Our content this month are as follows:-

• Inflation – a real threat
• In the news
• Books We Have Read
• Interesting Articles
• Quotes of the Month

There is a perception that in the western world at least, generally speaking, governments appear to have inflation under control, particularly over the past 10 to 15 years. Those of us who remember the bad old days of the 70s and early 80s could be forgiven for breathing a sigh of relief that double digit inflation appears to be a thing of the past. However, even at the relatively low rates of inflation we have suffered recently there is still a large threat to purchasing power, as evidenced in the following figures; the value of £1 million, when measured against the retail price index (RPI), has reduced in real terms as follows:-

10 years - £762,340

15 years - £670,375

25 years - £393,103

(All figures measured to 31st December 2007).

The loss of almost 25% of purchasing power over the past 10 years is a sobering reminder of the damage even low inflation can do.

There is an additional problem that has become more apparent in recent years, which is, "who trusts the official figures?". An article in the Financial Times last weekend suggests that inflation for the wealthy is double the official rate at around 6% and could be as high as 10%, as determined by a "cost of living extremely well" index constructed by Forbes magazine. The article points out that while the government statistics are based on a basket of goods which are deemed to be average, the cost of school fees, restaurant bills, luxury holidays and health insurance have all increased by between four and eleven times the official rate of inflation!

These statistics highlight the importance of ensuring that your investment portfolio is designed to produce real returns, over and above the official rate of inflation and perhaps, more importantly, your personal rate of inflation. This can only be achieved by investing in real assets and investing in cash will leave your capital at the mercy of inflation.

We are indebted to the designers of the website measuringworth.com for the figures above; we will be making a donation to their costs as they make no charge for their services. The website is worth a visit and can provide a fascinating insight into how fast prices move even in a "low inflation" environment.

In our July 2007 newsletter we carried a warning about "Absolute Return" funds and 130/30 funds. Updates on both have been carried in the Financial Times recently.

130/30 funds allow their managers to use "shorting" techniques to take a bet on the market or segments of it when they believe prices will fall. In the falling markets we have witnessed this year they are all posting negative returns. Although he does not run such a fund, Anthony Bolton tried using these techniques in his special situations fund last year and fell flat on his face. The Financial Times summed up the performance of this "sector" as follows, "performance has failed to live up to the hype of offering the potential for excess profits".

The Financial Times of 3 May reported that absolute return funds now have their own sector courtesy of the Investment Management Association, despite their spokesman commenting, "performance comparisons of absolute return funds are inappropriate because of the diverse nature of the funds, which may have different benchmarks and risk characteristics". There are only 17 funds in the sector (including five from one investment house), with investments in areas as different as Asian bonds and the UK equity market. How these funds can be grouped into one sector is beyond us.

Both are approaches which are characterised by the use of expensive and usually unsuccessful tactics, such as the use of derivatives, with the aim of seducing investors into believing that there are new ways of making money in equity markets. There are not. To repeat our mantra, markets work, risk and return are related and intelligent asset allocation is the only sensible investment approach.

A short read this month at only 106 pages, excluding notes etc. It is "An Appeal to Reason" by Nigel Lawson, subtitled "A Cool Look at Global Warming".

The former Chancellor puts forward a number of controversial arguments on the subject and regardless of your stance on global warming it should provoke a great deal of thought about some of the solutions he advocates. Some of his facts may be disputed and in fact already have been in some reviews, but it is slightly disturbing that no British publisher would accept the book because in the words of one of them, "it flies so much in the face of the prevailing orthodoxy". The author also comments that he has been able to write this book only because his career is behind him. Even if you disagree with the author I am sure you would support his right to be heard.

There are a number of articles on our website under "resources", to which we have added this month, "The 60/40 Solution" by Peter Bernstein, one of the most respected investment commentators in the world and author of "Against the Gods”, one of the best books on risk we have read.

As usual, Mr Bernstein has much of interest to say on historical returns and asset allocation; our favourite quote is "you should manage (your money) in the most cold-blooded fashion". Please follow the following link to this and other articles.

http://www.indexwm.co.uk/articles.asp

"If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed."
Edmund Burke: Statesman, political theorist and philosopher.

"Your chances of success in any undertaking can always be measured by your belief in yourself."
Robert Collier: Author and publisher