Investing

If there has been any theme in investing over the last ten years or so, it has been one of leveraging.  Borrowed money has been too cheap and freely available that using it to buy assets has become a one way ticket to riches, whether in property, cash deposits in another country or in the stock market.  Most visibly, the Private Equity funds have bought publicly listed companies pretty cheaply with debt and then been able to flog them back to the markets slightly revamped for a huge premium.  Homeowners have found that by borrowing to the hilt (a level, itself, which has been increased over formerly acceptable limits), they make a fortune just by owning a property.  The debt is cheap and all of the profit is theirs, even if there is nothing to do with it but plough it into another over-priced property.

Now, like all parties, it had to come to an end.  The end has been prophesied for so long now that it is hard to believe that it is finally come, but come it is.  We have now entered a period of de-leveraging, paying down debt.  The question is, what does the end mean for us all?

Well, if you run a Private Equity fund, it may mean an awkward discussion with your investors as to why you have lost them money now that your bank has gone cold on the whole thing.  For the majority who do not, it may mean a protracted period where the value our homes stagnate.  For those who are happy to sit tight, not much will change, although our confidence will be dented.  So long as interest rates do not go up too much, our day to day existence will not be affected, we shall just have to change our dinner party conversation back to the one of the early nineties.

It could be that our loss of confidence, which is often expressed in our shopping habits, may drive the economy into a recession.  Even if it does not, it may not be a great time to be an estate agent.  In another five years’ time, things will be better again and another five years after that we shall be ready to turn the music up again for a party as our hangovers will be forgotten.

Private investors seem intent on losing value.  One of the things they seem to like to do, and professionals are by no means immune, is to sell investments on hearing bad news.  The problem is, if they have heard the bad news it is more than likely that the purchaser will have too.  In fact, when it comes to stocks and shares, private investors, and the majority of professionals, have no choice but to trade through a stockbroker who will need a market maker to from whom to buy or sell.

Now, this market maker will be almost certain to have heard any news there is before it reaches many other investors and he or she will price this into the prices they quote.  If they did not, they would be left holding stock on which they will make a loss.  To prevent this happening, they will adjust the price accordingly and, perhaps, the spread between buying and selling prices.

This makes it very difficult for the investor looking to avoid a loss or make a quick gain as it is likely that the market will have moved well before they can.

So, having written about bank stocks last week, I was interested to read in the FT at the weekend that private investors were shedding these shares faster than the institutions.  I am not one for tips but this must be further evidence that the banks represent value for I am sure that any investment strategy which involved doing the exact opposite of private investors would have a good chance of succeeding.

That is not to say there will not be more bad news to come, especially as the banks have now started to sue each other to establish blame.  Am I the only one who is slightly disturbed by the thought that these major institutions, in which we place so much faith, had no idea of either what they were creating or buying and selling?  Next time I hear a sales pitch for something complex, I must try to remember this.

For someone who has any belief in the long term viability of the banking system, has there ever been a better time to buy shares in major banks?  With many paying a dividend of around 10% a year, the income alone represents a reasonable investment but when you add in the prospect of capital growth they must make a tempting buy for some.

Granted, it does not pay to act without caution or reasoning and, as recent events have shown, banking is not without its risks for share owners.  But, that said, banks have been hit by crises before, seemingly every ten years, or so and, whilst this crisis looks bad, is it any worse than the problems associated with the Russian Debt default, the collapse of the Savings and Loans institutions in the United States or the Latin American debt defaults?  Crises come and go, it seems, each on a little different from the last, but our need for banks carries on undiminished.

It also appears, if history is any indication, that banks recover from crises, as does the rest of the financial system.  Help is often required from Central Banks but, without sounding complacent, problems disappear.  They may not be everyone’s cup of tea but you can be certain that some will make money out of these travails.

One of the disappointing things about, mainly, the stock market is that private investors are truly terrible at deriving benefits.  Not so the residential property market.  When it comes to their own homes, people tend not to sell when the market drops; partly because they need a roof over their heads, partly because property is illiquid and most difficult to sell just when you need to do so most quickly, but mainly because homeowners do not want to realise any apparent loss on their home.

