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Justin Urquhart Stewart – director & co founder Seven Investment Management… Investment Thoughts: Another FTSE Fad Goes – Annuity Warnings & Pay

The FTSE100 is a remarkably unreliable friend. It has inconsistently changed its complexion faster than many ladies of a dubious professional standing. Over the decades, it has become the focus of the fashionable companies to invest in of the period, and we see them rise with enthusiasm and fall into financial disgrace on a regular and almost cyclical basis.

Thus, we have gone from the old imperial trading companies like British & Commonwealth and ICI, through the conglomerates of BTR, Hanson and Williams. Many will recall the early privatisations, then the demutualisations and the especially frenetic TMT (Technology, Media & Telecom) boom that bust so spectacularly at the end of the 20th century. Even after that, the fashion fads continued with, as I am sure we can all remember, the finance sector with its banks that were surely “too big to fail” and then, running parallel with them, the rise of the miners during the commodities super-cycle.

Well, now we are witnessing the waning of this latest investment fervour. Last week saw the end of quarterly FTSE shuffle when CEOs either find themselves suitably flattered or humiliated as they win or lose their membership to FTSE 100 status. This is not just a technical exercise but affects many, as of course the powerful tracker funds and ETFs will become forced buyers and sellers depending on which way your company is going and thus will see some quite dramatic price variations.

This quarterly shuffle is just a consequence of capital valuations and means that the index is going to be at the behest of sometimes short term capital swings and not provide the stability of, say, an equally weighted index where each constituent has an equal share. So, in this case, with the FTSE 100 each constituent being 1% of the index whereas currently around 10 companies account for 45%.

This time around, the newly privatised Royal Mail Group has come in after its “priced to go” flotation a few weeks ago. However, one of the leavers is to be Vedanta – the Indian mining company. Vedanta will – in fact – be the fifth stock from the basic resources sector to leave the index so far just this year. The others were Kazakhmys – the Kazakh miner, the controversial ENRC miner, the steelmaker Evraz, and Polymetal.

In many ways, 2013 has seen a rebalancing in the FTSE100 as the mining and metals sector slipped from a strong 17% of the index value to something less than half of that. Perversely, it has been the banking sector that has been reviving in value; with Barclays rising by 15% in the past year, and the much criticised and fined Lloyds up by over 50%. The lesson from this is as ever – beware the fashion fads, fashion looks foolish soon after.

So who is earning?
According to last week’s earnings figures, we are still seeing pay running behind inflation. Well, that’s the headline. Technically, if you look at average earnings they have now reached £27,000 with an increase of 2.1% over the last year. The Consumer Price Index though has been running at a slightly higher level of 2.4%, but with average weekly earnings having risen at their highest rate since 2008.

Of course – thanks to the energy price rises – many are feeling squeezed but an inflation measurement is very rough and varies greatly by the age groups – as do the earnings. I noted – for example – that apparently farmers have seen a rise in earnings of over 21% along with “undertakers, mortuary and crematorium assistants”. I don’t want to know what a rubber process operative does, but they are up 19% as well (perhaps that’s just their industry). On the other hand, cooks, librarians and waste disposal managers have seen falls of around 7% with miners, security guards and glass and ceramic workers down over 10%.

Another scandal – and a serious one: Annuities
I have an enormous amount of respect for the indefatigable Ros Altman whose knowledge, understanding and lobbying on behalf of those looking to retire – or who already have done so – has been outstanding. In the face of ignorant politicians and self serving industry commentators, she has championed the cause and the plight of many millions suffering under the oppression of QE and low interest rates, but now the abuse that is operating within our annuity mechanism.

Recently, the Financial Services Consumer Panel – a statutory body charged with defending consumer interests – described some of the brokers involved in selling annuities as “burglars”. Few understand their pensions and have little idea of where to turn to for honest and independent advice. The result is that many fall into an unknowing trap of buying an annuity from their pension provider with no shopping around or evaluation; they wouldn’t know where to start.

If they do come across an annuity broker, they then find that their commissions can be as high as 6%! It seems that some of these operatives may also not be institutions of deep pockets (in case things go wrong) but small offices of offshore units which have little strength or credibility – but how would the consumer know that?

Annuities have always been suspect in my book. You get to retire and are then expected to place a bet on your own life. Die young and they win, die later and they still win but die very much later and you might just win. I understand that from the age of 65 you would have to live to 85 to get your money back with the current meagre annuity rates… so why take one out at all? You might as well have it invested yourself for a better return rather than give the profits to the insurance industry. Now there is a question which we in the investment industry should look to answer.
So, clear direction for all of us – and for any of us who know people in this situation: Please seek advice now as it will affect the 400,000 people each year who are being sold these things.


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