Much of the trade press makes for amusing reading at the moment as we are at that time of year again when some of our industry's leading fund managers look to predict where the FTSE100 index will finish by the year end. This year however things are somewhat different.
The past few years have gone by and managers invariably get close (read: lucky) to the FTSE100 spot level one year's hence or at least within a few hundred points, so the exercise has become an annual ritual whereby predictions are submitted based upon analytical data combined with, more often that not, a hunch. 2009 however presents an entirely different challenge.
Throughout 2008 the FTSE100 annualised volatility measure reached unprecedented levels bringing with it massive uncertainty across the industry. Not even the most respected fund managers had any real idea of how or indeed why we were seeing almost daily swings of 10% plus or minus on the value of the UK's top 100 companies.
Panic ensued and investors clamoured to switch real assets to cash so as to stave off their losses. The fund management industry suffered one of its worst years in decades as many funds experienced net losses and outflows which, in recent times, had been unheard of.
2008 was the year where the FTSE100 started at 6,416 and predictions from eight top fund managers had the index finishing between 6,400 and 7,382! It finished the year down 30% at 4,434. All of this was based upon assumed knowledge of the markets and, of course, expectation. However with equity markets, what we think we know does not always transpire into reality.
My point is this: Markets are inefficient which is why we invest our money every year in the hope of outperforming whatever benchmarks we use within our portfolios, be that cash or an equity index or some other measure.
Trying to predict which direction equity markets will move on a short term basis is futile and should be completely discounted from the advice process. I just wonder how many investors have actually crystallised losses on the back of last year's falling markets.
Structured products do not replace traditional equity funds nor do they remove all of the risks associated with them. What they do deliver, however, is a range of return profiles not available from most investment funds whilst at the same time removing some of the investment risks. In addition, as I wrote in this column last week, as volatility remains high, there are certain structured products that offer extremely good value to the investor by selling volatility in return for additional performance upside especially where an investor is prepared to accept some risk to capital.
Equity investors sit firmly in this camp and should be made aware that there are many more ways to invest for equity-like returns without taking on the full extent of, currently, an unknown variable such as volatility.
Not surprisingly, of the same 8 fund managers, 3 have declined to offer a prediction for 2009 and the other 5 predict somewhere between 5000 and 5,500. I would ask the question, "Isn't that the type of market where structured products excel?"
Gary Dale is head of intermediary sales at Investec Structured ProductsIFAonline
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