New Star has announced it will de-list from the stock market and be majority owned by its banking syndicate. The asset manager's banks will own 75% of New Star's enlarged ordinary share capital and £94m out of £100m new high-dividend convertible preference shares. New Star's proposed restructuring will result in £240m of its £260m gross debt being converted into equity. It says the transition to an unlisted company will allow it to "concentrate on its investment performance". New Star - which had £13.9bn in assets under management at 30 November - says as the credit crisis deepended during September, a number of clients raised concerns about its debt levels in the face of the likely prolonged economic downturn. The preference shares will pay a high 10% annual dividend above LIBOR, which will start accruing six months following issue. However, the dividend will not be payable until 30 June 2013. Until the preference shares are fully paid, no dividends will be owed to ordinary shareholders. The balance of £20m current gross debt will remain in place and be repayable in June 2013. At 30 November this year, New Star has cash reserves of £30m. In a bid to keep "attract and retain" key staff, New Star has agreed an incentive scheme for senior managers and its existing share-based bonus scheme will be replaced by a new system "to ensure key people are locked in".

"The Board recognised the concerns of our clients regarding the level of our debt during these difficult times," chairman John Duffield says. "We have therefore taken this radical step to address these concerns completely and with one stroke." Duffield adds the restructuring is "regrettably a substantial dilution" for ordinary shareholders. "However in current market conditions we have to recognise that there is no other option to ensure the stability of the business," he says. Chelsea Financial Services' managing director Darius McDermott says: "It comes as a relief to investors and advisers alike that the eleventh hour discussions have delivered a relatively satisfactory conclusion. "This deal will provide stability to the company; allow its fund managers to focus on the challenges ahead for their portfolios; and hopefully give New Star unit holders a good night's sleep. "We always had confidence that someone of Duffield's experience and tenacity could broker an agreement that would be beneficial to his clients. Now it is time to get back to the business of delivering improved returns to these clients."

Investment Week

Unit holders invested in New Star funds through Selftrade may be concerned of recent stories regarding the share price and future of New Star Asset Management. Selftrade would like to take this opportunity to assure all clients of the security of their investment, although the performance of them will depend on the market in which the funds are invested and the ability of the fund manager looking after them. A careful eye will be required to see how the fund managers are reacting to their changing environment. You can rest assured that we will keep our clients informed of our views on this as events unfold.

New Star is believed to be currently in the process of finalising a deal with its banking syndicate which will see its key fund managers locked in with a new incentive package. It is understood that the negotiations are not finalised but are close to being agreed. The deal looks set to leave HBOS, Lloyds TSB, RBS, HSBC and National Australia Bank with the bulk of equity. New Star is expected to post details of the new arrangement on the London Stock Exchange later today. The controlling interest of the banks effectively dilutes the interests of existing shareholders in the firm, who are already sitting on heavy losses following a collapse in the firm's market value from around £500 million to £20 million.

Many of these shareholders are fund managers who received shares in the company to incentivise them to deliver strong performance. The agreement with the banks is expected to include a new incentivisation scheme for the managers to ensure they remain at the firm. This could either be in the shape of a cash incentive, or the distribution of more shares to them at discounted prices to limit how much the debt-to-equity swap dilutes their holdings. New Star's shares continue to struggle as the market waits for details of the bank deal. Cazenove has responded to the news by putting out a note stating that it believes that with its current level of debt the firm can reasonably be expected to have a market value of no more than £10 million, compared with the current market cap - even at these radically deflated share prices - of £18 million.

Citywire

Neptune Investment Management is considering an approach for some of New Star's funds and managers. The group is considering offering itself as a home for some of New Star's star managers as well as the assets they manage in the event that capital needs to be released as a result of its discussions with creditors.

The approach would come as New Star faces crucial negotiations with its banking syndicate over £230 million of debt. The negotiations could lead to it being forced into a debt for equity swap which would give the banks control of the firm. The negotiations led New Star to request a suspension of shares on Monday, which was denied by the Listing Authority. Shares in the firm have continued to fall to almost meaningless levels. Having reached over £4.90 at their peak in June 2007 they were priced at 6.78p by 15.27pm on 2 December 2008.

Neptune is not in a position to acquire the whole business and would be unwilling to take on the hundreds of millions in debt but could provide capital for the embattled asset manager by buying the more profitable active fund management operations. The chairman of Neptune, Jonathan Punter, told Citywire: 'I would say that we are certainly interested in some of the individuals and possibly some of the assets including the multi-manager proposition. 'We are one of just two or three fund managers who have a cash position and are in a position to take advantage of opportunities like New Star.' Neptune is thought to have in excess of £10 million on its balance sheet following several years of rapid asset growth accompanied by tight cost-controls.

Punter declined to comment on the individual New Star managers which Neptune is interested in but Citywire sources have suggested that European manager Richard Pease, rising UK star Tim Steer and financials manager Guy de Blonay are the candidates most favoured by Neptune. The group is also considering making a play for the multi-manager team of Mark Harris and Craig Heron. It is thought that Neptune, founded by star fund manager Robin Geffen, would consider including New Star executive chairman John Duffield on the deal, offering a stake in the business together with a non-executive role, but the firm would not comment on the issue.

Neptune undeniably makes for a better cultural fit for the fund managers than other touted suitors such as Aberdeen. Historically purchases of rival fund managers by Aberdeen have resulted in the departure of most individual fund managers who are reluctant to sign up to its strict investment process. Punter also said that Neptune is interested in exploring any other opportunities which come to market.

Citywire

Hargreaves Lansdown and Bestinvest have increased the pressure on John Duffield's New Star by removing a number of the firm's funds from their respective buy lists. The news could spark further runs on New Star funds, which have suffered significant outflows over the year on the back of the severe detioration in market conditions leading to a marked slump in performance on a number of funds in its stable. The downgrades by Hargreaves and Bestinvest comes as New Star finds itself in crucial talks with its creditors over its loan arrangement, which could result in five major banks ending up with a majority interest in the firm in exchange for writing off around £240 million of debt. Neptune is among those considering an approach for some of New Star's funds and managers. In an exclusive interview with Citywire, Neptune chairman Jonathan Punter said: 'I would say that we are certainly interested in some of the individuals and possibly some of the assets including the multi-manager proposition. We are one of just two or three fund managers who have a cash position and are in a position to take advantage of opportunities like New Star.

Hargreaves chairman, Stephen Lansdown, said the uncertainty surrounding the company is not good for the company. The firm has removed all funds from its Wealth 150 list pending a resolution to the situation. In a statement published on the firm's website, Lansdown said: 'Unit holders in New Star funds may be concerned. Whereas we can assure them of the security of their investment, the performance of it will depend on the market in which the funds are invested and the ability of the fund manager looking after them. A careful eye will be required to see how the fund managers are reacting to their changing environment. You can rest assured that we will keep our clients informed of our views on this as events unfold.'

