TRENDALERT

Launched 3/9/02         +13.6% in first year!!        This is DOUBLE the growth of the FTSE All-Share Index in the same period!        Did your fund manager even MATCH the All-Share Index?

How it works | Results | Charts | Statistics | Features | Why L&G? | Why an Index Tracker?
Switching Costs | Our Fees | Taxation | What Can Go Wrong? | Summary | Apply Here | Contact Us

If you have ever invested in stockmarket based investments such as unit trusts, PEPs, ISAs etc., you will have been told that your investment can fall in value as well as rise. But were you ever told to get out of these investments and put your money on deposit as they were starting to fall, and to get back in again when they started to rise? Probably not!

UNTIL NOW!………….

Buying and holding is not a reliable investment strategy given the volatility of the stockmarket. Although investors may choose a suitable time to invest, they simply do not know when to get out of their investments and nobody is going to tell them! As their investments start to fall, emotions start to take over and often the investor can end up thinking ….. “its gone so far down I might as well hang on until it recovers (hopefully!) and forget about it for now!” Wouldn’t it have been better to have got out as the fall started to happen?

By providing you with a mechanical switching system carried out by us with your authority, we are removing your emotional input which often results in “if only I had……...” scenarios.

How?
Our Trendalert system links a tried and tested system of moving average indicators to an investment fund. This helps us to detect a change in trend and therefore direction of that fund.

We will use the signal generated to either switch your investment into a deposit fund for safety or into a stockmarket based fund for growth.

We are therefore only using two funds, one for growth and one for security. The growth fund being the L & G UK Index Fund which tracks the FTSE All-Share Index and the other being the L & G Cash Fund which is a moneymarket fund.

Results:
We have back-tested our system to 1986 which showed that the system has produced an average annual return of 21.36%.

If you had adopted a ‘buy and hold’ strategy the All-Share Index would have produced an average annual return of 9.66% in the same period.

In addition, you would have been out of the market and in a low risk money market fund for an average of 26% of the time that you had held the investment. This process reduces the overall risk of stockmarket based investing.

Statistics:

• The average length of period that you would have been in a rising trend was 70 days.
• The longest winning trade period lasted 141 days.
• The longest period ‘out of the market’ was 101 days.
• The average length of time ‘out of the market’ was 27 days.
• Throughout the total period tested of 6,336 days with an initial investment of £1,000, the largest gain was £778 and the average gain is £173.
• The largest loss was £161 and the average loss was £61.

The main features are:

• No initial or entry charges.
• No exit fees.
• No switching fees.
• Annual Management Charge for the L & G UK Index Fund is 0.5% with a total expense ratio (ter) of 0.52%.
• No fund manager changes or investment styles to worry about.
• Fund switching is carried out by us on your behalf.
• The L & G UK Index Fund is AAA rated and one of the lowest cost tracker funds available.
• The tracking error of the L & G Index fund is less than 0.5% per annum.
• The L & G Cash Fund is one of the best performing Money Market funds available.
• Although there is no maximum investment limit, the minimum allowed by L & G is £500. However, you should consider the monthly cost of the Trendalert service at £20 as a percentage of your investment before proceeding with relatively small amounts.
  

Our objective is to use a low-cost index tracker to outperform the FTSE All-Share Index and lower the overall risk associated with stockmarket based investing.

Why L & G?
Legal & General employ top investment professionals to manage their unit trust portfolios on behalf of their investors. The sheer scale of Legal & General’s operation means that they can offer attractive terms, including competitive management charges and no initial charges for lump sum investments across their entire range of unit trusts. They are also renowned for their index tracking trusts. At present they manage more than £117 billion worldwide of investors capital.

Why an Index Tracker Fund?
The aim of a Tracker fund is to replicate the performance of the index that it is tracking as far as possible. This dispenses with the need for a fund manager, whose job it is to ideally outperform the index by active management for which they charge high annual management fees, often up to 6 times higher than the annual management charge of our chosen fund.

Many surveys show that investments in expensive actively managed funds consistently fail to match the performance of the index and many seriously underperform it.

The indicator that we use is based on a system of moving average indicators and has been chosen for its specific suitability with the FTSE All-Share Index . Put simply, a 10 day moving average indicator will produce a line on an investment chart by adding up 10 consecutive days of prices of an investment and then dividing by 10. This will produce a point on the graph. The next point is achieved by moving forward a day, adding the new daily price but dropping off the earliest price in the calculation and so on.

