Alternatives to cash investments

Firstly please accept our apologies for not posting items to this blog since the turn of the year. We have been fully occupied reviewing clients investments and following market events. We are certainly in for a challenging yet exciting 2009 and as a starter for ten here are our current views on investment alternatives for cash deposit based funds. With interest rates at all time lows and market positions offering tremendous potential now could be the maximum point of financial opportunity for many.

With interest rates at all time lows and further reductions in base rate almost certain it explains why we have been inundated with requests for alternative forms of investments. The requests are simple; higher returns without increasing risk (significantly), the solutions are more difficult to find. However difficult is not impossible hence the purpose of this letter.

As I say we have received numerous requests from clients with different sets of priorities and ambitions. Therefore in order that we can cater for the various requests I list below several options that are currently proving popular with investors.

Firstly a quick reality check on just how low interest rates have fallen. A quick survey tells us that cash ISA’s from several leading banks have fallen as low as 1% (before the recent 0.5% cut) and when you consider inflation is still above 3% funds in these accounts is actually depreciating in value. Here are few examples: -

Alliance & Leicester Easy ISA = 3%
HSBC Cash e-ISA = 2.8%
Abbey Direct ISA = 2.3%
Clydesdale Bank Cash ISA = 1.5% - 2.75%
Royal Bank of Scotland Cash ISA = 1.15% - 2.20%
Lloyds TSB Cash ISA = 1%

Enough bad news let us move on to the solutions……….

Corporate Bond Funds:

Corporate Bond investment is proving extremely popular as investors strive to secure higher yield investments to replace lost income from falling interest rates. In terms of risk weighting Corporate Bond sits one step up from cash but with anticipated returns ranging from 5% to 8% the potential additional benefit is outweighing the additional risk for many clients. It is widely predicted that Corporate Bond funds will prove to be one of the best performing sectors in the current year.

Corporate bonds are issued by companies to raise capital. They are an alternative to issuing new shares on the stock market (equity finance) and are a form of debt finance. A bond is basically an IOU - a promise to pay back your original investment (the 'principal') at a maturity date, plus interest payments (the 'yield' or 'coupon') at regular intervals between now and then. The bond is a tradable instrument in its own right, which means that you can buy and sell it during its life, and its value will tend to rise and fall as interest rates change.

For private investors, the safest way into corporate bonds is to invest in a corporate bond fund which spreads the money from lots of investors across lots of corporate bonds, thus diversifying the risk. As with all funds, you need to choose the one that matches your investment objectives and risk profile. Some bond funds aim for 'high yield' (i.e. high income) but to get it they may have to invest in riskier companies. Other bond funds will aim for more modest income, and will only buy bonds of the most dependable blue-chip companies.

We believe Corporate Bonds offer an ideal alternative to cash based investments, particularly Cash ISA monies, and we have identified several core funds to recommend to clients that we believe will offer quality yielding products backed by capital growth potential.

In a number of cases we have been able to secure Corporate Funds with no initial charge and no exit charge making the complete package highly competitive and attractive.

Capital Protected Plans: -

With market positions offering exceptional value many investors are keen to take advantage of this point of financial opportunity but perhaps are fearful of the associated risk with so much doom and gloom still in the daily news.

Capital Protected products might be the solution for this style of investor as long as you are willing to tie up the funds for a number of years, normally 5 or 6. Capital Protection offers you the peace of mind to know that your investment is protected.

There are currently a multitude of Capital Protected plans open to investors reflecting the fact that investment houses believe now is a good time to be investing, but with protection wrapped around the investment. The key is finding the plan that is best suited to you and that will depend on your specific investment ambitions.

Typically a plan will offer at least 100p per share, regardless of the markets, plus 150% of any positive Final Performance of the Index it attaches to.

We believe Capital Protected plans will appeal to those investors whose objective is to achieve capital growth linked to any positive performance of the index over the investment term in the understanding that the investment will be 100% protected up to a fixed maturity date.

Accordingly investors will benefit from Capital Protection and from the potential growth of the markets to receive a return superior to an ordinary deposit account. We believe Capital Protected plans are attractive alternatives for investors looking to re-coup positions or re-energise flagging investments, particularly equity based ISA’s.

If Capital Protected Plans are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.


Distribution Funds:

Moving up the risk scale ladder a little further (but still on the bottom rungs) Distribution Funds have proven themselves time and time again in and out of recession.

Distribution funds are structured so that capital growth and income can be separated from each other. In most cases, a significant part of the portfolio is invested in fixed interest stocks (corporate bonds, gilts etc.) to provide the underlying income. The other main investment is usually in income-bearing equities to provide further income and give capital growth potential.