Meanwhile, Bestinvest has suspended recommendations on all New Star funds. Bestinvest's senior investment advisor, Adrian Lowcock, said the New Star Sterling Bond, High Yield Bond and UK Property funds would no longer be part of his firm's recommendations, despite 'highest conviction'. He said: 'We have decided to suspend our ratings on all New Star funds pending greater certainty regarding the future of the company. Whilst the New Star funds that are rated have not been amongst our highest conviction recommendations recently, we do not feel it is appropriate to maintain our ratings until the situation becomes clearer.'

However, Lowcock said this was not necessarily a signal for investors to sell, or be worried, about their security of their investments in the de-rated funds as they are held in a separate independent trust which can not be used in any way to meet the company's liabilities. Bestinvest has replaced the three funds with the Swip Property, Invesco Perpetual Corporate Bond and M&G Optimal Income funds.

Citywire

The news that New Star is negotiating with its bankers has sent the shares spiraling to levels which many believe make a bid approach almost inevitable. Of course nothing is inevitable in markets like these and should, as the company appears to be indicating, the debt be successfully re-negotiated the prospect of a merger may recede.

As is always the case when there is talk of a merger among UK fund managers Aberdeen Asset Management is being heralded as the most likely buyer. The chief executive of Aberdeen Martin Gilbert and the executive chairman of New Star John Duffield have one of the most complex and interesting relationships in the fund management industry.

In the past Duffield has been the buyer of Aberdeen funds, providing a temporary exit from the retail market for the Scottish firm by buying its retail unit trusts in the wake of the split-cap crisis in which it became embroiled. But for the last few months talk has been ongoing that Duffield and Gilbert have been in discussions over a merger. If the gossip is to be believed the talk has failed to bear fruit up until now because Gilbert has been reluctant to give Duffield, the great patriarch of fund management, an executive role.

Now however with the matter more pressing a deal could potentially be more achievable. Those who know Gilbert say that he would do the deal at the right price. So what would a merger look like for retail investors commentators have asked? Well the lesson of history is that there would be little left of New Star's character and distinctive fund range should Aberdeen take it out.

In 2005 Gilbert bought DWS' UK business, which in character was similar to New Star with a range of bright and heavily promoted individual fund managers. At the time it was difficult to figure out which of the fund managers would move across to Aberdeen and how the investment processes would be integrated. In the end almost all of DWS' equity managers left and their processes were junked.

Instead Aberdeen chose to integrate the funds into its own investment range and apply the investment process first developed by Asian head Hugh Young across all the funds.

Having seen its brand damaged by the split-cap crisis Aberdeen has re-built itself very successfully under Gilbert in the institutional market. For institutional consultants knowing that the consistent research-based investment process remains in place across the firm is a crucial source of confidence. Gilbert would not do anything to jeopardise that by accommodating egos from firms he buys out.

It is believed likely that the same process would be applied to a merger with New Star. Gilbert would see it as an opportunity to acquire assets at a knock-down price, rather than to adopt the character and personalities of New Star's current regime.

There may be one or two exceptions. For example New Star European Growth manager Richard Pease has a franchise which is surely entirely dependent on his own reputation, perhaps he could be found a place. However, most of the fund managers including Pease would struggle in an environment which is so team-based. It is surely the near opposite of the culture of the star manager favoured at New Star in recent years and would be likely cause stars to leave for pastures new.

In short, for the retail investor a merger with Aberdeen will present a simple choice. Do you buy into the Aberdeen process or not? It is doubtful that the combined group would offer the opportunity to remain invested in the current fund range with the current managers applying the current process.

Citywire

New Star's share price plummeted over 70% on Monday morning following news the beleaguered fund manager was in "advanced and constructive" talks with its bank syndicate. The John Duffield-led group's share price opened lower and continued to dive after it was denied a suspension of trading after the announcement.

Last month Duffield admitted his firm has been "too slow" in reacting to market declines, with the manager suffering over £1.5bn in redemptions from investors since 30 June this year. Its funds under management from the middle of the year has dived from £19.8bn to £14.3bn. While the troubled group has had to recently renegotiate its financial covenants, with its debt interest rate climbing by 1.5%.

"Discussions with our bank syndicate are continuing and a further announcement will be made when the outcome of these discussions is known," today's statement reads. Aberdeen Asset Management has been long rumoured to potentially takeover New Star, with its CEO Martin Gilbert today hinting at possible acquisitions. "We believe that our group is better placed than ever to confront these challenges," he says. "We will continue to manage the business tightly, but we also remain keen to take advantage of relevant growth opportunities that may emerge during this turbulent period."

Investment Week

News that New Star has halted trading as it enters talks with banks saw its value fall from 14p to12.25p by 8.55 on Monday morning.

Last week, New Star froze dealings in its International Property fund due to increased redemptions.

Investment Week

New Star was prompted to suspend trading on its £674m International Property fund by two redemptions by institutional investors totalling £38m. The group is halting withdrawals for 28 days but is currently in discussions with the FSA over indefinite suspension. Manager Stewart Webster said: "A few big investors have redeemed in the last month so we had to shut the doors to protect existing investors. The fund had £75m or 16% in cash at the end of October but has seen phenomenal outflows in the past week or two as finance problems have hit investors across the globe."

This wave of redemptions rapidly used up the fund's liquidity buffer and Webster has been unable to sell underlying properties quickly enough to raise the capital needed. However he expects to be able to dispose of some of the fund's assets in the New Year. The fund has no exposure to the UK property market and has actually seen the value of its assets from countries including Japan rise over the last few months.

"We are not seeing similar falls in other parts of the world as in the UK," Webster said. "Good assets in good markets have been very resilient and will recover fast after market falls. The total fall including the move to bid pricing has been 9% since the fund was set up in June 2007," he added. The suspension of trading is due to redemptions not market turmoil or performance issues, New Star are keen to stress. Similar property offerings from New Star's competitors have not yet reported such severe redemptions. The £1bn Swip Property Trust has seen net positive inflows every month this year and has maintained around 20% in cash, while M&G's Property portfolio has seen days of net inflows but not consistently.

Selftrade will continue to update clients on the situation.

Investment Week

Deflation fears and falling interest rates point to investors favoring bonds over equities and cash into 2009, according to Fidelity's Trevor Greetham. Greetham, manager of Multi Asset Strategic fund, picks out government securities as a particularly attractive asset as central banks continue to slash rates. He says: "Income will be at a premium as deposit rates fall sharply. For more adventurous income-seeking investors, corporate bonds look attractive. Yields are very high compared with those on risk-free government securities, although investors will have to brace themselves for a significant rise in corporate defaults from their current low levels."