The good news for homeowners has been that they spend their 100% of the time invested in the market and, even though they experience slumps in value from time to time, they are always ideally placed to benefit from any upturn.  If you expect the trend to be upwards over the long term, this is a rational way to behave, even if the reasoning is less than analytical.

If we contrast this behaviour with that of the same people in the stock market, it tells a very different story.  Investors seem to head for the market at outset with no particular plan in mind and no thought to timescales or their own expectations.  Perhaps, they have responded to lurid headlines of fantastic returns being made somewhere and worry about missing out.  This may be why so much retail money floods into the fashionable sectors and funds.

If the market drops in value, these same investors sell quickly and move into, for example, cash, worried that losses would become even greater.  Worse still, many simply look at the best performing fund over the last three years, say, and decide to pile into that.

This is why the latest research from Lipper Feri is so depressingly familiar.  Outflows from some very sensible sectors are huge and funds like the Merrill Lynch Blackrock Gold & General Fund have benefited enormously, in its case to the tune of more than £300m.  Now, I am not suggesting that this is the bottom of the market, nor am I saying the Gold & General Fund, which has ridden the good news in commodities, is the wrong place to put money.  All I say is that it is pretty depressing to see all these investors chasing their tails, most simply guaranteeing that they will lose money.

Far better, surely, to have some sort of plan at outset and to use knowledge of the past to manage expectations of the future.  As people have discovered in property, buying into the market and sitting tight forever is not a bad strategy. 

If I had to pick the next investment calamity over the coming couple of years, I might go for Russia.  The reason is that investors seem to have the unerring knack of pulling out of one problematic investment and piling into the next. 

Not long ago, so much money was pouring into Property funds that the regulator had to express misgivings.  Now, a year or so later, those same people are hastily withdrawing their money amidst lurid headlines about the sector imploding.  By the look of things, these people are not giving any more considered thought to their investment objectives than they did the last time, or the time before that.

It does make you wonder what these people or their advisers are thinking.  It does seem that a large proportion of investors have no strategy whatsoever and simply charge around looking for last year’s best performer.  The problem is not that many investments will not deliver, it is that a lot of investors do not stick around to benefit.

The legendary Peter Lynch who ran Fidelity’s flagship Magellan fund very successfully into the Nineties said that his greatest regret was that many of the fund’s investors had just not benefitted from his performance because they had bought and sold at the wrong time rather than just sticking with it.

For anyone whose time horizon runs beyond next Tuesday, it may pay to try to develop a little patience.

For those looking for indications of a forthcoming boom in share values, yesterday’s FT held out some hope.  It reported on research published by the Washington Service who track legitimate insider share trades for 1,900 New York listed companies showing that senior executives and directors bought significantly more shares than they sold. 

According to the FT, the last time company insiders made net share purchases was January 1995 and the S&P 500 grew by 34.1% in that year.  Of course, this is a sample of one so it pays to be cautious but many investors will be hoping for a repeat this year.  That said, the FTSE responded by falling more than 160 points.

It seems that the inexorable rise in active management charges continues.  Fund data researchers Lipper have published their annual survey of fund management charges and their findings are depressingly familiar.  Total Expense Ratios (TERs) have increased from 1.52% per annum in 2003 to 1.61% last year meaning that the fund managers are taking a bigger cut of a pot which has grown considerably in size.  Would this be tolerated in any other sector?  We do not seem to be showing clothing retailers the same tolerance for profiteering, quite the opposite.  These companies seem not be passing on the benefits of economies of scale.

The liberties taken with charges seem even more iniquitous when you stop to consider that most of these funds are underperforming their relevant index, for example, the FTSE Allshare and many incur huge costs which are not even included in the TER because reporting requirements in the UK allow managers to conceal many of the costs their trusting investors are bearing.  Do remember that many of these funds will have charged 5% on the way in as well.

Thankfully, investors have some choice.  Many will forego the smoke and mirrors of active management and construct their portfolio from low cost index trackers with no, or very low, upfront fees either doing it themselves or finding advisers who have not bought the active funds’ sales pitch.

