Money
Managing your money
Investment - Keep it simple
The terrifying volatility that kicked off in global markets during the summer came with lessons for investors. One of the most depressing for many was this: diversification across different asset classes is no use whatsoever in a real crisis, writes Merryn Somerset Webb
One reason advisers try to make us buy hedge funds, private equity funds and commercial property as well as straightforward shares is that returns from all of them aren’t supposed to be linked – if one is falling in value the others may be rising. The idea is that buying into all of them spreads your risk and cuts the chances of you losing overall.
In August it didn’t quite work out like that. As the bond market seized up, so did the equity market. Property funds and private equity funds wobbled at the same time and there were a great many nasty hedge fund blow-ups.
Thanks to their attempts to spread risks, many people lost a great deal of money.
So what does this tell us about how to invest in the future? Probably much what the aftermath of the dotcom bubble told us, that we should keep it simple. We should invest in what we understand, things that we can be pretty sure will go up over the long term and nothing else. We should leave the complicated stuff to the so-called experts – they invent all the esoteric stuff, so let them be the ones to lose money on it as well.
So what fits the keep-it-simple bill? Income funds are one answer. These invest in solid listed companies paying out a good percentage of their income in dividends – this is important, given that historically the majority of total returns from the equity market have come from dividend income.
Income funds will of course rise and fall over time, but they come with the built-in protection of a dividend yield: losing 10% of your capital on a stock is not so painful when it is paying you 6% a year in income. One of the better income funds in the UK is Artemis Equity Income Fund, run by Adrian Frost. He has a pretty straightforward strategy – Frost looks to buy shares in companies that are producing “resilient and sustainable” cash flows and that also have a chance of growing.
Also well respected is the Invesco Perpetual High Income Fund – manager Neil Woodford has a good track record. Finally, the F&C Stewardship Income Fund is worth considering. Its manager, Ted Scott, is anxious about the way the markets will end 2007 – he thinks there is a good chance that financial volatility will feed through to affect real company earnings and has been investing with this in mind. I’m nervous about this too, so I approve of that.
* Merryn Somerset Webb is the editor of Moneyweek. Her views are personal and investors should always seek professional advice