Saying that, there are some major differences between funds, which need to be recognised. Such as inclusion of property, UK or global based, bias towards equities or fixed interest, etc.

Distribution funds are typically used by investors seeking income. However, as income can be reinvested, they can also be suitable for investors looking for growth on a total return basis. There are number of income withdrawal options available to investors, these are:

A percentage of the initial investment paid monthly, quarterly, half-annually or annually. Under this option all distributions are reinvested to purchase additional units and then regular withdrawals are made by cashing in units. By using this method the 5% rule can be utilised to maximise the tax deferral facility and in most cases ensure tax free income payments.

A specific cash amount on a regular basis. This works very much along the same lines as the above option. It should be recognised that in adverse market conditions, both this option and the above option are likely to erode capital from the fund.

The full distribution where investors take all distributed income, generally on a six-monthly basis. The withdrawals will vary depending on the size of distributions but should provide a rising income over the long-term, as the fund benefits from capital growth. In addition, these withdrawals are taken from the distributions and so units are not cashed in.

Deferred income (no withdrawals) where income is automatically reinvested and used to purchase additional units in the fund chosen. Generally an investor can choose to take an income at any time in the future.

As I say Distribution Funds, whether deferred or income producing, have proven themselves time after time with the fixed interest element of fund offer some protection through these troubled times and the equity element offering real growth potential particularly given the current market positions.

If Distribution funds are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.

Investment Bonds:

Finally we have traditional investment bonds offering no protection but unlimited upside potential. Through the ability to spread investments over a wide range of funds covering assets classes and sectors investors can take advantage of the lowly market positions yet maintain a degree of caution through diversity.

With unlimited funds covering all asset classes, sectors and geographic areas available through investments bonds with no initial charge and no exit charge exciting opportunities arise for the more risk orientated investor and we would be pleased to consult, review, research and recommend individual solutions for the bolder investor.

If Investment Bonds are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.

Pensions:

Don’t forget about pension contributions. Now is probably one of the most attractive times to make additional pension contributions. What other form of investment guarantees a 20% (or 40%) immediate return on capital with or without risk depending on your fund selection. The tax relief associated to pension contributions is more attractive than ever and should not be dismissed lightly.

When you add the tax relief to the potential growth through cheap markets and the enhanced flexibility options now available within pension contracts we foresee pension arising from the ashes as a highly tax efficient and productive form of investing.

If Pension Contributions are of interest to you please tick the appropriate section on the reply slip and we will be pleased to submit a detailed recommendation for your consideration.

Summary:

If no one solution meets your requirements or a number appeal to you then we can “pick & mix” to arrive at the most efficient solution for you. It is however a fact that interest rates are at all time low’s and alternative investment solutions whether for income, growth or a bit of both must be at the very least be considered. We believe we have come up with a number of practical and attractive solutions and we would welcome the opportunity to advise you in this regard.

If our comments are of some interest to you and you would like to explore matters further please contact us at ifa@ferguson-oliver.co.uk and we will contact you to progress matters further. As always our advice is free of charge and you are under no obligation or pressure to pursue matters further if you do not wish to do so.

Thank you for taking the time and effort to read this letter.

Festive Greetings

The Management and Staff wish all customers old & new a very merry Christmas and a happy New Year.

2008 has been one of the most difficult and testing times in recent memory. Whilst time will only tell whether 2009 will be any kinder we are starting to see the first signs of stability returning to the market.

With markets normally six months ahead of the economy whilst it may take some time yet for the economy to recover indications suggest sentiment is swinging towards buying back in while prices are low.

Whatever the future holds we hope everyone has a great time over the festive period.

Fidelity fund guru Anthony Bolton believes the new year will usher in a fresh bull market for investors. Bolton says that although this is the worst financial crisis he has seen in his 30 years in fund management, all the indicators like cheap valuations show that the bottom is there.

He says that a bull market is likely in the first quarter of 2009 followed by a period of consolidation.

Bolton, who ran Fidelity's flagship special situations fund from 1979 to 2007 has also called the bottom of the hugely troubled commercial property market.

He says: "Prime property is yielding 7.5 per cent at a time when there is a shortage of yield elsewhere. There are risks, but long leases protect you in the short term - unless the tenant goes bust. Some will go under but even if you lose 5 or even 10 per cent of your income, that's still 90 per cent that's protected for the next 10 years.

As for next year's rally Bolton tips financial stocks and consumer cyclicals to lead the bounce. He also believes owning a basket of banks is the best option.

"In 28 years I have nearly always been underweight in banks. They are opaque and impossible to analyse so I have generally been against them. However, sentiment has become extreme and governments have strengthened their balance sheets. One or two may have to raise additional capital, but that is why you should own a basket."

