Where should you invest in 2011?
If there's a theme to 2011, it's uncertainty. Experts are widely divided on the outlook for the global economy, and the regions, sectors and types of companies that will produce strong returns for investors next year.
As we'll see, they favour everything from higher-risk areas, such as private equity and technology, to more solid sectors like equity income.
But take a look at the areas that don't appear on the list of favourites. China is generally considered to be overvalued in the short term and is not a focus; nor is the US a popular choice. And government bonds, despite ongoing worries about the economic recovery, are not on anyone's wish list for next year.
So where do the experts think we should be putting our money in 2011?
Tim Cockerill, head of research at Rowan & Co. Capital Management
LIKES: EQUITY INCOME
"This year could prove to be quite tough. The Federal Reserve is doing more quantitative easing, which is a strong signal that the economic recovery is not working out as it had hoped.
"Even in the UK, where the economic data has been better than expected, there are the headwinds of VAT increases and spending cuts to battle against.
"That said, there are areas where investors will do better this year. Equity income is likely to be one of those areas - both in the UK and globally. Interest rates are likely to stay very low; you can get much higher income from shares, and have a far better chance of beating inflation. There's also the chance of capital appreciation.
"I would look at the Artemis Income fund. The top holdings are companies such as Vodafone, Glaxo and HSBC, which are going to be solid whatever the economic environment. Even if the capital value moves about, this fund is paying an income of 4.8%.
"More exciting is the M&G Global Dividend fund. It has a lower income at 3.3%, but is looking for dividend growth. Newton Global Higher Income is also a top performer; it is now paying almost 5% and has a solid investment process that won't let you down."
Andrew Bell, chief executive of Witan Investment Trust
LIKES : PRIVATE EQUITY
"There are times when the biggest decision on a market is whether it's too low. That was undoubtedly the case in 2009 as the FTSE moved from 3500 to 5500, but 2011 will be different.
"We believe stockpickers should be able to add value in this environment, so we've moved into active managers. We're also increasing our exposure to emerging market economies. Although everyone is quite bullish on emerging markets, which can be a red flag, we believe growth will be generally quite scarce and we want to be fully involved.
"However, my strongest choice is private equity. It was hit very hard in the downturn and the rout has left some opportunities.
"If you believe that the global economy is on some kind of track to recovery, no matter how weak, then the net asset values of private equity trusts are likely to perform better than the wider economy. These trusts are on enormous discounts to net asset value.
"We have bought 3i, which has had to go through a restructuring process but has now come out the other side. We have also bought Harborvest, which listed in London in the spring. The shares had an offer that allows investors to sell at the original purchase price in October of next year, so we can get our money back if something unexpected happens.
"We also bought Electra, which is currently trading at a discount of 35% to net asset value, despite coming through the downturn with flying colours."
Ted Scott, director and head of stewardship at F&C Investments
LIKES: TELECOMS AND UTILITIES
"Looking at the market as a whole, shares are still a good place to invest. There will be a scramble for yield, and those assets paying a superior income are likely to win out.
"A lot of large, blue-chip companies are increasing their dividends and are often paying an income far higher than that available in the bond market. We think these companies will do extremely well.
"Looking at particular sectors, we believe telecoms will be an area of interest, with companies such as Vodafone and BT showing strength. Utilities are also likely to do well. The electricity sector has been a laggard and is due to catch up, so we're interested in companies such as National Grid, Scottish & Southern and Centrica.
"We also like Shell. Whereas BP remains quite risky operationally, Shell has a more certain outlook and pays a 5% to 6% dividend.
"In general, we like mining shares that are exposed to emerging market growth and sitting on modest valuations. The market doesn't believe that commodity prices can be sustained and is already discounting quite a big drop. Rio Tinto should do particularly well."
Stephen Barber, economic and markets adviser at Selftrade
LIKES : BRAZIL AND TURKEY
"There are two areas that I think will do well in 2011 - Brazil and Turkey. I'm all in favour of investing in emerging markets through the BRIC economies (Brazil, Russia, India and China), but I think Brazil offers the most stable growth. It has the most robust political and economic system, with a strong banking sector and abundant natural resources.
