Quantitative easing: quick fix or long-term solution?
The idea behind QE is that the Bank of England increases the amount of money in the economy by buying up assets - chiefly government and corporate bonds - using money it has created itself.
Theoretically, this gives the sellers of these assets more money to lend, thereby oiling the wheels of the economy.
John Walker, chairman of the Federation of Small Businesses (FSB), says the initiative isn't working. "The point of QE is to get more money to businesses so they can invest and grow. But this money isn't getting through." Banks claim there is insufficient demand for loans but FSB research shows four in 10 small firms are still being refused credit.
Campaigners are also concerned pensioners are being hit in the pocket.
Fall in annuities
One consequence of QE is a huge decrease in annuity rates, as it drives up the price of gilts and reduces the yield paid to investors. Annuity providers rely on gilts so the lower a yield they get, the worse the deal they can offer consumers.
Tom McPhail, head of pensions research at Hargreaves Lansdown, says that in July 2008, before the Bank of England started printing money, a 65-year-old man could have secured a rate of 7.9% on his annuity. That rate now stands at 5.7%.
He says: "All things being equal, we would expect a further fall in gilt yields following an announcement of additional QE and in a short space of time this would be expected to feed through into lower annuity rates - again."
However, the Trades Union Congress is adamant QE is needed to help bolster our struggling economy. General secretary Brendan Barber says: "Given government inaction, the bank is absolutely right to renew quantitative easing. But this will only stop things getting even worse, it will not kick start the economy.
"What we really need is co-ordinated action by the government and the Bank to boost demand in the short term and build a job-creating economy for the long term."
Jargon-free fund info
Investors in the majority of funds must be provided with a Key Investor Information Document (KIID) under new European regulations. The KIID is a two-page document that sets out details of a fund's objective, investment policy, risk and reward, performance and charges.
The document replaces the simplified prospectus investors were previously given and should provide clearer information on how their money is being invested and what it is costing them.
Instead of a total expense ratio (TER), managers will have to quote an ongoing charge figure. Unlike the TER, this does not include performance fees or transaction costs, which will have to be disclosed separately by the fund manager.
The Investment Management Association (IMA) has welcomed the KIID, describing it as "free of jargon and complex descriptions". Many investors are still confused as to what charges they pay and do not understand the impact they can have on their overall return.
Julie Patterson, IMA director of authorised funds and tax, says: "We welcome the use of the term 'ongoing charge' instead of TER as it better describes what the figure represents - charges that are recurring."
The IMA is consulting on how fund management companies can better illustrate the charges associated with buying funds. Its recommendations go beyond the European regulations and suggest making more information available, such as three-year average broker commission, clearer descriptions of the bid-offer spread and other charges.
Patterson adds: "One recommendation we made in our recent draft guidance on fund charges and costs is that the ongoing charge figure should be disclosed instead of the annual management charge (AMC), or where the AMC is disclosed the ongoing charge should be given equal prominence in the information pack."
Lower interest rates encourage people to spend, not save. But when interest rates can go no lower and there is a sharp drop in consumer and business spending, a central bank’s only option to stimulate demand is to pump money into the economy directly. This is quantitative easing. The Bank of England purchases assets (usually government bonds, or gilts) from private sector businesses such as insurance companies, banks and pension funds financed by new money the Bank creates electronically (it doesn’t physically print the banknotes). The sellers use the money to switch into other assets, such as shares or corporate bonds or else use it to lend to consumers and businesses, which pushes up demand and stimulates the economy.
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%.
A document which describes and advertises a new share issue or flotation (IPO in US) to potential investors, the contents of which are regulated by UK company law, the Financial Services Authority (FSA) and the London Stock Exchange. The prospectus should include details such as a description of the company’s business, financial statements, biographies of executives and directors, detailed information about their remuneration, any current litigation, a list of assets and other information deemed relevant for consideration by a prospective investor.
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.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
Annual management charge
If you put money in an investment or pension fund, you’ll not only pay a fee when you initially invest (see Allocation Rate) but also a fee every year based on a percentage of the money the fund manages on your behalf. Known as the AMC, the actual percentage varies according to the particular fund, but the industry average for active managed funds is 1.5%.
Usually charged as a percentage of returns for performance above a specified benchmark, such as an index. The fee can range from 10% to 20% of total investment returns on a low starting benchmark such as Libor and investors could find themselves paying extra fees for merely average performance. Note that these funds do not compensate investors when the manager underperforms the benchmark.