Greetham believes equity investors face a tug of war between deteriorating earnings prospects and increasingly attractive valuations. He adds: "Dividend yields are beginning to offer support, and shares look cheap when compared with both earnings and asset values. The worst of the banking crisis is probably behind us and consumer stocks have already moved to discount a severe recession. "Interest rate-sensitive sectors such as consumer cyclicals and defensive areas such as staples and healthcare will be the most attractive areas for equity investors. Financials are likely to outperform industrials."

One of the potential surprises in 2009, according to Greetham, could be a recovery in US consumer spending on the back of falling energy prices and lower mortgage rates. "At some point, though possibly not next year, reflation will move on to full-blown recovery and a sustained bull market in equities," he says. "For me to become bullish, I will need to see signs that policy ease is taking effect, banks are lending again and bargain hunters are coming in to support property prices."

Greetham concludes: "The watchwords for investors in 2009 will be caution and diversification. With attractive returns likely in the bond market and the potential for sharp bear-market rallies in the riskier asset classes, investors will be best-protected from unexpected swings by holding a balanced portfolio."

Investment Week

UK funds saw a severe drop in assets under management this month according to the latest figures from the Investment Management Association. Assets were down 11% from last month and down 30% from October 2007. The most popular sector in this month was UK All Companies, making up 18% of gross retail sales of UK domiciled funds. Intermediaries remain the most used distribution channel for UK funds. The most popular net retail sector was UK Gilts with inflows of £154.8m, while the Specialist sector saw the biggest outflows with £256.1m, of which £117.2m was from property funds. Overseas funds saw a fall in assets of 9% from the previous month with net retail sales seeing outflows of £203.7m in October.

IMA chief executive Richard Saunders says: "October's outflow meant that in three of the last four months retail investors have been net sellers of funds. But the October outflow remains relatively modest compared to funds under management at around 0.25%. For the first ten months of 2008, retail investors have added some £1.3bn to their holdings. There are no signs of large-scale selling by retail investors."

IFA Online

New Star's Jamie Allsopp is continuing to see growth opportunities in sub-Saharan Africa but admits the region is not totally isolated from the economic crisis. Following last week's merger of Hidden Value and UK Alpha funds, Allsopp is now free to focus entirely on the management of Heart of Africa. He has also hired a new analyst who he believes will add greater insight into his management of the fund and allow him more time to meet companies and regional policymakers.

"Most of the projects in the region are not short-term projects and the amount of capital affecting an African country, relative to Chinese FDI budget is relatively small. So the whole story grows from a low base." The manager's greater concentration on the vehicle will see him carry on seeking out opportunities in companies with low levels of debt and high growth stories in eastern African nations favouring Ghana, Nigeria, Kenya, Malawi, Zambia and Mauritius. Following a recent trip to the continent, Allsopp is confident of his existing holdings and with his investment strategy to invest in simple, un-indebted companies positioned to benefit from a burgeoning middle class, which he sees as the key target. He says while not immune to the global slowdown, many African countries offer the potential for growth, much ahead of what is predicted in other countries, including more traditional emerging market economies.

In October's World Economic Outlook, the IMF predicted growth in SSA will moderate in the face of financial turmoil and high energy and food prices, slowing from near 7% in 2007 to just over 6% in 2008/2009. In contrast, the IMF has projected world output will fall to 3% in 2009 from 5.1% in 2006. The report also points to a number of cross-country variations within the sub-Saharan, as many countries will benefit from terms-of-trade gains resulting from the surge in commodity prices. For example, it says for oil importers, the terms of trade would remain broadly stable in 2008, with higher oil prices offset by higher export prices for metals, coffee, cocoa, and cotton. However, the countries hit hardest (Benin, The Gambia, Kenya, Madagascar, Rwanda and Sierra Leone) are projected to have a 15%-20% deterioration.

Allsopp says, "Intra-African trade is high, the corporate governance issue is only getting better, the amount of democracy has never been higher and these are very inefficient markets with little foreign capital. So although there will be some slowdown the growth rates are still relatively high."

Investment Week

This year has been tough for UK equities but now is the time to reinvest, according to Schroders' Income manager, Nick Purves. He says cyclical stocks and financials have fared particularly badly through the downturn because they have been most exposed to the vagaries of the economic cycle. By contrast, the majority of returns this year have been concentrated in the most defensive sectors including healthcare and utilities. "Despite the carnage in equity markets, now is the time to invest in equities, especially income stocks," Purves says. He justifies his view because historically the best returns follow troughs in equity markets, and with most developed markets down 30% to 40% year to date, there has certainly been a severe period of decline. "When markets are under stress people put value to one side and invest in companies that will not give them any nasty surprises. Utilities, for example, has been the best performing areas of the market but the sector has never been more expensive," he adds.

Investors should look to other sectors, as Purves believes there is exceptional value in certain areas of the market. From a dividend perspective, mining and basic resources do not represent good value despite falling valuations in these sectors. Purves disagrees with the consensus the food and beverages sector can be seen as a safe haven, and pointed out banks are about to cut their dividends, meaning financials are much less desirable for income managers. "If this is a depression not a recession banks will not look cheap at those levels, but we will not know until after the fact," he says.

Instead the manager favours the media, telecoms, pharmaceuticals and automobile sectors where valuations are low and dividends strong. Purves says although the outlook for dividends is very poor this year, investors should be prepared to take a degree of risk. "The year to February 2009 will hold to the current level but the year to February 2010 will be the real challenge as dividends will fall. Investors need to be positioned ahead of turn, taking a measured amount of risk," he says.

Investment Week

Old Mutual's Les Jones is to retire as manager of the Japanese Select fund in April next year, while the firm has also handed its Asian Select fund to Philip Hunter on a permanent basis. Jones has managed Japanese Select since October 1992. He has specialized in Japan for the past 30 years. From April, management of the fund will pass to Old Mutual's quantitative strategies team, which currently runs over £120m in Japanese equities. The investment objective will not change but, rather than using a discretionary stockpicking approach, the team will objectively and systematically cover the broad stock market to build portfolios optimized for return and risk. Hunter has been interim manager of the Asian Select fund since the departure of Suresh Sadasivan in September. He will appoint an additional investment analyst to join his team in due course.

