Market conditions in 2007

2007 was without doubt a difficult year for many investment markets, particularly over the second half of the year as the global credit crisis began to take hold and previously specialist terms such as sub prime became household phrases.

The largest single component of the stronger with profits funds is UK equities and the FTSE finished the year 3.8% ahead of 2006. Within this figure though is great diversity with for example mining stocks racing ahead, fuelled by a seemingly limitless demand from Asia, whilst most financial sector stocks were significantly down as the credit crunch took hold.

Overseas equities, which typically account for around 30% of the fund equity content produced mixed results. Standard Life inform us that their European equities posted modest gains, Asian stocks performed relatively well in a global context and US equities delivered similar results to the UK.

In such a turbulent year no with-profits fund will achieve significant gains from equities.

In the same way that the equity "bubble" burst we saw a retreat from high property prices decelerating sector returns especially in the latter part of the year. To illustrate this point the IPD Property Index fell by 5.5% during the year.

In order to provide a counter balance to equity markets with-profits funds invest heavily in gilts, typically around 35% in the stronger funds, which provide a strong base for the high levels of guarantee in with-profits policies. As equity markets fell in the second half of the year we saw counter balance from gilts with values rising as money was moved out of equities and the now infamous corporate bond sector. The FTSE UK Gilts All Stocks index grew by 5.27% during the year.

With-profits funds, despite their bulk, are actively managed and we saw a number of examples through the year of fund managers repositioning their funds to take into account changing conditions. In the middle of the year, before the sub prime issues were on the public radar, Prudential "de-risked" part of their fund by locking in some of their gains with the corporate bond sector and reducing exposure to UK property and Asian equities.

Against this background of volatility and uncertainty the returns on "low risk" with-profits funds of around 5.5% are a good performance and are a great example of professional management adding investment value.

Nothing contained within this document constitutes investment advice or an offer to subscribe . If in doubt, please talk to your financial adviser.

The Endowment Growth Fund (EGF) is the first sub-fund of InvestmentPlus plc, which is regulated by the Irish Financial Services Regulatory Authority. Registered in Ireland No. 289965. Registered office 39/40 Upper Mount Street, Dublin 2, Ireland. EGF is distributed by PolicyPlus International plc which is authorised and regulated by the Financial Services Authority and is a member of the Association of Policy Market Makers. Registered in England No. 2392989. Registered office King’s Court, Bath, BA1 1ER, England.