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Equities Excel

The latest IMA retail sales figures show that equities out-stripped bonds last December by more than two to one and, with the tide of investor sentiment turning against fixed interest, many are predicting another good year for equities.

Last December, net retail fund sales hit 1.5bn, with 780m going into equities and 353m into bonds.

Looking back at figures for 2004 and 2005, 5.8bn went into equities and 4.37bn went into bonds while in 2002 and 2003, at the height of the bear market, investors put 8.3bn into bonds and 6.4bn into equities.

Research by Scottish Widows Investment Partner-ship suggests that the equity trend is likely to continue. An NOP survey of 961 people shows massive enthusiasm for equities.

Swip investment director Roddy Macpherson says that, when extrapolated, the figures show that 3.64 million people plan to invest more in the stockmarket than they did last year.

Macpherson says: “Last year was a really strong year for equity markets, with our UK opportunities and select funds up by more than 30 per cent, for example. It is more a question of word of mouth so if someone has a friend telling them their investment trust is up by 70 per cent, it is tempting people to get back into the market.”

Despite strong stock-market performance, Isa sales were still down last year to 1.8bn from 2bn in 2004. Bestinvest funds analyst Rob Harley suggests this may be down to enthusiasm for direct equities, with greater tax breaks on offer for bond funds in Isa wrappers.

He says: “There are more tax benefits to holding a corporate bond fund in an Isa, where investors pocket all the gains instead of giving them away in tax. Looking at Isa figures, there might be a bias towards bond investment there. Most people can use their capital gains allowance in other ways.”

Harley says the message he is getting from corporate bond fund managers is that this could be a challenging year, with increased event risk stemming from take-overs. Many management teams are also becoming more shareholder-friendly, returning more money to them through dividends, for example, leading him to fav-our the outlook for equities. The technology sector has also seen an upsurge in interest. Close Finsbury head of distribution Stuart Alexander says since joining the firm last November, he has seen enquiries about the firm’s technology fund increase to around 150 a month, with much of the interest coming from private clients.

Alexander says: “We are seeing many more enquiries coming in, with a marked increase in the last four months. However, we are still in the process of converting this surge of interest into sales.”

The IMA’s figures suggests that many retail investors and, indeed, intermediaries may have given up trying to make the call between equities and bonds. The sales of balanced products rose markedly last year to 1.17bn compared with 587m in 2004.

Lawrence House head of multi-manager funds Alan Stokes says he is not surprised. He says: “Following the technology crash, people do want more exposure to equities so naturally they are adopting a more cautious approach. Japan’s revival dragged the 2005 performance figures up considerably and people are getting more interested but they do not want to get burned again.”

Last March, Stokes noticed an “incredible” switch in sales from his cautious fund of funds, which has an equal weighting in equities and bonds, to his balanced product, which has a 15 per cent weighting in bonds. The rest is in equities, including 11 per cent in Japan. He says clients are no longer being rewarded for the risk taken in bonds.

Threadneedle set up an absolute return bond fund last year. Communications director Richard Eats concedes that at the gilt-edged end of the market, prices have risen, pushing down yields because of strong demand from pension funds.

Volatility at this end of the market also means that investors are potentially taking more risk for less return but Eats says people will continue to need bond funds to build a diversified portfolio and are likely to consider more versatile absolute return funds as a result.

He says: “Now mightbe a sensible time for people to review their bond hold-ings, particularly in the long-dated arena, and consideran absolute-return product such as ours.”New Star investor communications director Richard Wilson thinks the IMA’s figures underline the fact that investors continue to seek diversification.

Wilson says: “The fourth quarter of 2005 saw a significant increase in investors’ appetite for equity funds as stockmarkets finished the year strongly. However, this was not to the exclusion of bond and balanced funds, implying that many investors remain fairly cautious and are choosing to diversify risk across different asset classes.”

Norwich Union investment strategist Gerard Laine says investors looking to position their portfolios for the long term should still take a bias towards equities.

He says: “It is not unrea-sonable to expect long-term returns of 8.5 per cent a year from equities over the next seven to 10 years. From bonds, if you are a good credit inves-tor, you are likely to get 5-6 per cent. It is not difficult, looking at these numbers, to justify equity investment over bonds in the long term.”


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