"Turkey also offers very good value. It's the gateway to the East, and is a much safer investment than some of the economies that surround it. The country has a stable political environment and is now relatively easy to access through exchange traded funds.
"No emerging market is without risk, but this is a very interesting area."
Algy Smith-Maxwell, fund manager at Jupiter independent funds team
"Technology is likely to be a big theme for 2011. We hadn't owned anything in this sector for 10 years but we bought into it again a year ago.
"We think it has a long way to run - the world economy is in the early stages of a technology replacement cycle that started in 2006 and could justifiably be expected to run into 2015. Valuations are palatable, and investors have learned lessons from their bad experiences in 2000.
"We've tended to invest with Stuart O'Gorman, who runs the Henderson Global Technology fund and is a very safe pair of hands. We've also moved into the smaller cap arena on occasion, and in this case we like the Polar Capital Global Technology fund. It's important to remember that it may not be the big companies - like Cisco or Microsoft - who will be the biggest beneficiaries of this growth trend.
"We also think that rising inflation may be an issue. As a result, we don't see a lot of upside in government bonds from here, which should underpin the relative attractions of equities and corporate bonds."
Gavin Haynes, investment director at Whitechurch Securities
LIKES: SMALL CAPS
"A promising sector for 2011 is UK Smaller Companies. There is plenty of value to be had in this area, yet not many people are talking about it. It was hit hard as investors became more risk-averse, but it performed better than the wider market in 2009 and 2010.
"It's the old 'elephants don't gallop' cliché: it's much easier for smaller companies to grow their earnings, compared with large ones.
"We like managers such as Harry Nimmo at Standard Life and Philip Rodrigs at Investec. They put the emphasis on good quality smaller companies that can grow their earnings."
Patrick Connolly, spokesperson for Chase de Vere
LIKES: HIGH YIELD BONDS
"It has never been more important to diversify a portfolio by holding a range of different assets including shares, fixed interest and commercial property.
"Fixed interest plays an important role in a balanced portfolio, but the yields on gilts and investment-grade bonds have fallen significantly and may now be overpriced.
"There's a strong case for slanting fixed interest exposure toward high yield bonds. Despite rising in value by nearly 15% over the past year, the valuations there still look more attractive.
"If the economy takes a downward turn then high yield bonds may suffer, but even then they should provide some protection against falls in the equity markets. Our current preferred funds include L&G High Income, M&G High Yield Corporate Bond and Standard Life Investments Higher Income."
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.
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.
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.
Invented by a Frenchman in 1954 and ironically introduced in the UK on 1 April 1973, VAT is an indirect tax levied on the value added in the production of goods and services, from primary production to final consumption and is paid by the buyer. Its levying is complex, with a number of exemptions and exclusions. For example, in the UK, VAT is payable on chocolate-covered biscuits, but not on chocolate-covered cakes and the non-VAT status of McVitie’s Jaffa Cakes was challenged in a UK court case to determine whether Jaffa Cake was a cake or a biscuit. The judge ruled that the Jaffa Cake is a cake, McVitie’s won the case and VAT is not paid on Jaffa Cakes in the UK.
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%.
An increase in the general level of prices that persists over a period of time. The inflation rate is a measure of the average change over a period, usually 12 months. If inflation is up 4%, this means the price of products and services is 4% higher than a year earlier, requiring we spend and extra 4% to buy the same things we bought 12 months ago and that any savings and investments must generate 4% (after any taxes) to keep pace with inflation. Since 2003, the Bank of England has used the consumer prices index (CPI) as its official measure of inflation (see also retail prices index).
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.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Corporate bonds are one of the main ways companies can raise money (the other is by issuing shares) by borrowing from the markets at a fixed rate of interest (the reason why they are also known as “fixed-interest securities”), which is called the “coupon”, paid twice yearly. But the nominal value of the bond – usually £100 – can fluctuate depending on the fortunes of the company and also the economy. However it will repay the original amount on maturity.
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 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).
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.
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.