Old Mutual said that they had made the decision to appoint Philip Hunter because he is a very well qualified candidate to take on the role as the permanent fund manager and because the firm had decided to postpone the recruitment of the head of emerging markets desk. According to Morningstar, Japanese Select lost 11.4% in the 12 months to 17 November, broadly in line with the IMA Japan sector average. In the same period, Asian Select was down by 40.7%. Meanwhile Nick Williamson has joined the group's small and mid-cap team, working as an analyst alongside Dan Nickols on the UK Select Smaller Companies fund. He will also work closely with Richard Watts who takes over the UK Select Mid Cap fund from Ashton Bardbury in January. He was formerly an analyst at Citigroup. Stephen Message has also joined as a large cap analyst working with Simon Murphy on the UK Select Equity fund. He joins from US private wealth manager Bessemer Trust.

Investment Week

New Star has announced that the International Property Fund has been suspended.

New Star has taken the action of suspending the share price to stop any redemptions in the wake of the fund becoming illiquid. This is because the underlying assets are physical property, which cannot be sold immediately to cover any outflow of client money. All valid deals for the midday valuation point on 25th November were placed and will be settled in the normal settlement periods. Purchases into the International Property Fund are not permitted until further notice. Any instructions to redeem holdings in the fund will be placed for the next available valuation point, following the end of suspension.

Selftrade will continue to update clients on the situation.

New Star Asset Management

Industry consensus is that equities will dominate as the main hedge against inflation despite opinion leaders being at odds over its future. The Bank of England's latest inflation report said inflation is likely to dive sharply from its current level of 5%. But Liontrust's Jeremy Lang expects a smaller dip. "Companies have said they are experiencing an easing of cost pressures as commodity prices fall and this will probably lower inflation from the current 5% to around or below 4%, he said. "But as 2009 progresses, I expect inflation to rise again." Efforts by the Bank to pump money into the economy, falling interest rates and rising government spending will fuel the resurging inflation, added Lang.

However New Star economist Simon Ward agrees with the Bank's prognosis about short-term inflation. "I see inflation following money supply growth after a year. It peaked last year and has come down quite rapidly," he said. But he agrees with Lang on the longer term. Ward said the Bank's view that into the second and third years, inflation would remain below its 2% target, could be wrong. "I am a bit concerned about that – we are not going to see people keep accepting wage cuts, at least not to a major extent," he said. Also the Government is stepping up borrowing and that, combined with a growing deficit, could cause inflation problems, added Ward.

Newton's fund manager, Tineke Frikkee stated that companies with defensive earnings and strong balance sheets will deliver above-inflation dividend growth in 2009.

Investment Week

Consolidation in the industry began in earnest this week as Schroders looks set to merge two major UK funds – UK Select Growth and UK Equity – and New Star continued its reshuffle of managers in a bid to improve its overall performance. Schroders is planning to merge its £188m UK Select Growth fund into Simon Brazier's £374m UK Equity vehicle. Schroder are set to cut the jobs of around 60 staff at the same time, to save costs. UK Select Growth lost 41% in the 12 months to 10 November, and was also down 30% over the past three months. Brazier has fared slightly better, with all a one year performance broadly in line with the UK All Companies sector average of -33%. Managing Director Robin Stoakley said: "We have been looking at areas of overlap in our range of UK equity unit trusts, and are considering making a change to the UK Select Growth fund. One option was to merge it with the UK Equity fund.

Meanwhile, consistent underperformer Stephen Whittaker has left New Star following a restructure of its equity fund range. The group's CIO will be replaced on UK Growth by Trevor Green, whose enhanced role will see him continue to manage the equity portion of Managed Distribution and Select Opportunities. In addition, several fund mergers will take place, subject to FSA authorization. Hidden Value will merge with UK Alpha under Tim Steer's management, allowing Jamie Allsopp to focus on the Heart of Africa fund. European Leaders will be merged European Value.

The group is said to be half way through its £20m cost cutting exercise, but is aware the last part will be the most painful, indicating further damage to the group. Further cost cuts have been made at other leading groups, as Fidelity announced last week it would lose around 300 UK staff. Fidelity said a formal consultation is taking place, to conclude in January. Gartmore is also making between 60 and 75 employees redundant as part of a global business review and cost-cutting exercise, with the majority expected to be from the UK. Threadneedle has also announced plans to cut up to 85 jobs.

New Star was recently at the heart of several takeover rumours as its share price was hit hard this year. Credit Suisse's business is said to be up for sale along with Santander Asset Management. There is uncertainty over the future of Insight and Swip following the merger of their respective parents.

Investment Week

Gartmore's Chris Palmer has been repositioning his £235m Emerging Markets Opportunities fund in line with a more risk averse investment strategy. The manager said: "Our strategy is to move our portfolios towards a more conservative stance, favouring companies with attractive cash flows, modest growth plans, and relatively low debt burden. "Cyclicality is slowly being replaced with 'predictability' across all our portfolios and analysts are being guided towards those companies that have demonstrated an ability to prosper in tough times in the past." Palmer said the need for this more cautious approach was emphasised by the International Monetary Fund's warning this month of a cyclical downturn. The body also cut output projections for both developed economies and emerging markets for 2009. Consequently Palmer has cut the fund's exposure to material and energy stock while adding to his holdings in large-cap utilities, consumer staples and conservatively managed financials.

Investment Week

Schroders is merging Richard Buxton's UK Large Cap fund into his UK Alpha Plus vehicle. The move will take place by the end of the year, as the group realized the latter was gaining more interest from investors. Robin Stoakley, managing director of the retail business, said: "The UK Large Cap fund was launched a number of years ago to offer investors pure exposure to UK large-cap equities. It has done its job by always owning over 90pc of the FTSE 100 but pretty much all clients who have wanted exposure to Buxton and large-caps have been investing in the UK Alpha Plus fund so it made sense to merge the two."

Schroders wrote to unit holders recently and received unanimous approval to go ahead with the merger. UK Large Cap currently has around £20m under management, which will be added to UK Alpha Plus's £1.5bn

Professional Adviser

Fund managers have conceded that an 'income drought' lasting at least 12 months could bring about disappointment for clients relying on UK equities to provide rising income. Whilst the UK equity income sector has traditionally relied heavily on high yielding banking stocks, the threat of dividend cuts, coupled with lower cash returns caused by an expected slash in interest rates in 2009, will leave many investors left in the lurch. 

Peter Botham, chief investment officer at Brown Shipley, believes that investors must prepare for the likely scenario of dividend cuts. He added: "If interest rates were to come down to 3.5pc or 3pc, then having money tied up in a bank is not going to be an attractive propostion for income. This will be one of the big issues of the next 12 months – how can investments generate not just a safe return, but a good level of income return, given that dividends are going to be haemorrhaging out?"

