Investment talk: Equities are making a comeback

Brewin Dolphin is one of the largest independent private client investment managers in the UK. Tim Walker, Divisional Director and Head of Office at Brewin Dolphin Exeter looks at investment opportunities and recommends that now is the right time to buy equities. 

The tide has finally turned - investors are beginning to wake up to the opportunities in equities. They were shy coming round. According to statistics from the Investment Management Association, more than half of all fund sales in July went into fixed income. Four of the top five most popular fund sectors were bonds. July was no anomaly - it was the 11th consecutive month that bonds proved to be the most popular asset with investors. Despite offering close to no capital growth and no scope for income growth - 2012 has proved thus far to be the year of bonds. 

Such was the clamour for dependable income, bond managers themselves warned of a bubble. Some fixed-interest managers admitted that it was a “very challenging time” for bond managers and warned investors off buying bonds, as liquidity issues threatened a bond bubble.That is not to say that all bonds are bad - but when fund managers are actively discouraging investors from buying up their own asset classes - it is surely time to take heed. 

And new research from Capita Registrars suggests shareholders are finally doing just that. 

Between June and August, investors added a net £1.3bn to their share portfolios, ending what Capita described as “nine months of extreme caution on equities”.

In its Private Investors Watch, a profile of 1.6 million individual shareholders, Capita found that despite depressed sentiment, the FTSE 100 dropping to 5,260 at the end of May was tempting enough to trigger a buying frenzy. 

And these brave souls were rewarded - the FTSE reached 5,900 in September. At the close of business on September 20, those investors owned £215bn of shares - the equivalent of 11.3pc of the market, and an increase of £17.6bn since May.

It wasn’t just capital appreciation either - these investors had quite literally reaped dividends. In the first half of the year, private investors scooped a record £4.7bn of dividends, and can expect a total for 2012 of £8.8bn, 10pc more than in 2011.

Composite funds display similar returns. The Corporate Bond sector has returned around 5pc since June, but those who took a punt on a European equities fund would have seen average returns of 10pc. 

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It is not just in the capital growth race that equities are pulling ahead. 

If you compare the yields available from each asset – equities are a clear winner. Lock cash away for five years and the most you can muster is 3.75pc. A five-year gilt is now offering around 2pc – compared with 6pc five years ago. A 13 year Vodafone corporate bond is yielding a slightly more impressive 5.6pc. But buy a Vodafone share, and you can benefit from a yield of nearly 8pc.

In short: cash is bad, bonds are flat and equities offer growth, income and income growth. As Capita Registrars commented: “Capital growth may have been hard to come by in recent years, but private shareholders will have earned £38bn in dividends by the end of 2012 since the crisis began in 2008. With interest rates perpetually at rock bottom, equities are generating by far the best income among the main asset classes.”

But equities are not without risk. Volatility, we are told, is here to stay. As the US prepares for another round of quantitative easing, and the problems roll on in the euro zone it would be naive to assume that the bounce in equity markets since June is a permanent trend. But in order to benefit from a market rally, you have to be invested. 

Even cautious investors should not discount equities completely - equity exposure can help fund managers to make a real, inflation-beating return, which “safer” assets such as cash and gilts cannot manage. 

A balanced portfolio should be positioned so that you can benefit from all eventualities in a market cycle. 

Sentiment may be depressed – but so are companies’ valuations. History decrees that now is the right time to buy equities; you do not want to buy when the market is buoyant and companies are expensive. Get advice about getting in now, before the herds and you might pick up a profitable bargain. 

Article supplied by Tim Walker, Head Office - Brewin Dolphin Exeter, www.brewin.co.uk/about-us/contact-us/exeter/