Hall: I would be surprised if the market finished the year at 5,500 or higher, although there is an upward momentum that could push it close to that level, before sanity or panic sets in. The upward momentum has lost some of its energy over the past few weeks or so with markets reacting quickly and sharply to any negative news. Older professional investors I speak to, including fund managers and discretionary managers, are, by and large, spooked by the current market level, given the underlying economy. A correction is due, almost imminently, I would say.
Schooling Latter: UK equities have seen a fantastic bounce from their low in March. There is no doubt that at that stage the market was oversold and I think the relief that we have avoided Armageddon has led to this strong rally.
However, the UK faces some very serious economic challenges so I feel we may see some profit-taking but whether this is within the next month or six months is very difficult to call. I suspect that we will see the current euphoria continue until the market is spooked by some negative newsflow, perhaps with the consumer pulling in his horns.
Witcombe: I am sure there are other predictions that say it could fall to 4,500 at the end of the year. None of us have crystal balls, so it is complete guesswork. I am always sceptical of people who make such predictions as it is all a bit worthless. While something is going up, it is easy to say it is going to keep going up but there is no logic behind that. We are very clear to our clients that we cannot make predictions. In the very long term, equities should go up, that is how capitalism works, but in two or three months? It could easily drop to 4,500.
Seven companies in the FTSE 100 now account for more than half of the income generated by that index. Is there a fear that equity income managers might be adopting a flight to safety strategy that could lead to a homogenisation of the sector?
Hall: We have had similar situations in the past with growth stocks and we saw a lot of funds that were nothing more than quasi-trackers. To generate a high level of income, there are limited stock choices, particularly if you want a degree of certainty and relative security.
I think we will see this situation for the next few years until companies begin to increase dividends, particularly the traditional income-payers such as the banks. There will be little to separate these firms so in the meantime why not go for an income tracker fund, it will probably be cheaper with similar returns.
Schooling Latter: Equity income managers are now facing a tougher environment, with fewer dividend-paying stocks available. For instance, the banking sector was previously a stalwart within income managers’ portfolios but, with banks keen to repair their balance sheets, dividends are not currently being paid out so perhaps a certain degree of homogenisation is inevitable.
The answer could be to look at smaller income funds, which are a little more flexible and able to move down the cap scale or to look for a European or global equity income fund to add to an equity income portfolio.
Witcombe: We do not like specific equity income funds because you are trying to have your cake and eat it, in that you are trying for a high yield as well as long-term capital return. Our view is it would serve clients better with a broader spread of equity assets and then have a fixed-interest fund running alongside that to reduce volatility and diversify their portfolio.
There are fewer and fewer shares offering higher yields, therefore it is suggesting that portfolios are becoming more concentrated. There are ways and means to move things around and receive better returns.
The IPD UK monthly index is now back in positive territory for the first time in two years. Is the bounce in the commercial property sector to be believed?
Hall: There is more to this than meets the eye, not least the amount of commercial property sitting as security with the banks. I do think that the commercial property sector has seen the bottom but there is still potential for a banking disaster to upset the apple cart. The banks have not been prepared to write down the value of the commercial property they have taken as security and, to some extent, this has led to a lack of deals being done. As with the residential sector at the moment, there is a lack of supply that is propping up the whole thing.
Schooling Latter: Commercial property produced spectacular returns but inevitably fell off sharply with other assets. However, prices seem to be bottoming and, selectively, I think there is value out there now. I would suggest that a portfolio should contain better-quality properties and be highly selective on retail.
With such low interest rates, yield is being sought out by institutional and private investors alike and property now offers a competitive yield.
I see commercial property remaining popular as long as the yield available remains competitive, while interest rates remain low and as long as demand does not drive up prices and hence reduce yield.
Witcombe: It is about market timing. Just as we do not have any crystal balls to predict where the FTSE will be at Christmas, no one knows whether now is the right time to get into property or whether it was a year ago or whether it will be in a year’s time. Admittedly, commercial and residential property have different return characteristics but they are still both property and most of our clients are homeowners and have much more property exposure than any other exposure. Because of that, we think we should not recommend property funds as it is something they are already overweighted in.
