September 2007

Welcome to the 9th edition of our Financial Connection e-bulletin.

We hope that you enjoy these e-bulletins. If you have any queries, or would like to discuss any of the issues raised with one of our consultants, please call us on 0845 788 9933 and quote EM-4489.

Investing in Gold

There is currently a remarkable lack of investor interest attached to investing in gold. This is in contrast with 12 months ago when many industry 'experts' were predicting that, due to increasing demand for base metals and other commodities from developing nations such as China and India, gold prices could only head upward.

The reason behind this changing sentiment, like the reason behind so many opinions in the investment arena, is based heavily on recent past performance. From 16th September 1999 to 12th May 2006, the gold price rose by 144% in Sterling terms. This performance led to a positive view on future prospects. However, from 11th May 2007 until 31st August 2007, the price of gold fell by 1.3%, and as a result sentiment has been more muted.

Historically the price of gold has tended to do very little, except for brief upward and downward spikes. This is evidenced in that gold has only provided a cumulative return of 11.2% from August 1980 to May 2007, equivalent to about 0.4% per annum.

So many people attracted by strong returns may then find that performance is duller than cash, although if they are unlucky enough to own gold on the way down, they can have particularly nasty bear markets. For example, the price of gold fell by 42.3% from 2nd February 1996 to 16th September 1999.

Another potential issue with investing in gold is that it produces no natural yield. Therefore investors are reliant on price increases and these are dictated by supply and demand.

So with this in mind, and with a commodity where it is notoriously difficult to predict where the market is heading, why would investors consider holding gold?

The major reason is that it offers excellent diversification benefits. The performance of the gold price is likely to have very little correlation with other assets. Indeed, in times of financial hardship or stockmarket volatility, there may be more demand for the security of gold and this could mean that the price may rise when other investment assets are falling.

It is now very easy to get exposure to gold. The most sensible approach is likely to be a gold ETF. This works like an index tracker, tracking the price of gold, and is a cheap and liquid option, costing just 0.3% per annum and having, for example, no storage or insurance costs.

As an alternative, investing in gold mining companies is often seen as a leveraged play on the gold price. These stocks can be bought either individually or through a collective investment fund. However, many 'ordinary' investment funds may already have a weighting in these companies and so it is important to be careful about duplicating exposure.

The key to investing in gold is to fully understand the pros and cons, and be aware that the prime benefit may be in terms of diversification qualities rather than expected returns. It is possible that short-term performance will be strong, but the flipside is also true and so it is sensible to maintain a low weighting as part of a balanced portfolio.

Patrick Connolly
Marketing and PR Manager

The pros and cons of a SIPP

Self Invested Personal Pensions (SIPPs) have been big news since their use for investing in residential property and other personal chattels was first mooted, in the run-up to the introduction of the simplified pensions regime on 6th April 2006.

While many would argue that pension legislation is still far from simple, and the ability to invest in these alternative investments was effectively withdrawn before it was even allowed, the popularity of SIPPs has continued unabated.

Many now consider SIPPs to be a 'must have' pension arrangement for wealthier individuals. But what is a SIPP, and is it really such an obvious choice?

A SIPP is essentially a personal pension with a wider range of investment options. The underlying investments are selected by the individual, or their advisers, rather than being restricted to a range of funds offered by the Provider. However, with this wider investment choice often comes higher charges, and so it is important to fully understand the clients needs and the associated costs, from outset.

A wider range of investments is good news, but of course there is then the danger that having more choice will lead to investors taking too much risk, especially if they are making their own decisions, or receiving just ad-hoc advice or recommendations. Private individuals, or financial advisers for that matter, do not have the best track record of making investment decisions. This is demonstrated with the popularity of equities in 2000 at the top of the market, particularly technology funds, and of corporate bond funds when equities bottomed in March 2003.

The wider investment remit of a SIPP can also lead to more obscure alternatives. For example, in recent weeks a fund has been launched investing solely in Chinese Healthcare companies. This fund could perform spectacularly well, and if it does then no doubt it will prove very popular, but how do you combine a fund such as this into a sensible and risk-controlled investment strategy? It is important to appreciate that the added flexibility of a SIPP is only a benefit if it is used wisely. If inappropriate investments are made then this flexibility can become a disadvantage.

At Towry Law, the SIPP is the desired pension option for many of our clients. We are able to use the added flexibility to manage their investments on a discretionary basis and ensure they are best positioned to meet financial goals and manage risk. By offering our own SIPP, we can control the standards of service our clients receive and we impose no initial or annual wrapper charges for those that invest in our Wealth Management Service. From a financial planning perspective, we can, alongside their SIPP holding, offer other in-house wrappers such as ISAs, PEPs, offshore bonds and portfolios to ensure a cohesive strategy.

