Qi3 – Quality, Insight, Integrity & Innovation - UNITING TECHNOLOGY & MARKETING

Tag: financial advice

Many happy total returns

It’s one of those jobs I do over the festive break, checking on the performance of investments during the 2011 calendar year, and thinking about where different classes of assets stack up against the roller-coaster risk of angel investment.  It’s been a pretty scary prospect.

As a starting point, let’s look at equities in 2011.  The FTSE100 index started the year at 5899 and closed at 5572, a fall of 5.5%.  The FTSE100 Total Return (TR) index, taking into account the dividends paid by these companies, fell by 2.2%.  With a high of 6091 in February and a low of 4944 in October, you could have gained 3% or lost 16% from the start of the year.  Expanding this to the FTSE UK All Share index, total returns were -3.5% and the FTSE World Index performed even worse, with a total return of -7.6%.  That’s all pretty alarming, and if you hold these shares within managed funds in your pension plan, the charges would see you with falls of about 9-11%.  I know of very few investors whose shareholdings appreciated in value in 2011, and the ones I do know relied on an income and reinvestment approach, rather than on capital gain.

Compare that with cash.  With UK RPI inflation at 5.2% in December 2011, interest rates at say 3% were a built in guarantee of losses during the year.  Nevertheless, despite the risk of holding a fiat currency, at least cash performed better than equities.

Bonds were mixed in 2011 with UK and US treasury bonds ending the year at historically low yields under 2%.  Corporate bonds showed high yields but significant risk. The outlook for 2012 has to be generally negative for gilts and corporate bonds, with huge uncertainty around the key indicators of long-term inflation, interest rates, growth, bank and sovereign stability.  Gold and oil did well, with gains of 11.7% and 15.5% in the year.  House prices in the UK fell by about 2% during 2011, with only London registering modest rises.  Surely the UK outlook for house prices has to be continued modest year on year real-terms decline?

So with that gloomy review of 2011, and 2012 looking no better for any asset class, where does that leave me as an early stage technology investor in UK engineering companies?  Surveys in the UK and US point towards long-term annualised returns of 20-25%, and that’s before taking the benefits of the Enterprise Investment Scheme into account.  The real picture for angel investors I know is far more mixed, with a few substantial exits dominating overall return.

The reality for this investor is that I’ve written a number of cheques, and I’m happy with the performance of all of the businesses so far.  So my loss is either 100%, or else I’m sitting on a share of their future successes.  I’m a firm believer that technology creates a great opportunity for good management teams to build businesses with excellent market share, growth and profitability.  Economic downturns are for me the ideal circumstances in which to build businesses and invest for the future, so I’m looking forward to 2012 with gusto.

Death of the IFA

Or maybe that’s what I was wishing for after interviewing four prospective financial advisors today.

Unfortunately, tax is complicated.  It can drive investment behaviour and deal structure – although hopefully not investment decision-making.  But it needs sharp minds, rigorous option analysis and a shared entrepreneurial spirit to provide suitable financial advice to an owner-manager-investor.  These qualities were absent in spades from today’s grey-suited brigade.

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