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Investors seek a class act

After months of misery in the world&#39s equity markets, IFAs are hungry for some good news. But while the bolder are starting to put money back into equities in the belief that the worst is now over, many would still rather keep their clients in cash.

For longer-term growth, however, fund managers still stand by equity investment. Threadneedle head of global strategy Colin Robertson confesses that equity returns may not be spectacular over the next couple of years but believes they will still outperform bonds by 2 or 3 per cent and gilts by a little more.

He says: “A return of 7 or 8 per cent is quite good if inflation is 2.5 per cent.”

Robertson&#39s view is certainly backed up by historical data, with equities having outperformed gilts and bonds consistently over the longer term.

But figures released in the Cazalet Financial Consulting 2001 report show equities&#39 outperformance of gilts has narrowed over the past 15 years. Over the next five years, it predicts that property and equities will return just under 8 per cent a year, with corporate bonds returning only 0.5 per cent less.

The report says: “Equities have not outperformed gilts by very much in recent years and, prospectively, look set to deliver much less by way of added value than in the good old days. What is more, such relatively slim outperformance is likely to be eroded to some extent by the impact of product charges.

“This scenario is set to impact on investment decisions and may well lead to greater use of corporate bonds, which may be viewed as providing equity-type outperformance relative to gilts with a little less volatility and somewhat less overall risk.”

Over the past year, corporate bond funds would not have been a bad place to invest compared with equities or even gilts. For the 12 months to the start of August, just four of Autif&#39s 31 sectors – money market (cash), property, index bear and corporate bond – produced a positive average return.

Hargreaves Lansdown head of research Mark Dampier believes people would do well not to write off corporate bonds off as a “pensioners&#39 product”.

He says: “If equity returns are going to be between 7 and 9 per cent and you have got a bond with 7 per cent – and that is in the hand – it seems quite reasonable. With equities, you are only talking averages. They could return a lot less than 7 per cent. I think high-yield corporate bonds could be one of the best-performing asset classes over the next 18 months.”

Dampier does not write off equities completely, however. He says: “Of course, there are funds which will outperform. Anthony Bolton has returned more than double the FTSE over the past 10 years.”

While most IFAs have done a degree of bond fund business for their more cautious clients, the consensus of opinion still strongly favours equities over a five-year time frame.

Michael Philips partner Michael Both has been putting his clients into cash over the past few months. He says when he sees the first indications that markets are going to recover, he will start to reinvest client money in equities.

He says: “The danger with going into corporate bonds is that you are looking at a limited upside but a fairly unlimited downside. If you stick your money into equities, you are certainly going to get some fluctuations but my guess is that the gain they make when they bounce will be better than going into corporate bonds in the short run.”

For those not taken by either bonds or equities, Cazalet&#39s research gives a positive outlook for property. With the average property fund having returned 5 per cent for the year to the start of August, the only sector to have produced a better return is index bear.

But while Cazalet predicts property returns of around 7.5 per cent, Portfolio property fund manager Robin White believes property will actually outperform equities over the next couple of years and at much less risk.

White says: “The general consensus is that property will return between 7 and 10 per cent this year, a little bit more next year and about the same again the year after that.

“The thing with property is that you get the benefit of a high starting yield, usually around 7 or 7.5 per cent. You have got to see the capital value decline before you get any less than that. If you get a company in there that goes bust – and you are near Heathrow or you have got good transport links – you have got a good chance that you will quickly find somebody to replace them.”

For the out-and-out growth investor, equities are still the only way to go as the best stockpickers always deliver over the long term. But for those investors whoh may have put their money into equities in search of a double-digit return at not too much risk, it would seem that there is a compelling case to shop around the asset classes before defaulting to equities.

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