The FSA recently revealed it had uncovered “serious issues” in its review of Lehman-backed structured products and gave the green light to review individual complaints on the products. Do you think it will be the providers or the advisers that will feel the brunt of regulatory backlash?
Hall: A green light to review individual complaints will clearly lead to a wave of complaints against the advisory firms that recommended these products – that is how the complaint system works. We need to wait and see how the Financial Ombudsman Service handles these cases as they will no doubt eventually land on the ombudsman’s desk.
In some cases, the advice will clearly be wrong. Where the advice was fundamentally correct but the underlying product was flawed, then it will probably depend on what an adviser could reasonably be expected to know and understand. Providers will also come into the firing line.
Schooling Latter: I suppose that will depend on who, if anyone, is found to be negligent. I know there has never been any negligence with regard to our sale of structured products but obviously cannot speak for other advisers. It was unprecedented circumstances that led to Lehman’s collapse and this has caused advisers and investors to be more cautious in their structured product choice.
Witcombe: If it is Lehman Brothers’ fault, then it will not have much impact. Regardless, I think it is a wake-up call. Any product that is offering you everything is impossible. Even in something that is marketed as a low-risk product there are other risks involved. I suspect one outcome will be much clearer marketing material on such products but I think any adviser selling a lot of these products will be very worried right now.
In a speech delivered at last month’s Gleneagles Savings and Pensions Industry Leaders Summit, FSA managing director Jon Pain floated the idea of product regulation – how would it affect the future of investment products if the FSA were allowed to veto certain products? Would an FSA green light constitute an endorsement? How would it affect the IFA sector?
Hall: As I understand it, product regulation would be additional to the regulation of advice so it is difficult to see how this will add any value to the current regulatory regime.
Of course, if product regulation was linked to advice and the regulation of advice, it may work. For example, “safe” products would benefit from lighter-touch regulation whereas products that posed higher risks to the consumer would demand greater regulation of advisers that used them.
We have a similar situation with stakeholder pensions being seen as the default recommendation and to use an alternative requires justification in writing.
Schooling Latter: All products currently need FSA approval, which I suppose effectively gives them a green light and allows them to veto those investments they consider to be unsuitable.
If the FSA were to give some approval rating that providers were able to use in marketing material, then I imagine that investors would use it as part of their investment selection process, along with ratings from other agencies and track records.
Witcombe: I am sure the FSA would not want to look like they are endorsing anything, as that is a huge risk. I think a lot of good work was done with the stakeholder concept. There was a cap on charges, the charges had to be simple and because of that the products were simpler – you could not go into a stakeholder pension scheme and buy a hedge fund with it whereas you could with a Sipp. Some sort of kite-mark approach like stakeholder would be good, focusing on charges and simplicity.
Also, rather than having standardised warnings that can be skimmed over, we could have clear and explicit warnings on higher-risk products that have to be signed off by the investor, just like a warning on a cigarette packet.
Are there any concerns over the way fund supermarkets are looking to develop their business models?
Hall: As more advice businesses embrace wraps and investment platforms, the fund supermarkets need to push hard to maintain market share and increase assets under management.
A cash bonus for re-registration of assets is Fidelity’s answer to building more and more assets. It is probably a safe ploy but only because it is an absolute nightmare to transfer away from these supermarkets. The money will probably end up sticking there on the platform until the supermarket has recovered their investment.
Although the supermarkets have improved considerably in recent years, they are still a long way from being full-blown wraps.
Schooling Latter: There are considerable concerns surrounding the development of supermarkets’ business models. Non-advisory businesses, such as ourselves, constitute approximately 20 per cent of the retail market and we need to make sure that supermarkets are developed in a way that is compatible with our own business model.
We need sufficient choice of funds available for our investors, with smaller boutique funds available as well as those of large providers.
It is important that their cost structure, product development and administration allow us to remain competitive and deliver the good service that our clients have come to expect.
Witcombe: All businesses are free to set their own charges of course but I think clients need to be clear on where that supermarket is making its money. In a way, if charging companies to have their funds listed is the way a supermarket is funded, isn’t that like a hidden commission?
I think wrap platforms and supermarkets are great but there needs to be more transparency as to where they are getting their money from . Advisers have to be totally transparent in their charging, so everyone else should too.