Botham revealed that his managers have been moving money out of equities and into fixed interest. Also concerned is Liontrust's Jeremy Lamg, whose First Incomee fund has achieved 12 years of rising dividend payments. Of the banks, he believes that only HSBC will significantly contribute to yield in 2009. "All the UK based banks are likely to suspend their dividends as a result of the Government bail out,"he said. "The Government, quite rightly, is demanding all taxpayer's money to be repaid before dividends can be paid to shareholders. Even Barclays, which says is doesn't need Government help, will stop paying dividends to conserve cash. The difficult economic environment that the UK faces over the next 12 months also means that many non-bank stocks will find it more challenging to sustain their dividend payments. This makes it highly likely that dividends, in aggregate, will fall sharply next year."

Despite the bleak outlook, Lang believes he can at least maintain the dividend on his fund by balancing between stocks on high yields and no dividend growth with safer stocks on lower yields and good growth. Lang added: "Around 6pc of the fund is invested in Lloyds and HBOS. I had already discounted a dividend payment from HBOS this year so the only real hole in the fund in terms of dividend payments is Lloyds, which comprises less than 4pc of the portfolio."

Professional Adviser

New Star's underperforming income manager Toby Thompson has admitted he did not expect things to get this bad for banks. But the Higher Income manager said global recapitalisation efforts will prove fruitful. "I think the Government's plan takes the banks to a level where they will be well capitalised even if there is a big recession,"he said. The manager took a similar view to colleague Stephen Whittaker going into the credit crunch, refusing to sell down troubled banks. His fund was 88 out of 89 peers in the UK Equity Income sector, over a year to the 21st October, according to Morningstar. This damage has fed through to longer-term performance and the fund is also bottom out of its sector over five years.

Looking forward, Thompson believes banks should report healthy bottom lines while part-nationalised. "In the recessions of the early 90s and 80s banks margins expanded significantly. It would make no sense, with the Government having a stake, to force the banks to make unprofitable loans."He added it is possible banks will return to paying dividends sooner than initially thought. "Aviva has less risk than the market has believed – it is an obvious target in a way, whilst life insurers had been holding up well but have just collapsed in the past month. They had held up very well as financials so people are looking at them and asking whether they might be next.”

Overall he believes we may have now seen the bottom of the market in areas like banks and if not should expect to see them in the next few months. "Assuming we get the sort of interest-rate reductions we require then we should start looking towards an improved economic background in 2010.”

Investment Week

Income managers warn the FTSE All-Share yield could drop over a third next year as several banking dividends are banned and other sectors slash payments. At part of the bailout deals for HBOS, Lloyds TSB and Barclays, the stocks are not able to pay dividends for at least 12 months. Many believe the yield on the index will fall at least 25% next year and could drop as much as 50% as bank dividends are stripped out and housebuilders and retailers continue to cut payments. Artemis' Adrian Frost said the All-Share has a historic yield of 5%, which he thinks would fall to roughly 4.3% if just the the bank dividends come out. Among other managers, Graham Ashby from Credit Suisse pointed to Collins Stewart research suggesting UK dividend growth will fall by 7.3% next year but believes the declines will not be as dire as suggested. "A lot of UK companies, including HSBC, AstraZeneca and some of the minors, now pay dividends in US dollars, which will benefit UK investors,"he added. "The banks will have an impact but not as much as people think."

Managers remain confident there are plenty of other areas to pick up healthy dividend payments. Jupiter's Tony Nutt points to stocks in the beverages, pharmaceuticals, utilities and tobacco sectors, although he is expecting flat or negative dividend growth next year. Elsewhere, James Henderson, manager of the Henderson UK Equity Income product, said there are opportunities in other banks such as Standard Chartered and HSBC, that continue to increase their proper cash dividends. Meanwhile, proposals for banks to pay paper dividends rather than cash, are also set to hit investors in UK equity income funds. They are likely to receive lower yields relative to previous years, although funds would still be achieving targets set out by the IMA. 

Investment Week

Bondholders will be major beneficiaries of £50bn rescue package for the UK's banking system, according to Aegon's Phil Milburn. The manager said bond-holders will benefit from the liquidity made available to the banks as most fixed interest assets is tier two debt, which is senior to preference shares. "The Government is buying preference shares in banks, which is below us in terms of tiers," he added. "We tend to hold upper tier two and lower tier two debt, which is senior to preference shares and means the capital structure is a big positive for bondholders." Milburn called the plans near perfect and said everything needed to save the system was present. "Banks have not been able to get the funding or underwrite capital but the Government has made sure they will get capital if they cannot obtain it privately," he added.

"The idea of moral hazard has gone as I think Mervyn King realized if we do not guarantee funding this cycle, there will not be another one." Milburn does believe banks should be punished for reckless lending but suggests they have already been through plenty and solvent institutions simply should not fail. He also said the rescue plan is good news for taxpayers, who should eventually profit from the funding. Prior to the Government news and rate cuts last week, Milburn said revised data will show there is already a recession in domestic consumption in Western economies. "Globally, one would expect a prolonged period of sub-trend growth as consumers and financials deliver," he added.

Investment Week

Fund managers have unanimously agreed that now is the time to start investing in bonds again. Ian Spreadbury, manager of the Fidelity Sterling Bond and MoneyBuilder Income fund said he believed that the current economic slowdown was a perfect environment in which bonds would prosper, provided that investors tread carefully. "The main reason I am positive about corporate bonds is that we are likely heading towards an economic slowdown and this is exactly the environment in which fixed income investors can prosper," he said.

Spreadbury added that credit spreads were as wide as he could remember and that yields at 8pc were very attractive when compared to nominal GDP growth – the long term driver of corporate bond yields. He also pointed out that nominal GDP growth expectations were currently 5.1pc, stating, "When these data diverge in the way that they have now, we know it could spell good news for fixed income investors."

Commenting on the current market, he said: "Although we are now in a full-scale banking crisis and I fully expect more bad news is already priced in, so we are seeing a potential for entry point." Other fund managers echoed these thoughts. Adam Cordery fund manager of the corporate bond fund at Schroders, agreed that it was time to return to bonds. He said: "It is a great time to return to bonds, as long as you are confident that you can pick the right bonds." He added that the world was going into recession and that no-one was expecting a recovery this side of 2010, explaining that in this environment, an increase in defaults and downgrades was likely. "If you pick the bonds and they default or get downgraded, then you lose a lot of money which is bad. However, if you don't pick the bonds that default or downgrade, then that can be very good," he said.

