Protection and hand-holding are key roles for all IFAs now

IT MIGHT not feel like it for Angus MacDonald when he looks at the plunging value of his portfolio over recent months, but his money is in good hands. By creating a degree of diversification, our ten competitors have largely sheltered MacDonald from the worst of the downturn, albeit some more effectively than others.

But for advisers, their role is far more than that in such an environment.

Over the past three months, IFAs have experienced a surge in calls from clients looking not necessarily for concrete information on their investments, but for reassurance and communication.

When markets slump they get calls from worried investors asking if they should get their money out – rarely the best option – and when banks fail, as in the case of IceSave recently, they are inundated with inquiries about the security of their savings.

In such circumstances, investors are looking for support and a bit of handholding through the crisis. What advisers can't do is control the flow of markets – they can only attempt to minimise the impact on their clients. With that in mind, here is the leader-board after nine months.

It is based not only on portfolio levels but on other criteria taken into account by the judging panel, such as fund selection, portfolio changes and how well the competitors understand the case study remit. With three months to go and markets liable to go in either direction, however, there's all to play for.

The current "league standings" are: 1 – Duncan Mackenzie, Mackenzie Taylor Wealth Management; 2 – Keith Thomson, Blackadders; 3 – David Rankin,Bell Lawrie; 4 – Mark Houghton, Condies Wealth Management; 5 – John Moore, Central Investment Services; 6 – Willie Crockett, Edinburgh Risk Management; 7 – Gordon Forbes, Caledonia Asset Management; 8 – David Thomson, VWM Wealth Management; 9 – Adeline Christy, Kudos Financial Services; 10 – Steve Wilson, Alan Steel Asset Management.

Keith Thomson: Blackadders

FEW if any investors or professional advisers have previously experienced the tumultuous events of recent months. But we need to take a step back and remember that the investment horizon for the portfolio is nearly ten years and the original asset allocation decisions were, and still are, sound.

We have made three changes since June. We switched out of the Aegon Global Bond fund and into the Swip Absolute Return Bond fund to provide some added downside risk protection. We also reduced our exposure to the Standard Life UK Equity High Income fund by adding to the Blackrock UK Absolute Alpha fund, again to reduce the risk while still creating upside potential. Finally we sold the Artemis European Growth fund and reinvested in the Artemis New Enterprises and the UK Special Situations funds. We believe that technology will become increasingly important as companies look to reduce their manpower costs and increase efficiency and productivity practices, while many shares are now looking attractive on a price/earnings and valuation basis. We still believe that the long-term asset allocation is correct and when a rebound comes, it will be rapid. The timing of this is the difficult part, but we would prefer not to be out of the market.

We would also suggest that Angus MacDonald should consider drip-feeding his annual £10,000 contribution to the portfolio to take advantage of lower stockmarket levels.

Overall the portfolio has performed negatively, but has outperformed both the Balanced Managed sector and the FTSE 100 MSCI World (ex UK) indices and sits between the Cautious Managed and Balanced Managed sector averages, which we believe is still the original client remit.

Duncan MacKenzie: MacKenzie Taylor Wealth Management

IT WOULD have been impossible for Frederick Forsyth, John Grisham and Tom Clancy as a combined writing force to have come up with the plot that we have seen unfold in financial markets over the past few weeks.

We have seen the collapse of major US investment banks, Bradford & Bingley going bust, Lloyds TSB in a compulsory takeover of HBOS, Royal Bank of Scotland going to the wire before effective nationalisation and the complete failure of the Icelandic financial system.

Unfortunately, the portfolio has not escaped the financial turmoil and has lost around 23 per cent since January. During this same period, the UK benchmark FTSE 100 index has fallen 34 per cent and the FT world index by 40 per cent.

The portfolio still holds a significant level of cash, which has been very much to the benefit of the client. In hindsight it is unfortunate we reduced the initial cash levels.

The investment funds are heavily weighted towards emerging markets and the Far East, and these have suffered more significant falls than more traditional UK-biased funds. I am, however, still convinced that medium to long-term growth will be found in these overseas markets as western economies will struggle to grow, especially in the wake of the current financial crisis.

I do not intend to make any changes at present, but will review the cash position as it is more than likely that we will have interest-rate cuts in the coming months. Fixed-interest will prove attractive as cash returns fall, but we may see further volatility in this apparently low-risk sector as weaker companies, particularly banks and insurance companies, look to raise emergency finance.

Mark Houghton: Condies Wealth Management

ANOTHER quarter, another reduction in share values, increased inflation, reduced interest rates and a 30-year low in house sales.

Angus MacDonald, like most investors, will be concerned. However, this was medium to long-term planning and he did state that, although he was naturally cautious, he was prepared to take an element of risk, so that his income requirements in retirement could be met. Going back to my initial calculations, the growth rate required was 8.75 per cent (after charges) and, as detailed at the time, this was always going to be a challenge. What does he do? Well my plan so far has been not to make many fund switches, as often chasing better returns does not work and incurs costs. I have continued with this plan, although at the beginning of October I switched my holdings out of natural resources and smaller companies. As the general consensus among economists is that we are heading into a recession, these are two areas which are likely to feel the squeeze and therefore I decided to move into corporate bonds (which should hopefully hold up well with interest rates being cut) and Newton's International Bond fund (global fixed-interest).