Cost to live !

A typical eighteen year old will need just over £1.7m to sustain an average standard of living until death, according to a survey by Axa designed to shock people into saving.

The study also found, a 25 year old will need just over £1.5m in today’s money, a 35 year old, £1.25m, a 45 year old, £0.9m and a 55 year old £0.6m to maintain an average standard of living.
Axa surveyed approximately 2,100 people to calculate the monthly expenditure of everything from accommodation, transport and groceries to pets and holidays.

The average person spends about £240 on groceries, £68 on going out, £24 on hobbies and gives nearly £10 to charity every month. With essential outgoings added, this amounts to an average annual expenditure of approximately£28,455, worryingly higher than the median average annual pay for full time employees, of £24,908.

Axa believes better financial planning could reduce the average total expenditure considerably; calculating people could save as much as £737 by focusing on their money worries, while regular monthly reviews of finances could shave tens and thousands of pounds off lifetime expenditure.

The firm has launched a suite of financial planning tools as part of its My Budget Day campaign. The tools are designed to help people manage their day-to-day finances and to plan for a comfortable retirement and are available from: www.axa.co.uk/mybudgetday

Mother of all bear rallies

Here is an interesting take on current events. I must admit to some sympathy with the writer as I can identify with signs that managers are starting to find value in certain markets.

"Earlier in the week we read that Barton Biggs, the former market strategist for Morgan Stanley for 30 years, is warning the ‘mother of all bear market rallies’ is going to happen imminently. So far his timing has been spot on with the Dow Jones Industrial Average Index rising 16% since the intra-day lows last Friday.

Some market professionals I’ve spoken to agree with this view and are looking for a move 30% higher from the recent lows to the end of December. If we equate that with the recent lows on the FTSE, we could be looking at somewhere between 4,800 and 5,000 points, about 675 points higher than Thursday’s close."

Only time will tell but for those investors keen to catch markets at or near the bottom now might just be the time to start considering suitable investments that meet individual risk profiles and investment outlooks.

We have a number of such opportunities on the table and would be pleased to discuss them with any interested parties.

JPM Natural Resources

A few investors might be interested in reading the most recent fund managers update in resepct of the JPM Natural Resources Fund.

One of the most popular funds in recent years it has hit hard times of late but the medium to long term outlook looks brighter.

Click here to read more.........

http://www.jpmorganassetmanagement.co.uk/vgn-ext-templating/jpmf-extensions/StaticFiles/English/Webcasts/JPM%20-%20Natural%20Resources%20Fund%20Summary%20[11%20Nov].pdf

Beware Cold Callers !

Cold called and offered a red hot share tip? Be very aware, it could turn out a lot hotter than expected. So hot, in fact, that the shares (and your money) vaporise in the intense heat of this boiler room trading scam.

You may be disenchanted with current investment opportunities and performance in these credit-straitened times, but don't let your enthusiasm to reassess and realign your investment portfolio turn you into the perfect prey for a smooth-talking, ever so convincing salesperson.

Yes, we are in a bear market and an exciting share offer will always have a 'grass looks greener' feel to it. Yet that grass will not only be just as tough to mow, it could also dry up and become your very own financial dustbowl. Boiler rooms are high pressure sales firms, unauthorised and often based offshore, that specialise in worthless investments. They target investors illegally, offering overpriced, non-tradable and often non-existent shares. Collectively UK investors donate upwards of £500 million to such hucksters each year. The average individual loss is around £20,000, although the Financial Services Authority (FSA) has reported a case where the investor lost £500,000 and it believes many others are too embarrassed to admit being swindled by boiler room activity.

Not that it would do them any good. Because such sales outfits are unauthorised, the Financial Services Compensation Scheme cannot offer redress to victims of boiler rooms. Hence the FSA has now teamed up with the main company registrars to warn investors. Together with the Institute of Chartered Secretaries and Administrators (ICSA) Registrars Group, the FSA is urging stockmarket-listed companies to include warning leaflets about boiler room scams in their communications with shareholders.

Shareholder lists are sold and resold by boiler rooms, although from October this will be more difficult to implement; new Companies Act provisions will force buyers of lists in stockmarket companies to state the purpose of their purchase. "This won't stop the old lists circulating but they will become less valuable as time goes on," says Andy Cotter, chair of the ICSA. "No company wants its register used to target unsuspecting shareholders with high-pressure sales pitches."

