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The Miles file

After three gruelling years in the equity market, investors do have something to celebrate in 2004. As I write in the final week of December, the FTSE 100 index is on course to finish the year in positive territory.

The last time that savers enjoyed any gains from the London stockmarket was in 1999. In fact, the blue-chip benchmark index peaked on New Year&#39s Eve of that year, propelled to the giddy heights of 6,930 by the investor craze for technology and telecoms stocks. The 11 per cent rise in the market is very welcome but it is worth putting into context.

At its current level, the FTSE is still 37 per cent below its peak. Savers who poured their money into shares in the late 1990s continue to nurse big losses.

It is also worthwhile setting London&#39s performance against the world&#39s other stockmarkets. The UK ranks among the bottom 10 in 2003, slightly ahead of Finland and the Netherlands but behind the US and Malaysia, as assessed by the rise in the relevant MSCI index for each country.

Our performance looks a little more respectable if you add in the dividends. After all, Britain&#39s stockmarket has one of the highest yields at 3.25 per cent. An investor who had reinvested his income in the market would have pocketed more than 16 per cent.

But the returns from the S&P 500 Composite index, America&#39s most representative benchmark, are nearly 26 per cent on the same basis. Still, Britons would have been better off staying at home. The dollar&#39s weakness has reduced the real return for a sterling investor to 15 per cent.

For gains worth getting excited about, savers will increasingly have to look overseas. Emerging markets go up and down frequently but those who get their timing right can make huge gains. Turkey was no turkey in 2003, topping the global pack with a return of more than 90 per cent in sterling terms.

Investors who fear the dangers of overseas markets and who stay at home will have to get used to lower returns but with as much volatility. At least that is the overwhelming message I have gleaned after trawling through the heaped mass of forecasts from fund management groups and investment banks.

Inflation may have been conquered but the consequence is lower nominal ret-urns. The truth is that savers are impressed with a 10 per cent gain on equities when inflation is hovering around 6 per cent but find 7 per cent against an inflation rate of 3 per cent far less tempting, even though it is a superior reward.

Anyone who wants a higher headline return will have to trade more often, take more risk or both.

Since the stockmarket rally that began in mid-March last year, the FTSE 100 has risen by 34.6 per cent but the mid-caps and smaller companies have jumped by 50 per cent.

A rotation into the larger caps would be an obvious play. The buy and hold strategy just will not work.

At first glance, the idea of trading your portfolio regularly would seem at odds with the traditional tenets of long-term savings. But these laws were set down during the bull market years of the 1980s and 1990s when, so long as investors kept their nerve, they would make money.

Casting my mind back to the 1990s, all the fodder from fund groups had charts dating from the mid-1980s when, coincidentally, the FTSE 100 was established. A wise investor – or journalist, for that matter – would have looked at the longer-term picture.

That clearly shows that the recent past was a blip, not the normal run of things. So the key to a decent profit in 2004 will be spotting the fund manager who is nimble enough to identify the market trends and then to take advantage of them.

It follows that investors will drift to particular types of funds. They will be small, probably capped following a change in the regulations and managed by a boutique or an investment house that gives its managers a great deal of freedom.

Bunging all your money into a with-profits or managed life fund, no matter how attractive the tax advantages might seem, will no longer suffice.

Indeed, some life insurers, including Standard Life, have already woken up to this and started to select panels of fund managers on a best-of-breed approach. It is also an acknowledgement that no single house can excel in all fields of investment.

Let us hope, too, that if 2004 does not usher in another bull, then at least it shows that the bear has been tamed.

Richard Miles is investment editor at The Times

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