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					                                             investment bulletin                                                                              8 September 2010




Fixed Interest & Property
We have taken the decision to reduce Property and increase Fixed Interest within our
discretionary portfolios.
Property has seen some good returns but we believe these will now level off. We expect
capital growth to slow, but rental yields are still relatively high and this should provide
support for property prices.
We have previously been very positive about property but are now “neutral”, meaning
we expect returns over the next 18 months to be somewhere around our typical planning
assumption, 7% per annum.
We were slightly negative on Fixed Interest until recently but are now positive again. Having
previously recommended clients reduce Fixed Interest and increase Property holdings, we now
believe clients portfolios should be adjusted back to our normal positioning.                                                         “We were slightly
                                                                                                                                      negative on Fixed
If you would like to implement this change then please get in touch. If you are a “discretionary                                      Interest until
- asset selection” client then we have already done this for you. Please ask if you are unsure.                                       recently but are now
                                                                                                                                      positive again. We
Why Fixed Interest?                                                                                                                   now believe clients
We are generally positive on corporate bonds whilst being negative on gilts.                                                          portfolios should be
                                                                                                                                      adjusted back to our
A gilt is basically a loan to the UK government. Gilts are issued at £100 with a fixed interest                                       normal positioning.”
rate, and will also mature at £100. In between, gilts are traded on the open market. If the
interest yield is particularly attractive, the price will be more than £100. If the yield is
unattractive, it will be less than £100.
A 10 year gilt maturing in 2020 currently provides annual interest of £4.38 but it would cost
you around £106 to buy on the open market. However, you would lose £6 of your capital if you
held it until maturity. This reduces the “yield to maturity” to around 3% p.a.
The IBOXX Sterling Corporate Bond Index
currently has a yield to maturity of 5.3% per
annum. This is 2.3% p.a. more than 10 year gilts
(the difference is known as the yield “spread”).
This makes corporate bonds look very attractive
compared to gilts and even more attractive
compared to cash. The chart on the right shows
that this “spread” has typically been around 1%
over the past 10 years, but widened dramatically
in the credit crunch:
Despite the recovery in Corporate Bonds, the spread remains well above pre-credit crunch
levels. We believe that gilt yields will rise and therefore capital values will fall. This will reduce
the spread somewhat, but we also believe Corporate Bonds could increase in value.

Contact information:                              Equilibrium Asset Management LLP (A Limited Liability Partnership) is authorised and regulated by the Financial
                                                  Services Authority. Levels and bases of any reliefs from taxation are subject to change. The FSA regulate advice
Equilibrium Asset Management LLP                  which we provide on Investment & Insurance business, however they do not regulate advice which we provide
Brooke Court, Lower Meadow Road,                  purely in respect of taxation matters. Partners: Colin Lawson CertPFS, Gareth Jameson CertPFS and
Handforth Dean, Wilmslow, Cheshire SK9 3ND        Debbie Jukes DipPFS.

t 0161 486 2250 f 0161 488 4598
e askus@equilibriumam.co.uk
www.equilibriumam.co.uk
                                             investment bulletin                                                                             8 September 2010




Fixed Interest & Property (continued)
If the yield on the corporate bond index reduces by 0.5%, then the capital value of the index
will have risen by around 10%. When you also take into account the income from the bonds
it is therefore possible we could see returns well above the 6% p.a. we normally assume as an
average.
Whilst we believe this is realistic, prices could of course fall rather than rise. The danger to all
fixed interest investments is if inflation and interest rates rise dramatically. Gilt and corporate
bond yields would also rise dramatically. If gilt yields rose from 3% to 5%, this would be a
capital fall of around 20%.
Despite this risk, we think there is potential to receive good returns from corporate bonds.
Strategic Fixed Interest Fund Change
                                                                                                                                     “We have switched
We have switched the Legal & General Dynamic Bond fund for the Fidelity Strategic Bond fund.                                         the Legal & General
This is partly due to their recent pricing change, which concerned us because L&G failed to                                          Dynamic Bond
tell us in advance. We are also big fans of the Fidelity fixed interest team, already using their                                    fund for the Fidelity
Moneybuilder Income fund run by the same manager. This change affects those in our Strategic                                         Strategic Bond fund
Fixed Interest portfolio and Model Asset Allocation Portfolios Four to Nine.                                                         We are big fans of the
EEA Life Settlement                                                                                                                  Fidelity fixed interest
                                                                                                                                     team, already using
We have previously used the EEA Life Settlements fund as part of our Alternative Equity                                              their Moneybuilder
portfolio.                                                                                                                           Income fund run by
                                                                                                                                     the same manager.”
This fund is only dealt once a month. If we want to make asset allocation changes within our
model portfolios then this fund can hold up those amendments. We have therefore taken the
decision to separate this fund from our portfolio. If you currently hold the EEA fund, we will in
future consider its suitability for you as a stand-alone investment, rather than as part of our
standard portfolios.
Where possible, we will move the fund to a different account (at no cost to clients) to
physically separate it from your other investments. Where you hold it under a discretionary
agreement we will still retain the ability to switch out of the fund if we feel the risk increases.
This fund is an offshore fund which is not regulated by the FSA. The standard UK compensation
arrangements do not apply to this fund. The FSA are currently reviewing advice in relation to
unregulated funds, to ensure all recommendations have been suitable. Returns of the EEA fund
have been steady with very little volatility, but the fund has other risks such as liquidity. Due to
the risk profile, we have typically recommended clients hold only around 2% of their portfolios
in the fund.
In order to ensure that our clients have a full understanding, we have created a separate
factsheet explaining some of the risks in more detail. If you are reading electronically, click here
to view. If you hold the fund we will discuss it with you at your next review. In the meantime,
please let us know if you would like further information.
Contact information:                             Equilibrium Asset Management LLP (A Limited Liability Partnership) is authorised and regulated by the Financial
                                                 Services Authority. Levels and bases of any reliefs from taxation are subject to change. The FSA regulate advice
Equilibrium Asset Management LLP                 which we provide on Investment & Insurance business, however they do not regulate advice which we provide
Brooke Court, Lower Meadow Road,                 purely in respect of taxation matters. Partners: Colin Lawson CertPFS, Gareth Jameson CertPFS and
Handforth Dean, Wilmslow, Cheshire SK9 3ND       Debbie Jukes DipPFS.

t 0161 486 2250 f 0161 488 4598
e askus@equilibriumam.co.uk
www.equilibriumam.co.uk

				
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