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EDITIONS
 Wednesday, 18 September, 2002, 08:58 GMT 09:58 UK
New investment world baffles City gurus
Queen holding an umbrella
Even the grandest investors need shelter from stormy markets

The Queen, it seems, is to diversify.

No longer will her investment patronage be focused on a limited range of traditional assets.

Justin Urquhart Stewart
Justin Urquhart Stewart: Bond booster
Her Majesty is being urged to spread her loose coppers among a wider range of savings pots.

If, that is, her City adviser Cazenove gives monarchs the same advice as offered to subjects.

"We believe that private clients need to consider diversifying beyond equity and bond markets into a broader range of asset classes," Andrew Ross, chief executive at Cazenove Fund Management, told investors in a circular last week.

Hedge funds, for instance, near banished in 1998 after a spectacular bust, are now a must-have in the Cazenove set.

"Most private clients should consider allocating a proportion of their assets to hedge funds," Mr Ross wrote.

"Strategic asset allocation" - City-speak for spreading one's risks - is the buzz phrase not just at Cazenove, but throughout UK finance.

A fine balance

"The way you invest in this market is through good asset allocation, not through just selecting a few equities," says Justin Urquhart Stewart, marketing director at Seven Investment Management.

Paul Kavanagh
Paul Kavanagh: "Difficult times"

"You need a balance of bonds, cash, property and equities."

Certainly the FTSE's ups and downs, and downs, continue to hog the headlines.

But it is the bond market which should really steal the column inches.

"The bond market is five times larger than the equity market, yet people tend to forget about that," says Mr Urquhart Stewart.

The name's bond

Examine the daily listings in the FT and you will find entries for shares and funds, and even for government bonds.

The changes in prices of company bonds, however, go unrecorded.

"They are not something people traditionally try to own in this country," Mr Urquhart Stewart says.

"Unfortunately our broking fraternity focuses far too much on equities, and on a short term basis."

Indeed, equity specialists used to receiving returns of 15% a year should be grateful now for 5-7% achieved from a diversified portfolio.

Back to the future

The trouble for shares is that the investment overview has changed.

The market has changed... It is making our job difficult at the moment, I can tell you

Paul Kavanagh, Killick stockbrokers

Or, rather, reverted to pre-1980 rules.

"What we had in the 1980s and 1990s was a once-in-two-centuries phenomenon of a bull market," one analyst says.

"Historically, about a third of returns from share investments have come from dividends.

"It looks like that pattern is reasserting itself."

Cash switch

Indeed, it was to high-yielding stocks that investors rushed when the tech bubble collapsed, and new economics was exposed as old cobblers.

Cash switched to power firms, chemical companies even, ugh, some manufacturers whose modest actual earnings had seemed pocket money when compared with the fortunes promised by internet start-ups.

Ditching dot.coms, investors embraced so-called "defensive" stocks - shares in companies which offered, furthermore, slump resistance.

Come boom or bust, Britons would need housing, food and water, healthcare and military protection.

So why not invest in military equipment maker BAE Systems, drug maker AstraZeneca, utility International Power, or supermarket chain Safeway?

Difficult times

For a while the trend held, and shares in utilities, for instance, proved among the more resistant to last year's stock market slide.

Some of the better share investments
Imperial Tobacco: +6.1%
Associated British Foods: -2.0%
British American Tobacco: -4.1%
United Utilities:
-4.8%
MMO2: -8.9%


FTSE 100: -22.9%

Period: 16 May to 16 September

"One of the trends that stood up best was that high-yielding shares performed best," says Paul Kavanagh, director of stockbroking at Killik.

But this summer's slump revealed that even going defensive offered only limited protection.

An investor who split his money in mid-May between BAE, AstraZeneca and Safeway shares would now be sitting on a 33% loss.

International Power, meanwhile, has slid sufficiently to see its shares ejected from the FTSE 100 elite on Friday.

... and some of the worst
British Airways:
-47.8%
AstraZeneca:
-38.1%
BAe Systems:
-33.8%
Anglo American:
-34.0%
Safeway: -29.0%


FTSE 100: -22.9%

Period: 16 May to 16 September

"The market has changed," Mr Kavanagh says.

"You can get the right sector, only to find the stock you pick in it blows up in your face.

"It is making our job difficult at the moment, I can tell you."

Fund managers are having to delve further and further into firms' fundamentals to identify those best placed to prosper amid humdrum UK economic growth.

"You have actually had to look down into companies and see which ones are generating safe cash flow, and which ones are seeing a deterioration in their market places," says Steve Russell, equity strategist at HSBC.

Stars in their eyes

Hence a new focus on the star fund managers best able to sort their BATs from their BAEs.

Cazenove itself two weeks ago poached five "highly rated" fund managers. (From HSBC, as it happens).

Hence also the widespread advice to investors to diversify into hedge funds and property.

Perhaps the housing bubble is indeed about to burst, as price rises outstrip wage increases and rental values slide.

But in the long term, it would seem a Briton's home (or palace) is not just their castle, but their nest egg, asset safety net and pension pot too.


Analysis

IN DEPTH
The Markets: 9:29 UK
FTSE 100 5760.40 -151.7
Dow Jones 11380.99 -119.7
Nasdaq 2243.78 -28.9
FTSE delayed by 15 mins, Dow and Nasdaq by 20 mins
Launch marketwatch
View market data
See also:

18 Sep 02 | Business
05 Aug 02 | Business
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