The FTSE 100 has now risen significantly from the low points of March and there are more positive forecasts from economists, with the consensus view being that the UK and US economies will be growing by early 2010. Nonetheless, markets remain volatile with daily movements which can be larger than those we are used to historically. By many normal measures, global markets continue to look good value but commentators consider that much of the rise to date has been driven by speculation rather than economic fundamentals, raising concerns that the current equity market recovery may not be sustainable.
Amidst this uncertainty, it is understandable that you want to both protect your investment portfolio from further possible falls, whilst at the same time ensuring that you do not miss out on what could be a sustained market rally. Following most bear markets, recoveries can be sudden and sharp and the impact of missing out the start can be marked.
A day in the life of a moderate investor
It’s becoming a familiar routine now: home from work; dinner cooked, eaten, and all washed up; kids tucked up in bed; and now logged in to the website to check my ‘portfolio’. Sounds good, doesn’t it? |
So many investors will be focused on either when to time their re-entry to the market and / or how to maximise the benefit from the rising market as we emerge from recession. Whilst the ability to protect your investment portfolio as
well as profiting from any upturn might seem too good to be true, the wide range of investment products available to individual investors today means that, to some extent at least, you can have your cake and eat it.
With market conditions remaining unstable and many asset classes volatile, Barclays Stockbrokers recognises how important it is to give you the ability to diversify and protect your portfolio as much as you want to, at the same time as enabling you to identify and rapidly respond to market movements where you feel it is appropriate.
The choice of products, tools and information available makes it easier than ever for you to spread risk across different asset classes and regions, dampen volatility and protect your portfolio by investing across shares, bonds, funds, including exchange traded funds (ETFs), and structured products.
You can also use leveraged products such as Covered warrants and Turbos to take tactical positions with a portion of your portfolio if you wish. Other products such as Contracts for difference (CFDs) and Financial Spread Trading (FST) can provide you with the ability to enhance returns, or to ‘hedge’ and insure your portfolio if used appropriately. However, the pursuit of enhanced returns always carries a greater chance of losses and these products should be considered high risk. Whilst an investor with a moderate investment approach might use them as a small proportion of a well diversified portfolio, they should always be used with care and alongside other lower risk investments to balance a portfolio, with a full understanding of the risks involved.
To read our Cautious Investment Approach click
on the yellow abacus at the top of the page, click on the red one for
our Opportunistic Investment Approach.
- Gilts
- Corporate Bonds
- Funds
- Exchange traded funds/iShares
- Structured products
- Covered warrants
- Turbos
- Contracts for difference (CFDs)
- Financial Spread Trading (FST)
Government Issued Securities
Also known as gilts, these are loans to the British Government which promise to pay a fixed annual rate of interest and to repay the capital at a specific maturity date in the future. Gilts cannot be cashed in before their maturity date, but can be traded on the stock market.
