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Expectations lowered

I am a middle-aged investor with £100,000 at my disposal for clear investment. I want to make the most of this to strengthen my case for an earlier retirement. I have a knowledge of the share privatisation issues but would like to leave the detailed investment planning to you. I want to minimise the risk of my investments going down in value every time the stockmarket sneezes or when there is an international military event in the news. I suppose I am a cautious to balanced investor – but I want to avoid my investments being affected by any forms of terrorism activities.

Whether you choose to be cautious, balanced or adventurous – whether you buy into unit trusts, investment trusts, Oeics, managed life or managed pension funds – you need to ask yourself if your fund manager have the ability, or the facilities, to manage your money away from the risks now presented by “financial terrorism”.

This phenomenon is not really new. It has been around for years in the form, for example, of conventional managed funds versus hedge funds. The interests of the two are frequently diametrically opposed in terms of their activities during bear market conditions.

Then there is the dealing which has been going on for years by the “black” and/or “grey” economies, including money laundering operations. All of these activities distort the intrinsic value of the markets to investors who want a true value.

Yet again there is the effect of market movements triggered by individual stock press reports, comments and analyses. All of these actions contribute to distortions of the true intrinsic value of equity funds. All of these instances create market instability and uncertainty.

Just as interest rates and currency movements are of concern to fund managers, so the movement of legal and illegal money is of concern to us all. Another factor is the movement of fund managers from one fund to another, and for what reason.

To this concern should also be listed another form of uncertainty, similar to that created by “financial terrorism” but known as actuarial uncertainty.

You could point to examples such as the developments at Equitable Life and the Leeson/Barings situation. So, “financial terrorism free” funds in my opinion are perhaps National Savings certificates and premium bonds.

But gone from the list are with-profit bonds (due to MVA being invoked), zero-dividend preference shares (due to hurdle rate versus uncertain growth rate assumptions) and endowments (terminal bonus uncertainties and opacity issues).

However, maybe we could add in some corporate bond funds and gilt and fixed-interest funds which have good credit ratings.

If you are still looking for a reasonable equity investment fund, then try Personal Assets Investment Trust. This trust has astutely held, on average, 40 per cent cash over the last three years and is now one of the top performing international equity funds.

You would have thought that “stockmarket guaranteed” investment bonds were fairing pretty well due to the minimised downside risk.

However, if you look a little more closely, you see that, over the last six quarters, an equity or managed fund with a 98 per cent guarantee will most likely have lost a full 2 per cent in each quarter, or 12 per cent in total. A 95 per cent guarantee fund will most likely have incurred a loss of 5 per cent per quarter – 30 per cent in total.

These deficits are going to take some time to restore, especially with these types of funds – which are only participating in market rises on a fractional and not full basis by and large.

The list for financial terrorism does not necessarily end where we have so far drawn it. It is a deep and ethical subject to research.

Indeed, it will also be interesting to see how ethical funds deal with these issues in the future.

Talking of ethics, remember that as well as the value of investments falling as well as rising, best advice can be overridden by compliance departments.

Compliance departments can be re-directed by regulators, rules can be overridden by reviews and reviews can be re-reviewed (so no chance of any financial terrorism there then).

Investors&#39, advisers&#39 and earlier retirers&#39 expectations of financial growth will now be substantially curbed.


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