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The Credit Crunch
“I am a Rock; I am an Island” Paul Simon & Art Garfunkel
The sub-prime lending crisis in the US continues to cause damage to the financial markets. Northern Rock was its first manifestation to most people in the UK, and when its problems were first hitting the headlines, shares in general had hardly suffered. The UK dithered over Northern Rock, but it provided a valuable lesson for subsequent problems – and the rescue of Bear Stearns in the US (a much bigger institution) was a big improvement.
Northern Rock relied too heavily on other banks for its finance. Like most banks, it borrowed short and lent long, but the Financial Services Authority (FSA) should have spotted just how much it was out on a limb. By contrast, life insurance companies – including Friendly Societies – are looking after people’s long-term savings and most of their investments are highly liquid.
We are still paying the price for lax lending by the banks – and not just in the UK.
· The USA has been in recession, and growth in the UK is sharply down.
· House prices rose too high and are now falling.
· Equities have been volatile (“jumpy”), and we are on the verge of a bear market (but many financial stocks have already taken a hammering).
· Liquidity is a problem worldwide – banks are being very choosy who they lend to (including each other) and on what terms.
As investors, at MPFS, we have weathered the turbulence in the markets before, but we know these are difficult times for our customers. Particularly hard hit are those whose fixed term mortgages have come to an end and they have insufficient equity in their homes to get attractive re-mortgage terms. It is still worth talking to a mortgage expert and we can put you in touch with one. They are also trained in debt counselling.
It is a risky time if you have lots of cash to invest – say from your commutation or perhaps an inheritance. You probably do not want to put all your eggs in one basket, but beware if you are holding lots of cash on deposit. Even cash should be spread around. The government plans to increase the £35,000 limit for cash deposits under the statutory compensation scheme, but only to £50,000 and it has not happened yet.
Savers with life insurance companies and friendly societies are protected for 90% of their investments without limit. There have only been the most trivial claims on this compensation scheme. (The same cannot be said for general insurance companies – the most recent high profile case being Independent.)
Even with our investments spread, we still have good years and not-so-good years. Like most with-profit funds, we aim to smooth the investment returns to our members, rather than passing on the full impact of the market’s ups and downs in one go.
We believe that there is a good future for with-profits funds in the mutual sector, where there are no shareholders to satisfy. To take an example, a lump sum invested with us 10 years ago in our with-profit bond has grown by 75% (about 6% per annum compounded) with basic rate tax paid by us. This 10 year period included the “dot.com bust”! Other examples are given in the Past Performance page on our website www.mpfs.org.uk
Saving in our with-profit fund through our “Stocks and Shares” ISA can increase your returns. You can hold a Cash ISA as well.
Article submitted by Stuart Bell
Chief Executive at Metropolitan Police Friendly Society (MPFS)
www.mpfs.org.uk
