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.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Mark Dampier: 'Headlines scream panic but don't start ripping up your investments'
The green energy switchover: five things you need to know about ditching fossil fuels
Questions of Cash: I've been chased for a phantom debt. What can I do to stop it haunting my credit status?
Offset mortgages: How to save thousands of pounds and reduce the term of your home loan
My Travel Cash card charges a punitive 'inactivity' fee of €2.50 a month
- 1 If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
- 2 'Heartbreaking' Syria orphan photo wasn't taken in Syria and not of orphan
- 3 Bob Geldof offers to take four refugee families into his home 'immediately' as he condemns humanitarian crisis as a ‘f**king disgrace'
- 4 Orthorexia nervosa: How becoming obsessed with healthy eating can lead to malnutrition
- 5 Bryan Cranston speaks candidly about wealth
Britain to take more refugees as Cameron bows to pressure after more than 250,000 back our campaign
Senior British politicians tell David Cameron: When dead children are being washed up on beaches – it's time to act
Jeremy Corbyn calls Osama bin Laden's killing a 'tragedy' - but was it taken out of context?
If these extraordinarily powerful images of a dead Syrian child washed up on a beach don't change Europe's attitude to refugees, what will?
Make your voice heard: Sign The Independent's petition to welcome refugees
If you're not already angry about the refugee crisis, here's a history lesson to remind you why you really should be
iJobs Money & Business
£16000 - £40000 per annum: Recruitment Genius: A Foreign Exchange Dealer is re...
£20000 - £40000 per annum + OTE + Incentives + Benefits: SThree: Established f...
£20000 - £25000 per annum + OTE 40/45k + INCENTIVES + BENEFITS: SThree: The su...
£14000 - £16000 per annum: Recruitment Genius: This company was established in...
Day In a Page
This five-bedroom home in Sutton Coldfield is arranged over three floors, with a detached garage to the rear and a driveway at the front of the property.
In an elevated position above the bay, this four-bedroom home offers sea and headland views. There is a decked balcony and sun terrace - plus coastal walks on the doorstep.
With four bedrooms, this spacious maisonette in a mid-terrace period-style house in Holland Road is well-maintained and offers high ceilings and period features.
The terraces of this two-bedroom penthouse apartment offer panoramic views that stretch over fifty miles from the cliffs of Beachy Head.
In the heart of the coastal village of Mumbles and moments from the pier, this five-bedroom Victorian terrace is set over three floors and retains many original features.
In a sandbanks location, moments from the beach, this three-bedroom apartment has a large open-plan living area and a south-west facing balcony.
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
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.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
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.
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 first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
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.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
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.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
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.