The FTSE 100 may have ended the year only 5.5% down from its starting point, but it was an excitingly roundabout trip. Gilts offered a more comfortable and rewarding journey.

The FTSE 100 ended 2011 in negative territory after two years of rises following the traumas of 2008. It could have been much worse – in early October the FTSE was over 600 points lower than its eventual closing level of 5572.3. But then again it was nearly 600 points higher in early July before the latest round of euro troubles got under way.

The FTSE, with its increasingly foreign mix, is only part of the story, even though it represents 81% of UK market capitalisation.

Index                                                               2011 Change         Comment

FTSE 100                                                                 -5.5%                     The big caps headline number

FTSE 250                                                                12.6%                     Mid-caps underperformed the big caps

FTSE Small Cap                                                    -14.9%                    Small caps lost out to the big caps and mid-caps

FTSE 350 High Yield                                           +0.7%                     Value-investing had a better year than last

FTSE 350 Low Yield                                             -14.2%                    Growth-investing was the wrong style for 2011

FTSE All-Share                                                       -6.7%                      Underperformed Footsie due to mid/small caps

FTSE Tobacco                                                        -23.9%                   A win for sin (and Neil Woodford – fund manager)!

FTSE Industrial Metals and Mining                 -52.6%                    Iron ore gets rusty

Over the year the dividend yield on the FTSE All-Share rose from 2.89% to 3.52%, partly due to the fall in values. Total dividend income from the UK equity market was up 13% from 2010. The return to dividend payments for BP, albeit at half their previous level, was an obvious contributor to this solid performance. It is a reminder that, for all the gloom, companies are still generating and paying out large amounts of real cash. Indeed, if you add back in the income over the year, the total return on the FTSE All-Share was only about 3% the wrong side of break even.

The overall drop in the UK equity market paralleled performance in most other stock markets. For example, the Euro Stoxx 50 fell by 17.1% amidst the euro troubles and the Nikkei 225 dropped by 17.3%. Emerging markets were also weak, with the FTSE All Emerging All-Cap down by 22.1% in US $ terms (21.5% in sterling terms). The best performer among major stock markets was the USA, where the S&P 500 moved from 1257.64 at the start of the year to 1257.60 at the end, albeit with more than a few exciting swings en route. So much for the loss of an AAA rating!

The place to be in 2011 was not equities, but government bonds. The benchmark ten year gilt yield started 2011 at 3.40% and ended it at just 1.98%, while the real yield on the FTSE Over 15 year Index-linked yardstick shrunk from 0.56% to -0.16% (i.e. negative real returns). The FTSE 10-15 year gilt index climbed by 15.1% in 2011 while the FTSE Over 15 years Index-linked index rose by 24.6%. It was a similar story around the world, with the obvious exception of the Eurozone problem countries. For example, the US 10 year+ Treasury bonds returned an impressive 26.5%.

COMMENT A year of poor equity performance and strong bond performance will have been bad news for defined benefit pension schemes. With 10 year gilt yields now little more than half UK equity yields, these are challenging times for all types of pension arrangement.

NS&I has withdrawn its Index-linked Savings Certificates and Fixed Interest Savings Certificates from general sale at close of business on 6 September 2011.

The latest Issues of Savings Certificates have been on sale for almost four months (since 12 May 2011) and have been very popular during this time. At the outset NS&I assumed that the sums invested would be very substantial, and the original expectations have now been met.

They said, “Due to our unique position in the UK savings sector, we always follow a policy of balancing the interest of savers and the taxpayer with the stability of the financial services market as a whole. While doing this, we must also meet the government’s financing objective – called our Net Financing target – which HM Treasury set at £2 billion (for the 2011/12 financial year) within a range of £2 billion either side of this.

By taking the action to withdraw the current Issue, NS&I will ensure that the Net Financing target set for 2011/12 should be met.”

Changes implemented with immediate effect

NS&I’s website and call centres stopped taking new sales of Savings Certificates at close of business on 6 September 2011. Postal applications received on 7 September 2011 will be honoured, but all postal applications received after that date will be returned.

Reinvestment on maturity

On maturity, anyone who has existing Savings Certificate customers can rollover their investment into an Issue of the same length. Alternatively they can reinvest into another type of Savings Certificate or term on offer at the time – regardless of the Savings Certificate they currently hold.

However, as Savings Certificates have been withdrawn from general sale, any clients who have invested in other NS&I products will not be able to reinvest their money into Savings Certificates.

If you would like any information on these products or alternatives then please do not hesitate to call Templegate on 0845 833 8837
(local call rate).

Source: National Savings email sent to Independent Financial Advisors 07 September 2011.

Having shown little direction so far this year, over the past week a barrage of downbeat economic news-flow has resulted in the sharp sell-off in global stockmarkets. Mounting fears over US and European sovereign debts and weakening US growth has prompted the investor sentiment barometer to move to an extreme “risk off” mentality. With little positive news-flow to prompt buyers to dip into the market and trading volumes thin during the holiday season, prices of shares and other risk assets have been marked down sharply.

