Investment Newsletter October 2012
Defined Returns We are pleased to report that the Defined Returns products we bought in October last year have now all “kicked out”. These structured products were designed to pay a set return provided that the FTSE was the same or higher than the starting level, at the anniversary date of each product. The FTSE was significantly higher for all of the products at the first anniversary. This means that the products end for those who bought them at outset have received the following returns from the banks: • Barclays – 12.75% • HSBC – 11.25% • Credit Suisse – 11.05% Those who bought on the secondary market will receive a slightly different return, depending on the price at which they bought. The products take some time to settle as the securities are wound up. The funds from all three products will be in your Nucleus or 7IM accounts by the end of the month.
Risk and Return We have been considering various reinvestment options including fixed interest and alternative equity. However, we have concluded that purchasing new Defined Returns plans which work in a similar way to last time is our preferred option. The returns from this type of product are not going to be as attractive as they were this time last year. There are a number of things which affect the “rates” which the banks will offer: • Market levels – which are much higher than 2011 when they were between 5,298 and 5,401 for the products we bought last year. • Volatility – the more volatile the markets, the higher the rates banks will offer. Recently markets have been relatively stable between around 5,750 and 5,850. • The perceived credit risk of the bank. In autumn 2011, we were in the midst of the European crisis which was having a knock on effect on the banking system. Due to heightened concerns, we were able to get some very attractive rates last year. At present, the perceived risk of most banks is much lower than last year, and therefore the rates they offer are lower. However, there are ways we can enhance returns.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Investment Newsletter | October 2012
Reinvestment Options We are currently finalising the new products into which we will reinvest your cash. We are using Barclays again, who are still perceived as the riskiest of the banks we used last year. The product they are currently offering will pay 10% pa (simple, not compounded) provided the FTSE 100 is above the level it is on the “strike date�, which will be 12 November 2012. If the FTSE 100 is the same or higher on 12 November 2013, the product will end and clients will receive their money back plus 10%. If not, the product rolls on until 12 November 2014 and if the FTSE is then the same or higher than the strike date, the product kicks out paying a 20% return. This carries on with potential kickouts at each anniversary until 12 November 2018, six years after the strike date. If, at that point, the FTSE is still not above its start level, the product ends and Barclays repay the capital, with no return. However, if the FTSE is down by 50% or more at that point, clients would lose money on a 1:1 basis. At present, we are finalising the choice of the other two banks and negotiating the rates that they are prepared to offer. We think we are likely to get an average return over three products of around 9.5%. With markets at relative highs of almost 5,900 as I write (the morning of 22 October), we are happy to take our time to negotiate a better rate. If markets drop in the meantime, we will get better rates and we can take advantage of a lower strike level. We feel the risk of markets rising dramatically and us missing out on this rise is not that great. The strike dates of the other products are likely to be towards the beginning of November.
Secondary Market The structured products we use can be bought or sold on the secondary market at any time, with a 1% spread between the buying and selling prices. This means that we do not have to hold them to maturity, but can sell if we think the time is right at any point in between. Some clients were unable to invest in the Defined Returns we bought last October, mainly those that became clients after this time. For those clients, we typically bought a different Barclays product at the end of July this year and an HSBC product at the end of August.
Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Investment Newsletter | October 2012
This Barclays product is currently showing a 5.5% gain, over half the potential return of 10.6% that could be available in July 2013. If we sell now, that equates to an annualised return of around 30%. The HSBC product is up by over 2% in just over a month, which equates to an annualised return of over 17%. Both are up by more than the FTSE 100. For our model clients, we are therefore planning to sell these products, capturing the gains, and reinvesting into the new products which we feel can generate higher returns. For bespoke clients, the decision whether to sell or not will be taken on a client by client basis.
Equinox We will issue another communication with full details of all the new Defined Returns products shortly. You will also be receiving the latest edition of our half yearly investment magazine, Equinox, in the next couple of weeks. This is packed with performance information, features and interviews, so look out for it coming through your letterbox shortly!
Mike Deverell
Investment Manager
Equilibrium Asset Management LLP Brooke Court Lower Meadow Road Handforth Dean Wilmslow Cheshire SK9 3ND United Kingdom Visit us at www.eqasset.co.uk t : +44 (0)161 486 2250 f : +44 (0)161 488 4598 e : askus@eqasset.co.uk Equilibrium Asset Management LLP (a limited liability partnership) is authorised and regulated by the Financial Services Authority. Equilibrium Asset Management is entered on the FSA register under reference 452261. The FSA regulates advice which we provide on investment and insurance business; however it does not regulate advice which we provide purely in respect of taxation matters. Copyright Equilibrium Asset Management LLP. Not to be reproduced without permission
Market Views | October 2012
General Economic Overview The European situation appears to have settled down for now. A new round of quantitative easing in the US could have a positive economic effect and economic data has been generally more positive of late. However, global growth remains muted at best with many Western economies barely growing. We expect more central bank stimulus to keep the economy on track. Inflation is falling back globally, however stimulus could eventually lead to this rising significantly in the future. Asset class key + positive - negative = neutral (normal behaviour)
+5 -5
strongly positive strongly negative
Equity Markets We remain very positive taking an 18 month view, based on valuations such as the Price/Earnings ratio. However, with the recent recovery we could easily see some short term downwards moves. We particularly favour the UK and Chinese markets.
Outlook
+4
Fixed Interest Interest rate risk has receded for the short term but inflation could hurt bonds in the long term. Corporate Bonds still provide reasonable yields and could do reasonably well in this environment. We are avoiding Gilts whose values have been inflated due to recent risk aversion.
+1
Commercial Property Whilst the rental yield on commercial property remains attractive, this is diluted by high levels of cash in property funds. We are seeing capital losses although we believe that overall returns will probably be positive, but low. However, we don’t believe the returns are worth the risk of investing in property at present.
-5
Residential Property
-5
We believe prices are likely to remain flat over 18 months. Cash With interest rates remaining at record lows, returns on cash could remain below average for some time. However, there is a short term safe haven appeal. Balanced Asset Allocation For a typical balanced portfolio we are overweight equity and cash, neutral fixed interest and hold no property. A neutral score (=) means we expect the asset class to move in line with our long term assumptions: 10% pa for equity, 7% for property, 6% for fixed interest, 5% for residential property, and 3% for cash. A +5 score means we think the asset class could outperform by 50% or more. A -5% means we think it could underperform by 50%. A negative score does not necessarily mean we think the asset class will fall. These represent Equilibrium’s collective views. There are no guarantees. We usually recommend holding at least some funds in all asset classes at all times and adjust weightings to reflect the above views. These are not personal recommendations so please do not take action without speaking to your adviser.
-5