What you should do: If you pick up the phone and get some smooth patter about the benefits of investing in shares of a company you've never heard of, get the caller's company name and say you will phone back. Ignore protestations about 'time is tight and the offer could be withdrawn.'
Then check the FSA website to see if the company is authorised or whether it is on the black list of some 500 known financial rogues. Report to this City watchdog any firms that cold call you offering to sell shares. The FSA in the past 18 months has taken action against seven firms operating as boiler rooms or working on behalf of such scams. Its recently updated leaflet explains how to identify and what to do about them should they contact you.

The message should be clear: don't buy from a boiler room unless you really do have money to burn.

Inflation, Deflation... Where next

First it was oil, now it’s the goods we buy on the High Street. It’s funny. While all around doom and gloom is the staple diet, the best bit of economic good news we have received for a very long time has barely been noticed. The latest data out from the British Retail Consortium (BRC) revealed that both food and non-food inflation turned negative in October.

The annual figures are still well into positive territory, of course, with the BRC recording the annual rate of food inflation at 7.5 per cent. Non-food annual inflation stands at 0.7 per cent and the combined rate at 3 per cent. But you need to bear in mind, 12 months’ worth of data make up the annual figures and, therefore, it takes a year before changes work their way out of the system.

Annual food price inflation peaked in August, hitting 10 per cent, whereas month on month food inflation peaked in the previous month when prices rose by 1.9 per cent in just the one month. But ever since then, the trend has been down. Food inflation rose by just 0.3 per cent in August and turned negative in September. But October was the first month which saw negative month on month food and non-food inflation for a very long time. Overall, prices were down 0.1 per cent in the month, the first fall this year. But, expect the decline to accelerate. We could be just six months or so away from seeing the annual rate of food and non-food inflation go negative.

That the next year or so is going to be tough, is patently obvious. But for those who can hold on to their jobs, affordability is set to improve significantly. Every penny will stretch a lot further.
Falling food and oil prices will also afford the Bank of England greater leeway in cutting interest rates – of course. By the time you read this, you will probably know how much the Bank of England has chosen to cut interest rates.

The time is now right to cut rates in a big way. The UK’s central bank could easily justify knocking 1.5 percentage points off interest rates. It probably won’t, a half a per cent is far more likely, given the bank’s usual cautious approach. In any case, the full extent of rate cuts won’t be passed on by the banks. But the trend is clear. Interest rates, and in turn the monthly amounts mortgage holders have to fork out for their payments, are all set to fall.

0% Interest Rates !

Zero interest rates are on their way. They could be days off in Japan, weeks off in the US and, maybe, months off in the UK. The decade beginning in the year 2000, and finishing in 2010, may be known as the noughties for more than one reason.

Yesterday, the Fed cut interest rates to 1 per cent. And its chairman, Ben Bernanke dropped a big hint they will be cut again. “Downside risks to growth remain,” said the official Fed statement, and then talked about “levels consistent with price stability.”

Rumours that the Central Bank of Japan is set to cut rates back to zero have been doing the rounds for a couple of days now. In fact, it is these rumours that have lain behind the surge in stock markets around the world over the last couple of days, with the Dow enjoying its second-highest daily rise ever, on Tuesday, and the FTSE 100 its third-best day ever, yesterday.

And what about the UK? Yesterday, Capital Economics said: “Extraordinary circumstances require extraordinary actions. With the current recession likely to be deeper than that in the early 1990s and the credit crunch impairing the effectiveness of monetary policy, we now expect UK interest rates to fall to an all-time low of just 1 per cent.”

Earlier this week, former MPC member and extremely illustrious economist, Charles Goodhart, told Channel 4: “Interest rates will go down from now, by how far and how fast nobody knows… They could go to zero. They went to zero in Japan in the 1990s when the Japanese had a recession or depression which went on for a long time and was quite severe.”

Irish Government Extends Guarantee to I of M.

Further to our previous postings in relation to the security offered by The Irish Government we are pleased to see today's announcement lifting some of the uncertainty floating around just now.

The Irish government has confirmed four banks and two building societies will be protected by its bank guarantee scheme safeguarding offshore savers in the Isle of Man.

Irish Minister for Finance Brian Lenihan signed the order on Friday night after the six lenders agreed to be in the scheme, which will protected 100% of depositors’ savings. The guarantee makes the protected Irish banks more attractive than other Isle of Man deposit takers, who are only covered for the first £50,000 by the Manx Depositors Compensation Scheme. ‘The guarantee has as its central objective the removal of any uncertainty on the part of counterparties and customers and gives absolute comfort to depositors and investors that they have the full protection of the state,’ said Lenihan. The four Irish banks with Isle of Man branches protected by the scheme are:

• Anglo Irish Bank Isle of Man
  Bank of Ireland Offshore
  Irish Permanent International
  Irish Nationwide Isle of Man