The following chart is an example of the performance of the FTSE All-Share Index over a 12 month period.

We then apply our specific moving average indicators which helps us to identify a change in trend. In this simple example - when the chart of the investment fund starts to show a change in trend, it will cut through the moving average, and it is a reasonably reliable indication that you should consider switching either into or out of your stockmarket based investment as follows:

Points A, B, C and D clearly identify a change in trend of the FTSE All-Share Index as the Index either fell through, or rose above, the moving average trend line. Switches would have been carried out on your behalf between the two L & G funds either into the Cash Fund as the market was falling or into the UK Index Fund as the market was rising.

Areas 1 and 2 indicate problems which can occur from time to time where you get switching instructions in a very short period of time. At point 1, you would have had an indication to switch back into the market only to be told to switch back out again a few days later at a time when the market had fallen again. This highlights a time when you could suffer a potential loss of some of your capital.

At point 2 you can see that although you were given an indication to switch into the market there is also an indication to get back out of the market again within a matter of days but on this occasion you would have got out a level possibly slightly higher than when you went in.

At Point D there is a very clear change in trend and the growth achieved easily offset any of the potential losses at points 1 and 2.

This chart ideally highlights the workings of the Trendalert system but we also have other charts which show the problems of a sideways market which is generating regular switching and although at nil cost, the switches could mean small losses of the capital due to the changes in the market direction at that time. These switches have been taken into account in our calculations.

What about switching costs?
Normally, regular switching of investment funds can incur charges often up to 5% (being the bid/offer price spread) depending on the charging structure of the investment switched.

In order to overcome this, we have chosen a low-cost Tracker fund which tracks the performance of the FTSE All-Share Index which is a measure of the performance of approximately 800 shares on the UK stockmarket.

• The Tracker fund chosen has no initial, entry, exit or switch charges.
• The annual management charge of the fund is one of the cheapest in the market place at 0.5% per annum.
• The fund has a tracking error of less than 0.5% per annum which puts it amongst the best performing trackers available.

What do we, as advisers, get out of the Trendalert system?
Although there are no initial or entry charges to invest in the Legal & General range of funds, as advisers L & G will pay us 1% of the amount invested into the UK Index Fund (i.e. £10 per £1,000 invested) and this is funded by L & G and is not being deducted from your investment capital. Furthermore, we do not receive any ongoing or trail commissions, which are typical of investments of this nature which are normally funded out of high Annual Management Charges.

Our Trendalert system can only operate efficiently with a totally clean and charge-transparent tracker fund.

The recent Sandler Report on the Financial Services industry suggested that Advisers should separate the cost of the product from the cost of the advice. We have constructed the Trendalert system to take into account as far as possible, the relevant contents of this Report including extracts such as:

• “Correlation between higher charges for unit trusts and superior investment performance was at best weak. Consumers who pay more usually receive no additional benefit”.
• “Recent research showed that the average UK unit trust underperformed the market by 2.5% per year due to a combination of charges and unsuccessful active management”.
• “Recent research by the FSA found statistically significant evidence of Advisers recommending one provider’s offering over another because it paid a high commission”.
• “Wide use is made of technical terms which are largely incomprehensible to the layman and, in many cases, may not even mean the same thing when used by different providers”.

Warren Buffet the legendary American investor said:

“most investors, both institutional and individual, will find that the best way to own common stocks is through an Index fund which charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals”.

We are using the Index Tracker concept and improving it to try to deliver outperformance of the FTSE All-Share Index whilst lowering the overall risk of investing in the stockmarket with timely switches.

What is the cost for the Trendalert System?
For the daily monitoring of your investment and the application of our Trendalert strategy, there is a flat fee of £20 per month, irrespective of the size of the investment, payable on the first of the month. There is no contract term. We will carry out the fund switches for you with your authority by dealing directly with L & G on your behalf.

Taxation
The main objective of the Trendalert system is to produce capital growth and if any gain is generated by switching, you would be deemed to be potentially liable to Capital Gains Tax. Under present legislation you are allowed to make a gain of £7,900 per person in the current tax year before you will be liable to Capital Gains Tax which is payable at your normal rate of Income Tax. If any capital losses are created they can be offset against your capital gains. For the period of time that your money will be out of the stockmarket and held in the Cash Fund, any interest generated will be re-invested having been taxed at 20%.