What the current climate does illustrate is the importance of clients utilising fund switches nearer retirement, to lower the risk so that the fund does not deplete just when benefits are required.

For the moment, though, MacDonald has to hold tight and take a medium to long-term view. As we know from looking at the past, the markets are cyclical and confidence will return, it's just a question of when?

Willie Crockett: Edinburgh Risk Management

IN SETTING out the basic asset allocation framework and mindful of the client's challenging long-term objectives, attitude to investment risk and the ten-year timescale involved, we embarked upon constructing a portfolio that would have approximately an equity/bond percentage split of 75/25.

As the year has progressed, the fund has been tilted to a higher fixed interest content, with a reduction in UK equities in favour of overseas holdings.

The events of the past few weeks, unprecedented in their nature, require at the very least a re-examination of our strategy. Having been faced with the threat of a breakdown in the functioning of the global financial system, governments around the world, taking their lead from the UK administration, have part-nationalised banks, pumped liquidity into financial markets and begun a concerted effort to cut interest rates.

This has undoubtedly been the correct policy response and seems to have stabilised matters for now.

Attention has now turned to the prospects for the real global economy and it has to be admitted that they are not promising, with recessionary conditions evident or imminent in a number of countries.

The implications of this are not all negative, however, as global inflation and UK interest rates are set to fall significantly.

Equity and bond markets have started to anticipate a more difficult economic backdrop and, while this has been painful in the short term, it is certainly not the time to make wholesale reductions in our equity holdings, bearing in mind the investment timescale involved. As returns from cash fall away, the first place to look to increase exposure will be investment grade bonds.

David Thomson: VWM Wealth Management

IT HAS been a difficult year and we have been much more active than usual as various sectors and assets have come under selling pressure.

Last January we saw the first signs of the impact of the credit crunch and switched property into corporate bonds in a bid to limit – but unfortunately not avoid – the full extent of the downturn in markets which has subsequently unfolded.

As the crisis deepened, we reduced exposure to cyclical areas investing in an absolute return fund designed to provide steady returns under a variety of stockmarket conditions.

Although this fund has not performed as well as we had anticipated, it has fallen significantly less than the shares we previously held. The shares we hold are focused on blue-chip companies and those paying healthy dividends, which should provide a reasonable degree of support. We also have a significant bias towards the US as we anticipate that it may be one of the first markets to emerge from the crisis.

We had persisted with an exposure to commodities, but when we saw what we believed was the short-term peak in this area we made our exit, although not before commodities had already fallen sharply.

When we see experienced investors such as Warren Buffett in the US and Anthony Bolton, one of the UK's most experienced investors, beginning to dip their toes back in the water, we wonder if now is the time to look for buying opportunities.

So, although it feels uncomfortable, we have begun to reverse our build-up in fixed-interest investments.

Adeline Christy
Kudos Financial Services

UNCERTAINTY over the health of the global economy is continuing to hit asset prices worldwide. By 16 October, the FTSE 100 had fallen 38.1 per cent this year, with all major asset classes, including property, gilts, corporate bonds and overseas equities, seeing negative returns.

Accordingly, it has not been a great start for Angus' investment portfolio and he may need to reassess his income expectations. But as he has more than nine years until he needs his £50,000 income per annum in retirement, the cyclical nature of the stock market is such that we can expect significant growth over that period.

Areas such as Russia, emerging markets and Asia have been sold off aggressively in recent months on fears over the extent a global recession will have on those regions. But they are still growing at above-trend rates, albeit at a slower pace, and I continue to believe returns from these regions will outpace those of more developed markets over the medium term.

Russia has been hit hardest as commodity prices have fallen sharply and liquidity has tightened, although I continue to like the themes of energy, infrastructure, growth in consumer spending and a lack of exposure to subprime debt, all inherent in this economy.

The Insight Diversified Target Return Fund has not been immune from market falls, despite its cautious mandate, with its exposure to corporate bonds of financial companies proving costly.

This fund now makes up nearly a third of Angus' overall portfolio and it does make an excellent core holding and strategies and has handsomely outperformed every major equity market and the IMA Cautious Managed sector since the beginning of the year.

John Moore: Central Investment Services

THE last three months has been a period that will live long in the memory and in time we may find out how close we came to a complete global banking meltdown. My summary in July stated that there was good value to be had in investment markets and if that was the case, then we must consider whether anything has changed fundamentally that would bring you to any other conclusion than current valuations represent incredible value.

I do think that the risk of a more prolonged global recession has increased, although I still believe that we will witness a relatively short, shallow recession. Current valuations seem to have factored in Armageddon for global economies and if the reality turns out to be better (and let's for everyone's sake hope that is the case) then we could see a sharp rebound in valuations in the very short term with a more prolonged bull run continuing through 2009.

