Middle-age investment challenge

May 26, 2009

Stephen Peters

– Stephen Peters is an investment trust analyst at Charles Stanley, covering all closed-ended investment trusts and companies. The opinions expressed are his own. –

With between 5-25 years to go before one retires, the “middle aged” are in a conundrum at the current point in time. Having seen the value of their assets decline sharply in recent years, dreams of an early end to one’s working life have been put on the back burner for a little while.

Markets have done nothing over the last decade. Analysis by Barclays Capital show that UK equities have performed worse than straight and index linked gilts over the last 10 years, as well as cash. This is highly unusual.

Taking 10-year holding periods, going back 109 years to 1899, equities outperform bonds and cash 81 percent and 92 percent of the time. Extending the holding period to 18 years, that rises to 90 percent and 99 percent respectively. This all goes to show that equities are generally the best place to be invested for the long term – something a middle aged investor still should be doing.

If equity investment is regarded as “too risky” in current markets, then consider typical person’s largest asset – their home. Criticism of hedge funds and financial instruments for “excessive leverage” conveniently ignores the fact that a homeowner with a 20 percent deposit on a new house has “gross” leverage of 5 times committed capital. Most hedge funds would regard maintaining that level of leverage within a fund as too risky even for them.

Readers aged 40 and above hopefully don’t have mortgages of that size. But commitments such as school or university fees and a desire to fund one’s retirement mean that equities remain the best way of investing for the long term. As part of a balanced household asset allocation, therefore, how, and where, should one invest?

Many default money purchase pension default funds are lifestyle vehicles – giving equity exposure during the early working years, slowly migrating into cash and bonds as one gets older. Valuations are ignored, especially equities versus fixed interest. Well regarded commentators speak of both extremely cheap global equity markets as well as a bond bubble.

Investing into straight gilts as a “low risk” option may very well serve to be exactly the opposite over the next few years. We would urge readers to check exactly what their pension fund is invested in, and consider if it will meet your needs going forward. Charles Stanley’s approach strongly advocates active versus passive fund management, and we recommend actively managed funds, investment trusts or portfolios run by managers that we rate highly.

Over the next decade or two we believe the engine of global growth will be the Asian economies, especially China and India. This is not a particularly novel or unique view, but we would be very happy, on a 5-10 year view, having a decent proportion of our equity assets invested in that region.

Allocations to gold and index linked gilts should be considered, given the supply and demand characteristics of the former and inflation protection provided by the latter. Most importantly, the middle aged should be aware of their overall asset allocation. An equal split between equities, cash/bonds and property is highly unscientific but acts as a useful starting point to begin debate.

For investors looking to recover some of the losses in their pension funds, investment trusts are an interesting option to consider. Whilst one would have to invest via a Self Invested Personal Pension (SIPP) to access the sector in your pension, investment trusts offers some advantages not shared by traditional pension funds or the larger open ended sector.

As shares, investment trusts trade at discounts, often charge lower fees than mutual funds, run by better managers, and are able to borrow to enhance returns. If one believes the low point in markets has been reached, investment trusts should be the vehicle of choice for investors with a willingness and ability to invest in the stock markets worldwide for a reasonable period of time.

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