Spicing up your portfolio

Published by Sarah Coles on 05 May 2010.
Last updated on 05 May 2010

spicy chilli

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.

What's next?

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.

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