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June 19, 2011 10:53 pm

Private investors warned over equity risk

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Private investors in search of income are steadily building up their holdings of equities to levels not seen since the downturn, in spite of warnings by wealth managers that they may be taking on too much risk.

Retail investors pumped money into the stock market in four successive quarters to the end of May, bringing their total equity holdings to the highest level since the credit crunch began, according to research by Capita Registrars.

Stagnant rates of interest on cash and falling bond yields led private investors to buy nearly £800m net in equities in the three months to the end of May, taking their total share of the FTSE All Share to £237bn.

But private investors have still not built their proportion of holdings in the stock market back to levels seen in February 2008, when they held 13.1 per cent. At the end of May, just 11.7 per cent of the market was in retail shareholders’ hands.

Holdings by proportion declined from September 2008, when Lehman Brothers collapsed, to a low point of 10.9 per cent in May 2010, when many private investors still held unusually large levels of corporate bonds because their yields were so high.

They have since been steadily rising, as investors and private client managers move from corporate bonds into equities. But the gradual rotation that has taken place from cash to corporate bonds to equities means that private clients who were originally cash investors now have more of their portfolios in equities.

Wealth managers have begun to warn that some private investors are taking too much risk, buying equities simply because of the yields on offer. While the FTSE All Share currently yields just over 3 per cent, defensive companies favoured by income investors, such as Vodafone and GlaxoSmithKline, are yielding more than 5 per cent.

A survey of client portfolios at 41 private client wealth managers in the UK by the Financial Times on Saturday found that three-quarters had moved more of their clients’ money into equities in the year to May.

So-called “balanced” portfolios at wealth management firms now hold an average 58 per cent in equities, up from 54 per cent the previous year.

“Equities are increasingly taking up larger weights in private client portfolios. Some are taking up to 80 per cent, which we think is way too high,” warned Tom Becket, chief investment officer at PSigma Investment Management.

Last week, the Financial Services Authority warned that private client wealth managers were not communicating properly with their clients, resulting in portfolios taking the wrong level of risk.

Professional investors, meanwhile, have been reducing their exposure to equities. A survey of 199 fund man 27 per cent were overweight equities at the start of June, down from 41 per cent in May.

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