2005 is already shaping up to be an interesting - read challenging - year for those wanting to save given the conflicting news about how best to save and what assets to hold.
Consider this: some days ago Standard Life announced its funds under management hit the £100bn mark. However, just today newspapers have carried news that the company’s chief executive Sandy Crombie is taking a pay cut of sorts – foregoing a bonus and cash incentive – because long-term savers are still suffering the effects of the stock market meltdown, which ended in March 2003.
Competitor Axa meanwhile has just announced reductions in reversionary bonuses for its Equity & Law conventional life and pensions savers.
The bonus rate is down to 1% for 2004 from 2% in 2003, although the majority, 97%, of Axa’s with profits policies will not find out their annual bonus rates until March.
The fact there are bonuses at all is seen as a positive, yet the long-term returns are still questionable: Axa’s chief actuary Peter Shelley is quoted by the company as say customers with 25-year conventional life policies maturing now are seeing an average return of 8% per annum. Those with 25-year pensions policies are seeing average returns of 11% per annum.
Those figures would look good against the current rates of inflation, interest rates and FTSE average dividend yield.
However, considering rates of inflation and interest rates since 1980, and the appreciation of residential housing as an asset over the longer term in the UK, it is not surprising savers may be scratching their collective heads.
That lover affair with houses and such saw investors pour some £35bn into UK property last year alone, according to some calculations.
From a short-term view it is arguable that even a bog-standard passive tracker fund would have provided significant riches in the past couple of years: the FTSE 100 index is up about 46% since January 2003.
Even that most fickle of assets commodities continued to reward investors handsomely: Merrill Lynch’s World Mining Trust investment trust went from 115p to 212p in the past two years on the back of soaring demand from developing economies such as China, Brazil, Russia and India.
That, of course, is all history, which as the regulator tells us is no basis for investment decisions.
Which, unfortunately, leaves savers and investors none the wiser.
One rule of thumb currently being followed by some commentators is that what goes up must come down: therefore currently expensive assets such as housing and commodities should do less well this year.
Or, perhaps it depends simply on an investment style.
Legg Mason chief executive Bill Miller’s $16bn Value Trust UD mutual fund gained 12% in 2004 to beat its benchmark index for a 14th consecutive year on the basis of a concentrated holding of stocks that looked set to return less than the S&P 500 even just a few weeks before the end of the year.
Geographical factors may provide some clues as many of last year’s bets performing indices were based in emerging markets.
Here too there are dangers, however, such as an easing of US economic growth, which would reduce demand for exports from developing economies.
A downturn in Chinese demand could hurt Asian economies and stock markets – which have been largely untouched by the devastating tidal wave sparked by an earthquake under the Indian Ocean on Boxing Day.
Exports between Asian countries is now bigger than exports to the US, according to some calculations.
Cash may be attractive with instant access accounts offering more than 5% in the UK currently.
This comfort may be upset by one’s view of what actually constitutes inflation: is it the CPI index, which suggests a rate of well below the 2% official target, or is it the ‘old’ measurement of RPI (or RPIX), which would suggest the reigns have been slackened considerably over the past year.
As stated, the choices facing savers and investors are numerous and baffling (not to mention pensions, mortgages, general insurance and other financial services and products) presenting a perfect opportunity for financial advisers to make themselves useful and needed by their clients.IFAonline
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