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Investment View

If there is one question anyone who contributes articles regularly can be

certain to be asked time and again, it is “How do you think of something

different to write each week?” The more observant may have cottoned on to

the fact I am no stranger to the world of repetition. The truth is the same

themes come around again and. It was no surprise, therefore, to find that I

was talking on pretty much the same topics to audiences of both IFAs and

private investors last week. The same concerns affect both advisers and

their clients.

The three themes doing the rounds are whether markets will remain

volatile, if technology is still the best game in town for investors and

how on earth do you generate income from an investment portfolio without

incurring unnecessary risk. Needless to say, all three are closely

intertwined. The slick answers are yes, partly and with difficulty.

But the reality is you cannot cover any of these topics without reference

to the others. You need to recognise that the difficulty of creating income

is partly due to the popularity of technology stocks. This popularity has

in turn exacerbated the problem of volatility, which itself is because

technological change has speeded the flow of information to investors and

allowed swifter reaction to events. No wonder it is impossible to speak on

one subject without involving all the other collateral issues, themselves

all individually important.

Behind any glib explanation of why a trend is developing will be some

fundamentals likely to dictate how investors behave. Take income as an

example. The yield on UK ordinary shares has been driven steadily down over

the past decade, partly due to a long bull market but also because

attitudes are changing. The American approach of striving to achieve

shareholder value – using cash to repurchase shares if necessary, rather

than pay out dividends – has taken hold.

Company dividends are also less important, given that the Government has

changed the rules that allowed pension funds and other non-taxpaying

investors to reclaim tax. It is not only the income stream from shares that

has fallen. The return on gilt-edged stocks has also been declining, due in

no small measure to the pressures of the minimum funding requirement. I

would have thought (and indeed said so at seminars last week) that it is

hard to see the Chancellor easing this position.

Our Government has no need to step up its issuance of debt so the

principal alternatives would appear to be our entry into the single

European currency, which would make available euro-zone sovereign debt

without currency risk, or allowing corporate bonds to be purchased. My view

was entry into the euro was years away and giving corporate bonds the

go-ahead was unlikely. Lo and behold, I discover last week the Faculty and

Institute of Actuaries has issued a report to the Department of Social

Security recommending reform of the minimum funding requirement. While the

content remains under wraps, it is believed they are recommending – you&#39ve

guessed it – using corporate bonds to ease a situation fast becoming

embarrassing, with annuity rates depressed and long gilt yields the lowest

in Europe.

Now, it is one thing to make a recommendation, it is quite another for the

Government to accept it. But there do seem to be some compelling reasons to

revisit this set of rules, which were put together in haste following the

Maxwell scandal. Although the outcome is far from certain, any widening of

the investment remit is unlikely to do corporate bonds any harm, so the

launch of a new fund by Old Mutual Fund Managers targeting this area could

prove to be well timed, particularly as it will be majoring on

investment-grade bonds, likely to be the first port of call for managers if

they receive the go-ahead.


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