Safe from the slings and arrows of the markets

Clare Francis sees if battle-scarred investors should go into bonds
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The Independent Online

With less than three months to go until the end of the tax year, you'd expect a flurry of activity in the investment market as people move to use up their £7,000 individual savings account (ISA) allowance. But three years of falling markets are taking their toll and investor confidence is at rock bottom.

With less than three months to go until the end of the tax year, you'd expect a flurry of activity in the investment market as people move to use up their £7,000 individual savings account (ISA) allowance. But three years of falling markets are taking their toll and investor confidence is at rock bottom.

"Anyone who's invested over the last two or three years will be reluctant to put in new money until their other investments are back to where they started," says Gordon Davidson, joint managing director at Jupiter Unit Trust Managers. "Investors are more preoccupied by the prospect of losing more money [if they go into the stock market] than they are about making money."

With the FTSE 100 falling again last week, even those wanting to invest in equities are at a loss about where to put their money. But for longer-term growth, there's no point in holding it in cash.

"It seems investors want to buy the market but are struggling with this volatility," says Chris Burvill, manager of Gartmore's new Cautious Managed fund. "It's short-term fears that seem to be blocking people from investing at the moment. But what I'm trying to do is persuade people that there are even bigger risks if you wait until the market starts to rise before you buy."

Investor sentiment is such that we follow the herd and miss most of the gains by going in near the top of the market. In fact, now is the ideal time to buy because, while markets may fall further, you'll at least benefit fully from the recovery. "Realistically, the threat of war aside, times to invest haven't been better," says Nikki Foster, savings and investment manager at independent financial adviser (IFA) Chase de Vere. "The markets are low and there is good value out there."

Rather than following a trend, you should look at your portfolio and aim to plug any gaps so that you have a diverse spread of investments. But make sure you're happy with the level of risk you are taking.

Corporate bond funds have been popular over the past year. The bond market has been performing well in comparison with equities, and at a time when investors are reluctant to take a chance, corporate bond funds are seen as low risk. That said, you have to be careful because the most attractive funds, those with the highest yields, don't fit this "safe" profile: a product offering returns of 8 or 9 per cent is high risk. What's more, some experts believe the bull run in bonds is nearing an end.

"I think bond funds will be popular again this year but for the wrong reason," says Philippa Gee, investment strategist at IFA Torquil Clark. "It's still a worthwhile investment area over the short term and there are some good stock-picking fund managers, but bonds won't be so good in the longer term. I think the next 12 to 24 months will be the best you'll get."

If your portfolio is dominated by equities and you want a better balance of investments, one alternative to pure bonds is a distribution fund, which offers a split between equities and bonds. Jupiter launched a distribution fund last year that is 65 per cent invested in bonds and 35 per cent invested in high-yielding equities. New Star is launching a Managed Distribution fund on 12 February, and Gartmore is unveiling its Cautious Managed fund this Friday. The aim of these funds is to provide steady growth of about 5 per cent a year, while limiting risk.

"In the current climate, investors are looking for new ways of generating income and returns, while protecting their investment from capital erosion," explains Mr Davidson at Jupiter. "By increasing their exposure to bonds, investors have the potential to reduce the risk and obtain a relatively secure income stream. At the same time, they are able to remain firmly in the equity arena."

Michael Owen, managing director at IFA Plan Invest, believes distribution funds will be popular. "There's a lot of re- sistance to investing 100 per cent in equities at the moment, but for those wanting to commit new money, I think many will like the idea of a halfway house," he says.

Ms Foster at Chase de Vere says these funds are ideal for first-time or risk-averse investors. "They aim to grow your money gradually year after year, but they're not aiming to be the top performer."

If, though, your portfolio already has a good balance and you want to be more aggressive, it's worth looking at other funds. Ms Gee says that for those wary of the current conditions, a phased plan could be a good option. This lets you invest your full ISA allowance in cash and then drip-feed it into your chosen fund over a number of months, so ensuring that not all your money is exposed to a market fall.

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