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Inflation theory

Our panel look at FTSE 100 volatility and how investors can deal with inflationary pressures

The FTSE 100 has been hugely volatile in recent months. What are your predictions for its level at the end of the year?

Lowcock: I would give a range on this of somewhere between 5,500 and 6,000.

Witcombe: I have no idea. We need to be careful as an industry about making rash predictions as there are people out there who might believe us.

McDermott: Unfortunately, I think it will probably be lower than where it is today but not by too much, perhaps around the 5,400 mark.

Inflation has reached 5.2 per cent for CPI and 5.6 per cent for RPI. How should investors deal with these pressures?

Lowcock: Inflation is likely to have reached its peak now and we expect it to come down in 2012 but it will remain higher than the 2 per cent target. In addition, extra quantitative easing may lead to more inflation and keep it at a higher level in 2012. Investors should always have an eye on inflation because their main objective should be to beat it over time.

This means it is important to have income-generating assets in your portfolio, whether you are looking for income or not. Equity income provides the best defence against inflation because yields can grow. However, it is important to diversify income generation so exposure to global equity income along with strategic bonds would be advisable.

Witcombe: Focus on your own expenditure and spend less. Most people could reduce their expenditure quite painlessly if they gave it some thought. Look at your own personal rate of inflation – it is the basket of goods that you buy that is important, not what happens to be in the CPI/RPI basket.

McDermott: Steer clear of cash would be my advice. With the best rates a good 2 per cent lower than inflation, there is no point. Longer-term investors should stick to equities as returns should beat inflation, meaning they will also have time to ride out current volatility. Bond funds are also an option. I like M&G optimal income.

Will junior Isas be a success?

Lowcock: The Isa is a well known product with a reputation for simplicity so the junior Isa will be easy to understand. However, many providers are not offering Jisas at the start, so it may be a while before we can determine their success. High-street banks are not showing much interest, so the Isa season in March 2012 will be the earliest indicator.

Witcombe: I would like to think they will be although it is only the wealthiest households that will be able to fully fund them. In terms of getting the nation saving, I think they are a red herring. But that does not mean they cannot be a success for the industry.

McDermott: This is the first time there has been a simple, tax-efficient savings product for children with a reasonable investment limit and decent range of high-quality investments to choose from. With the introduction of higher university fees and big deposits required for first-time house purchases, the need for long-term savings for children has never been greater. I anticipate high demand for the Jisa, particularly from the grandparent generation.

The FSA has warned that low interest rates will make consumers look to structured products as safer investments are offering low returns. Do you agree this is a danger?

Lowcock: Low interest rates are forcing savers to turn to investments when they would usually prefer not to. In doing so they are taking on more risk – but they have little choice. Structured products promise a lot but tend to be very complicated and lacking in transparency. In addition, charging structures are unclear. Inexperienced investors should be careful of structured products.

Witcombe: It is generally when people want to have their cake and eat it that problems arise. Consumers do not complain when their equity fund goes down by 20 per cent if they know they are invested in equities and a 20 per cent drop is likely.

However, when interest rates are so low, people want low-risk alternatives to cash. But there is no such thing and that is the problem.

If we try to kid consumers that risk and reward are not related, we are on a hiding to nothing.

McDermott: Investors are definitely looking for alternative investments to cash but this is a trend we have seen for a couple of years now. The important thing for investors to realise is they will need to put more time into researching alternative investments than they may have done for cash savings.

Absolute return funds saw their biggest outflows in three years in August and few are delivering good performance. Have they lost their charm in the eyes of investors and advisers?

Lowcock: The shine has worn off. However, the timing is unfortunate as the volatility seen in August exemplifies the sorts of conditions where investors will benefit from exposure to absolute return funds. There are still a few good funds in the sector but because the managers are able to sell as well as buy shares, people need to be more discerning in finding the good managers.

Witcombe: As an industry, we need to manage clients’ expectations. If we tell them to put money into a fund that aims to go up in the good times and up in the bad times, the odds are that they are going to end up disappointed. The world simply does not work like that. The outflows, therefore, do not surprise me.

McDermott: There are some decent absolute return funds out there but, as with any group of funds, you need to do your research.

The other thing to remember is that it is not overly surprising that as the markets have come off, some people have looked to move their money into equities to make the most of a potential recovery.

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