Churchouse: No, not in the shorter term but I think the recent volatility would have been greater if it had not taken such significant steps. Some would call this a panic move but the pressure is on the Fed to finely balance what is a difficult position. I think that volatility will calm in the last two quarters of 2008, with the possibility of positive growth at that time, but we will see further volatility in the meantime.
Catt: It is a question of whether it is seen as a kneejerk reaction in the knowledge that there is worse to come or an olive branch to all the sub-prime borrowers to get them out of trouble. There is so much contradictory economic data and uncertainty that I believe markets will remain quite volatile. Markets hate uncertainty. Such big adjustments ring alarm bells.
Sutcliffe: These cuts have the potential to have a calming effect and have curbed some volatility. I would expect there to be a fair amount of volatility regardless for the next six months and then it is very much down to how the financial sector reacts. If its response to the cuts is positive, then we should see a correcting of the markets and a calmer picture. If there is a negative reaction, brace yourself for further volatility.
What long-term effect will the huge loss suffered by Societe Generale have on consumer confidence in the investment markets?
Churchouse: Sadly, this is another event that is likely to cause an underlying concern in financial markets and consumer confidence. The scale of this fraud and loss is significant and questions have also been raised as to who knew what. There has even been speculation over whether the Fed’s decision to drop rates by 0.75 per cent was linked to the knowledge of this loss. It will take time for this issue to filter through the system, as we have seen with the credit crunch, but I think that consumers will remember the era of bad news rather than the loss itself.
Catt: It seems that this loss will simply negate the profits made by the company. If it had brought down the bank, the effects on consumer confidence would have been much greater. I cannot see that it will have much effect on consumer confidence because only the bank seems to be out of pocket and the trader does not seem to have made any personal gain. He was simply a trader who lost a few big bets.
Sutcliffe: These events come out of the blue. We did see an immediate reaction from the market at the time but the impact on investment markets overall should not be quite so dramatic. They will look for the markets to show that they are taking the event seriously but I do not see this making a major dent in confidence.
Have the restrictions imposed on many property funds in the last few weeks changed your clients’ attitudes to commercial property?
Churchouse: Many clients are concerned about all areas of investment and commercial property as an asset class is no different. The option to impose a restriction on most property funds has always been there and as long as clients’ expectations are maintained on this point, it should not cause an issue. The fundamentals of commercial property investment have not changed although most funds have seen a correction in what became an overheated market. The news is not surprising and it is likely to be prudent for funds and investors.
Catt: This type of limitation does cause anxiety for clients as they feel they are likely to lose money whereas the institutions are doing this to avoid crystallising losses unnecessarily.
Sutcliffe: Commercial property has been a popular sector in recent years but that has begun to change in the last 12 months as many clients have seen the downturn coming. Clients recognise that commercial property is another asset class that has ups and downs.
Many had begun to look at rebalancing property-heavy portfolios before restrictions were in place. Investors are more savvy than ever before and look for understanding now, whereas a few years ago they were more inclined to panic. This has meant that they recognise that moving from a direct property fund is not as easy due to the illiquid nature of the fund and the restrictions have merely galvanised their views to move away but not caused undue panic.
How much of a negative effect will the market volatility have on equity Isa sales in the next two months?
Churchouse: Investors are likely to be cautious as they approach the end of the tax year and the annual Isa season, especially existing Isa investors, as some have seen recent falls in values.
However, many shrewd investors will see this as an opportunity to capitalise on some asset classes that appear to be offering good value in the current climate. Isa investment should be seen as medium to longer term and this needs to be taken into account when considering short-term volatility. Again, managing client expectations is the key to controlling these negative effects.
Catt: It should have an effect on the advice being given to prospective investors. Depending on attitude to risk, market volatility can provide tremendous buying and selling opportunities with remarkable regularity. This is where the successful fund managers will earn their corn, either by profittaking or loss avoidance. The volatility may be a little too sporting for some investors’ tastes.
Sutcliffe: The credit crunch had given rise to investors taking a more defensive stance, with many looking to restructure portfolios, and the outflow from funds had increased. This always meant we went into 2008 with an uncertain view on how much money we would see this Isa season.
The market volatility and the concerns over global recession are only going to have a more negative impact. This is a time for IFAs to remind clients that the Isa allowance is annual and it is a use it or lose it situation, encouraging them to make defensive investments rather than none at all.
Do you agree with the Investment Management Association’s changes to the yield requirements for UK equity income funds? Has it gone far enough?
Churchouse: The IMA’s news release on the updating of sector definitions makes interesting reading. This demonstrates clearly the changes made, with an emphasis on distributable income/yield on UK equity income, maintaining a level in excess of 110 per cent of the FTSE All Share index.
This is a sign of changes in the current economic climate and I believe reflects what is happening in our domestic economy. Has it gone far enough? The market will decide that over time.
Catt: Any clarification to the classifications to help choose the right funds for clients should be seen as a positive help. I have been a great believer in equity income funds over recent times and the changes should lead to more focused decisions regarding the suitability of funds for clients.
Sutcliffe: This is a very positive move by the IMA to distinguish this sector clearly as an income-producing sector. By changing the definition from aiming to achieve a yield on the underlying portfolio to achieving the yield on distributable income, it increases the level of yield these funds are looking to create. Many of the funds have been falling short of the IMA target and this will mark those funds that should no longer be in this sector. With the funds now being targeted after costs, any investor looking for income should have more confidence in this sector.
Will Virgin Money’s new climate change fund confuse the issues of what is a green or ethical fund, as it allows investment in all sectors on a best of breed basis?
Churchouse: It is good to see the introduction of this fund as an expansion of this sector is welcome. I am sure this will only be the first of a few funds trying to achieve a similar objective. We have seen more interest in ecological areas rather than just ethical funds. This will cause some confusion and may not suit those looking for pure ethical funds. The issue of climate change is not going to go away and investment opportunities can and will appear from this issue. I welcome this fund and look forward to competition from other providers.
Catt: It is just another fund pandering to topical issues. It would be assumed that the investments within the fund would be undertaken to meet the climate change mandate. Whether it is classified as an ethical investment by the client will depend on the positive or negative criteria used in the selecting the investments.
Sutcliffe: It is not easy being green and Virgin Money is not making it any easier. Whenever an investor says they want to have an ethical stance with their investment, you need to get an overview of just what their ethics are. There are some great organisations that evaluate how green funds are and you base your recommendation on whether a client is avoiding tobacco or looking to a sustainable future.
This is becoming a niche product that is trying to sustain performance while holding an ethical viewpoint. The biggest problem is that many of the stocks are likely to appear in other portfolios and, with no strong ethical criteria, these funds are unlikely to meet too many ethical clients’ needs.