He explained his reasoning: "Firstly, in a recession interest rates come down and that is good for bond prices generally. Secondly, the yields that you are getting on corporare bonds at the moment relative to government bonds are extremely high, so if you happen to pick the bonds that survive, you will earn those high yields and they will re-price eventually." Jim Leaviss, head of retail fixed income at M&G was also in agreement. He stated that investors are seeing twp pieces of news that favored bonds. He cited the banking system as the first of these: "Although it will probably limp around for the next couple of years without doing much in terms of profits, we are not seeing the end of capitalism, the end of the financial markets or banking, so that's extremely good news. It doesn't mean that we won't be seeing a significant economic slowdown, but it does mean that the system of lending and borrowing will continue, albeit in a shrunken form."

Leaviss pointed to inflation as the second piece of good news, saying that this was no longer something that investors had to worry about. "I think that in a year's time, we will be talking deflation rather than inflation and that certainly gives central banks around the world plenty of room to slash interest rates. You can see the UK's interest rate getting down below 3pc in a year's time," he said. He emphasized that although he was very negative on the global economy – believing that there will be another two to three years of slow growth – he believed that corporate bond markets were now poised for a scenario like the great depression and insisted that if such a scenario did arise, there were still good companies available, trading at yield spreads. "There are currently BBB rated corporate bonds trading at 450 basis points over government bonds, which is the widest ever recorded," he explained. Leaviss concluded: "We certainly think that valuations are extremely positive for bond investors."

Professional Adviser

PSigma's Bill Mott, veteran UK equity fund manager, has said in a recent conference call to clients and advisers that this may be the 'beginning of the end' of the market conditions that we have had over the last few months. The action we have seen from the British government, the Bank of England and the Treasury with regard to the banks in the UK will be seen as the blueprint that other world nations should use. For the first time in some years, the UK could be seen to be leading the rest of the world in innovative financial policy-setting. Mott said that as a result, UK equities are offering excellent medium-term value on any sort of reasonable timescale. Mott said, "The first step that the government has taken in underwriting the banks' balance sheets will be very positive for the economy in general and I would expect it to be followed by significant cuts in interest rates over the next few months. Clearly the Bank of England's worry about inflation over the last 6 months has now proved to be misplaced. Deflation is much more of a fear both in the UK and elsewhere in the world and I can therefore see no reason for UK interest rates not to fall dramatically." The question then becomes will the underwriting of the capital of the banks, plus a collapse in interest rates, be enough to revive the UK economy? Or are we so downtrodden by our 'credit bubble' and debt deflation that falling interest rates will not have any effect? Mott commented that he thought that question remains to be answered. "My best guess is that these actions will alleviate the downward spiral in the economy but the recovery will be somewhat anemic."

"In my view, equities are undoubtedly cheap on a long-term basis. Whether this is the absolute nadir and how quickly we recover is more debatable. Led by the British government, central and banks and governments worldwide are now fully aware of the extent of the problem and therefore all the 'heavy artillery' will be rolled out to try to avoid a Japan-style meltdown," he said.

On commenting on equities, Mott said, "It is sensible to have asset allocation in a variety of asset classes, but people should not think that equities are a high-risk asset class. It is very appropriate at the moment to have a proportion of your wealth in equities and I would suggest that a broadly spread UK equity portfolio with no big stock-specific risks is a sensible policy for part of one's wealth at the moment. There is a good chance that what we have seen over the last couple of days is an inflection point for markets. Of the difficulties has been to try and co-ordinate international action to do the same things that the UK has done.

"We are trading very actively, given the day-to-day volatility in the market. There are 103 stocks in the portfolio and until a week ago there was only one company in the fund (Premier Farnell) which had a 'more than 1% against the index' relative weighting," said Mott of the portfolio. "I can make a case for the defensive areas. I do not think they are as attractive as some of the more economically-sensitive areas but if we see falling interest rates, then the returns on some of these areas are attractive compared to returns on cash. Equally, domestic cyclicals (pub-operators, house-builders, retailers) should benefit from greater mobility of money around the system, following the government's intervention and from falling interest rates and of course this area of the market is very cheaply rated. Equally I can make a case for some of the international cyclicals which had been riding high until seven or eight weeks ago and of course have fallen in a complete heap in the last weeks."

"In the last 2-3 weeks, we have bought our first holdings in the miners, having had zero weighting. Over the last 3-4 weeks in particular, we have been taking relatively low stock-specific risks throughout the fund. 72% of the portfolio is in the FTSE 100, whilst the rest is in mid-cap stocks. We reduced our overweight positions we had in domestic cyclicals and that has been put into other areas of the market, some into defensives and some into internationally-exposed stocks. The bias of the fund is, however, still a bit towards domestic cyclicals, relative to the peer group."

"We increased our weightings in utilities and defensives. We have 2% in International Power and Scottish & Southern. We have less than 5% in Centrica, National Grid and the water companies. We are market-weighted in the pharmaceuticals and oil companies but are overweight in tobacco and telecoms such as BT, Cable & Wireless and Vodafone. We are also overweight in the retailers (such as WH Smith), pub-operators, defence, construction (such as Balfour and Carillion), foods (such as Dairy Crest and Tate & Lyle) and support services (Premier Farnell and Travis Perkins). I am comfortable with the shape of the portfolio and I want to have the appropriate level of conviction when I have a strong view, but also the right risk spread. The portfolio is not as defensive as some in our peer group and I think that the biggest risk is in the stock price and not in the market."

Mott thinks banks are cheap, although he says the market needs time to know that the worst is over. "After this trauma is over, the banks will be in a powerful position because there will be fewer strong competitors. Looking at the HBoS/Lloyds merger, the new company is going to have a third of the mortgage market in the UK with very wide margins and in normal times that would not be achievable, due to competition rules The banks will become like 'private sector utilities' and will be allowed wide margins on the business they do. They will be regulated strictly and they will be much lower risk investments with good returns. The problem is just getting from where we are now to that point."

"Prior to last weekend's announcement of the government stakes in the major banks, we were fractionally overweight in the four domestic banks but close to the index weighting. Obviously the dividends have mostly vanished for the foreseeable future. We will make an assessment about what we will do with the banks, given that lack of dividend."

PSigma

Invesco Perpetual's equity income star Neil Woodford has described the current state of equities as 'bombed out' but has warned investors that the current market chaos is a 'very bad time' for them to cut their exposure to the asset class.

He said due to recent events unfolding in global markets, he now believed the current downturn was likely to be deeper and more prolonged in the UK than in the early nineties due to the impact of the credit crunch.

Speaking to investors on Monday, prior to the Government's £400 billion banks rescue package, Woodford advised investors that while they should not take money out of equities due to the current liquidity crisis and global downturn, those looking at a three to five year investment horizon, should be looking to add to their equity exposure, albeit on a 'selective' basis.

