Spicing up your portfolio
There was a point in April 2009 when it felt like the end of the world was nigh. We had suffered 18 months of stockmarket misery, seeing the FTSE 100 fall from peaks over 6,500 to a low point below 4,000. It seemed that the only way was down.
Then, just as we started to feel the sun would never shine on the markets again, there was a dramatic reversal of fortune.
In the intervening year we have seen prices climb back over 5,600, but there have been plenty of bumps along the way. So what does the market hold in store now?
The experts have plenty of different views about what will happen next. However, they all agree on one thing: for the next 12 months the markets are likely to remain volatile.
An index like the FTSE 100 will see its fair share of ups and downs, and if you want to make decent returns you have to do something more creative than simply plug your money into a UK index tracker.
There are plenty of interesting options worldwide. The most commonly recommended areas are the emerging markets, such as China, India and Brazil.
Gavin Haynes, managing director of financial adviser Whitechurch Securities, says: "Over the long term, emerging markets will be the drivers of global growth.
"There is consensus optimism about the area, which could mean a pull back over the short term, but we still believe in the long-term story."
Patrick Connolly, spokesperson at adviser AWD Chase De Vere, emphasises this short-term risk, saying: "These countries have performed well over the last 12 months.
These parts of the world are very volatile, so if you jump in now there’s a chance you could be doing so at precisely the wrong time, and you could see some sizeable losses, at least in the short term."
Investing in BRICs
These areas can be accessed through broad emerging market funds. Alternatively there are BRIC funds, investing in the major powerhouses of Brazil, Russia, India and China.
A third option is a fund with a smaller geographic focus, such as Latin America, Emerging Europe or Greater China.
If you opt for this third approach, the fund will be dominated by the BRIC country in that region. So, for example, a Greater China fund will feature plenty of China stocks.
However, they will also have a place for lesser-known growth stories such as the relatively unloved Taiwan, which could benefit from thawing relations with China.
For those investors looking to take more risk, there are single-country funds. Connolly says there is an argument to be made for Japan.
"It's a contrarian view, because Japan has been in the doldrums for such a long time, but you can build an argument for growth there, and you certainly couldn't be accused of buying in at the top."
Haynes agrees: "It remains depressed economically, but there are a number of global leading companies at attractive valuations."
What about technology?
There are also unloved sectors to consider. Haynes likes technology: "It was very popular just before the crash in 2000, so a lot of people got their fingers burnt, but a decade on much of the sector is attractively valued and there are good growth prospects."
You can invest in any of these specialist sectors through active funds, or more generally in an index through an exchange traded fund (ETF).
These capture the overall movement of the market, at a much lower cost than a traditional managed fund. Alternatively, you could use an investment trust.
These are collective investments, much like unit trusts, which buy and sell a range of different assets. However, instead of the price reflecting the performance of the underlying assets, it is affected by supply and demand for the investment itself.
This means if market sentiment is tough, and demand for the fund falls, the price could drop below the value of the assets in it. This is known as trading at a discount.
The advantage of buying on a discount is that you could stand to gain not only with the increase in the underlying assets, but also with an improvement in sentiment, which will lift the price of the trust and give you a double-whammy.
Of course, you risk the market and sentiment falling and the double-whammy working against you.
Discounts have narrowed considerably in recent months, with the average now close to 10%.
However, there are still some bigger discounts in unloved sectors, such as Henderson Smaller Companies on a discount of 23% and North Atlantic Smaller Companies on a discount of 48%.
There are plenty of opportunities in sectors and funds that could grow over the long term, despite the ups and downs of the wider markets.
However, they come with additional risk, so you may need to have the stomach for a fairly rough ride in the short term.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.
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.
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.
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 acronym, which stands for Brazil, Russia, India and China; countries all deemed to be at a similar stage of advanced economic development. The term was coined in 2001 in a report written by Goldman Sachs director Jim O’Neill who speculated that, by 2050, these four economies would be wealthier than most of the current major G7 economic powers.