This page contains a Flash digital edition of a book.
FEATURES Investment


goes, the higher the returns have been in recent months. In addition, the recently reported relaxation of Basel III capital requirements has proven to support those bonds issued by fi nancial institutions and bonds generally.


US three-month interest rates 1929–1961 versus 2007–date 6


5.5 5


4.5 4


3.5


Index-linked gilts Investment in index-linked gilts may also be regarded as a strategy intended to reduce or mitigate the risks associated with holding cash. Index- linked issues provide some diversifi cation and protection against a potential increase in infl ation that would undermine the real value of monetary assets. For example, the 2024 index-linked


% 3 2.5


2


1.5 1


0.5 0


1929 2007


Rates went below 1% in 1932


And didn’t go above 1% until 1948 – 17 years later


1929 onwards 2007 onwards


2012 1934


1939


1944


1949


1954


1959


gilt was originally issued in December 1986 at a real yield of 2.5 per cent. Over time, investors have been willing to buy index-linked gilts at much lower yields. Index-linked gilts protect against UK RPI infl ation because both the interest payments and the capital value that will ultimately be received at maturity are increased in line with infl ation over the life of the gilt. The value of the UK RPI when the 2024 index-linked gilt was issued was 97.67. The current index reading is 243. This equates to approximately


GBP248.8 as an ‘indexed’ or infl ation- adjusted value of the capital. As the capital value, i.e. the price, is currently approximately GBP334, this is roughly 34 per cent higher than the infl ation indexing earned to date. Essentially, the value of capital invested now will be protected from future infl ation only after the infl ation indexing has caught up with this premium – i.e. about 34 per cent higher than now. The income is unaff ected as it is automatically calculated and paid according to the original terms.


Historic returns from equities In a period of relatively low economic growth, I believe that dividends will provide a greater proportion of total


Equity performance


Number of consecutive years 2


3


Outperform cash Underperform cash Total number of years


Underperform gilts Total number of years


74 37 111


76 35 111


76 34


110


82 28


4


78 31


109


82 27


5


80 28


108


80 28


10 93


10 103


81 22


18 94


1 95


Probability of equity outperformance 67% 69% 72% 74% 90% 99% Outperform gilts


110 109 108 103


Probability of equity outperformance 68% 75% 75% 74% 79% 88% SOURCE: BARCLAYS CAPITAL


84 11


95


DERMOT HAMILL IS HEAD OF WEALTH MANAGEMENT AT COLLINS STEWART WEALTH MANAGEMENT, ISLE OF MAN


WWW.STEPJOURNAL.ORG APRIL 2013 79


return. Moreover, if growth over the next few years proves relatively anaemic, those companies paying high, safe and growing dividends will outperform. Since 1931 dividends have accounted


for over 40 per cent of the total return on stocks (in the US). In lower growth environments, however, dividends actually made up a greater proportion of the index’s return than capital appreciation – for example, in the 1930s, the 1970s and the 2000s, the latter being a decade of zero capital appreciation. Historically, equities have provided


investors with positive, long-term real returns, although in recent years they have been mixed with negative returns on several occasions.


Despite recording a sharply negative


return in 2011, equities have still provided positive historic returns over longer periods in real terms and have comfortably exceeded returns from cash over the past 20 years, albeit eclipsed by gilts over that period as yields have fallen to multi-decade lows. The table below illustrates the performance of equities against cash and gilts. For example, the fi rst column illustrates that over a two-year holding period, equities outperformed cash 74 times out of a total 111 times in the entire sample, or 67 per cent of the time.


The incidence of equity market outperformance increases as the time horizon is extended, with equities outperforming cash 99 per cent of the time over 18-year holding periods and outperforming gilts 88 per cent of the time. I believe investors should focus on


stocks that have a high, well-covered dividend, preferably via companies that are not highly leveraged. I am focused on global equities


with strong dividend growth prospects, global listed real estate, and selected infrastructure projects linked to ‘infl ation plus’ returns.


Summary


In spite of all the current economic uncertainties, interest rates will remain at current levels at least for this year and probably much longer. Given this, it is vital that advisors and investors actively manage their cash positions to at least maintain the real value and avoid issues in subsequent years. For those of a lower-risk disposition, gilts, index-linked gilts and corporate bonds will be suitable alternatives, but for those with a longer investment horizon exposure to higher yielding equities, infrastructure, commodities and healthcare should be considered.


Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8  |  Page 9  |  Page 10  |  Page 11  |  Page 12  |  Page 13  |  Page 14  |  Page 15  |  Page 16  |  Page 17  |  Page 18  |  Page 19  |  Page 20  |  Page 21  |  Page 22  |  Page 23  |  Page 24  |  Page 25  |  Page 26  |  Page 27  |  Page 28  |  Page 29  |  Page 30  |  Page 31  |  Page 32  |  Page 33  |  Page 34  |  Page 35  |  Page 36  |  Page 37  |  Page 38  |  Page 39  |  Page 40  |  Page 41  |  Page 42  |  Page 43  |  Page 44  |  Page 45  |  Page 46  |  Page 47  |  Page 48  |  Page 49  |  Page 50  |  Page 51  |  Page 52  |  Page 53  |  Page 54  |  Page 55  |  Page 56  |  Page 57  |  Page 58  |  Page 59  |  Page 60  |  Page 61  |  Page 62  |  Page 63  |  Page 64  |  Page 65  |  Page 66  |  Page 67  |  Page 68  |  Page 69  |  Page 70  |  Page 71  |  Page 72  |  Page 73  |  Page 74  |  Page 75  |  Page 76  |  Page 77  |  Page 78  |  Page 79  |  Page 80  |  Page 81  |  Page 82  |  Page 83  |  Page 84