Citywire AAA-rated Woodford said: 'I think the [equities] asset class-albeit selectively-looks very attractive on a three to five time horizon.  The overall index has been very disappointing now for a very long time. I think we are now a lot lower than we were 10 years ago in terms of index performance but I think the asset class now is looking very bombed out and should deliver decent returns over a three to five year period and especially against other asset classes.'

Woodford said he believed the equities market was at a 'very low point' but that over the mid to long term investors could make 'very good' returns while he observed that the average equities holding time had shrunk drastically over the last few years.

'The average holding period now in the UK equity market is probably below six months so I would say that reflects a much more short term focus in the market generally. Our holding period is over five years and we seem to be doing something quite different from the market and I think that explains why we have been able to perform well.'

He added: 'I think this is a good time to put money to work in the UK equity market but I think you have got top be very selective.

Woodford warned that the UK was likely to face a recession which could last up to two years. He said: 'The outlook is very poor over the next 18 months maybe even two years. We are likely to see a recession, falls in GDP, higher unemployment, falling asset prices, falling commercial property and falling house prices. Businesses will find it very difficult, especially those that are consumer facing and cyclical in nature.'

Woodford said he expected sectors such as tobacco, pharmaceutical, telecoms and the oil sector to be in good shape in two years time as economic conditions improved.

Global bond manager Stewart Cowley thinks the Bank of England should take the radical step of issuing mortgages. Government guarantees, meanwhile, have made bank bonds attractive, he says.

The manager of the Newton International Bond and BNY Mellon Global Bond funds played down the significance of Wednesday's co-ordinated interest rate cuts and urges central banks to go further.

'The reduction of rates is more symbolic than anything else unless commercial rates follow them down. There has been a breakdown in the transmission mechanism between central banks and commercial rates in the market. I mean, did Libor really respond yesterday? The one week Libor rate in the US is actually higher today than yesterday,' he says. 'There is no money circulating in the system. None of this will work until we get money circulating in the system again.'

'The US has taken a big significant step by buying up commercial paper and the UK will have to do a similar thing. That is how to get money flowing around system again, unless that happens it doesn't matter what central banks do,' he says. 'My advice would be for the US, UK and ECB to cut rates immediately to 0.5%, then try and get the transmission mechanism working again.'

Aside from slashing rates further, Cowley also has radical proposals for mortgages in the UK.

'I think the Bank of England should start issuing mortgages,' he says. 'If banks are deleveraging, who is going to give out mortgages? [UK Chancellor] Alistair Darling yesterday said very proudly that since taking over Northern Rock it has reduced its lending by half. This means that people with mortgages have been forced into arms of others at punitive rates. At some point people will be faced with a problem. I think the government will have to step in and start financing mortgages.'

Meanwhile in his own portfolios, Cowley has been buying up bonds from banks.

'Implicit guarantees coming into the banking system from governments mean that some bank bonds are looking very attractive. It is effectively a whole new class of state sponsored utilities,' he says. 'A lot of outstanding financial bonds are very good value. We already have some, but it is an area we are seriously looking at.'

Citywire

Last night the UK Financial Services Authority (FSA) introduced new temporary rules prohibiting the creation of new short positions or the increase of existing short positions in a list of 29 UK quoted Financial companies which impacts the BlackRock UK Absolute Alpha Fund effective immediately. We are in the process of clarifying certain issues of interpretation in relation to the FSA's statement. We may update this commentary in the light of such clarification.

It appears that these rules will affect, in the short term, the ability of the BlackRock UK Absolute Alpha Fund to create new synthetic short positions in these stocks. The Fund will, however, continue to be able to invest in a wide range of UK equities and cash, and to create synthetic short positions in any stock not on the FSA list.

Mark Lyttleton and Nick Osborne, Fund Managers of the BlackRock UK Absolute Alpha Fund said: "In the short term, there may be some restriction on our ability to create new synthetic short positions in certain stocks. However, we note that the FSA has confirmed that they view short selling as a legitimate financial technique, and believe that there will be no significant impact on the long term ability of the Fund to achieve its investment objective."

The events in financial markets over the past few days have been unprecedented. Given the demise of US investment bank Lehman Brothers, the hasty mergers between Merrill Lynch and Bank of America; and HBOS and Lloyds TSB, and the bail out of insurer AIG, it is appropriate to drop you a summary of the exposure we have to these businesses in our client portfolios, and the views that we have. I attach a brief article written by Mike Turner, Head of Global Strategy & Asset Allocation, reflecting on the market turmoil, efforts by the authorities to prevent a major financial collapse and the opportunities that are presenting themselves.

The UK and international equity portfolios we manage for UK clients have had no exposure to Lehman, Merrill Lynch, AIG or HBOS. Indeed, we have not had exposure to these companies for at least a year, in some cases considerably longer, having sold Lehman and Merrill Lynch from US regional portfolios where they had been held. Overall the portfolios have been underweight Banks and Financials, avoiding investment banks and mortgage banks.

While we have no exposure to Lehman securities in the majority of our fixed income pooled funds, our global bond funds held a small position in Lehman senior debt. We also have had modest positions in AIG and HBOS. The rescue of these institutions by the US government and Lloyds TSB respectively may offer some support for the bonds; we will continue to monitor the investments in the wake of these developments.

We are also looking at the exposure within our client portfolios to Lehman as a counterparty. Some portfolios that permit over the counter derivatives have contracts with Lehman. At present we cannot say for certain whether there will be any loss relating to these contracts, but we anticipate that the overall impact will be small.

Most of our bank holdings have now disclosed their direct equity and debt exposure to Lehman's and while it seems likely that they will incur some losses as a result of that company's bankruptcy the magnitude so far is manageable. We are conscious of the potential secondary effects on both the banking sector and wider real economy resulting from the current squeeze on credit availability. As a result we are carefully monitoring all of our holdings including ongoing due diligence on the direct exposure of our bank holdings to counterparties such as the above names.

The market's nervousness may continue for a while. We will keep you informed if there are further developments on other holdings or financial institutions that are linked to your fund.

Aberdeen Asset Management

Net short positions on financial stocks have been banned until January by the FSA.

The regulator introduced provisions to the Code of Market Conduct which prohibited the creation or increase of shorts from midnight last night in an attempt to curb further volatility in the sector.

Hector Sants, chief executive of the FSA said whilst he regards short-selling as a legitimate investment technique in normal market conditions, the extreme conditions in the market have caused disorderly markets. Therefore they have introduced the prohibitive measure to protect the integrity and quality of the markets.

Chairman of the FSA Callum McCarthy also commented: We have been much concerned - as have many - at the volatility and what I would describe as incoherence in the trading of equities, particularly for financial institutions.