The management of SocGen, the French bank, who are now disgraced, may be thankful for the Protectionism exhibited by their government; shareholders, however, may have less to celebrate.  SocGen seemingly ignored warnings that one of their traders had gone rogue and it is unlikely that senior managers will avoid walking the plank and ordinarily to would look ripe for takeover.  The French, though, are not too keen on seeing foreign ownership of high profile companies and it may be that once again the government will force a home grown deal through, even at the expense of shareholders.  It can come as a surprise to some investors outside mainland Europe that shareholders’ interests are not seen as paramount in some major Continental markets but national pride (usually paraded as national interest) can take precedence.

Because of this, any interest by a foreign bank, Barclays is one that has been mentioned, may be thwarted.  Officially, the EU takes a dim view of this kind of monkey business and it probably damages the economy in the long run but it seems hard to change long entrenched habits.

It seems that the woes of New Star, the high profile new boy on the fund management block, worsen by the day.  It seems like only yesterday, or last year, that New Star could do no wrong. Their right ups in the Press were glowing and public and advisers alike rushed into their well performing funds.  Now, its funds languish at the bottom of performance tables, managers are reshuffled between funds and its shares disappoint.

This is neither the time nor the place to analyse the exact reasons for New Star’s travails, which may be short lived, but there are lessons to be learnt from their fall from grace.

Out performance of the market can only come through either manager skill or manager luck.  As with Napoleon’s generals, it seems that it is better to be lucky in the fund manager world.  Manager skill is notoriously difficult to isolate and the marketing machine puts a lot of effort into persuading that positive results stem from skill rather than luck.  This, it seems, plays into the hands of much of the public and their advisers because there is comfort in believing that the person managing your money has a special skill.  In order to outperform the market, a manager must make bets by holding investments in a way which are different to their weighting in the market.  I do not think much of granny’s money would wing its way into a fund were the advertising emphasised that the manager had been very lucky with his bets of late.  No, what the public seek is skill, any sap can be lucky.  Skill is worth paying for, luck is not.

The problem with luck is that it turns.  It also cannot be engineered, it is all down to chance.  So, if stellar performance turns out merely to have been luck, as it usually is, there is nothing for it but to await its return.

None of which brings any comfort to those who bought into the skill story only to find it was down to luck.  Someday, perhaps, investment management groups will have to warn investors that any outperformance can only be attributed to luck.  Another reason to stick to tracker funds.

It looks as if the outlook for the coming year has worsened significantly even since the doom laden reports around the turn of the year.  It is never comfortable for investors watching markets fall whilst sitting in a home which is losing value and there will be some who will wish they had made different decisions.

So what should investors do?  For those already invested, there may be no other rational course of action than taking a long term view and sitting tight.  For those who are not invested, they face the difficult decision of whether to invest or to stay out and risk missing the boat should the market turn.

It is a sad fact of life that retail investors will happily pile into a market when it sits at a record high (viz the residential property market) but get all nervous when the same assets can be had at a discount.  My advice is always the same; if you are investing for the long term, timing your entry into, or exit from, the market is extremely difficult indeed.  It, therefore, makes no sense not to invest.

If this evidence of the bumpy ride which assets provide gives you the wobblies, then you have to question whether you should be investing at all.  You may just have to settle for a much lower prospective rate of growth in return for greater certainty.

Those who have diversified and last a little of the headline growth will, at least, have something for which to be thankful.

Many investors in shares are wondering how they should respond to the current volatility in most Stock Markets and the fear that 2008 will be as troublesome as last year, if not more so.  The answer to this really depends on why you are investing and for how long.  Many cash rich emerging nations, such as Kuwait, China and Singapore, and other wealthy investors are greedily gobbling up almost anything we are selling at a knockdown price.  They have very long time horizons and very deep pockets.  For them, the prospect of picking up stakes in some of the developed world’s finest financial institutions at five year lows is too good to miss.

I strongly suspect that many guardians of public wealth in the UK, for example, company pension funds, are eager sellers and may well have proved once again to have sold at exactly the wrong time whilst buying into, probably, bonds at the wrong time as well.  Like second rate defenders in football, they seem destined to rush time after time towards the player with the ball only to see it deftly passed to another who has space and time.  Oh, the humiliation of it all.  Meanwhile, much as the England Football team are often found to wanting custodians of the hopes of a nation, the trustees responsible for around £1 Trillion of the public’s money are wrong footed by foreign operators to whom they gave the game in the first place.