With investor confidence non-existent, the credit agency S&P chose the weekend to announce a downgrading of US debt from the maximum AAA rating for the first time in its history. The effect of this move prompted commentators to predict that this may lead to a further crash when markets opened this week, but early signs are that an element of calm has been restored.

Despite the downgrade of US Government bonds, their prices rose this Monday morning! In Europe, the intervention by the European Central Bank, (ECB) to allay concerns over Italian and Spanish debts appears to be working, with these Countries bond yields falling sharply.

The on-going concerns over debts in the peripheral European economies and the continuing weak US consumer led economy undoubtedly provide causes for concern – but these are not new issues. In fact little has fundamentally changed to the economic environment over the past week. The one thing that has changed dramatically is confidence. The magnitude of market falls
in recent days appear to be a fine example of herd driven panic selling rather than prices providing a true reflection of the medium term risk /reward profile of different markets and asset classes.

There is no doubt that fear of the global financial crisis remains in the forefront of investors mind and areas of the media have pounced on the opportunity to spread the gloom and doom. Robert Peston is enjoying being back in the limelight and scaring people with big numbers (although I don’t remember ‘ billions added to share prices’ making the headlines after a good day
on the market). A sustained lack of confidence can prove dangerous and it is vital that politicians and central banks act quickly to restore confidence in global markets and economies at this point. The ECB have already taken some action and it is very realistic that a third program of quantitative easing will be implemented in the US which would act as an adrenaline shot for markets
and the US and global economy.

I do not believe that the past week has been a game changer that means we should be running for cover and hoarding all money in Krugerrands and Government bonds. I am not going to second guess short-term market movements and although sentiment could remain gloomy in the short-term and markets could fall further, I believe “crisis hardened” authorities will move to avert the worst case scenarios. I believe that for those prepared to take a medium-term view or longer current market levels could provide some compelling investment opportunities.

I remain of the belief that the economic climate in Western developed countries is going to be tough, but it is also belief that there are several areas that provide good opportunities for investors at the current time. For my investment client’s, the focus should still be the core investment philosophy of diversification, with possibly emphasis on the following key points:-

- A bias towards income producing assets that I believe will remain sought after, as interest rates are going to remain rooted at emergency levels for some time.

- Dividend producing shares in less cyclical areas of the market appear to offer compelling value, and these will be at the core of our income and growth equity portfolios.

- A focus towards exploiting the shift in global economic power away from the US led Western economy towards Asia and Emerging Markets.

Trying to time these volatile markets by running for cover in cash is a dangerous strategy that could just result in crystallising losses. I remain focused on advising clients to invest in areas that I believe are well placed for the medium to long-term. I believe that my portfolios are well positioned, with a diversified range of funds being managed by highly experienced and capable fund managers.

My stance is to Keep Calm and Carry on!

The weekend financial pages gave reasonable (and in some cases extensive) cover to the increase to the contribution limit
for the forthcoming Junior ISA to £3,600. This was the highlight of the final regulations along with

• the fact that both cash and stocks and shares Junior ISA could be held with up to one cash and on stocks and shares ISA (ie two accounts in total) being   capable of being held in the name of a child.
• no transfer from a CTF will be possible
• those with a CTF will not qualify to have a junior ISA

It has been predicted that if a junior ISA were commenced at birth and the full investment permitted were made each year
then at an assumed rate of growth of 5% and the maximum contribution adjusted upwards by 5% pa a fund of around £100,000 could result at age 18.

With the burgeoning costs of higher education all of this is likely to be needed to fund a full time degree course.

The treasury press release announcing the regulations stated the following summary:

Junior ISAs will ensure that all parents have a clear and simple way to save for their child’s future, following the end of
Child Trust Fund (CTF) eligibility from January 2011. Junior ISAs will be available from 1 November 2011.

On 31 March the Government published draft Junior ISA Regulations for comment which set out proposals on how the accounts
should operate. The consultation closed on 31 May and the Government received over 60 written responses from a range of interested parties, including potential Junior ISA providers, trade bodies, consumer groups and members of the public.

On 27 July 2011 the Government laid detailed Regulations, amending the existing ISA (Individual Savings Account)
Regulations, to provide for the establishment of Junior ISAs.

Responses received informed the Government’s thinking on final design of Junior ISAs, and the Government confirms that
Junior ISAs will have the follow key features:

• All UK resident children under the age of 18 who do not have a CTF will be eligible for Junior ISAs.
• Any income or gains will be tax-free.
• Both cash and stocks and shares Junior ISAs will be available. Children will be able to hold up to one cash and one stocks
  and shares Junior ISA at a time (two accounts in total).
• There will be an overarching contribution limit of £3,600 per year which will be indexed by CPI from 6 April 2013
  onwards.
• Accounts will be owned by the child and funds will be locked in until the child turns 18.
• Children will have the right to manage their accounts from age 16. Junior ISA accounts will by default become adult ISAs on
  maturity.

Tax Free National Savings Certificates - withdrawn since Jul y 2010.

Tax Free Premium Bonds – quoted return  from the NS&I: -

Rate for prize fund, 1.50% (variable). The odds of each £1 unit winning a prize are 24,000 to 1 each month.

For an alternative, speak to and Independent Financial Advisor.