News

31/07/2008 - Frequently asked questions in a volatile market

Q. Why does my portfolio appear to have gone down so much over the last 12 months?

A. Stockmarkets in general have taken a tumble over the last 12 months, mainly due to the sub-prime lending market in the USA, together with the fact that many banks are now concerned about lending out further money to large institutions. In turn this has had a knock-on effect to the value of property as well as shares. In addition to this, Bond markets which normally work in the opposite direction to equities have also not performed as well as one would have expected and this is again due to inter-company and bank lending.

Q. Should I be looking to switch out of my existing portfolio?

A. You do of course have the opportunity to switch between the different Liberation portfolios, but at this time it would be our recommendation to sit tight and weather the storm. We realise it is difficult for people not to focus on fallen share prices and appreciate that it can be a worrying time for investors, with the temptation to bale out of the market and wait for stability to return. For investors who sell out at this point, they would obviously lock-in any losses and it is then difficult to gauge the right time to go back into the market. Over the long term it has been shown that those who resist the temptation to reduce their holdings or the investors who are adventurous enough to view stockmarket falls as an excellent buying opportunity, will be rewarded over the long term.

Q. Are the Liberation funds the right areas to invest in or would I have been better remaining with my previous insurance company pension?

A. The Liberation funds are infinitely more weather-proof than one particular fund within an insurance company. The weaknesses of investing with one insurer are that they do not always have consistency over their portfolios, messy administration, infrequent or no rebalancing and much less fund choice. As well as the Liberation funds offering daily rebalancing which we know in a volatile market will give out-performance over the long term, our funds also include tactical and strategical asset allocation and in simple terms this means that our fund managers are using a rear view mirror approach as well as a forward-thinking approach. Not only are they trying to produce a pattern based on what has happened in the past, they are also trying to gauge what may happen in the future due to current economic climates. Most insurance company funds only base their findings on past performance rather than what may happen in the future. I am also pleased to be able to confirm that the Liberation funds have outperformed the benchmarks which are set for them.

Q. Should I be paying more money into my pension or should I wait?

A. This is commonly known as “Pounds Cost Averaging”. Normally regular or phased investments reduce the risk of buying on the “wrong day” and in volatile markets this could mean being able to purchase more units on the days that the markets are down. As an example, you could have one client who had invested a lump sum at the beginning of January and a second client who chose to invest £500 per month. Over a 12 month period, in a volatile market it is highly likely that the monthly investor would have more units at the end of the 12 month period than the client who had invested a single lump sum at the beginning of the year. There is no guarantee that Pound Cost Averaging will result in better returns than lump sum investing, but in a volatile market you obviously do have more purchasing power.

Q. Why does the Liberation V fund appear to have performed more poorly than Liberation VIII which has more exposure to equities?

A. This is simply down to the percentage of assets in the property fund. Liberation V has approximately 21.3% in property, whereas Liberation VIII holds less than 6%. Property is viewed as a safe investment and over the long term will produce good returns. However, due to the Corporate Banks all being very worried on who to lend to at present, this is not doing the property market any favours. In addition, the Liberation funds do not actually hold bricks and mortar property but instead invest in shares in bricks and mortar such as British Land, F&C Commercial Property and ING Real Estate. The good news here is that the fund managers are being able to buy shares at approximately a 40% discount on their normal value which means when the markets do recover the portfolios will hold more shares with a higher value and in turn this will see Liberation V increase in value.

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