10 ways to get the most out of your portfolio
You didn't need to be clever or lucky to make money out of the stockmarket over the last 18 months, you just had to be there.
With the FTSE 100 rising from a low of 3,512 points at the depths of the gloom in early 2009, to pushing the 5,500 level less than a year later, whatever you invested in had a fair chance of performing.
But the next 18 months are going to be less kind: the expert estimations range between a pretty flat overall performance to some serious drops.
So if you want your portfolio to perform you'll need to invest far more carefully. Here are 10 areas we think are worth considering:
1. Equity income
Typically, funds in this sector provide a solid equity base to portfolios, investing in blue-chip companies with consistent earnings.
One big attraction is the dividend income, which makes a startling difference. From 2000 to 2010, the FTSE 100 Index (without dividends) fell by 22%.
With dividends included, it rose by 13% over the period. Robin McDonald, co-manager of Cazenove's multi-manager funds, says: "Dividends and dividend growth are incredibly important this year."
McDonald adds that another big attraction is that these are often defensive stocks. "This year there will be a fair amount of economic disappointment, so we really like the boring areas of the equity market," he says.
Justine Fearns, investment research manager at AWD Chase de Vere, rates Invesco Perpetual High Income and Jupiter Income.
2. Emerging markets
This has been the big story of the last few years and advisers remain keen on the basis of fundamentals. Fearns says: "Growth should remain high, relative to the developed world."
Andrew Beale, manager of Henderson PR Pacific, agrees: "The area has had strong economic growth and there are good reasons why it will continue, such as the low levels of government, corporate and personal debt; the strong liquid banking sector; and tremendous structural growth."
The downside at the moment is that valuations are high, most notably in China.
Fearns believes you should opt for a broad emerging markets fund with the freedom to invest wherever is most suitable at any given time.
"Asset allocation by fund managers is important, as volatility means investing when assets are relatively cheap," she says.
She recommends Aberdeen Emerging Market Opportunities and JPM Emerging Markets, although she emphasises this is a high-risk area.
3. Strategic bond funds
These funds invest across the bond spectrum, from government bonds (gilts) to corporate bonds. They have the freedom to move into whichever part of the market is best placed to perform.
This makes them particularly attractive to investors as there are a number of variables that could have a significant impact on various parts of the bond market.
Fearns rates M&G Optimal Income and L&G Dynamic Bond, which target a total return. Paul Carne, a fund of funds manager with F&C, also rates the L&G fund, as well as the M&G Strategic Bond and the Fidelity Strategic Bond fund.
Fearns warns, however, that the asset class is not going to have as good a run as last year. "Although there's still value in corporate bonds, the large gains will not continue."
4. Large companies
There's a strong argument that larger companies will outperform their small and medium-sized counterparts this year.
The bull run has seen smaller businesses outperform dramatically, partly because their values had fallen so low in the recession that many were priced to fail.
McDonald says: "The premium for smaller and mid caps has never been so high, but the bull market won't last. This year we expect it to revert to the mean and large caps to outperform."
Most of the experts believe the way to get exposure to these funds is through an equity income fund. Darius McDermott, managing director of Chelsea Financial Services, recommends Invesco Equity Income or Artemis Equity Income.
5. High-yield bonds
The higher yielding end of the market, which pays more income in return for higher risk, suffered in the downturn. However, the danger level has subsided and the market is still paying investors well for taking the gamble.
Carne says: "It isn't risk-free but you're being paid for it. Bond funds are yielding 7%, 8% or 9%, so you have a cushion against capital loss."
Exposure, for many experts, is best found through a strategic bond fund (see point 3). However, McDermott likes the Threadneedle High Yield Bond fund and Legal & General High Income.
6. Pharmaceutical companies
This traditionally defensive sector has had a tough year. Healthcare spending is focused on the US, and the uncertain fate of the healthcare bill threw everything into question. But there's light at the end of the tunnel.
Grant Challis, partner at Frostrow Capital, which works with the Finsbury Worldwide Pharmaceutical Trust, says: "Pharmaceuticals lagged the rest of the global equity market last year, due to uncertainty over healthcare reform.
"Valuations across the sector have declined to historical lows. Now the fate of healthcare reform is more certain, stocks should rally."
He adds that the market should benefit from new breakthroughs in the biotech sector, as well as increased merger and acquisition activity.
As the fifth most populous country in the world, there's plenty of scope for growing consumer demand over the next decade. Brazil also has a strong export story.
The country will host the 20th FIFA World Cup in 2014 and the Olympic Games in 2016, which should result in another boost to the economy.
There's no doubt, however, that this is a higher-risk investment sector, suited to adventurous investors who are prepared to accept volatility.
8. UK commercial property
Expert views on this sector are fairly mixed. However, Martin Bamford, managing director of Informed Choice, is upbeat about commerical property.
He says: "Compared with cash and equities, this sector is offering some very attractive yields."