Where does this leave the rest of us?  Well, if you are investing in shares you really ought to know that they will not deliver stellar returns year after year and sometimes suffer losses from which they can take quite a while to recover.  It makes sense to diversify your investments away from shares alone, this is generally held to be a sensible strategy but you should ask yourself about how long you intend to be invested.  If, like Kuwait, you expect to be an investor indefinitely, then, perhaps, you should not worry about how poorly things are going now but wonder whether you are in a position to buy something on the cheap.  It is odd how discounts in shops turn us into buyers and discounts in stock markets turns us into sellers.

Now may be a good time to reflect on whether you have the stomach for stocks at all, there is no shame in admitting that they hold too much fear.  Fear and greed need to be kept in balance and shares can be more scary than, for example, fixed interest investments.  What is wrong with holding index linked bonds?  They may not offer the prospect of much real growth but you may be able to sleep at night.

It seems to me that the whole basis of ‘Lifestyle Investing’ has been undermined by the twin forces of increasing longevity and the removal of the compulsion to purchase an annuity with pension funds.  I shall start with a quick recap of what I think it means.

The idea of Lifestyle investing is that you are aiming to move completely into cash on a particular date and has been marketed heavily by insurance and pension companies as a solution for retirement planning where it is expected that an annuity will be bought on the day of retirement.  Of course, the last thing anybody wants is for their retirement fund to be exposed to investment volatility, i.e., possible losses, in the run up to annuity purchase.  Better to lock in the gains made over the years of investing by moving the funds gradually to secure investments.  As such, it is hard to fault.

But what if you are not planning to buy an annuity?  If you are expecting to move simply from wealth accumulation to drawing an income directly from your investments, you may not be best served by finding yourself 100% in cash on your 65 birthday.  You may prefer an income yielding balanced portfolio instead, particularly as you may well live for another twenty-five years.  If you are receiving a stable yield of, say, 3% a year as income, it matters less what happens to the capital value of your investments in the short term than that you have a reasonable prospect of being able to maintain your standard of living in real terms indefinitely.

Unfortunately, many Lifestyle funds are bought without any advice so those investing in them may well not have thought through the possible consequences.

Despite the best efforts of the Regulator, Government, consumer groups and reputable IFAs, it looks as if the great commission rip off is alive and kicking.

For many investors, it will come as something of a rude shock to discover that their ‘Independent’ Financial Adviser is being bombarded with tantalising end of year commission offers from supposedly reputable insurance companies (an oxymoron?).  Take this one, for example; a Scottish Insurance Company is offering commission of 6% on pension contributions or transfers in.  Now, many advisers will not be tempted by such huge sums, £3,000 on a typical £50,000 transfer, but how does an investor know what is driving the advice?

In my view, the Regulator should be querying the appropriateness of these inducements, especially when research shows they lead to bad advice.  Sadly, for those choosing an adviser who takes commission, it is still a case of buyer beware.

Driving to Perth Zoo this morning, we were listening to MIX 94.5 FM Radio Station, which is pretty much as you would expect and much the same as many pop stations in the UK.  Whilst the music is patchy, the station clearly expects its listeners to take an interest in matters financial.  At the end of a news bulletin came a piece of the current state of the Australian stock market and the benefits of overseas diversification.  It is hard to imagine a similar station doing the same in the UK, I would expect the audience to be almost universally uninterested.

Now, this hardly constitutes exhaustive research allowing us to conclude that Australians are more sophisticated than their British counterparts when it comes to investing but it does form part of a consistent picture, as I have commentated before.  Australia is very different to the UK in many ways, not all of which are better, but they run a budget surplus and seem to take pension funding very seriously as a nation.

 Of course, it helps to be sitting on top of a disproportionately high amount of the world’s natural resources but they do seem determined to make the most of their good fortune.

