cash deposits, is sensible. But when deciding which equities to go for, he says income funds should not be overlooked.

Chelsea Financial Services managing director Darius McDermott says: “Our view is that you always need to build a balanced portfolio, including income, growth and other areas. It is certainly a nervous time at the moment and if any clients are defensive, we would advise them to look at more value-type equity funds.”

McDermott says he can see no clear direction for markets at the moment but is looking carefully at the impact of the US elections, oil prices and UK and worldwide interest rates.

He believes inflation will inevitably rise in response to any changes in the energy markets. He says: “Although we do not actively manage our clients&#39 portfolios, when markets are tricky, we have to monitor them more closely. I think we may well have a period of vol-atility and more problems in Iraq could see oil prices soar.”

McDermott agrees with Dalby that some fund managers are opting for a defensive position, with Invesco in particular taking a very bearish stance.

IFA Willis Owen head of communications Kerry Nelson says that while consumer confidence started to build at the start of the year, it has petered out as interest rates have risen and Chancellor Gordon Brown looks to tigh-ten purse strings.

Nelson says: “My starting block would be UK funds. We are looking at those that are going to do well in all sorts of market conditions rather than those that perform well under certain conditions such as trackers or small companies.

“People are holding back from making any decisions at all at the moment. The econ-omy is going through another set of changes and it is more about the general economy and the impact this has on day to day living.”

Willis Owen is looking at different ways to help its investors review their portfolio in the next few months. She says one of the only benefits of dwindling markets has been that it has encouraged investors to review their Peps and Isas.

Nelson says that whether clients are advice-led or making their own decisions, now is a good time for advisers to build relationships with their clients and work on rebuilding their confidence in the investment market. With no clear market favourite emerging, opting for UK equities at least rules out currency fluctuations.

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