A review of the FTSE in 2011 and what we can learn

10 January 2012 / by Oliver Roylance-Smith

The FTSE is one of the most important indicators of investment performance and acts as a key benchmark for many investors in the UK. For this reason, we review 2011 and see what happened and what we can learn from a difficult year.

2011 highlights

The Index opened 2011 at 5899.9 and closed the year at 5572.3, a reduction of 5.6%. Month on month, the FTSE had eight months where it returned a negative performance, the worst of these being the month of August when the FTSE dropped 7.2%.

Although the year was overall negative, there were some positive months, the most significant being October, when the Index rose by 8.1%. This shows just how important it is to retain exposure to the stock market, as with most investments. This month was key in reducing the overall impact of the year.

A year of two halves

The first half of the year was solid, with the FTSE finishing every day above the 5,500 mark and staying steadily between 5,500 and 6,000 until the end of July, tipping over the latter on several occasions during that time.

It should also be remembered that this followed the culmination of a steady 6-month rise in the last half of 2010, which saw the FTSE increase from just under 5,000 to finish the year just shy of the 6,000 mark.

Seconds away, round 2

The Eurozone debt crisis was the biggest story of the year and had the biggest impact on the FTSE in early August. During the first days of trading that month the FTSE dropped by almost 13% which was followed later in the month by the largest single daily loss since November 2008 as the Index fell by 4.5%.

What can we learn?

It is quite clear that direct exposure to these returns would have been a torrid time, even for the most hardened investor. These are the times which most challenge the senses and when investor emotion can often let us down as we give in to coming out of the market when we need to be in it most.

This rarely does more than consolidate losses and leaves an even bigger mountain to climb to get back to where we started. For example, if we invest £10,000 and suffer a 10% loss, the value of our investment is now £9,000. However, in order to get back to our original £10,000, our investment must now grow by 11.1%, so a further 1.1% must be found from our investment and remember this is after charges. This is compounded further over time.

Direct exposure to the stock market

This volatility highlights the need to consider carefully how one gains exposure to the stock market. Direct exposure through shares is the most extreme in terms of volatility with low diversification and nowhere to hide. Here you will see the full force of the ups and downs which will have a direct impact on your income and any capital growth.

The ability to invest in more than a handful of shares can be achieved by using a collective investment such as a fund. Funds offer exposure to the stock market but with reduced risk since your investment is pooled with other investors and is diversified across a number of shares (normally between 40 and 100) and so your exposure to one share is limited to the size of that holding.

Actively managed funds try and select the shares which the manager feels will outperform the market but this can be difficult, and it is very rare for managers to consistently outperform year on year, with many funds actually underperforming the market over time. Tracker funds are another fund option which try to track a particular index such as the FTSE 100 although the effect of charges makes it difficult to keep track over time.

Alternatives looking attractive

Structured investment plans offer perhaps a more convenient option since they lay their cards on the table at the outset in terms of the rewards available for the level of risk taken. This is attractive in its own right but the mechanics of the plans can also produce other benefits which are not immediately obvious.

Income?

The choice available in how these plans are structured means that there is a wide selection of options to choose from depending on your circumstances. Those seeking income can have either a fixed income (see Investec’s Bonus Income Plan paying up to 7.25% per year) or an income which is dependent on the FTSE being higher than a certain level (see Gilliat’s Income Builder which pays 8.2% per year provided the FTSE stays above 3,000).

Or Growth?

In the growth space there is even wider choice. For example, a fixed return of 75% if the FTSE is higher at the end of the term (see Investec’s Geared Returns Plan), a plan that pays 200% of any growth in the FTSE (see Investec’s Accelerated Growth Plan), or a defensive option which pays out a fixed return of 60% even if the FTSE falls by up to 20% (see Morgan Stanley’s Booster Plan).

Finally, one of the most popular plans in 2011 was the Kick Out plan which can mature early each year if the FTSE finishes higher than its starting value and can therefore pay out even if the Index has only gone up by a very small amount. The current range available offer some of the highest returns from this type of plan ever (up to 13.5% per year) and are becoming a popular default for many investors.

Research all of your options

The main point to learn from 2011 is that when times are tough, having investments where the value is directly related to the ups and downs can raise some serious questions. Further, this should not be considered the only option and there is a wide choice of alternatives available which can be matched against your view of what will happen to the market.

So whatever your view, the most important point is to make sure you research all of your options. At Fair Investment we are constantly reviewing all of the options available and aim to keep you right up to date with the best the market has to offer. We want to make sure you have the best information available before investing so please make sure you contact us with any questions on any of the plans you see. We’re here to help.

No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.

Some structured investment plans are not capital protected and there may be the risk of losing some or all of your initial investment. There is also a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated, in which case you may not be entitled to compensation from the Financial Services Compensation Scheme (FSCS). In addition, you may not get back the full amount invested if the plan is not held for the full term. The past performance of the FTSE 100 Index is not a guide to its future performance.

© Fair Investment Company Limited