Anything Warren Buffett and his investment firm, Berkshire Hathaway, do is bound to attract attention.  Buffett has been a famously successful investor for a number of decades now and investors would be advised to pay attention to his methods which have survived many different fads and economic environments.

I am not putting myself forward as an expert on his techniques, although Buffett makes no bones about sharing these with the rest of us.  His philosophies are seemingly simple; buy when no one else wants to, securing a good price and buy for the long term, Buffett famously said that the ideal holding period for an investment is forever.

We should all probably pay attention then when we read that Berkshire Hathaway has acquired $2.1bn of 'Junk Bond' debt in TXU, a Texan utility.  Of course, when you are sitting on $47bn of cash, that may seem like a reasonable gamble but other buyers have been scarce in this market.  Buffett has probably made a nice little investment and, knowing that he can hold to redemption (i.e., final repayment), will consider the risks to be worth taking.  From a bondholders point of view, utilities make sense because they are unlikely to go out of business and own valuable assets.

As I have said before, we may look back in a couple of years' time and wish we had made more of this credit crunch, such are the bargains that fear creates.

During the current market volatility, by which, we mean that the stock market valuations are up and down like a yo-yo, nervous investors tend to worry about their prospects for returns.  Also, there is an inclination to obsess about capital growth.

For those with an eye on history and a longer term outlook, however, the real action is in dividend payments.  In this year's Barclays Equity Gilt Study, it shows that £100 invested in 1899 would be worth £213 in real terms on the basis of capital growth.  Reinvest those dividends and the value today would be £25,022, which is quite respectable.

Now, 108 years is longer than most people would expect to be invested but, with longevity increasing by the week, a sixty year old should be planning on the basis that they may be around for another thirty-five years or so.  Even then, they still would not receive one of the many telegrams the Queen sends out every year.

Of course, when markets seem to be dangerous places, it is hard to think long term but, for those who do, there would seem to be every chance of being well rewarded.

In these uncertain times, it is hardly surprising that some investors are turning their attention to Gold, the traditional refuge.  Gold has outperformed most major stock markets this year (up about 20%) as well as many other indices, although Sterling returns are hampered by the fact the Gold, like most commodities, is quoted in US Dollars.

For most investors, though, Gold presents a few practical problems.  Firstly, it is expensive and I doubt many bullion merchants would be happy to sell a small piece of an ingot.  Secondly, it is costly to store and insure; it is hardly much of a refuge for your money if it lying about the house.  Also, most investors would not know where to go to buy it.  On the plus side, allocated bullion represents no credit risk and it does represent a traditional preserver of real value, even if its track record in this is patchy.

Access to gold has recently become easier; a number of ETFs (Exchange Traded Funds) now exist, some of which give access to allocated gold bullion.  This means that investors can include Gold in their portfolios, whether it is a good idea or not is another matter.  

It seems impossible to open the finance pages without having the commodities boom (or story, as the product manufacturers would have it) rammed down our throats.  As I have written before, I look favourably on including commodities as part of a well diversified portfolio but, to read the press, you would think that we had just started eating as a species or driving cars.  The population has doubled over the last century but, apparently, only now do they need feeding.

I do not wish to be too cynical but, also, I don't want to get to easily drawn into the next bad news investment story.  Only now are the products available to give easy access to these markets and it cannot be a coincidence that we are hearing a lot of the underlying markets and why they are this seasons must have investment.

The hunt for more scalps over the Northern Rock fiasco rumbles on in Parliament.  The most recent visitors to the dock have been the ratings agencies, who have found themselves widely vilified for their role, real or apparent, in the credit crisis globally and the small matter of a run on a bank here in the UK.

The ratings agencies, of which there are three major players, credit score companies and other institutions who are looking to borrow money in the capital markets.  There has long been a concern over the potential conflict of interest which arises because the borrower pays for their own rating, the concern being that they may shop around to get a higher rating.  Also, the agencies may be reluctant to downgrade the debt in future as it may put off future customers.

So, the ratings agencies have a fine line to walk and it cannot help having governments the world over queuing up to give you a duffing over (the US has already had a go) but it is a lucrative business and, effectively, a closed shop so they don't have to fend off too much competition.  Also, whilst there are concerns, an obvious solution does not seem to be presenting itself so, although we can expect a period of circumspection (probably when least needed), I imagine it will be business as usual pretty soon.

