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The return of equities

Equities bounce back but tied agents continue to sell corporate bond funds

For some time now the fund management industry has been hoping the stockmarket recovery would tempt people back into the market.

The rising FTSE 100, which has soared 70 per cent since the stockmarket reached an eight-year low in March 2003, seems to be doing the trick.

The public has been wary of equities ever since the technology bubble burst in March 2000 but the latest Investment Management Association figures show there are tentative signs that people are putting their savings in equities again. There is every chance that total IMA sales will break the 10bn barrier this tax year for the first time since the tech boom.

But not everyone is benefiting from rising share prices. Last year, 99 per cent of mutual funds made positive returns, more than 200 funds returned in excess of 30 per cent but people who bought a fund through a tied agent are unlikely to have seen such gains. While equity markets have climbed, tied agents have continued to sell corporate bond funds by the bucketload. Such funds have been the top sellers via tied agents in each of the last six months accounting for about half of their total sales.

These buoyant sales of bonds have been sustained, despite warnings earlier in 2005 from leading fixed-interest fund managers, such as Paul Causer at Invesco Perpetual and Stephen Snowden at Old Mutual, that the bond bull run was at an end. As it transpired the average mutual fund – including bond and equity funds returned about 17 per cent in 2005, yet no corporate bond fund matched or bettered that return – returned less than 10 per cent.

Compare that with the IFA route where less than 10 per cent of total sales have been corporate bonds. This marked difference between the distribution channels has been prevalent not just for the past few months, but for a few years now.

There is no doubt that corporate bonds are a vital component of a balanced portfolio but the contrasting view of the different asset classes, taken by IFAs and tied agents, is worrying. I cannot help thinking that tied agents have taken the path of least resistance – and against their better judgment.

I have no doubt that corporate bond funds have been an easy sell to the novice investor and to those who have lost money in the past. Not surprisingly, banks and building societies deny they have given bad or wrong advice. They argue that their customer base is older and more suited to the lower-risk nature of corporate bonds.

Yet corporate bonds have not always been their best sellers – you only have to look at the bumper size of many banks’ and insurers’ UK Growth funds to see that they too were once huge sellers. What odds would a bookmaker give on the popularity of corporate bond funds sold by tied agents waning in 2006 if the FTSE100 continues its march onwards and upwards?

IFAs are by no means perfect. They too have been guilty in the past of flogging a product rather than a rationale. But many IFAs have ignored the market pessimists and gone with their instincts. Many well-known IFA commentators have been banging on about the merits of equities ever since the market crashed in 2003. One vehement bull, Scottish-based IFA Alan Steel, has repeatedly phoned me to reiterate the merits of equities. Alan, along with hundreds of IFAs, has every reason to smart if he wishes to do so – as do his clients.

Whether the rising sales mean the return to the so-called Isa season is a different matter. Figures from IMA, to be published this month, will show that sales of Isa unit trusts and Oeics fell to their lowest annual level since they were launched in 1999, dropping to about 1.75bn in 2005 compared with 2bn in 2004.

It’s early days but there does not seem to be a notable increase in marketing spend from the fund groups. Maybe, they too have given up the ghost on equity Isas, just as the Government appeared to do when it decided to scrap the dividend tax credit a couple of years ago. Money Marketing50 Poland Street, London W1F 7AX

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