Our content this month are as follows:-

• Market News Roundup
• Onassis award for Finance goes to Eugene Fama
• Books we have read
• Quotes of the month

The big news as we go to print is the no vote that American lawmakers gave to Hank Paulson's rescue package. The consensus view is that many had half an eye on the upcoming election and voted to placate their constituents. After falling heavily markets have risen in the expectation that the decision will be reversed on Thursday. It is hoped that by taking what are being termed "toxic assets" off banks’ balance sheets that they will be more prepared to lend to each other and the credit markets are revived somewhat. The Irish government's guarantee of their largest institutions bank deposits was a welcome move which also gave markets something of a boost; the guarantee appears to extend to subsidiaries and the Irish banks may be a good home for spare cash, at least until 2010.

Of the bank failures this month, shed no tears for Lehman Brothers, whose investment banking operation more resembled a betting shop than what we imagine a bank to be. Washington Mutual in the United States, Bradford & Bingley in the UK and Fortis Bank in the Benelux countries have all been bailed out by a combination of private and public money. JP Morgan in the US and Santander in Europe appear to be hoovering up the assets of smaller banks and the overall picture is that the better capitalised and larger banks are taking advantage of the troubles of their smaller brethren. Given the poor management demonstrated by Northern Rock, Alliance & Leicester and Bradford & Bingley it is probably no bad thing that they are under new ownership.

We might consider that the failure of these weaker organisations is a demonstration of capitalism in action (with the current exception of Northern Rock perhaps, although it is likely it will end up in private hands in due course); a banking crisis has had the effect of demonstrating weak management and stronger, better run companies are utilising their financial strength to buy them at attractive prices. We would not seek to minimise the anxiety felt by customers of these banks, of course, and would advocate depositing no more than the maximum covered by the compensation scheme with any one bank.

There has been a predictable chorus of media speculation that current events could mean the end of capitalism, although what they envisage in its place is impossible to imagine. Markets have survived many "doomsday" scenarios including world wars in their history. In fact, although it is painful for those who are selling assets, markets are setting prices, securities and assets are being bought and sold and trades are clearing; there has been no interruption to this process and markets, whilst volatile, are doing exactly what they are expected to do. Although nobody can predict where this current situation will end up there have been other occasions when the end of markets was predicted; in 1973 the UK stock market dropped 28% and in the following year 51%. Despite unutterable gloom and inactivity towards the end of 1974, the market grew by 151% in 1975. Similarly, in 1981, a famous headline appeared in a US financial magazine, "The Death of Equities"; 1981 was the beginning of an 18 bull year run in the United States market, with the S&P 500 growing at 18.5% per annum over that period.

Although we would prefer that markets were rising, we are confident that the diversification within client portfolios is doing its job; we are equally confident that capital markets will continue to do their job and that at some point the markets will turn. In order to be in position to take advantage of that turn we need to remain invested and ignore the frequent media forecasts of financial Armageddon, which help to sell newspapers, but unfortunately generate more heat than light.

As promised below is an update of instant access and short notice accounts, together with information on how your deposits are protected.

Bank deposits and How the FSCS Protects You

Financial Services Compensation Scheme (FSCS)

The FSCS is the UK's compensation fund of last resort for customers of financial services firms authorised by the Financial Services Authority or previous financial regulators. This means that the FSCS can pay compensation to consumers if an authorised financial services firm is unable, or likely to be unable, to pay claims against it and so is in "default."

As well as protecting deposits, the FSCS also protects:
•insurance policies,
•insurance broking (for business on or after 14 January 2005),
•investment business, and
•mortgage advice and arranging (for business on or after 31 October 2004).

For deposits, the limit of compensation available is as follows:
Deposits: £35,000 per person (for claims against firms declared in default from 1 October 2007) 100% of the first £35,000.*

FSCS is triggered when an authorised deposit taker (such as a bank, building society or credit union) is unable, or likely to be unable, to repay its depositors. Joint account holders are each entitled to claim compensation of the above level.

To qualify for compensation you need to be eligible under the FSCS rules. These form part of the FSA Handbook of rules and guidance, and can be found under Redress, Compensation on their website. The rules tell them which types of claim are eligible for compensation, and limit how much compensation they are allowed to pay. The FSCS must abide by these rules at all times.

Depositors may still receive a share of their savings above £35,000 back following any distribution of assets as part of the insolvency process for a failed bank. This would be a matter for the insolvency practitioner to determine and any recovery would, by necessity, vary according to the circumstances of the specific failure.
The actual level of compensation you receive will depend on the basis of your claim. FSCS only pays compensation for financial loss. Compensation limits are per person (per firm and type of claim).

The main points of the scheme are:
•Compensation can be paid, only when an authorised firm is unable, or likely to be unable, to pay claims made against it. This is described as being in default. They will carry out an investigation to establish the financial position of the firm.
•Compensation can be paid, only if a claim is eligible under the FSCS rules.
•FSCS can pay compensation only for financial loss and there are limits to the amounts of compensation they can pay.
•The Scheme was set up mainly to assist private individuals, although smaller businesses are also covered.
•Larger businesses are generally excluded, although there are some exceptions to this for deposit and insurance claims.