The sharp drop in valuations over the past few weeks has been a result of panic and fear. The final stage of a bear market is generally capitulation and I believe that over the last week we reached that stage. Falls have been exacerbated by hedge funds offloading assets to raise capital and when these positions have been unwound there is every chance of a sustainable recovery. While society may feel the pain of a recession over the coming months, history has shown that the market generally rises strongly during a recession.

This is a time for courage. If Angus MacDonald can afford his proposed additional contributions, this is the time to invest. With nine years to retirement, he still has time on his side. At this stage I firmly believe that it is still realistic to achieve his objectives for his retirement with his current investment portfolio.

David Rankin: Bell Lawrie

CREDIT crunch and financial crisis have been the buzz words of the past 12 months, as the world comes to terms with a new financial order. My duty to my clients is to assess how these new circumstances affect their long-term pension objectives.

To a certain extent I believe it highlights a need for cool heads and responsible long-term strategies.

My objective during this quarterly review has been to assess the strategic allocation of assets and decide if these still provide the best opportunity for my client to meet their final objective. In this case I remain convinced that a globally diversified portfolio continues to provide the best opportunity for the client to achieve his stated objective.

In my view, the governments of the developed nations, led by Gordon Brown, have taken the first positive steps in protecting the global economy. I would now expect this to be followed by significant cuts in interest rates, co-ordinated globally, as inflation dissipates. In fact deflation both in the UK and elsewhere could be a greater threat, hence the need to maintain fixed-rate exposure to bond funds. Furthermore it is difficult to argue that, on a medium to long-term view, equities are not cheap.

I have not made any changes to the portfolio to date, believing the sector weightings are as they should be for a long-term pension portfolio.

Making regular investment changes is an aggressive strategy that can exaggerate losses. With current market volatility so high it is impossible to predict what will occur over the next week or even the next year.

Steve Wilson: Alan Steel Asset Management

THERE is an old saying that the only things that go up in a down market are correlations. Normally one asset will tend to rise while another one falls, but in bear markets they tend to converge and there have been few hiding places. We believe there is incredible value in the market now, but as sentiment is poor this has not been reflected in share prices as yet.

Experienced investors see great buying opportunities out there for the long term and, as Angus MacDonald is contributing £10,000 a year to his self-invested personal pension he will be buying units at a discounted price. Investment guru Warren Buffett recently said that, in the short-term, the stockmarket is a voting machine and in the long run a weighing machine. As a voting machine it responds to people's emotions, however you vote, according to how much money you have, not how smart you are. So the market does silly things short-term. Over the long run it behaves rationally and five years from now we will look back and see that some extraordinary buys were on offer.

As the financial turmoil has progressed throughout the year we made some changes and recently increased our US holding. Both have excellent fund managers at the helm and Tom Walker at Martin Currie is only down 8 per cent since the start of the competition.

At times like this it is important to remain patient and focus on the long term. It is also important to make sure we are in the right places to take advantage of the upturn when it comes around. With the average fall in a bear market being 29 per cent and the average gain in a bull market being 92 per cent, the long-term investor is usually rewarded.


Gordon Forbes: Caledonia Asset Management

WITHIN our fund selections we continue to avoid property as we feel that this depressed sector is still showing no signs of recovery. All our other funds have either no or very small weightings in banks – currently a cause of some concern – and we see no reason to alter this. The market intervention by government and the activity in mergers will clearly lead to a position with fewer and stronger providers that should lead to them offering good prospects at some point in the future. Given the low

Whilst the negative performance of our portfolio to date is disappointing, against the major indices like the FTSE All Share it has outperformed, which is a testament to the diversity we have adopted. Angus MacDonald must remember that we are establishing a pension strategy with a ten-year view, linked to his moderate attitude to risk, which means he is prepared to accept that downward movements will occur over the short term. During the course of this turbulent year it is understandable that many may be tempted to shy away from the markets and place monies in cash for example. However, cash holdings, which are traditionally seen as emergency funds, have probably brought more grief and uncertainty to customers than any other form of investment.

Case Study: Ensuring MacDonald of a proper pension is aim of competitors

ANGUS MacDonald (50) is a solicitor who runs a small family law firm in Aberfeldy. He is married and has two children – Robert, who is 24 and employed as a chartered surveyor in Edinburgh, and Susan, who is a medical student at Aberdeen University. MacDonald's wife, Margaret, is a full-time housewife but also does some voluntary work for a local charity.

Over the years, MacDonald has accumulated an ad hoc collection of self-employed annuity contracts and personal pensions, the majority of which have been last-minute purchases before the tax year end. As a consequence there is no real structure to his investment strategy. He has recently consolidated his various pensions into an investment only self-invested personal pension (Sipp) with Hornbuckle Mitchell – an independent trustee company. The current value of his fund is £300,000.

He is seeking advice on how to construct an investment portfolio that will meet his long-term objectives and match his risk profile. He plans to retire at 60 and would ideally like to have an income in retirement of around £50,000 per annum. He is naturally cautious but realises that he may have to increase his exposure to risk to meet his long-term goals. He plans to contribute £10,000 a year into his Sipp.