There have been significant changes in legislation over the past 12 months, which has allowed investors to obtain greater diversification within their investment portfolios, and a summary of the most relevant is as follows:

1. Fund Supermarkets

   The majority of MDM's clients now have some of their investments within a fund supermarket, due to the administration advantages that this provides, and the number of investment and insurance companies being linked with these supermarkets is increasing all the time. It is hoped that in the not too distant future that our clients will be able to hold all of their investments within some form of administration wrapper at no additional cost, making it easier to keep track of performance, build an appropriate balanced portfolio and switch between funds at modest cost. It is also easier to analyse the make-up of the portfolio.

   Although many existing investments can be re-registered onto these trading platforms at no cost , care should be taken if there are any exit penalties or the investment cannot be re-registered as there may be re-investment charges.

2. Property Investment within ISAs

   Her Majesty's Revenue and Customs now allow commercial property funds to be included within ISA and PEP portfolios, and this is helping to provide diversification at a time when the returns from fixed interest instruments have been unattractive. Within the last nine months, there has been the introduction of international property funds, increasing diversification further, with Skandia, Standard Life and Fidelity receiving significant inflows into their funds.

3. Absolute or Target Return Funds

   The passage of UCITs III, the European new directive on collective investments, has enabled fund managers of target return funds to use derivatives to short stocks - sell shares they do not own in the expectation that the price will fall. This has allowed fund managers to access international hedge fund managers, which previously would have been unavailable to the everyday investor.

   Hedge funds are unregulated investments at present but this situation is due to be reviewed by the FSA next year. They are widely used by investment groups worldwide, particularly in the United States, to reduce risk within portfolios. Hedge funds is a broad name for imaginative investment strategies and in total account for about half the activity within the New York and London stockmarkets.

   In principle, absolute return funds tick all the right boxes in that they aim to provide absolute returns, typically over 18 months to 3 years, regardless whether markets go up or down, however the performance to date has varied significantly and they have yet therefore to become part of mainstream financial advice

   Following the market falls in May and early June of this year, a number of these funds have however proved their worth. Increasingly, these alternative investments are seen as an asset class in their own right and should be considered for inclusion in most balanced portfolios - these funds tend not to be correlated to equities and often rise in falling equity markets helping to deliver less volatile returns.

   The structure of Absolute return funds is left to the individual financial institution with some simply being sophisticated, cautious managed funds with equity exposure up to 60%, while others are purely bond funds simply trying to make money from irregularities in the fixed interest markets.

   Two of the most successful funds to date have been the Insight and Old Mutual propositions, which have performed well in both positive and negative equity markets, due to the combination of long and short positions within their funds. We particularly like Old Mutual Prosper 80 fund currently, which has the following asset allocation:

   

   This fund interestingly also has a guarantee that the share price will never fall below 80% of its highest ever value, and this is guaranteed by Barclays Bank plc. As the share price rises over time therefore, the guaranteed price rises, giving the investor a limited downside.

   It should be remembered that the value of this type of investment can go down as well as up and you may not get back the full amount invested. Past performance is not a guide to future performance

4. Global Best Ideas Fund

   Skandia has recently launched a new fund which has taken £120 million in its first month of trading. This fund invests in the best ideas of ten of the country's leading fund managers. Asset allocation is 50% UK and 50% rest of the world, with no benchmark constraints.