By Jonathan Eley, 16 November 2010
Over 600 people attended our recent roadshow events in London, Edinburgh and Manchester, hearing presentations on income and defensive strategies and an outlook for key markets in 2011.
We decided upon an income and defensive theme because these are two of the key challenges facing investors this year. With interest rates at a 300-year low, and likely to stay that way until the second half of 2011, securing an income that even keeps pace with inflation is tricky. And markets have remained frustratingly rangebound for much of this year, central bank intervention notwithstanding.
Below, we've summarised the content of each presentation. You can also download the presentations in PDF format, which should be compatible with any computer. You need to register before you download anything from the IC website - registration is quick, secure, and most importantly, free!
ETP ideas for income and defensive portfolios
You may think of exchange-traded funds (ETFs) as being growth investing products - a handy, low-cost way to access racy asset classes like emerging markets. But they also have many defensive applications, too. Manooj Mistry of db x-trackers gave an introduction to how ETFs work, how they are structured and how to compare charges across different providers.
He then gave seven case studies of how ETFs can be used to generate income and protect capital. These ranged from using ETFs to invest in sovereign bond indices or to track overnight money rates, to using a forex-based ETF that has outperformed both bonds and shares over the last few years; to using ETFs to profit from the seemingly endless appreciation of the gold price.
In the Q&A sections, Mr Mistry was repeatedly asked about the tax status of ETFs, and whether it's possible for investors to attend annual meetings, as they can for investment trusts. He explained that the tax reporting status of ETFs is changing in 2011, so that income and capital gains will be taxed separately, and that it is possible to attend AGMs - provided you're willing to travel to Luxembourg! .
A Guide to Bonds from the London Stock Exchange
Bond markets set the price of money for everyone. No wonder an aide to President Clinton once quipped that if he were reincarnated, he'd come back as the bond market. Bonds are also an essential component of any diversified portfolio.
However, for many years, investing in bonds directly was difficult for the private investor. There was no single platform that supplied dynamic pricing and data, dealing often involved telephone calls and a degree of back and forth, and most importantly, minimum investment levels were prohibitively high at £50,000 and upwards.
The launch of the LSE's Order Book for Retail Bonds (ORB) earlier this year may change all that. It brings bond trading onto a regulated exchange, provides continuous two-way pricing and manageable minimum investment sizes. Around 140 instruments are available to trade, including gilts, bonds from supranational entities like the European Investment Bank and corporate bonds of various maturities.
Michael Johnson explained the main features of fixed-income securities, how to calculate 'clean' and 'dirty' prices, and how to use the LSE's extensive bond data platform. Popular themes in the Q&A sections were the inclusion of bonds in individual savings accounts (they must have a maturity of five years at the time of purchase) and the capital security of subordinated bond issues. .
Income and defensive strategies
Following on from the LSE presentation, Killik & Co's senior investment strategist Patrick Gordon outlined some of the attractions of including individual corporate bonds within an investment portfolio and offered some thoughts on a market that some have described as a bubble.
His colleague Mick Gilligan, head of research, talked about income and defensive strategies using funds, stressing the need to buy while discounts are attractive and not when they have closed up, or even moved to a premium. This is the case for several investment trusts at present. He also highlighted how defensives have outperformed cyclicals, and named some of Killik's favourite funds to play today's uncertain markets.
Making gains in flat markets
In flat or rangebound markets, a buy-and-hold strategy may only produce limited gains. Whether your priority is income or capital growth, listed structured products can offer an alternative. Like shares, they are listed on the stock exchange and can be traded through your broker at any time. They allow investors to play a theme - such as the FTSE100 rising - with strictly limited and defined downside, and possibly leveraged upside.
The key risks with listed structured products are that the issuer - in this case Royal Bank of Scotland, majority-owned by the government - defaults. Other issues to consider are the lack of dividend income and the fact that the price performance of the instrument may not always reflect the likely pay-out at the end of its term.
How much leverage you wish to employ is largely a matter of your personal risk appetite, according to RBS's Josh Blundell; there are products for all levels, ranging from listed bonds to autocalls to covered warrants. The tax treatment of these instruments was a popular topic in the Q&As; with the exception of the bonds, any gains are treated as capital gains and taxed accordingly. .
How to get ahead in 2011
Dominic Picarda, IC Associate Editor and author of 'The Trader' column, rarely leaves the audience in any doubt as to his views and this year was no exception. Fed chairman Ben Bernanke is America's "counterfeiter in chief", the current stock market rally is "sponsored by the government" and the constant reflation of asset prices will only make the day of reckoning worse when it does eventually come.
However, it's not all doom and gloom. Dominic reminded delegates that his optimism regarding gold and government bond prices this time last year has paid off handsomely, but cautioned that there is a fair bit of 'froth' in both markets at present. He remains cautious on stock market prospects, considering US shares to be overvalued, but acknowledged that the timing of any down leg was difficult to predict given the distortions caused by quantitative easing. His favourite sectors remain the defensive ones, such as tobacco, pharma and food producers. .
FUTURE EVENTS: IC GOLD & FOREX EVENT
The essential event for anyone wanting to or already invested in Gold.
Gold has always traditionally been the safe haven for investors and the recent market turmoil has proved how important it is to have gold in your portfolio. Many argue that gold should make up between 5 -10 per cent of every serious investors portfolio. Yet one of the most frequent questions our readers ask, is should we invest in gold now, and how do we do it?
The Investors Chronicle Gold & Forex event will be held on Friday 3 December 2010 at the American Square conference centre. The free event will explain why you should invest in gold and foreign currencies. You'll learn how these assets behave, as well as the best ways to gain exposure to them, whether you're a short-term speculator or long-term investor. You'll also hear the IC's forecast for leading currencies and the yellow metal for the months and years ahead.
Speakers include Dominic Picarda who will be explaining the benefits of holding currencies and gold and the different ways you can access these markets.
Places are limited, so register now to avoid disappointment. Call 0208 950 9117 or visit icgoldfx.co.uk for more information.
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