Secrets of Success: Beware funds that hold back dividends
Saturday 08 January 2005
Scanning the usual crop of new year predictions once again reminds us of the force of JK Galbraith's axiom that economists make forecasts not because they know, but because they are asked.
Scanning the usual crop of new year predictions once again reminds us of the force of JK Galbraith's axiom that economists make forecasts not because they know, but because they are asked. In the case of brokers and other professionals with a vested interest in higher share prices, the safest bet continues to be to predict that the market will rise by around 10 per cent each year - which is where most such forecasts seem to have clustered.
This figure is no accident. Given inflation of 2-3 per cent per annum, it equates to the long-run return from equities as an asset class (7 per cent in real terms). It is notable that the most successful fund managers are more cautious about the outlook. My sense from talking to them is that most will be happy if they can register positive gains for the third year in a row.
The odd thing about 2004 is that it did in fact turn out to be that rare thing - a fairly average year. Bonds did little in price terms, despite some serious wobbles on the way to a mid-single-figure total return. The stock market (as measured by the total return of the FTSE All-Share index) hauled itself up to a return of just over 10 per cent, continuing the recovery from the market lows of spring 2003.
The other striking thing about the past year is that volatility fell to very low levels. Notable exceptions to this were a rising oil price, the continued outperformance of midcap and some smaller company shares, the final apotheosis of the house-price bubble and a fall in the value of the US dollar. Emerging markets and commodities also did well.
Looking forward, as always, it is easier to predict which variables are likely to change at some point in the future than to make specific forecasts about when that will happen. A good approach is to log trends that have moved out of kilter with their recent or long-term course and adjust your exposure when each looks like reverting to its traditional relationship.
In general, it can be said that the period of relative outperformance by smaller companies will end soon in favour of the large-cap sector/FTSE 100 index. The point when technology shares start a sustainable upward trend is also approaching - though my hunch is that it may be 2006 before it gathers pace.
In terms of overall market performance, next year, the first year of a new presidential term, is likely to deliver poor returns. It is traditionally the point at which tough measures to stabilise the economy after two years of blatant electioneering are introduced. This may already be happening to some extent, judging by comments from the Federal Reserve that imply a more aggressive tightening of monetary policy this year than some expected.
If you look more carefully at what happens to the US stock market, however, history suggests that when first years of new terms are good, they are very good indeed, typically with gains of more than 20 per cent. So if volatility returns, 2005 will almost certainly be an exciting year one way or another - the exact opposite of the consensus forecast. In the short term, however, both the US and UK stock markets look over-bought, as the chart suggests, with director selling in particular at a very high level.
One other prediction I make with some confidence is that 2005 will again be a good year for those selling "structured products". These are instruments that use derivatives to offer investors a tempting array of new risk-reward combinations. I confidently predict that some of these products will again cause regulators, investors and financial advisers difficulties in the months ahead. If you are tempted by one of these new products, approach with care - they can be difficult to analyse and model.
Take, for example, a new product, sponsored by the Woolwich Building Society, that offers investors the chance to invest in the stockmarket with 100 per cent capital protection and the chance to choose, at the end of the five-year term, which of three leading market indices they wish to have the bulk of their money invested in. This is the first time, in my experience, that hindsight has been used as an investment marketing tool.
The product in question is a form of investment bond that you have to hold for five years. At the end of the period you get your initial investment back, plus a capital return linked to the level of three market indices, the FTSE 100-index, the S&P 500 index and the Dow Jones Eurostoxx 50 index. Investors have the option to put half their money into the one that has risen most, 30 per cent into the second-best performing index and 20 per cent into the third-best index. There are penalties if you cash in before the five-year term, but charges are taken account of in the promised return formula.
Sounds good? Maybe. The two catches are that the market return is based on the average index level in the fifth year, not the end-year level (which will cost you something if the market finishes the period rising), and - more seriously - that the return is limited to capital growth in the indices, without any credit for dividends. At current-dividend levels, that will cost you some 15 per cent of the market's overall return over five years, and the charges (though included) will take up to an extra 7 per cent. So you are giving up more than 20 per cent of certain return, plus the use of your money for five years, for a no-risk punt on the more unpredictable capital level of three stock market indices.
It is hard to say whether this will turn out to be a good or a bad bargain (such fixed-term products are always a bit of a punt). Dividend-free stock market investment is not in general a good choice, as reinvested dividends account for the majority of stock market returns over time. But the new product is certainly ingenious, and evidence that marketing will continue to pull in the pounds this year by making investment seem a much simpler business than in truth it really is.
The 'no-hang up' scam targets vulnerable people - and your bank may not protect you
Budget 2015: George Osborne is set to get tough with further cuts in public spending
Bargain Hunter: Our exclusive deal cuts the cost of buying foreign currency by 20 per cent
Five Questions On: GB Energy's new tariff
Simon Read: 'Taylor Swift tickets purchased on Viagogo were cancelled hours before the concert'
- 1 Autistic teenager beaten up by bullies makes them watch 20-minute video about autism
- 2 Greece debt crisis explained: A history of just how the country landed itself in such a mess
- 3 People all over the world are getting semicolon tattoos to draw attention to mental health
- 4 Greek debt crisis: Yanis Varoufakis's funniest (and most memorable) quotes
- 5 Swedish minister gives strongest case yet on why EU should stop turning away asylum seekers
More Britons believe that multiculturalism makes the country worse - not better, says poll
Osborne to cap family benefits at £23,000 – announced ahead of his post-election Budget
Nathan Collier: Montana man inspired by same-sex marriage ruling requests right to wed two wives
Forget little green men – aliens will look like humans, says Cambridge University evolution expert
Girl, 7, stares down hate preacher at Ohio festival with pro-LGBT rainbow flag gesture
Sickness and disability benefits could be reduced by £30 a week as part of £12bn welfare cuts
iJobs Money & Business
£40000 - £95000 per annum: Recruitment Genius: This is an exciting opportunity...
competitive: SThree: Are you passionate about sales?Do you have a keen interes...
£17000 - £30000 per annum: Recruitment Genius: This is an exciting opportunity...
£15000 - £17000 per annum: Recruitment Genius: This company offers a range of ...
Day In a Page
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.
Well-located for coastal walks and popular restaurants, this detached four-bedroom home offers views over farmland, to the Solent, the Purbecks and Bournemouth.
If you love high ceilings, school conversions like this one are bang on the money. This two-bedroom flat is minutes from Burgess Park and the foodie haven at Borough Market.
Set within a church conversion in Bermondsey, this two-bedroom maisonette combines existing features, such as original arches and brickwork, with a contemporary finish.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
This four-bedroom home offers a vaulted ceiling in a breakfast room that's ideal for summer entertaining with doors that open to the patio and garden.
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.