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End of year edge: Mark Dampier

Despite gloomy forecasts, indices are up and investors who abandoned the market for buy to let missed out on the rally. But the next few years could be tougher going for Anthony Bolton, as the rerating in smaller companies could be largely over.

We started 2004 with most commentators fairly gloomy on investment markets. The gloomy ones were the economists, who in my view are rarely right. To be fair, most fund managers were not overly optimistic for 2004 either.

As I write this piece, the FTSE 100 is up by 5 per cent, mid-caps are up by 15 per cent and small caps are up by 9 per cent – and these figures do not take into account dividends. These have also surprised on the upside, with many companies increasing dividends by upwards of 20 per cent. There were plenty of special dividends from the likes of Centrica and big share buybacks, too.

Despite many commentators suggesting that 2004 would be the year of the FTSE, it has been the mid-caps that have stolen the thunder yet again. However, I suspect the rerating is now largely over and I predict far more managers will move up into the lower end of the FTSE in 2005.

As ever, it was a busy year for fund manager moves. Neil Pegrum left Insight for Cazenove – his second move in only 15 months. This was a blow for Insight as Pegrum’s fund had doubled in value but I did wonder why he went from one big organisation to another when a boutique would probably suit his style more. He seems to have made a cracking start at Cazenove, with his fund already having attracted over 50m and moved up the performance tables.

Elsewhere, JO Hambro continued to gain retail recognition, bagging Clive Beagles from Newton and Scott McGlashen, who strangely sold out of his own boutique to join the Hambro team.

Last year’s star performer, Framlington’s David Mitchison, also jumped ship to JPMF, where he obviously felt a big existing team would add to his individual talents. The jury is out on whether he can repeat his performance but, given the increase in resources he will have, I would not bet against it.

I was surprised there were not more mergers but groups did prune and close down funds which they felt were not profitable. The biggest move was the merger of Isis and F&C. This resulted in Mike Felton moving to M&G while James Foster will be joining Artemis in April after he has finished sunning himself in the Caribbean.

The longest serving fund manager, Anthony Bolton, celebrated his 25th anniversary at Fidelity with the announcement that he is going to stay on at least until the end of 2006. This no doubt pleased Fidelity, as his is by far its biggest-selling fund. However, I suspect these two years will be slightly tougher going for Bolton’s style, given the incredible rerating we have seen in midand small caps.

On the intermediary side, there was a continuation of losses among the major IFAs, which must be a worry to the insurance companies which have backed them. The highest-profile problem probably came from David Aaron’s company, which went into administration on the back of precipice bonds. The frustration for the intermediary community was seeing liquidated companies’ liabilities being dumped on to the Financial Services Compensation Scheme. Once again it is the good brokers picking up the pieces.

Is there any other industry that works in this way? Can you imagine if BMW had to pay for the losses within a company like Mercedes? Welcome to the crazy world of financial services. Unfortunately, the precipice bond story is not yet over and I am sure we will be reading about continuing problems in 2005.

Investor confidence remained at rock bottom during 2004 and Isa sales went into reverse in September for the very first time. Retail investors who fled the market to invest in buy to let have missed the tremendous market rally.

The Chancellor seems to be thinking of extending Isa limits to 2009 – a small reprieve given that Isas were less tax-efficient than Peps in the first place and there was no need to change them. He did surprise many in his Budget by making VCTs more tax advantageous, extending the 20 per cent income tax relief to 40 per cent for at least two tax years.

Turning our thoughts to 2005, I am sure the oil price, China and Russia will continue to dominate financial headlines. There is a strong secular theme to countries such as China, Russia and India industrialising at phenomenally fast rates. The pace of this will cause shudders in the world economy. I have no idea where markets are likely to finish 2005 – if I did, I wouldn’t be writing this, I would be making my way to Eagle’s Nest in Val d’Isere. I wish you all a happy Christmas and prosperous New Year, wherever you may end up spending it.

Mark Dampier is head of research at Hargreaves Lansdown

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