Gilts prices are affected by wider economic conditions, especially interest rates. If you believe that the government’s quantitative easing programme will cause the value of medium and long dated gilts to rally, you might consider buying gilts with the intention of selling if their value goes up, or otherwise hold and receive the income from them. If you consider that quantitative easing will fuel inflation in the longer term, then you may want to consider index linked gilts. These are gilts where the return is linked to the rate of inflation and as such their value does not tend to be adversely affected when inflation increases. Like gilts, corporate bonds are in effect IOUs, but issued by companies rather than governments. They pay a fixed rate of interest, or coupon, in return for the loan, and promise to return their face value at maturity. They can also be traded on the stock market and so their price will fluctuate. You should be aware that corporate bonds are considered more risky than gilts. Like gilts, the value of corporate bonds will tend to go down when interest rates are rising, and up when interest rates are falling. However, corporate bond values are also heavily influenced by the perceived credit risk of the issuer - recent events with General Motors are a good example of why it is very important to evaluate the fundamental credit risk of the issuer. Despite their strong performance in recent months, you might think that corporate bonds backed by solid companies in a defensive sector like food retailing are still a good investment. In this case, you could invest in a specific bond, such as the Tesco 5% Feb 2014, in anticipation that its value will rise in the coming months. Alternatively, you could gain diversified exposure to a cross-section of corporate bonds by buying a corporate bond fund through our Funds Market or the iShares £ Corporate Bond (SLXX) which offers exposure to a diversified basket of sterling-denominated UK corporate bonds across a broad range of different sectors and maturities. Funds are collective investments that can provide instant diversification by spreading exposure across different companies, sectors or countries, helping to reduce risk. Some simply track an index and others are actively managed by experts with the aim of achieving a specific objective. Our
has access to over 700 funds available at reduced initial charges and also provides a range of tools and market research to help with investment decisions. You might use funds to adopt what professional investors call a ‘core and satellite’ approach. To do this, you could use a number of broad-based tracker funds, or even ETFs, at the core of your portfolio to capture global market performance and meet long-term investment objectives. In addition to this, you could invest in a number of specialist satellite funds to implement more tactical investment ideas perhaps focused on a specific geographic region or country, such as China , or a theme like property or natural resources. An exchange traded fund (ETF) is a specific type of fund that allows investors to effectively ‘buy the market’ through a single share. Simple, transparent, and very cost effective, ETFs track and emulate the performance of an index, such as the FTSE 100, and can provide exposure to mainstream investments, as well as niche sectors, international markets and assets that may otherwise be difficult to access directly. If you believe that world markets are recovering, you might take the opportunity to buy and hold a number of ETFs linked to the main global indices with the intention of participating in the upturn as markets recover from recession. Tradable structured products, provide the potential for defined returns, with either full capital protection - where you get your money back if held for the full term otherwise you may get back less than the initial amount invested - or in return for putting capital at risk should the market fall, investors can often secure enhanced returns through what are described as Supertrackers. Structured products can be used to complement your core investment portfolio by providing access to markets that can prove difficult for retail investors to gain access to for example our China & Agriculture Note or Commodities Notes which diversify your share portfolio by offering exposure to other asset classes. Some structured products on the secondary market are trading below par, reflecting the decline in the underlying assets or markets since the launch of the product. If you believe that, for example, the price of commodities will rise as the global economy emerges from recession we have Structured Products which offer the opportunity to benefit from this. See our Secondary Markets page for more information
We also offer structured products in the primary market. This gives you the opportunity to participate in investments at the outset, as soon as they are launched. Find out more about our latest structured products and the part they can play in your portfolio. A covered warrant is the right to buy or sell an asset - including shares, indices and commodities - at a fixed price, on or before a specified future date. As covered warrants are geared they magnify positive returns if you speculate with them in the right direction, and while you can make losses, this is limited to your initial stake. If you feel that gold will maintain its safe-haven status and the price will rise in coming months, you can gain quick and efficient leveraged exposure to any rise in the price of the metal using covered warrants. For example, you could buy a 6 month Covered Call Warrant on gold with a strike price of $1,000/oz, for a small deposit. This would provide you with the right to buy gold at $ 1,000/oz in the future. Turbos are products linked to share prices or indices, similar in some ways to covered warrants, but with some key difference. Investors can use them to take either 'long' or 'short' positions, to boost upside potential in portfolios, or for hedging strategies. If you believe that the value of Company A will rise from current levels, you could buy a ‘long’ Turbo contract with an expiry date in 6 months time and a strike price of 150 pence, providing you with the right to buy the shares