Existing the Recession and Choosing an Investment Strategy

There is a growing optimism amongst British businesses that the country has turned a corner and regained economic credibility, crucial to its efforts to compete in the global race. The changing face of 21st century economic power has given rise to the economies of Asia and South America and British business is adapting to the evolving market dynamics and economic realities.

Britain’s austerity, whilst deeply unpopular, may be showing signs of justifying its pain as unemployment dropped to 7.8% according to the governments December figures. The third quarter of 2012 recorded 1% growth and the Triple A rating is intact, encouraging investment opportunities in Britain and a new founded optimism for investors.

Although it is premature to jump for joy and declare Britain healed, more businesses are growing in the UK and hiring new employees, further enabling investment opportunities which are both opportunist and conservative.  Private equity firms, international companies and senior partners invest capital on behalf of their clients and choose and investment portfolio conceptualized through the diagram below.

St. James's Place

Defensive portfolios can provide steady growth opportunities although seizing advantage of the recovery could prove to be lucrative to the more adventurous investor.  Different types of portfolios provide varying levels of income but are designed to increase capital growth. The decision to invest your business capital should consider the time horizon for the investment and the ability to withstand losses in the short term. St James’s Place are one organisation which can help choose the right investment strategy for your business and offer an ideal growth portfolio for companies emerging from the recession.

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Growth portfolios are designed for investors aiming to build up the value of their capital and achieve returns above inflation over the medium to long term. Let’s look at two lower risk portfolios that take a defensive and conservative approach.

Where fund names differ for offshore, unit trust and ISA portfolios, these are shown in brackets. The Property fund is not included in the offshore versions of the portfolios. Where this results in differences in fund mix, this is indicated above. What the diagram can’t explain is the financial risks that arise from each investment. If deciding on either a defensive or adventurous portfolio it is crucial that you determine the risks involved prior to making any decision on your investment strategy.  The key terms have been included below, which you should discuss with your consultant, prior to confirming your investment choice.

A – Equity Risk

This fund invests in equities. The value of equities can rise and fall quite sharply at times. Returns are not guaranteed and, whilst equities have tended to outperform over the long term, there have been periods when equities have fallen significantly in value over the short term.

B – Currency Risk

This fund holds investments in other currencies, or is priced in a currency other than sterling, so the value of the fund may rise and fall due to fluctuations in exchange rates against sterling.

C – Low Interest Rates: Risk to Income

This fund invests in deposits and money market instruments in order to reduce the risk of sharp falls in value. This means that the return will be low in periods when interest rates are low.

D – Bond Risks

This fund holds bonds issued by companies and governments. There is a chance that some of the companies or governments that issued these bonds will fail to make interest or capital payments, or other investors may believe the security of the government or company has declined, both of which would reduce the value of your investments. The values of bonds are also sensitive to changes in interest rates; for example, an increase in interest rates will usually cause a fall in the value of an investment in bonds.

E – Property Risk

This fund invests mainly in property (i.e. land and buildings). Property can be difficult to sell in a short period, so you may not be able to sell or switch out of this investment when you want to – we may have to delay acting on your instructions. The value of property can fall as well as rise, particularly if there are more people trying to sell than buy, and is generally a matter of a valuer’s opinion until the property is sold.

F – Concentrated Portfolio

This fund holds a limited number of assets, typically fewer than 40 stocks. As such, its value is likely to fluctuate more than a widely diversified fund.

G – Commodities

This fund invests in commodities such as gold, oil and timber. The prices of commodities are influenced by demand, which is driven by global economic growth, and scarcity of supply of the various natural resources. These global influences, and the fact that natural resources are controlled by many different countries and governments, often cause commodities to fluctuate in value more than equities.

H – Emerging Markets

This fund holds investments in less developed economies and invests in less mature stock markets, so its value may fluctuate more than a fund which invests in developed economies.

I – Derivatives

This fund invests in derivatives. A derivative is a contract whose value changes depending on the value of an underlying asset. The fund buys derivatives from other institutions; if one of these institutions fails to meet its obligations when they fall due, this would impact the value of the fund.

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