With the 'resignation' of Chuck Prince of Citigroup this week, the pain being endured in the Investment banking world continues.  These things are relative, however.  No big player is walking into the sunset without a huge pile of cash for their efforts (supposedly, $95m for Chuck), which, I suppose, cushions the blow.

What is intriguing for the rest of us is how these organisations which shower the cream of the academic world with money to labour for them, suddenly wake up to find that they have mis priced something by billions of dollars.  Some of the investments they hold are now worthless.  They have also lent money to companies which bought investments, sometimes from the same bank, which are now worthless, so their loans are looking a little tricky.

By pursuing ever riskier and opaque strategies, they have wiped out years of profits in some departments in a matter of weeks.  It would not be so bad were it not for the fact that these institutions are well placed to spread the pain to the rest of us n the form of more expensive finance or lower returns on our deposits.  Also, they will bounce back more confident than ever and ten years, or so, from now we will see a very similar wiping out of much of the intervening profitability.

Will our house prices go the way of those in the US, i.e., downward?  Well,  our American friends were until recently busy building houses at the rate of 2million a year, which is a pretty astonishing rate of activity compared to us in the UK, where we build about 200,000.  Given that their population is about five times ours, that means they are building twice as many new homes per head of population than we are.  It would seem, therefore, that their supply of property is better than ours.  Here, it is difficult for young professionals with good jobs to buy a home, let alone the much discussed sub-prime sector.  In the parts of the UK were people most want to live, the South East, mainly, there just are not the numbers of homes being built.  Other places, such as Liverpool and Manchester may find the market in a slightly weaker state over the coming couple of years but there seems to be no reason for too much gloom amongst those who have a home.

Here, there seems to have been much less of the sub-prime lending that is causing so many ructions in the markets at the moment, so, perhaps we shall avoid most of the dislocating problems associated with widespread repossessions.

Of course, if you do not have a home, a crash is exactly what you may need to be able to afford a place.  The trouble with property is that people do not flood the market with cheaper places when prices are under pressure, for the mos part, they stay put until they can sell it at a price with which they are happy.  Developers, also, may just sit tight and wait for better times, except for those who have over built.   

Things may get sluggish here but a crash in the places were some need it most seems highly unlikely.  Even in the early nineties, prices did not fall except were there was a distressed borrower and back then we had a recession and very much higher interest rates to spice things up.

Certainly, parts of the States are seeing some more 'realistic' pricing and some borrowers will struggle with affording their mortgage but interest rates have come down a fair bit over there and this may ward off the worst that could have happened.

Still, expect to see many more headlines of the scary sort in months to come even if there is no good news for would be first time buyers.

Is the stock market, as a whole, an inherently riskier place to invest money than the residential property market?  Now, I am not for one second suggesting that either is an appropriate place to put your money, although one or both may be, I am just opening up the discussion.  I am also considering the property market in investment terms rather than housing terms, no share portfolio will keep you dry through the winter or give you somewhere to show off your latest plasma TV.  These thoughts are probably, therefore most applicable to excess property investment, by which I mean a second property, a buy-to-let property or a house larger than your requirements, which you hope to sell to fund your retirement.

Firstly, what do we mean by risk?  It is, I suggest, unlikely that the stock market or the property market will drop in value to zero.  It is, of course, possible to make a bad choice of investment.  Some companies will go bust and some properties may become worthless, perhaps because of flooding or encroachment by the sea.  Now, you would be daft to buy a property without insuring it against these risks but most people will buy a share in a company without any corresponding insurance against loss (i may cover how another time).  This, then, starts to colour our view of the relative merits of the investments; we take more risk with our stocks, for some reason, than we do with our real estate.

The world of professional investors usually expresses risk in terms of the volatility of returns.  An investment which can deliver high returns with periodic big drops in values is considered to be riskier than an investment which is more steady in its delivery, even if they end up at the same spot.