at this level in the future. If the cost of the Turbo at a current share price of 165 pence is 30p and after two months, the value of the shares increases to 190p, the price of the turbo would also increase by approximately 40 points to 70p, giving you a much greater proportionate return than if you had invested in the shares directly. However, if the value of the shares fell below the strike price, the Turbo would expire worthless. However, the loss would be restricted to the cost of the Turbo regardless of how much lower the company’s share price fell. CFDs allow investors to gain leveraged exposure to short-term fluctuations in markets, without needing to buy or sell the underlying investment. With CFDs available linked to a wide range of markets including more than 500 UK and 700 international stocks, commodities, indices, currencies and sector specific contracts, they are a flexible and cost-efficient alternative to traditional investments. Although they are considered high risk , CFDs can also provide you with the ability to protect your portfolio against falls in value through hedging strategies – a type of insurance policy. By taking out a ‘short’ position in shares that you already hold, whilst you would lose money on the shares if the share price falls, you would make a profit on the CFD. If the share price goes up, then although you would lose money on the CFD, your shares would have increased in value. Financial Spread Trading (FST) is a dynamic, flexible way for investors to speculate on the direction of future price movements, both up and down, of a wide variety of financial instruments. FST requires a deposit which is only a fraction of the contract value. As with CFDs, you can lose more than your initial investment and as a moderate investor, you should use FST with caution and then only as a small proportion of the overall value of your investments. With the bulk of your portfolio well diversified across a wide range of investments, you might use FST to speculate on the movement of the share price of a particular company that you have tracked and in which you have noted specific patterns. Through FST you can indicate the amount you want to risk on each point movement of the company’s share price upwards, or downwards, and the profit or loss would simply be the difference between the opening price and closing price of your trade, multiplied by your stake. Our Stock Watch section can help provide you with a deeper insight into selected companies and our Market, News and Research section will help you to compare and contrast different companies and sectors. On our website, you will also find the Barclays Wealth research publication, Compass, which provides the latest economic and market views as well as the quarterly publication Signpost. It is now possible for investors to automate their own trading strategies, or more generally protect their equity portfolio, with the help of our advanced order types. Having determined your strategy, you can input stop loss and limit orders online, which automatically trigger shares sales and purchases on your behalf when target prices are reached or breached. A trailing stop order tracks a share price up and automatically sells the holding when it falls by a given amount from its peak, letting you benefit from movements in a rising market but kicking in to provide protection if the price moves lower. Every time the share price hits a new peak, a new stop loss position is automatically created, which not only restricts losses but also locks in higher gains. Many of our clients find these tools extremely useful, with record levels of these order types set up over recent months and there are no additional charges associated with using advanced order types as any resultant deals placed are charged at your usual commission rate.
Strategy to consider
The value of gilts can fall as well as rise and if you buy them in the secondary market for more than their face value, you will get back less than your initial investment if you hold them to maturity.Corporate bonds
Strategy to consider
Funds
Strategy to consider
Although most funds are invested across a range of companies or assets which tends to make them less risky than holding a single investment, their value can still fluctuate and you might get back less than you invested.Exchange traded funds/iShares
Strategy to consider
You might also hold the view that companies that focus on environmentally friendly ways to provide power will be a good investment in the next few years. You could implement this view through buying the iShares S&P Global Clean Energy ETF, which provides exposure to the world’s 30 largest companies involved in this area.
Although by tracking an index, ETFs provide diversified exposure to a market, region or sector which tends to make them less volatile than individual investments, their value can still go down as well as up and you may get back less than you invested. View the complete list of iSharesStructured products
Strategy to consider
Covered warrants
Strategy to consider
If at the end of 6 months, gold is above $1,000, you would receive a cash payout equal to the difference between the strike price and the current gold price. However, if the gold price is below the strike price, the Call Warrant would be allowed to expire and become worthless, limiting the maximum losses to the price paid for the covered warrant.
Conversely, if you believe that the price of gold may fall, you could buy a Covered Put Warrant, giving you the right to sell gold at a pre-agreed price in the future.Turbos
Strategy to consider
Contracts for difference (CFDs)
However, CFDs are highly leveraged and you can lose more than your initial investment, so they should be used with extreme caution. As an investor with a moderate approach, you should take particular care to ensure that if you use CFDs, they form just a small portion of a well-diversified portfolio.
Strategy to consider
Financial Spread Trading (FST)
Strategy to consider
Due to the risk-profile of FST, you should ensure that you fully understand its nature and that you apply strict risk management procedures to your investing, potentially using ‘stop loss’ orders to limit your exposure.Research and advanced order types
