Our content this month are as follows:-

• Get on the Starting Grid for the Index Grand Prix
• Client Feedback Program
• Books We Have Read
• From the Press
• Quote of the Month

The Index Grand Prix will take place this year on Friday 8th September at the usual venue of Priory Park, Tamworth. Invitations have been issued and if you have not yet received yours, please let us know. We have had a number of replies, but if you have not yet sent your acceptance back, please do as soon as possible.

Corporate Occasions will again provide the catering to their usual very high standard and we have ordered the customary good weather. We are again relying on one of the ladies bumping Les off the track and we fully expect Noel to be last once again.

It is usually a great day and we hope you can make it.

One of the results of a staff brainstorming session is that we will shortly be introducing client feedback cards in reception. The intention is that if you would like to suggest any improvements to our service, you will have the opportunity to do so easily and conveniently.

Comments can be made anonymously and we hope that we can have the benefit of your experience as clients to enable us to do things better for you.
Many of you have been kind enough to make suggestions previously and indeed many clients have made very complimentary remarks about the way we do things now - please feel free to continue with these!

We will point out the availability of the cards when you next visit us, please help us to help you by completing one, every little helps.

You may be surprised this month that our selection is "Art of War" by Sun Tzu, a book about Chinese military strategy. We were reminded about it by the World Cup; "Big" Phil Scolari, the Brazilian manager of the Portuguese team made the book compulsory reading for his players before the tournament. You could argue that the Portuguese overachieved by reaching the semi-final (particularly after their lucky win over England in the quarter-final!) and we began to wonder how much the book had to do with their achievement.

We can assure you that we are not advocating war or fighting of any kind. Whilst the book is one of the "Seven Military Classics" and has been studied by the likes of Napoleon it is really about strategies that can help you to win in a competitive situation, something we all face in business.

The version that we have is translated by Ralph D. Sawyer and is superior to most other prints, currently available. The book is available from Amazon.co.uk and if you have any trouble obtaining it please contact jayne@indexfundadvisors.co.uk.

There are an increasing number of articles appearing which endorse our investment philosophy and it is pleasing that the press are catching up with all of the research that is available, indicating those factors which point to a successful investment experience.

Another article from the Financial Times, this time by Philip Coggan, is detailed below, and we are sure you will find it interesting reading.


FT MONEY: Track index and outdo the toss of a coin

By Philip Coggan

Is it luck or skill? It can be very hard to know exactly why a fund manager has performed well.

That was neatly illustrated this week with an analysis by New Star, the fund management group. Sometimes press releases do not carry the message companies mean to convey. The reader draws a different moral.
New Star looked at the number of managers who had outperformed the median in each of three (and then five) consecutive years. Only one in eight UK equity managers had done so over three years, for example, while over five, the hit rate was one in 34.

To New Star, the message is that investors need to employ an experienced fund-of-funds manager who can sort out the sheep from the goats.

But take a look at those numbers again. The chances of tossing three heads in a row is one-in-eight; five heads in a row is a one-in-32 shot. so it looks as if the chances of a fund manager beating the average are no better than tossing a coin. In other words, performance is entirely random.

If that is the case, why pay an extra fee to a fund-of-funds manager when you can make the same guess yourself? A higher fee will reduce your long-term return.
New Star would retort that it has shown skill in picking managers, by beating its sector substantially over the past four years. Alas, its record is not long enough to prove that skill, not luck, is involved.

The decision between active management and passive (or index-tracking) funds is not an easy one. Implicit in the index-tracking case is the belief that markets are always efficient, something that is hard to believe after the dotcom boom.

Second, having met many intelligent and shrewd fund managers, I find it hard to believe that there is no skill involved in the record of, say, Anthony Bolton or Neil Woodford.

However, the problem lies in spotting such performers in advance, or at least early enough in their career to take advantage.

Unless you have a lot of time to research the sector, the percentages clearly suggest an index-tracking approach. That is also the conclusion of an informative new book* on investment planning by Tim Hale.

Hale points to a US survey that shows, over the 20 years to 2003, more than 80 per cent of active investors failing to beat the market. A second survey found that the average index fund beat the average active fund by 2 percentage points a year over the long term.

Hale favours using index funds as a building block for assembling portfolios. While he certainly has a case for equities, I think the argument is much less convincing for bonds.

If we are talking about corporate bonds, then an index weighting would mean investing most of your capital in the most indebted companies. If we are talking about a domestic government bond index, then the weighting will be highest in short-dated maturities (where issuance is greatest) rather than in long-dated paper which is probably a better match for the investor's liabilities.

Hale also suggests two rules of thumb for deciding the proportion of an investor's portfolio that should be devoted to bonds. One is to make your bond percentage equal to your age; that is, a 50-year-old should have 50 per cent in bonds. That seems a little conservative for younger people.

The second rule is to multiply your investment horizon, in years, by four to get your equity percentage and own bonds for the rest. So if you have 20 years until retirement, you should own 80 per cent in equities and 20 per cent in bonds. This is not a bad rough and ready calculation, although for those with a 25-year time frame owning no bonds at all feels like too big a bet.

Hale also suggests scope for further diversification into asset classes such as property, index-linked bonds, commodities and funds-of-hedge funds.
All of this makes for sensible advice (and a useful book). Diversification does make sense.

But there is a problem with diversification that has become clear this year. When everyone is piling into an asset class, it ceases to be a diversifier. Thus, according to Société Générale, commodities have recently been more correlated with equities than they have been in decades.

So I believe that, in addition to diversification, investors should be willing to make asset allocation decisions on the basis of expected future returns.
Some will dismiss this as "market timing", an approach that has rarely been known to work. But while it is very hard to guess where markets are going in the short term, over the long run there is some evidence of reversion to the mean.
Saying that the equity markets were overvalued in 1998 looked pretty stupid during 1999 and early 2000. But the scale of the market plunge was such that, by 2003, investors had earned far greater returns from bonds than from equities over the previous five years.

Investors should give a greater weight to those asset classes that have underperfomed their historic trends over the medium term (10-20 years or so) and should underweight those asset classes that have outperformed.
Part of the problem for investors was that earlier this year, it was hard to find assets that looked cheap or below trend.

If there is one good thing about the current turmoil, it is that it may once again throw up assets that look unloved. Then, all investors need is the courage to buy.

"You gain strength, courage, and confidence by every experience in which you really stop to look fear in the face... The danger lies in refusing to face the fear, in not daring to come to grips with it... You must make yourself succeed every time. You must do the thing you think you cannot do."

Eleanor Roosevelt