Smaller businesses are defined as having 2 out of 3 of the following:
•Turnover: not more than £6.5 million
•Balance sheet total: not more than £3.26 million
•Total number of employees: not more than 50

* The FSA changed the rules that govern compensation payments on 1 October 2007 to increase the total limit to £35,000. For deposit claims against firms declared in default before 1 October 2007, the maximum level of compensation is £31,700 (100% of £2,000 and 90% of the next £33,000).

Spreading the risk

As stated, the compensation scheme covers you for £35,000 per person, per institution on deposits, therefore it can be a worthwhile exercise spreading your deposits over different institutions to lower your exposure to the risk.

Below is a table of providers that count as one institution and therefore depositors would only be covered for one amount of £35,000, should one or more of the providers in the same be in default:

Providers that count as one institution: Providers registered separately:
Abbey, Cahoot, Alliance & Leicester
Bradford & Bingley, Asda Barclays
Co-operative Bank, Smile, CIS Capital One
Halifax, Bank of Scotland, B'ham Midshires Cater Allen Private Bank
Intelligent Finance, The AA, Saga Citibank
HSBC, First Direct Egg
Lloyds TSB, Cheltenham & Gloucester ICICI Bank
Nationwide, Portman NatWest
RBOS, Direct Line, Lombard Sainsbury’s Bank
Post Office, Bristol & West, Bank of Ireland Standard Life
Yorkshire Bank, Clydesdale Bank Tesco Personal Finance
Virgin Money

HBOS and Lloyds TSB are expected to retain their individual FSA registrations following the merger. Also, Alliance & Leicester will be kept separate from Abbey when it is taken over by Santander.

Source – The Financial Times and moneysupermarket.com

Account Rates Summary as at 29 September 2008

Instant Access

Alliance & Leicester – E Saver issue 2
AER 6.60% (5.13% net)
www.alliance-leicester.co.uk

Kaupthing Edge – Instant Access Savings Account
AER 6.55% (5.09% net)
www.kaupthingedge.co.uk

Bradford & Bingley – Internet Saver 3
AER 6.51% (5.06% net)
www.bradford-bingley.co.uk

Birmingham Midshires – e-Saver Account (Issue 2)
AER 6.52% (5.06% net)
www.askbm.co.uk

ING Direct savings Account
AER 6.5% (5.05% net)
www.ingdirect.co.uk/savings

6 Month Fixed

Kaupthing Edge – Fixed Term Deposit Account
AER 6.97% (5.48% net)
www.kaupthingedge.co.uk

Bank of Cyprus UK Bond (24th Issue)
AER 6.86% (5.4% net)
www.bankofcyprus.co.uk
Telephone - 0845 850 5555
Address: 123 Parade,
Sutton Coldfield
B72 1PU

ICESAVE 6 Month Fixed Rate Savings Account
AER 6.86% (5.4% net)
www.icesave.co.uk

Investec High 5 Account
AER 6.57% (5.10% net)
www.investec.com
Telephone - 0845 366 6333

West Bromwich Building Society – Crown 30 Day Notice Account
AER – 6.56% (5.10% net)
www.westbrom.co.uk
Telephone - 0845 330 0622

The inaugural Onassis Prize for Finance, awarded by the Cass Business School in London has gone to Professor Eugene Fama of the University of Chicago who is also an independent director of Dimensional Fund Advisors. The award recognizes his huge contribution to the world of finance, which includes development of the efficient market hypothesis and the three factor model and confirms his place as a giant of the world of finance. These principles are enshrined in our approach to portfolio construction and are the reason why we include small and value companies within client portfolios, as well as diversifying internationally.

It is gratifying for all of us to know that our methodology for putting together client portfolios has won not only Nobel prizes, but other prestigious international prizes also.

A book to take your mind off the markets this month, The Pedant’s Revolt, by Andrea Barham. The subtitle of the book is "why most things you think are right are wrong" and offers a clue as to the fun you can have after you have read this book. It is broken up into sections such as "Things that are bad for you", "William Shakespeare", "Events from history" and “Medical matters" and examines "well-known facts" and, quoting authoritative sources, gives them the lie. Among many things you might be disappointed to learn are, ostriches do not bury their heads in the sand, St Bernard dogs do not carry brandy flasks, Julius Caesar was not delivered by caesarean section and, most shocking of all, Sherlock Holmes never said, "elementary, my dear Watson".

This is a book that will make you first choice for pub quizzes. It is available from good bookstores and Amazon, but if you have any difficulty finding it please contact sarah@indexwm.co.uk.

"I have not looked at any of my holdings and don't intend to. I don't want to be tempted to jump because I think I'd be more likely to jump in the wrong direction than the right one. My advice has always been to choose a sensible diversified portfolio and stop reading the financial pages. I recommend the sports section."

Richard Thaler, Professor of behavioral science and economics, University of Chicago Graduate School of Business.