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Be sensible – not fashionable

With mixed predictions over the future of the US economy over the short and long term and the continuing rollercoaster ride on the world stockmarkets, many investors are approaching the coming Isa season with an element of caution.

Last week&#39s half-point cut in US short-term lending rates and talk of more to follow will leave investors balancing short-term optimism over share prices with fears that the speed of Federal Reserve chairman Alan Greenspan&#39s cut hints at panic.

Despite these concerns, the message from IFAs and fund managers is that a sensibly structured investment portfolio is the way forward and Isa investors should buck the trend of investing in the fashionable but often higher risk specialist funds.

Figures show that Isa sales are picking up earlier than usual and, with equity prices low, there is an argument that many are buying to exploit the dip in the market.

Although Isas are not likely to give the high short-term returns some have in the last two years, many remain an attractive option over a threeto five-year period.

Investors who sustained losses in the technology sector may take their money elsewhere but those with other portfolios should not have lost confidence in the Isa market.

Prospects for this Isa season, however, remain good for the fund management industry as the likelihood of lower interest rates will discourage a flight into cash savings as people use their tax allowance for the year.

Some in the industry fear investors will be overcautious with their investments this time as they believe some advisers have been overselling higher-risk investments and forgetting a portfolio approach.

Hargreaves Lansdown head of research Mark Dampier says: “Some portfolios I have seen lately are absolutely appalling – just a list of the most recent top-performing funds. The same thing happened with the emerging markets crisis when a lot of clients ended up with 20 to 30 per cent in the Far East when it collapsed.”

But Schroders director Robin Stoakley says: “People have not been any more reckless than in 1989 investing in Japan or in Hong Kong in the early 1990s. Intermediaries are being more adventurous because there is a wider variety of products on the market such as style-specific, thematic and emerging funds.

“We are not getting reports of clients coming back to our intermediaries disappointed with the year. Those who have chased just tech stocks will have lost 3-15 per cent over the year but clients are broa dly satisfied.”

This year, Dampier bel ieves there is no obvious area to invest but says Europe could be attractive if the pound continues to weaken against the euro although he believes US interest rate cuts will set back recent euro recovery.

Dampier says: “If the US lands with a bump it could be bad but no one really knows. If the US goes from 5 per cent growth to 2 per cent, then prices will not be so out of kilter. We may then see UK rates come down. The UK equities market appears stronger at the moment and Europe could be strong.”

Michael Philips partner Michael Both says: “Europe is a little behind us in the cycle and that could be good news. But at the moment it is more of a traders&#39 market than an investors&#39 market.”

One thing is certain. Con sumer confidence is key to a successful Isa season and IFAs should emphasise the medium to long-term benefits of Isas as well as the advantages of buying when the market is low.

Dampier says: “To educate the public is hard and it will be interesting to see if customers are more sophisticated now and will be prepared to buy when there is blood on the floor.”

St James&#39s Place head of investment Callum Girvan says: “The US cutting rates makes it easier to invest in the US. On the assumption that the same thing will happen over here when rates come down in the UK, people will have more money to spend and therefore more to invest. Investors will be more prudent in what they choose, preferring, for example, a UK growth fund rather than a UK tech fund. People will not be focusing on the hot areas.”

Stoakley says: “Despite the gloom, the single most important thing that moves investment is interest rates. As rates are coming down, then the outlook must be positive for the UK.”

Best Investments deputy managing director Jason Holl ands believes that inv estors should not excessively err on the side of caution.

He says: “Customers inv es ting over three to five years should not be panicking. Even those who invested on the eve of the crash were back on par after two-quarters. Histor ically, it has been better to invest in the quiet period around Christmas when trading is light rather than in the stampede at the end of the tax year.”

Most industry commentators see 2001 as a stockpickers&#39 market. Dampier sees active fund management as the key to performance.

He says: “If you look at the FTSE 100, it is flat over two years. Tracker funds could be flat for a long time. Both HSBC investment funds and Lion trust investment funds have stockpickers of the highest quality although Fidelity will also do well as they have a broad fund base.”

As long as questions rem ain over the US economy, there will always be some investors holding back. The challenge for IFAs is to get the message across that a sensibly structured portfolio bought when valuations are low can beat buying table-topping investments on the crest of a wave.

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