William Kay: One fund takes a cautious step forward in a still-dicey market

When Theo Zemek had finished spilling coffee over me this week, she had thought-provoking points to make about the outlook for the stock market. Ms Zemek is the overall manager of New Star Asset Management's new Distribution Fund, which is being put up as the fund management group's flagship fund for the peak Isa (individual savings account) selling season until the end of the tax year on 5 April.

It is no coincidence that New Star, as shrewd at marketing as it is at picking stocks, is launching its latest offering hard on the heels of its High Yield Bond fund. Investors, true to form in the trough of a bear market, have lost their appetite for all but the most conservative havens. The High Yield Fund began in October and has maintained its value because its manager, James Gledhill, invested in high-class corporate bonds to produce a cautious 7 per cent yield. The Distribution Fund will have two-thirds of its money in corporate bonds – again managed by Mr Gledhill – and the rest will go into equities carrying solid dividends. The overall effect will be a corporate bond fund with a judiciously spiced equity kicker to give a yield of 5 per cent and modest growth prospects if the market should pick up.

Last spring, Jupiter Asset Management, New Star's deadly rival, launched its Distribution Fund. That held its value in the teeth of a 22 per cent fall in the FTSE-100 share index, so the defensive qualities of these funds – if skilfully managed – are well established. Ms Zemek who, like Mr Gledhill, proved her worth at her previous employer, M&G, is highly cautious about the prospects for equities. She believes at these levels shares represent fair value but she knows bear markets are rarely spent until they have driven prices down to outrageously good value. We are not there yet. When the 1974 bear market ended with shares selling on an average price-earnings ratio of only four and, at a time when inflation was far higher than it is today, the average yield was 12 per cent.

I still believe the best tactic is to drip-feed money into a well-spread unit trust or investment trust. But, for those too nervous for that, the distribution and high-yield bond funds of the likes of Jupiter and New Star are infinitely preferable to complicated products offering unrealistic yields which may ultimately be paid out of the investor's capital.

* The Personal Finance Education Group, backed by the Government and the financial services industry, was understandably pleased with itself this week when it celebrated the first anniversary of its four-year Excellence and Access project to develop financial expertise in schools.

The intellectual case for ensuring children leave school with a good financial grounding was won long ago. It is rightly seen by the Government as an essential bulwark against fraud and mis-selling. But, as so often in Britain, translating that into practice is proving far harder.

This week's event featured a mock Kilroy TV show by Catford Girls' School in south London, which was a brilliant and well-acted format for a discussion of such basic financial issues as loan sharks, gambling debts and Islamic mortgages.

But Professor Linda Thomas, of Brunel University, said much remains to be done. The subject is described as outside teachers' "comfort zone", a euphemism meaning teachers frequently know roughly as much about the subject as their pupils. And many of the older generation have a lingering distaste for filthy lucre.

It is a great advance to have personal finance in the curriculum, but that amounts to only a tiny segment of the citizenship course. The idea of a personal finance GCSE is still pooh-poohed as too narrow and specialised, though the more rarified discipline of economics has long been an exam staple.

Speakers at the first anniversary celebration claimed teachers had found a ready and enthusiastic audience of children eager to learn how to make the most of their money, but the sheer scale of the challenge can be measured by the campaign having so far reached only 130,000 school-age children out of more than 10 million in the UK.

* As if the high-street banks have not got enough on their plates, a news item this week was enough to have them reaching for the whisky bottle and the loaded revolver. The world's biggest retailer, Wal-mart, is going into financial services.

At present, the US-based group is offering little more than the sort of cheque-cashing and money-order facilities available in British post offices. But Wal-mart, which owns Asda here, rarely does anything by halves and we can be sure it will expand into loans, credit cards and savings.

It will not have been lost on Wal-mart that internet banks such as Egg or Intelligent Finance have been able to offer far better deals than their counterparts who have to pay for expensive branch networks. The only factors that have prevented a wholesale conversion to internet banks has been inertia and the upstarts' need to build trust in their brands. Wal-mart hardly needs to do that in the US, and Asda has a wide following here.

It may take a few years, but retail banking could be on the verge of a real revolution.

w.kay@independent.co.uk

The writer is personal finance editor of 'The Independent'