"There is a danger in a trading system which allows financial institutions to be targeted and subject to extreme short selling pressures, because movements in equity prices can be translated into uncertainty in the minds of those who place deposits with those institutions with consequent financial stability issues.

"We have seen acute examples of this phenomenon in both London and New York this week.

"The FSA has therefore decided to introduce a rule which will take effect from tomorrow, to require both the disclosure of short positions on a daily basis in respect of financial institutions; and a prohibition in any active increase in a net short position in a financial stock by whatever instrument.

"This is a measure which reflects the present turbulence in markets. It is designed to have a calming effect - something which the equity markets for financial firms badly need. I hope that practitioners will support both the ambition and the chosen means of achieving it."

The ban will be in place until 16 January 2009.

Also, from 23 September, traders must disclose all of their net short positions in excess of 0.25% of the ordinary share capital of the relevant market close on the previous working day.

Investment Week

Markets have witnessed some extraordinary events in the last week, with bulge-bracket investment bank Lehman Brothers failing, Bank of America buying Merrill Lynch and insurer AIG being bailed out by the US government. Most recently Lloyds TSB has swooped to the rescue of the UK's biggest mortgage lender, Halifax Bank of Scotland.

Over twelve months since rising default rates in the US sub-prime mortgage market first triggered a financial crisis, fear of a continued deterioration in the asset quality of banks continues, with AIG exposed due to the insurance contracts it has written on these assets.

To make matters worse, there is also a significant 'crisis of confidence' surrounding the global banking community. Rising bad debts within many housing markets are creating mistrust between lending institutions, leading to restricted credit lines and higher funding costs, which feed back into more bad debt as the availability of finance deteriorates.

This cycle has got to be broken if markets are to emerge from the turmoil, and indeed we now believe that there is a concerted international effort between monetary authorities and governments to prevent a global systemic crisis. Part of the action taken includes regulatory initiative, which we believe should be successful in preventing any meltdown of the system.

The effective nationalisation of mortgage lenders Freddie Mac and Fannie Mae is a major step in this direction, and should not be underestimated. Although this step is no economic panacea, it does alter the conditions under which the economic environment may evolve - in particular the housing market.

Mortgage rates in the US have now fallen by almost 1% since their peak in July, while housing affordability is back to pre-boom levels. The impact of declining oil prices on the US consumer will be considerable, and the effect of these lower prices on inflation should allow more relaxed monetary conditions everywhere. There is scope for further fiscal stimulus in the US and in some other countries, and when all things are considered, investors may be more surprised if growth is actually stronger than expected than if it is weak.

For us, the turmoil presents some staggering opportunities as securities pricing in this environment is indiscriminate rather than rational. It is difficult to say when this bout of anxiety will end, but investor risk appetite is approaching an extreme, and usually that means major market low points are not far behind. We continue to follow our disciplines and maintain our meticulous stock selection process, while adding incrementally to the equity risk on our portfolios.

Aberdeen Asset Management

Unprecedented risk aversion exhibited by markets has led to significant volatility in corporate bond prices. This has been particularly true for financials. At the close on Thursday 18th September, BBB sterling spreads had widened to 400 basis points (8.5% yield) and aggregate spreads of A rated sterling financials were 562 basis points (10% yield). UK government bond yields had fallen to less than 4.5%.

For some time strategy has been to use the liquidity built up in recent years to begin scaling back in to credit as spreads widened. An area of particular focus has been banks and other financials. Underpinning this strategy was the view that banks were going through a painful yet necessary process of deleveraging and balance sheet repair via capital raising, the sale of non-core assets and in the extreme takeovers, a trend which would ultimately benefit bond holders. Crucially, investors were being paid for taking this risk.

Whilst the risks of default on financial bonds increased this week, if anything, this has led to an acceleration of the trend towards consolidation - HBOS with Lloyds and Merrill Lynch with Bank of America.

Of course bondholders will certainly not benefit in every instance. The Fed's loan to AIG ranks senior to the bond holders and Lehman has defaulted. Credit markets could well remain volatile for some time. Banks and other corporates will need to raise new capital and the macro backdrop has deteriorated in recent months. Nonetheless, with valuations at extreme levels and monetary and fiscal authorities now galvanised into taking action (liquidity injections, a temporary ban on short selling, support for takeovers, and talk of a government sponsored fund that will buy impaired assets) risk/reward could be considered compelling. For those investors prepared to take a medium term view, the yields on offer and potential upside from spreads at all-time highs in investment grade and multi-year highs in high yield, makes credit attractive.

Invesco Perpetual

The abrupt falls of both Lehman Brothers and HBOS have highlighted the shortcomings of the credit rating system, providers warn. They argue the methods of agencies including Standard & Poor's (S&P), Fitch and Moody's "have been found out" after they failed to adequately warn investors and advisers of the firms' impending troubles.

However, providers agree the task for advisers to assess an investment's true risk remains extremely difficult, adding credit ratings can often provide a useful guide. Lehman Brothers Holdings was rated 'A+' by S&P, 'Aa2' by Moody's, 'AA' by Fitch and 'AA' by DBRS, all indicating excellent or high financial security and credit quality.

Mark Dixon of Blue Sky Asset Management says, "We have seen throughout the credit crunch that all the main ratings agencies including Standard & Poors have struggled to keep up with events. Throughout the crunch it has been very difficult for anybody external to the firms involved to make an accurate assessment of how much risk, particularly mortgage risk, that firm has on their books and Standard & Poor's have struggled with that alongside everybody else."

Gary Dale, head of intermediary sales at Investec Capital Markets, says too few investment banks provide the extra information advisers would find useful, such as capital adequacy and liquidity ratios. "It's difficult to blame the ratings agencies and to be fair, they never claim to be an absolute guide," he says. "But some of them have been found to be wanting and the truth is advisers have to look past the ratings alone and see how an institution is run."

Mark Dampier, head of research of Hargreaves Lansdown, added, "The ratings agencies have all been found out. But it is not only the agencies, it's also the Government and central bankers. What are advisers supposed to do? If an adviser really wanted to look at the risk of an investment, the work he would have to do would be out of all proportion. They have to have some reliance on credit ratings."

IFA Online

19 September 2008Neptune's Robert Burnett believes China could perform a pivotal role in injecting capital into the beleaguered global financials sector in the coming weeks. The manager has shifted his European Opportunities portfolio, taking structural long positions in banks for the first time in over a year. Burnett said China has the power to act as a "circuit breaker" in the current crisis, which he said would cement a bigger trend that has been in the background in recent years with global leadership moving to the East, which will in turn see the system healing itself.

While not making a call on timeframes, the manager s