This is the 9^th edition of Tr@cker Magazine but the first to be published in adverse market conditions.

Investors in PEPs and Unit Trusts are universally encouraged to regard them as medium to long term investments. History has proved conclusively that the best returns on money have been from equities despite the higher risk. But how do investors feel now, having held onto their investments and watched the UK stockmarket fall to around 20% below the peak on 20^th July 1998? What, if anything, should they be doing?

An investment in UK equities as measured by the FTSE All-Share Index over the last 12 months is virtually back where it started, having been 21.9% higher on 20^th July 1998. Therefore anyone who invested in the last year will be disappointed, but the result cannot be regarded as a major disaster despite what the papers say. But whilst a year is too short a term to measure any stockmarket investment, their faith in getting better returns than, say, a Building Society Deposit over the next few years must be shaken. Maybe their expectations have become unrealistic. Certainly longer term investors have fared very well. Over 2, 3 and 5 years, an investment of £1,000 in UK equities (All-Share Index) would be worth £1,272, £1,482 and £1,821 respectively. Even after the significant falls since July, these are equivalent to annual rates of return of 12.9%, 15.5% and 15.9%, far superior to even the best deposit rates available in the last 5 years.

Reassuring though this may be to shorter term investors who are nursing paper losses, they must be wondering what, if any, action they should be taking. Here are just three pointers for investors to consider.

1. PEP investors need to remember that if they sell their PEPs and shelter the proceeds in cash to await signs of recovery, they forego their right to future tax exemption in their PEP. Existing PEP investors can continue to receive tax free income for at least the next 10 years and also shelter profits from capital gains tax.
    
2. Investors generally overlook the importance of dividends. The BZW Equity-Gilt Study which analyses the returns from equities, bonds and cash since 1919 shows that dividends account for around two-thirds of total returns on equities over long periods of time. The benefit of rising dividends cannot be over-emphasised especially within a tax free PEP.
    
3. It is significant that professional investment managers are seeking shelter in stocks which offer liquidity i.e. shares which they can sell more easily. This explains why Blue Chips continue to show their heels to the rest of the market. The FTSE 100 Index which comprises Britain’s top 100 companies which account for three-quarters of the UK market by value has outperformed the other indices consistently over the past 5 years. And significantly, just in the past 4 months the FTSE 100 Index has fallen by less from its all-time high and risen by more above its 1998 low than any of the other indices.

In this Issue:

Regular Features: