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Inside edge: Peter Dornan

Equities came under the spotlight again last week after one of the UK&#39s leading insurers announced that its withprofits funds would no longer invest in shares. The move prompted further heated debate on the wisdom of equity investment and has left many IFAs considering whether to advise their clients to avoid equities as a long-term investment.

I certainly believe current market conditions should make both providers and advisers reconsider their attitudes towards this asset class. This is already happening and can only be a good thing. However, for most investors, the key to a successful investment strategy is a balanced portfolio and equities should form a key part of this.

One effect of the prolonged bear market has been more realistic expectations of all asset classes. Our attitudes towards equities in the late 1990s had become skewed to the point where many of us were hoodwinked into believing that they were a fail-safe way to get rich quick.

They are not and never have been. They are a higherrisk investment with the potential of higher returns as the reward. Nothing has changed. In the longer term, equities still have the potential to outperform and conversely underperform. Providers, advisers and investors understand this all too well and it will likely be a long time before expectations get quite so distorted again.

The bear market has also seen a collapse in demand for more niche investment areas. Latin America, the Far East, emerging markets – all these had their day in the sun but are now very much out of vogue. Again, this is probably a good thing. While such investments may be good for some investors, the volatility associated with these markets is probably too much for most. The vast majority are best focusing on the core areas UK, Europe and the US. These are the biggest markets and generally provide the best bet for those looking for equity exposure. These are also the sectors in which most investment managers should focus on providing excellence.

The real issue is not the investments themselves. One way or another, these generally do what they say on the tin. It is rather more creating balanced portfolios and matching these to the individual risk profile. Too many investors with too much to lose have inappropriate portfolios. For a young person or scheme, a higher equity weighting may be appropriate as the investor can afford to rise out the volatility.

For a mature scheme or someone approaching retirement, perhaps a portfolio consisting largely of bonds may be more appropriate. Here, the adviser plays a crucial role in determining the client&#39s needs.

It may well be that with profits provides an excellent option. Most offer a balanced portfolio, with some exposure to both bonds and equities. That is why they have been so popular for so many for so long. It is only in recent years that they have started to come under fierce fire and that is for one main reason – they do not understand what they are buying.

Compare it with unit trusts. How many of those investors who piled into their Isas three of four years ago really understood the risks they were taking? Most I would suggest although a significant minority probably did not. Now what about those who invested in with-profits? A much smaller proportion, I would hazard, and this lack of understanding is why so many have cried foul when markets moved against them.

There are two solutions. The first is to redesign these products so they are easier to understand. Step forward, Ron Sandler. The quicker the industry adopts these standards, the more satisfied clients we will all have. Lastly, we need to educate our clients to the nature of the risks when investing in any asset class.

Herein lies the great challenge and opportunity for intermediaries. Providers should do everything in their power to help them in this crucial task.

Peter Dornan is director of group businesses at Aegon UK

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