While a SIPP may be the ideal pension vehicle for many individuals, it is only part of the solution and needs to be combined with sensible investment and financial planning strategies.

Patrick Connolly
Marketing and PR Manager

State Pension forecasts

When planning for retirement, it is important that individuals are aware of their state pension entitlement. While the State Pension, on its own, will fall some way short of providing a comfortable standard of living, it can still provide useful additional benefits.
It has previously been possible for individuals to obtain a State Pension forecast from the Pension Service at www.thepensionservice.gov.uk. However, due to their computer systems being upgraded, it will not be possible for anyone who is due to reach State Pension age on or after 6th April 2010 to receive a State Pension forecast.
This situation will not be rectified until their computer systems are updated, which the Department of Work and Pensions estimates to be Autumn 2008.
This is extremely unhelpful and it is difficult to understand why this process will take so long. In the meantime, we will have to use a best guess approach to determining many of our clients' state entitlements, until we are able to obtain figures that we know are more reliable.

Patrick Connolly
Marketing and PR Manager

Market Commentary

The recent market shake out triggered by the sub prime issue in the US has been turned around by a timely 50bps reduction in the Federal Reserve discount rate. This has been billed as a temporary move and as yet the more important Fed Funds rate remains unchanged. However the three-month Treasury bill rate has turned down sharply and for the last 20 years or so the Funds rate has eventually followed suit.

Market traders will shortly be returning from the summer break and it will be interesting to see how the investment banks cope with raising funds for the leveraged buy outs that they have agreed in principle to fund. A rate cut will help this exercise and put some sort of floor under the markets. Whatever the Fed does our asset allocation strategy will ensure that we have the proper strategic diversification in our clients' portfolios to deal with any outcome in an optimal manner.

Commercial Property has been a good investment over the last few years, having become extremely undervalued relative to equities and bonds in the late 1990s. Commentators were too quick to predict the end of property's bull-run, although it does now seem to be slowing down to far more sustainable levels. Bricks and mortar property funds were able to return around 7% to investors over the year, and something similar should be achievable over the next 12 months. Some funds have been swinging down their exit price recently, and this has been as a result of institutional investors selling down their exposure and looking elsewhere for returns although most funds are generally reporting net inflows. Property is an expensive asset class to trade in, and so the change in price simply reflects the extra costs associated with these sales, which otherwise would have to be borne by the remaining investors, such as our clients. The value of the underlying holdings remains unchanged. Therefore we are pleased to have been protected.

The best part of the property market has been the Office sector. Geographically, it is the South East of England that has made the biggest gains, and London in particular. Offices in the West End have seen the greatest rises and continue to be bid up. That said, they seem to be at the peak in their cycle, and 2008 may see the story evolve on to other areas and we are well diversified across the property sectors to take advantage of this. Yields in general are very low, and there is no longer any positive valuation anomaly versus bonds and equities. Nevertheless, the investment and portfolio building characteristics of commercial property remain intact, and it is a crucial part of a multi asset class portfolio.

The bond exposure in client portfolios has had two major opportunities to help provide ballast versus the gyrations of the equity markets, and these occasions were February and July this year. On both occasions, despite bonds being in a downtrend due to rising interest rates, they have rallied as investor risk aversion has risen and led to a flight to quality. This has been particularly true of UK Government gilts since July, which have rallied from a 5.5% yield to 5.0% and US Treasuries which have hardened from 5.2% to 4.5%. Therefore they have made gains when portfolios have needed them the most, and protected the downside in performance terms. For this reason our Strategic portfolios have held their value well during the turbulence of July and August, and have performed much better than equity biased investment solutions.

Andrew Wilson
Head of Investment

This Global Markets Commentary is solely for information purposes and is not intended to be, and should not be construed as investment advice.

Whilst considerable care has been taken to ensure the information contained within this commentary is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information.

The opinions expressed are those of Towry Law Investment Management Limited on behalf of Towry Law Financial Services Limited and are made in good faith, but are subject to change without notice.

IMPORTANT NOTICE: Towry Law Financial Services Limited. Registered in England No. 607039. Towry Law Investment Management Limited. Registered in England No.793636. Towry Law Trustee Company Limited. Registered in England No. 1151146. Towry Law Pension Trustees Limited. Registered in England No.781047. All of the above firms are authorised and regulated by the Financial Services Authority. Towry Law Holdings Limited. Registered in England No.4773122. Towry Law Nominees Limited. Registered in England No.2988101. Towry Law Services Limited. Registered in England No. 5169111. The Registered Office of all these companies is Towry Law House, Western Road, Bracknell, Berkshire, RG12 1TL. Telephone 01344 828000.

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