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US housing market fears remain By Faith Glasgow
Despite a useful recovery from the August setback, stockmarkets remain worried that problems in the US housing market will seep into the world economy. This is affecting confidence not just in equities, but also property and fixed interest. Cash seems the safest refuge, especially now that interest rates on deposits have moved up. But investors must remember that shares have been much more rewarding than cash over the medium to long term, and waiting for everything to be perfect before venturing back into the stockmarket usually means missing out on a lot of gains. Those who want a relatively defensive exposure to equities should consider the Equity & Bond Income sector. To qualify for inclusion, funds must have between 20 and 80% in fixed interest holdings and between 80 and 20% in UK equities - although they can also include overseas equities if they want. In addition, they must aim for a yield 20% higher than that on the FT All share index, which currently yields just over 2.9%. The result of the equity/bond mix is that the average Equity & Bond Income fund has lagged the All Share index in bull market conditions, but outperformed in the difficult period from late 2002 to early 2003. Trusts which have kept their bond exposure close to the minimum 20% have done best over the last four years, but if they maintain that position they will be more vulnerable to weaker markets. Size doesn't necessarily matter As is often the case, however, the size of funds is not always connected to their success. The Scottish Widows High Reserve fund is the largest in the sector, but has seldom been a top performer. In contrast, Allchurches Higher Income is one of the smallest, but is in the top category for both consistency of returns and overall rewards. The Allchurches fund has been managed since 1994 by Robin Hepworth, who generally has between 30-40% in a mix of corporate bonds, gilt edged securities and cash. This is more than most of his peers, and helps explain why he did comparatively well in 2002/03, but looked a bit dull for the next three years. He is currently cautious about the outlook, so has increased cash to over 10% and cut the fund's equity exposure to around 60%. On the fixed interest side, the small size of the Allchurches fund allows Hepworth to invest in areas such as Building Society PIBs (permanent interest bearing shares), which have contributed to an attractive 4% yield. On the equity side, he has built up his overseas exposure to around 30%, with a particular emphasis on China and other parts of Asia, and this helped the fund to do well over the 12 months to the end of July. Holdings in the likes of Petrochina and the Hop Fung Group sound racy, but Hepworth says he insists on the same valuation and yield characteristics as he would in the UK. Increased vulnerability The Jupiter Monthly Income fund has an even better five year record than the Allchurches fund, but may find it hard to maintain such a scintillating performance. The reason is that its manager Laurie Petar specialises in investing in the Ordinary shares of split capital investment trusts. These tend to do very well in rising markets, but can be extra vulnerable to difficult conditions, as was evident in the first three years after the fund's 2000 launch. In addition, the diminishing supply of split capital trusts means Petar will have to look elsewhere for returns. This could make the trust less volatile, but will also make it harder to maintain its attractive 4.25% yield. Investors could sleep better at night with the Jupiter High Income, which is much more straightforward. It has close to the minimum permissible 20% in fixed interest and the balance is mainly in larger UK companies such as Vodafone, BP, and Royal Dutch Shell. It is managed by Tony Nutt, who is also responsible for the award winning Jupiter Income fund. The High Income fund has a similar equity portfolio to the Jupiter Income, but the latter has no fixed income exposure; it therefore has a slightly lower yield, and its record has been both more dynamic and more volatile. While Nutt does not expect equity prices to grow quite as strongly as they did a couple of years ago, he remains positive on their prospects relative to other asset classes, and therefore expects the fund to retain the maximum possible exposure on this front. "Company balance sheets remain in good health, economic growth is still strong in many parts of the world, directors have been strong buyers of their shares recently and share valuations are reasonable," Nutt explains. "Against such a background, a high single-digit total annual return seems a perfectly reasonable expectation over the medium-term."
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