The IMA Property sector is down by an average of around 30% over the past three years, which suggests there's some good value to be had.
With the continued weak pound, UK commercial property is looking more attractive to overseas buyers, particularly those from eurozone countries. Bamford rates L&G UK Property Trust.
However, as always, there is another side to the argument. McDonald says: "We understand why people are excited, but we still view the market as structurally challenged in terms of supply and demand and funding.
"Credit is not getting looser - and it's the lifeblood of commercial property."
This sector has been in the doldrums since the dotcom crash of 2000, but Carne says now could represent a great buying opportunity.
He explains: "We are now reaching the point where people have to upgrade to Windows 7. There was so much spent on IT in 2000, followed by very little for the next 10 years. It means we are now reaching the replacement point of the cycle."
McDermott likes Henderson New Star Technology and AXA Framlington Global Technology. However, he warns that pure technology funds are only for those investors with a high conviction that the technology sector will perform well.
10. United states
Magnus Spence, partner at Dalton Strategic Partnership, likes the US. He says the growth story of this year will be in developed markets rather than developing ones, and that the US is particularly well-placed to benefit.
This view is backed by the fact that the signs of recovery have been good, including the better-than-expected performance of companies, manufacturers and the jobs market.
Spence says: "Last year my fund was predominantly in emerging markets; this year it's in developed markets. There is strength in the US: the flexible workforce can be reallocated to growing areas."
McDermott particularly likes Investec American and Neptune US Opportunities, which he says has performed well over the medium to long term.
All investment returns are measured against a benchmark to represent “the market” and an investment that performs better than the benchmark is said to have outperformed the market. An active managed fund will seek to outperform a relevant index through superior selection of investments (unlike a tracker fund which can never outperform the market). Outperform is also an investment analyst’s recommendation, meaning that a specific share is expected to perform better than its peers in the market.
Investment funds that invest in other investment funds from a wide range of asset managers and are often referred to as funds of funds. Some multi-manager funds only invest in the funds of the investment house providing the fund of funds and these are known as “fettered”. An “unfettered” multi-manager fund is free to invest in what the fund manager believes are the top performing funds from across different markets and industries. Investing in multi-manager funds means your risks are spread across geographical regions and industry sectors but it also adds another layer of charges and some multi-managers also levy an out-performance fee.
Total expense ratio
Most investment funds levy an initial charge for buying the units/shares and an annual management fee but other expenses also occur in running the fund (trading fees, legal fees, auditor fees, stamp duty and other operational expenses) which are passed on to the investor and so the TER gives a more accurate measure of the total costs of investing. The TER is especially relevant for funds of funds that have several layers of charges. Unfortunately, investment fund companies are not obliged to reveal TERs and many only publish the initial charges and annual management charge (AMC).
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
The familiar name given to securities issued by the British government and issued to raise money to bridge the gap between what the government spends and what it earns in tax revenue. Back in 1997, the entire stock of outstanding gilts was £275bn; by October 2010 it had surpassed £1,000bn. Gilts are issued throughout the year by the Debt Management Office and are essentially investment bonds backed by HM Treasury & Customs and considered a very safe investment because the British government has never defaulted on its debts and this security is reflected in the UK’s AAA-rating for its debt. Gilts work in a similar way to bonds and are another variant on fixed-income securities.
A market-weighted index of the 100 biggest companies by market capitalisation listed on the London Stock Exchange. It is often referred to as “The Footsie”. The index began on 3 January 1984 with a base level of 1000; the highest value reached to date is 6950.6, on 30 December 1999. The index is “weighted” by how the movements of each of the 100 constituents affect the index, so larger companies make more of a difference to the index than smaller ones. To ensure it is a true and accurate representation of the most highly capitalised companies in the UK, just like football’s Premier League, every three months the FTSE 100 “relegates” the bottom three companies in the 100 whose market capitalisation has fallen and “promotes” to the index the three companies whose market capitalisation has grown sufficiently to warrant inclusion. Around 80% of the companies listed on the London Stock Exchange are included in the FTSE 100.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
An Exchange traded fund is a security that tracks an index or commodity but is traded in the same way as a share on an exchange. ETFs allow investors the convenience of purchasing a broad basket of securities in a single transaction, essentially offering the convenience of a stock with the diversification offered by a pooled fund, such as a unit trust. Investors buying an ETF are basically investing in the performance of an underlying bundle of securities, usually those representing a particular index or sector. They have no front or back-end fees but, because they trade as shares, each ETF purchase will be charged a brokerage commission.
A bull market describes a market where the prevailing trend is upward moving or “bullish”. This is a prolonged period in which investment prices rise faster than their historical average. Bull markets are characterised by optimism, investor confidence and expectations that strong results will continue. Bull markets can happen as a result of an economic recovery, an economic boom, or investor irrationality. It is the opposite of a bear market.