Being a truly independent insurance brokerage, working in our clients’ interest, we believe we are well placed to take advantage of the global recession.

From talking to potential new clients, it is becoming increasingly obvious, that local deals brokered in the local market are advantageous to them. The retention of earnings within the local business is paramount in a time of cost reductions globally. We have successfully tendered for and won a number of key global accounts in the past few months based upon our ability to broker such deals.

In the past Financial Directors and HR departments have been advised from overseas as to which companies they should use locally; today they are looking independently at who offers them the best value in the local market. Today the main criterion is to cut costs and make the business profitable locally.

There is certainly no harm in inviting an independent broker to come in and review your cover to see that your premiums accurately reflect the risks of your business. We firmly believe in being proactive when it comes to helping clients manage their  claims and in helping them to get the best possible deal in the current environment. Unlike our international competitors, we have only ourselves and our clients to answer to.

There has been an argument put forward for a number of years that globalization was the way to go, perhaps it is now time to look more at localization and local pricing, while at the same time retaining global integrity.

No one doubts that this will be a tough year for employers and employees alike.
In the current environment there is an argument that staff will not move because the security they now have is important.

We believe that good staff will take this as an opportunity to review their packages. And very good staff will now be even more important. Being complacent about your staff is probably not the right approach. It’s time to show them how much you value their services by also reviewing their remuneration.

Talking to some of the major insurance companies we have found that they are keen to get good, well-managed companies into their portfolios and are willing to offer very attractive rates to get them to move on a long term basis. In view of this, we believe enlightened companies should begin to review their options.

Prior recessions, earnings and equity markets
Given that we are currently in a recession which will see GDP growth turn negative for several quarters, it is interesting to review what happened previously, and begin to generate expectations about what may happen in the current crisis.

An analysis of previous recessions/depressions reveals that on average:

1. Earnings fall 44% and share prices fall 41%
2. Prices begin to rally nine months before earnings recover. Equities tend to rally strongly during the period, on average increasing 27%. The 2001- 2003 recession was the first time that this trend reversed and equities rallied 5 months after earnings recovered.

In 2008 we experienced a very sharp correction in both earnings and equity returns, both falling by 40%, and the S&P suffered its second worst annual return since 1871. However, over the seven years in which the S&P declined by more than 20%, five of them were followed by strong returns in the next year; exceptions were 1931 and 1973.

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Conclusions
What will be the signs that the concerted efforts of central banks and governments are working?

One key indicator to watch is the Libor spread as this reflects the cost of bank funding much more closely than offered rates. Another series of linked indicators we will be keeping an eye on are the expansion, or contraction, of central bank balance sheets and the monetary rate: shrinking central bank balance sheets and a declining monetary base would indicate that the period of qualitative monetary easing is coming to an end and credit is beginning to flow again.

We also need to see signs that the tax cuts are being spread and not saved, and that fiscal deficits are providing enough demand to break the downward spiral of activity. Early signs of a pick-up in consumer confidence and increasing retail sales should also be watched for.

A combination of the gold standard and constraints on the Fed’s use of monetary policy turned the recession into a depression in the 1930s. We are reasonably confident the Fed will not make the same mistakes this time around. Ultimately however we must wait and see.

When the indicators we have referred to begin to turn in the right direction, that is likely to signal the beginning of the end of this particular financial crisis, and may well bring about a meaningful recovery in risk assets, including all forms of credit, equities and property.

That’s why we believe now is the right time to invest in funds using a strategy known as ‘dollar cost averaging’.

Simply put, dollar cost averaging can improve your returns in turbulent times, especially when you invest in a seemingly volatile fund. As prices drop, it allows you to take advantage of buying more units when the price is low. Over the medium to long term, if and when the value of these units recovers, you reap the rewards. Let me show you what I mean:

Fund prices used are for example only and not based on past experience. While investors may benefit from volatile fund prices, it is not guaranteed and losses may be incurred

Fund A is a relatively stable fund, Fund B, a more volatile one. The graph shows the accumulated value of an annual investment of 10,000 dollars, together with the unit price at the time each of the investments were made. Over the period, the lower unit prices available under Fund B mean that investors benefit by purchasing more units with their regular investments than they would in Fund A. As all units are worth the same at the end of the period, Fund B investors benefit from its volatility. Although only an example, this shows that with dollar cost averaging, you can still benefit from fluctuating fund performance.

property market. Until this event, Brandeaux had a healthy level of net subscriptions with more investor money coming in than going out. Since the Directors have no intention of engaging in a fire sale of quality assets they have acted swiftly to suspend the funds to ensure all shareholders are protected and treated fairly.

In our capacity as financial advisors, LawtonAsia has clients, and indeed, some of our own personal money, invested in Brandeaux funds. We believe we all need to look at the current situation with a considered view as to what the fund manager is doing. The underlying investments in Brandeaux funds are ground rents and student accommodation in the United Kingdom. Both of these are revenue generating assets at pre-determined rates, so there is a guaranteed yield on their investments. Indeed, all Brandeaux funds are in positive territory. In the twelve months to the end of November 2008, Brandeaux Ground Rent Income Fund has returned +8.01% and Brandeaux Student Accommodation Fund has returned +10.71%.

Here is an example of how Brandeaux works: it is a major property owner in Leicester of student accommodation and operates the properties on behalf of the university over a fixed period. Students attending that university in their first year are put into Brandeaux accommodation at pre-determined rates, producing a yield on the investment Brandeaux made a number of years ago. Unless there is a dramatic downturn in university admissions these halls of residence should remain full for the foreseeable future.

At this moment in time liquidity in the United Kingdom is poor. If Brandeaux wanted to raise money to meet redemptions they would need to sell properties and in the current circumstances that would have a dramatic effect on the underlying assets of the funds. Therefore in the interests of those people who are invested in the funds for the long term, they are protecting their interests.  Those in a regular savings plan should therefore not panic at this stage. Can we suggest, if you have a Brandeaux fund in your portfolio, you talk with your financial advisor who will be able to explain the situation in more detail.

As Brandeaux should make up just a small portion of a managed portfolio it should have no dramatic impact on the performance of your overall portfolio. As we have always maintained, a balanced portfolio should be a mix of all asset classes, not just property.

Finally, the steps Brandeaux have taken are not uncommon in funds where the underlying assets are illiquid. This is also one reason why such funds adopt penalties for early redemption.