So, how does volatility compare?  My main concern here is one of information delivery.  If you valued your share portfolio every year, it may not look particularly volatile and, indeed, in most years it would have gone up in value, probably even in 1987.  This is where the stock portfolio is at something of a disadvantage when compared against property.  You see, property is not valued by anyone, let alone the market (as distinctly opposed to an estate agent or even a surveyor) in anything like real time.  Depending on how often we move, a property may only be market valued, i.e. bought, once every seven years.  We may read in the press about the general sentiment but no one is able to rub our noses in its value in real time, minute by minute.  If you own a stock portfolio, you can watch it go up and down every minute of the working day, responding instantaneously to investor sentiment, and it can be frightening for some.

Also, I have referred to a stock portfolio as opposed to one stock, mostly, as it would not be rational to hold only a couple of different shares.  Diversification is easy with shares, not so with property as it is expensive and slow to sell, amongst other things.  

What of the returns?  Well, ignoring income form dividends or rent, which I gauge to be similar after costs, I think property and equities have probably delivered similar capital growth.  If you take into account transaction costs and the difficulties of diversifying across a number of properties, it may well be that a property portfolio has lost ground to a share portfolio.  What, though, will the next twenty bring?

After years of stalling, the Government finally caved in to pressure from the property sector and allowed the conversion to and establishment of Real Estate Investment Trusts from January this year (REITs are an established investment in many other countries).  Unfortunately, the year has not been kind to the sector with a loss in share price of almost 25% so far.  They have also been hit by the Governments proposal to introduce a flat rate for Capital Gains Tax of 18%.  Capital Gains realised within the REIT most be largely distributed to shareholders as income, with correspondingly higher rates of tax.

In fairness, most REIT investors would not be buying investment property directly and appreciate the high liquidity of REITs, even if they bring with them higher volatility and slightly higher tax.  it does, though, look as if the hype has proved to be without substance and REITs in the UK may be confined to the fringes for a while.

Is there any end to the pain endured by holders of With Profits funds and policies?  The relentless downward spiral of these once great investments is a sad indictment of the way insurance companies have treated their policy holders over the last twenty years and they (by which I mean WP funds but it could apply to the insurance companies) seem to be in terminal decline.  The inherent lack of transparency and flexibility of With Profits funds have left them struggling for relevance in the modern world and with the possibility looming that the regulator will turn off the commissions tap, there seems little left to sustain them.  Unloved and misunderstood by most, we should not mourn their passing.

Below is a graph showing the history of annual bonuses awarded to the ever suffering investors by a 'leading' insurance company.  Not a pretty sight.

Zombie Funds, so called because the money in them is living in a dead fund, have been hitting the business headlines of late.  In particular, Resolution Life has become the subject of a tug of love between Pearl and Standard Life.  For millions of savers this is of more than a apssing interest because Resolution takes care of many billions of pounds of their money and is itself worth more than £2bn.

Resolution was formed as an acquisition vehicle for funds lying in closed life funds with insurers such as the Royal and Sun Alliance.  These companies had decided that they would be better off getting out of the business of running pension and life funds and simply shut up shop.  Having decided to abandon their many policy holders they then sold off the funds to save them the bother of running them and dealing with disappointed investors.

Whether I would be happy with my life savings being in a Zombie Fund is a moot point, it hard enough keeping track of who exactly is running this unloved pot of cash, let alone being sure they are acting in your interests.  Whoever owns it, it seems to be more profitable than being an investor.

Everyone knows that Final Salary (Defined Benefits) Company Pensions are better than their poor relations, the Defined Contribution, or Money Purchase Scheme.  After all, Final Salary Schemes provide members with a guaranteed benefit based upon their earnings and now this guarantee is Government, i.e., tax payer, backed.  What is less often discussed is quite why DB schemes are generally better; employers contribute a good deal more to them.  In fact, employers pay in almost three times as much to DB schemes as they do to DC schemes, so it is hardly surprising that the benefits are superior.

Scheme members are often wary of investment based DC schemes, rightly so, in many cases, but they should be concerned more about how much is contributed than where it is invested.  Final Salary schemes are invested, after all, its just that they are often cautiously invested and make up for it with high contributions.  Although, it helps to invest wisely, the lesson seems to be that successful pension planning has much to do with shovelling in a lot of money.