ISAs and PEPs
As it is not possible to hold the L & G Cash Fund in PEPs or ISAs we will use the L & G Fixed Interest fund as a home for your investment when you are “out of the market”. Although still low risk, this fund is slightly more volatile than a money market fund and carries the same annual management charge of 0.5%.

What can go wrong?
You should always remember that the value of any stockmarket based investment can fall in value as well as rise which means that you will not get back the amount that you invested should you encash the investment at a time when the valuation is lower than your original investment.

Past performance of the Trendalert system is no guarantee or indication of future returns. We would consider the investment to be of average risk on the basis that you are potentially investing in shares representing approximately 800 of the top companies in the UK and there are no currency risks.

A stockmarket based investment will normally exhibit three trends; upwards, downwards and most difficult of all – sideways.

• Whilst we would hope to get you in the market in the uptrend and out of the market for the downtrend, a sideways trend is often very close to its moving average, resulting in regular switching into and out of the Tracker fund. Whilst this process is not incurring any costs, small losses can easily occur.
• Severe market movements as the result of major political, financial conditions or acts of terrorism and war etc., which will cause movements in the same or opposite direction to the recommended trend shown by the system. An example of this is the September 11th tragedy which caused sharp stockmarket falls across the world on the day of, and for a period of time after the event. The Trendalert system indicated a switch out of the market to the safety of the Cash fund on August 28th, so on this occasion you would already have been out of the market on September 11th and avoided the losses which were incurred. Equally, the system suggested a switch back into the market on September 29th.
• Although our calculations were based on the level of the FTSE All-Share Index when it broke through the moving average trend line, an allowance should be made for the fact that our analysis system is updated with the end of day closing price of the FTSE All-Share Index.

Whilst we will act the following morning to get the next dealing price from L & G at 12 noon, there will often be a price move which can work for you as well as against you due to the fact that the UK Stockmarket closes at 4.30 p.m. (which provides the price that we use for our calculations) but Wall Street continues to trade until 9 p.m. that evening which can often determine the sentiment for investors in the UK for the following morning. The overnight performance of the stockmarkets in the Far East can also set the trend for the following morning by which time the UK stockmarket will have been trading for four hours until the 12 o’clock price fixing time for the L & G UK Index fund.

In order to avoid any unnecessary switching, we reserve the right to defer a switch, particularly if it becomes apparent that the movement of the investment markets in the morning following a switch signal received at the previous day’s close is in the opposite direction and effectively negating the need to switch.

It is inevitable that there will be some price “slippage” between the day of the signal and the unit price of the switch carried out the next day. Any tracking error between the FTSE All-Share Index and the L & G UK Index Fund can also compound this difference. However, we cannot ignore any switch signal as it could be the most important signifying the start of a new trend.

These differences are accentuated in a sideways trend where there is regular, almost daily switching but the following table should offer some comfort in that regular switching in any month is not the normal trend and you should expect to switch one or two times in an average month.

Summary
We have tried to put together an investment strategy which takes into account and seeks to address, all of the concerns facing investors today.

• Investors do not like paying fees or commissions.
• Investors do not like any entry or exit charges.
• Investors do not like hidden penalties.
• Investors want to know that someone is watching their investments for them – daily if possible.
• Investors want to be able to get an up-to-date valuation of their investment at any time (which is available on the internet or by telephone from L & G).
• Investors want to be told when to get into the market.
• Investors want to be told when to get out of the market, and ideally have someone to do it for them!
• Investors do not want to pay any charges to switch between funds.
• Investors do not want to pay high annual management charges only to find that their fund did not even match the performance of its bench mark index, i.e. where an index tracker would have been better value.

We are not doing anything new! We are using an old, established, moving average charting system in conjunction with funds provided by one of the leading unit trust companies, Legal & General and simply putting together a system where action is being taken when there is a change in trend in the growth of your investment. It is this added value of daily monitoring and tactical switching when there is a change in trend which makes the whole system work!

We would therefore consider that the Trendalert System provides investors with an ideal way of having exposure to the UK Stockmarket as a core holding for part of their investment capital.

Contact Us

Nigel Bourke & Co
2 Yarm Road
Stockton on Tees
Cleveland
TS18 3NA
England

Tel: 01642 670307
Fax: 01642 677020
Email: ifa@nigelbourke.co.uk

See our main site at www.nigelbourke.co.uk