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Structural damage

Much to the annoyance of my family, I have spent the weekend watching the Ryder Cup. Even as I write this article, I am enjoying the thrills and spills of the singles on Sunday night.

It is a typical ebb and flow competition. One minute, the Europeans appear to be turning it round, the next, the US regains control. As it is only now 8.30pm, it is early days and it could go either way.

So it is Sunday and I look back at an amazing week. It started with the US government deciding that they would allow Lehman Brothers to go into administration and allowing the takeover of Merrill Lynch by Bank of America.

Next, the UK government decided to allow Lloyds TSB to buy HBOS which apparently needed the support to ensure it did not follow Lehman Brothers. In the meantime, stockmarkets have had one of the most turbulent weeks in history, ending on Friday with the biggest surge anyone can remember.

But what impact does all this have on IFAs and their clients? The future looks incredibly bleak for risk-averse clients investing in structured products with the intention of securing their capital and gaining an investment return at maturity. When the “guarantee” is provided by Lehman Brothers, these investments might result in total loss.

UK investor protection via the Financial Services Compensation Scheme might be available but this is uncharted territory and I think these clients will be left with no support.

This will prove to be a difficult conversation next week for the IFA recommending these products and with other US investment banks heavily involved in more of these products, this is a situation where we do not want to see further failures.

I do not know how many more days would have had to have passed last week before we might have seen a run on HBOS.

The prospect of this is clearly what resulted in Gordon Brown approving the takeover which is clearly a great short-term result for everyone in the UK.

The longer-term consequences will be something we will need to wait for but they cannot be worse than the prospects of the failure of a UK retail banks, with the knock-on effect on tens of millions of customers.

Something else which has been bothering me recently is the relative performance of absolute return funds which are marketed to retail clients.

One fund I have been looking at recently has fallen over 25 per cent in 12 months. I had better not name names but this will again result in a few difficult conversations at reviews.

Furthermore, 27 funds in the 40 I can see on Trustnet have delivered negative returns over 12 months. The best seller has performed well (+8 per cent) but this has to be one of those cases where the sector title should be reviewed to ensure these funds do what they say on the tin.

Cautious managed is another potential problem as some of these funds are right up to their maximum of 60 per cent in equities. I am not sure how these can be described as cautious and an unadvised client buying such funds might not expect negative returns at these levels.

With my cynical hat on, perhaps it is good news that issues such as these exist as, without them, clients would find it easier to know which funds to buy.

I am sure that the FSA should take some action here as such titles and variety of performances cannot be treating custo- mers fairly in any way.

It is now 9.50pm and it looks as if Europe are going to lose. Let’s just hope that the same does not happen to clients, banks, funds and markets next week.

Peter Heckingbottom is deputy managing director and investment director at Pearson Jones


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