Top investment tips for 2013
At the start of 2013, investors face the same issues as in the previous two years. Interest rates remain ridiculously low, forcing income-seekers into more risky asset classes to obtain a decent yield, while growth-focused investors need to keep an eye on the politicians - in the US over its budget impasse and in the eurozone with sovereign debt and banking issues yet to be resolved.
Investors still face a 'wall of worry' but, as in previous years, there are decent gains to be had for those with the courage to scale it.
I've got four tips of my own for the year ahead. I'm wary of valuations across the fixed-interest spectrum, which have driven yields on most bonds to multi-decade lows, so these selections are all equity-focused.
The first two are primarily for income-seekers, but both would fit into a balanced portfolio. For growth-seekers, I've picked an unconstrained, steady-as-she-goes fund delivering decent returns, and a speculative specialist trust.
Fidelity Enhanced Income
The first fund I'd look at is Fidelity Enhanced Income. It uses options strategies to enhance its yield and currently distributes a net annual equivalent yield of 7.4%.
It is co-managed by Michael Clark, and David Jehan runs the options strategy, which involves selling covered call options on the underlying holdings to boost income. With UK equities yielding around 3.5%, this strategy is certainly delivering income enhancement.
The top 10 shares make up nearly half the fund's value and read like a 'who's who' of income shares in the FTSE 100, which should help reduce volatility in capital values.
Diverse Income Trust
As we went to press, the Diverse Income Trust was due to announce the success of its efforts to raise in excess of £20 million in new capital to invest. The trust is run by respected fund manager Gervais Williams, managing director of MAM Funds.
The trust had a rocky start. From launch in May 2011 it fell 12% by the year end, but has since seen a 35% return over the year to 3 December - double the return of the UK Growth & Income sector. The trust yields 5.5% and is currently trading on a small premium, but that should narrow when the new shares start trading.
Fundsmith Equity's manager Terry Smith adopts an investment style that is as uncompromising and far-reaching as his views on everything from the madness of Ed Balls to the causes of climate change. You may take issue with his views but there's no arguing with the outstanding performance of his fund.
From a standing start in November 2010 it has grown to £800 million, and early callers have been rewarded with returns of 30%, or six times the Global sector average of 5% to 3 December 2012.
Smith describes his style as lazy. Once he buys a share for the fund, he holds it long term.
Baker Steel Resources
My second growth choice is a little off-piste but this is often where big potential gains can be found, in under-researched and unloved sectors of the market.
Baker Steel Resources (BSR) is a speculative choice. Its portfolio is comprised mainly of unquoted mining and commodities companies, and the share price has been on a rollercoaster ride over 12 months, from a high of 125p to 75p, a whisker below where it is now.
Many analysts believe the recent flotation of miner Ivanplats, which represented 30% of BSR's portfolio, has not been recognised in the trust's share price, which is at a 26% discount to net asset value.
With the trust's unquoted assets stated at book cost rather than estimated value, there could be substantial gains from further successful realisations.
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.
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
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 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.
Flotation involves a company selling a percentage of itself in the form of shares on a regulated exchange, such as the London Stock Exchange. Prior to flotation, the company is independently audited and valued and shares offered for sale at a price determined by the company’s value. After flotation, the shares are traded on the exchange for what the market deems they are worth. Shares are bought by other financial institutions and private investors.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
This is more usually a feature of car insurance but it can also crop up in contents, mobile phone and pet insurance policies. An excess is the amount of money you have to pay before the insurance company starts paying out. The excess makes up the first part of a claim, so if your excess is £100 and your claim is for £500, you would pay the first £100 and the insurer the remaining £400. Many online insures let you set your own excess, but the lower the excess, the more expensive the premium will be.
A term applied to raw materials (gold, oil) and foodstuffs (wheat, pork bellies) traded on exchanges throughout the world. Since no one really wants to transport all those heavy materials, what is actually traded are commodities futures contracts or options. These are agreements to buy or sell at an agreed price on a specific date. Because commodity prices are volatile, investing in futures is certainly not for the casual investor.