If volatile markets do one thing, at least they make people think more about what is happening to their money – even if it is just on the basis of fear. The frantic headlines of hyperbole over the past few weeks certainly do little to comfort or educate investors and serve only to scare the pants off most.  Sadly most of the time, many appear more than happy to bury their heads in the sand and live in a fool’s paradise of blissful ignorance with the vague hope that it will be all wonderful in the end.

The reality is of course more logical. Unless you are a conspiracy theorist, the chances of financial Armageddon occurring are still somewhat unlikely. Yes there are going to be some further financial disasters, and yes we are going to see an economic slowdown. However, although there are parallels with the start of the Japanese economic depression in the early 1990’s, the operation and structure of the US economy compared to that of Japan are vastly different. The structures and rigidity of the Japanese economy led to fractures and failings: the greater flexibility in the US and UK economies will most likely allow for survival of at least the fittest, if not necessarily the rest. Capitalism is going through a crisis, but announcements of its impending demise are a little over-exaggerated.

So what can investors do? Well for those willing to accept the risk, investing in assets at these prices is obviously far better value than just a few months ago. However, of course these values may weaken yet further from here but as ever no-one actually knows when the bottom will be hit. At this time though, it certainly does make a great deal of sense to be dripping money in to take advantage of lower prices, and if prices go lower then you will be buying in at even cheaper levels; if they do start going up, then you will have certainly bagged a bargain.

My view is that if you are willing to take a five year view from here, and accept some hairy headlines, then your decision to invest in 2008 may well prove to have been a good one.

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The cost of investment has always been a serious concern of mine. In the UK, whether it has been cars through to wine, many items have always appeared to be more expensive. Whether the excuse has been that we are an island and therefore things have to be shipped in, or whether we have little direct price comparison with connected neighbours, as on the continent, we have seen an array of excuses for higher prices. So when it comes to financial services, similar apologies seem to apply.

Often the excuse applied in the financial service industry is “that is the way we have always done it” – which is a somewhat limp excuse as far as I am concerned. Such things need to be challenged and justified. I have found some appalling examples of excessive charging from greedy banks to commission hungry stockbrokers, as well as unfortunately some awful habits from a minority of financial advisers.

However, let me extend this net further to the active fund management industry which has relied for many years on the advisory sales structures to have its funds flogged for it. These often come with extremely healthy sales commissions backed by impressive fund management marketing machines that have the power to shout the attractions of their star managers from every railway hoarding and poster site. It appears that he who shouts loudest often wins – or should I say he who shouts loudest, and pays most commission, wins?

In fact it seems that out of a universe in the UK of 2000 funds, nearly 50% of new investment money goes into just 150 of them. But then look again at what you may be buying. With a few honourable exceptions, most active fund managers don’t manage to beat their own benchmark (normally an index or combination of indices) – especially after their charges. So one can ask the question - why pay the extra cost of an active manager who can’t beat his own index when you could buy the index at a far cheaper price – and of course logically you must thus achieve the index result!

So in comparison if you take an active fund annual management charge at, say, 1.5% to 1.75% plus additional costs of, say,  0.25% to 0.5% then an overall cost, Total Expense Ratio, (excluding the manager’s trading commissions, which are not included in the figures!) is likely to be over 2%. Compare that with buying a passive index tracking Exchange Traded Fund on, say, the FTSE 100/Allshare and you would only pay 0.40% in all. Quite good value by way of comparison I think.

Now take this to the next level and build a portfolio of such passive funds and again you find that the annual cost for such a multi-manager mechanism can be brought down significantly from the traditional multi-manager costs of often over 2.5%. Such innovation should be welcomed in the UK as our industry can at last be seen to be providing better value to its clients at a lower cost. Some more barriers broken down!

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And finally……….if I may relay an excellent note by the London Evening Standard on the State visit of the French President. The pictures they commented on were a tribute to the cosmopolitan face of modern Europe. The Queen is largely of German extraction while Prince Philip is mainly Greek. Additionally Nicolas Sarkozy is of Hungarian ancestry and Mrs Carla is of course Italian. Scarcely a drop of French or English blood between them.

Have a good weekend,

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited