UK shares posted gains for a fourth successive day on Friday, as positive US jobs data combined with hopes of a resolution to the Greek debt crisis both improved investor sentiment.

The FTSE 100 finished the week at its highest level in over six months. This week saw £43.5bn added to the values of the largest 100 UK companies.

If the Bank of England announces a further round of quantitative easing on Thursday, as many economists expect to happen, we could see the FTSE 100 rise above the psychologically important 6,000 level.

Over a year the FTSE 100 has fallen from 5,983.30, a fall of 82.23 points or -1.37%.

£1 is currently worth $1.58170 US or €1.20300 Euros.

Brent Crude Oil Futures is currently priced at $114.44/barrel. Gold is $1,734.00/ounce and Silver is $33.93/ounce.

The UK Bank Rate is 0.5% and CPI inflation was 4.2% for the year to December 2011.

Both M&G and Thames River bond fund managers have taken short positions on gilts in recent weeks.

Going short on an asset allows an investor or fund manager to profit from a fall in its value.

Should the price of gilts go down, the fund managers will receive a positive return for their short positions. Of course they will also lose money should gilts rise further in value.

What has prompted this position is a belief that gilt yields have reached ‘extreme’ lows.

In recent weeks we have seen the yield on a 10-year government bond reach the historical lows of a shade under 2%.

At that level, there is very little further that gilt yields can fall.

If gilt yields do experience a sharp correction, with yields rising say 20 or 30 basis points in a short period of time, then fund managers will be rewarded for taking these short positions.

Shorting is not an investment tool generally available to retail investors. Instead, they must rely on their asset allocation decisions and the decisions taken by fund managers to position funds accordingly.

Given these recent fund manager decisions and the very low level of gilt yields, is now the time to get out of gilts?

We would argue that investment portfolios need to be well diversified and this includes an allocation to gilts.

At the start of the year, our Investment Committee made the tactical decision to cut our exposure to this asset class, retaining our underweight position in gilts but making further cuts to allocations in the model portfolios we manage.

We pointed out at the start of the year that gilts look poor value at their current yields, offering a limited upside potential to investors.

As with any investment decision, you should position your pension or investment portfolio according to your wider financial objectives and the risks you are prepared to take with your money.

Now might be an appropriate time to cut back on high levels of exposure to gilts, in case they should suddenly fall in value.

Getting out of gilts altogether would be a very dramatic decision which is best left to full-time investment professionals who can attempt to time the market very quickly.

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That is the question currently posed as we expect to see Facebook launch their Initial Public Offering (IPO) later this week.

If those numbers prove to be accurate, the valuation will be supported by hype rather than reality.

It is bound to invoke memories of the dot-com bubble between 1995 and 2000, when markets expected profits to materialise from previously unproven business models.

Facebook is likely to argue that its value lies in the user base.

More than 800m people globally are reported to have active Facebook accounts. The personal data they share is valuable to advertisers, who can personalise their messages to individual users.

But are Facebook users really worth an estimated $125 each?

If the IPO goes ahead as expected, it is not going to be based on a conventional valuation model.

Investors will need to suspend reality for a while, and convince themselves that Facebook is worth more than (for example) Apple, with its ample profits and long history of success.

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UK company shares fell sharply during afternoon trading on Friday after disappointing US GDP data. The US economy grew by 2.8% rather than the expected 3% that had been priced in to markets.

Over a year the FTSE 100 has fallen from 5,965.10, a fall of 231.65 points or -3.88%.

£1 is currently worth $1.57300 US or €1.18980 Euros.

Brent Crude Oil Futures is currently priced at $111.53/barrel. Gold is $1,726.00/ounce and Silver is $33.48/ounce.

The UK Bank Rate is 0.5% and CPI inflation was 4.2% for the year to December 2011.

We take a neutral stance when it comes to the active and passive investment debate, with a belief that both approaches to fund management can add value to investors.

Some new analysis from the Investment Management Association (IMA) has found that transaction costs within actively managed funds are more than offset by investment returns, on average.

The research looked at the accounts of UK All Companies funds from 2009.

Actively managed funds had average transaction costs of 0.31%, compared to tracker funds at 0.06%.

For active funds, two-thirds of these transaction costs were the result of stamp duty.

Most interesting, the IMA analysis found that (again, on average) these transaction costs are more than offset by the returns delivered to investors from actively managed funds.

By looking at the annual difference between benchmark returns and fund returns after charges over a ten year period to December 2011, the IMA found that the difference between the net fund return and the benchmark return was on average significantly less than the Total Expense Ratio (TER).

For tracker funds, this analysis found that the TER was broadly the same on average as the difference between the benchmark return and the fund return.

Fund charges are important when constructing and managing an investment portfolio, but they are only one factor to consider.

There are situations where tracker funds are less suitable than actively managed funds, and vice versa.

An obsessive focus on the cost of investing can often ignore the importance of value, which in the case of fund selection is partially the net return received by the investor.

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It was only slightly worse than expected, with many economists forecasting a 0.1% fall.

This means that the UK economy expanded by only 0.9% last year.

The fall in economic output in the final quarter followed GDP growth of 0.6% in the third quarter of 2011.

Whilst this latest GDP figure could be revised upwards, it increases the chances that the UK economy has already entered a recession.

A recession is technically defined as two consecutive quarters of economic decline. If the UK economy has fallen again in the first quarter of this year, we will have entered recession once more.

Whilst it is disappointing to see GDP falling in the final quarter, the economic growth for the year as a whole is in line with official targets from the Office for Budget Responsibility.

Contributions to this GDP fall in the final quarter included poor performance in the manufacturing sector and the economic impact of the public service strikes in November. Nearly a million working days were lost as a result of this industrial action.

Earlier this week we saw the International Monetary Fund cutting their forecast for UK GDP in 2012 from 1.6% to 0.6%.

It is difficult to predict for how long any new recession might last, with the eurozone sovereign debt crisis acting as the deciding factor in any economic recovery closer to home.

Investors should keep in mind that economic performance is not always closely correlated with stock market performance. A sluggish UK economy will not necessarily mean disappointing returns from UK companies, many of which now derive most of their earnings from overseas activity.

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Speaking in the Financial Times, new FCA managing director Martin Wheatley explained that the global financial crisis had changed the view taken by the regulator of investors.

As a result of this new view, which draws lessons from behavioural economics, the FCA will take a more interventionist approach than that previously taken by the FSA.

Some investors will be unhappy with the description of them used by Wheatley.

He said to the FT that investors, when faced with complex decisions or too much information, will often hide behind credit ratings agencies or the promises that are given to them by the salesperson.

By taking a more interventionist approach, the new regulator could help to protect some investors from those financial products that involve the greatest risks.

We have recently seen the FSA flex its own interventionist muscles, with a warning over the suitability of life settlement funds for retail investors.

Had this approach been practiced earlier, it is possible that the FSA could have banned the sale of other toxic investment schemes, including Arch cru.

There is a risk that the FCA banning unsuitable products will result in their tacit approval of the products they have not chosen to ban. This will not be the case.

The FSA has not historically been a product regulator and we do not expect the FCA to take up this role either. There is a big difference between banning toxic financial products and giving approval to all financial products in the marketplace.

Whether a more interventionist approach from the FCA works to benefit investors in the long-term is still to be seen.

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One method of curbing excessive rewards for executives is giving greater powers to shareholders.

This is favoured by Business Secretary Vince Cable who is planning to announce measures today in a speech to the Social Market Foundation.

Other proposed measures include making remuneration reports easier to understand and executives needing to justify their salaries in relation to the earnings of other employees.

On shareholder influence over remuneration, this could see shareholders given a binding vote on areas including notice periods and exit packages.

These proposed measures could represent good news for investors.

The Investment Management Association (IMA) has supported these calls for reforms to executive pay, welcoming the strengthened accountability it would provide.

These measures could place a lot of power in the hands of fund managers, with the IMA representing asset managers with £4 trillion of funds.

If the proposed package of measures is introduced, the selection of investment funds in the future might need to include an understanding of the approach taken by the fund manager towards executive pay.

That said, with the government already in a position to curb excessive pay and bonuses at some of the major High Street banks but seemingly failing to exercise their influence as major shareholders, the prospect of decisive action on this subject seems limited.

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With interest rates on cash falling to near zero, the yields available from other investments quickly followed in the same downwards direction.

The entire banking sector came under immense pressure to slash dividends and bond yields dropped to record lows as investors flocked to the relative safety of gilts.

Even the income available from commercial property, whilst initially looking more attractive as capital values fell, came under increasing pressure with the failure of big name retailers.

Whilst there are some indications that investment income levels are starting to return to a more tolerable level, the challenge for income investors remains stark.

The Search for Income by Maike Currie

This new book from investment journalist Maike Currie arrives at the perfect time and is an invaluable resource for income investors. In fact, the elements of investing are so well explained in this book that those investing for capital growth will also benefit from having this in their library.

Maike takes readers through the basics of investment income before describing each of the main investment income asset classes. The explanation of the various investment terms and calculations relevant to income investors are some of the clearest I have seen.

As well as providing a clear explanation, The Search for Income is a very practical read. Maike uses real-life examples of funds, platforms and portfolios to illustrate the different approaches to income investing.

Aimed at the retail investor, this book is equally valuable for professional advisers who want to improve their understanding of the issues and refresh their knowledge.

One benefit of the recent publication of this book is that it contains explanations of some of the most popular current investment options, including Exchange Traded Funds (ETFs) and infrastructure funds.

As a Chartered Financial Planner, I devote a great deal of time each month to reading and keeping my knowledge up to date, particularly in respect of investments. The Search for Income is one of the best investment books I have read to date and I can recommend it to anyone with an interest in the subject.

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A total of £67bn was paid out to investors in UK companies in the form of dividends last year.

Capita forecasts an increase of 11% in dividends in 2012, taking the total to £75bn this year.

The rise last year represented the first annual rise in dividend income since 2008. In real terms, dividends remain slightly behind the £77bn paid to investors that year.

A total of 438 listed companies paid a dividend to investors in 2011, which is a slight improvement on the 434 who paid out in the previous year.

In 2012, the gross equity yield for investors in UK listed companies is forecast to reach 4.4%.

Investors looking for income will often include UK equities in their portfolios along with cash, fixed interest securities and property.

Whilst a predicted gross yield of 4.4% from equities appears attractive relative to the interest rate available from cash or the yields from bonds in 2012, it is important to also consider the risk to capital an equity income investor must accept.

Stock markets are likely to remain volatile in 2012. Equity income investors tend to be investing in lower risk stocks, with more defensive characteristics, but the risk profile of these investments still tends to be unacceptably high for more cautious investors when held in isolation.

Diversification can help to reduce overall levels of risk, with cautious investors typically weighting more towards non-equity investments in their portfolios which often experience less volatile performance.

What income investors should be wary of in 2012 is exposing their money to newer sources of income investment. Fund managers are increasingly arguing the case for overseas equity income, to improve the potential returns when compared to UK options.

With higher potential returns always comes greater risk to capital and income. Overseas equity income funds also introduce elements such as currency and political risk to portfolios.

With 2011 delivering a record year for dividend income and this year forecast to be even stronger, we hope that this represents some good news for income investors who have been squeezed in recent years.

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