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Make your mind up: buying equities
The penny drops
SHREWD stock market professionals have a favourite saying: “When private investors start piling into shares, it’s time to pile out.”
This reflects the common view that investors can never get their timing right and that when they do buy, they often buy the wrong thing.
A classic example was the technology boom of the late 1990s, In early 2000, investors poured billions of pounds into technology funds, only to see them shrink to a fraction of their previous value as the bubble burst and tech shares fell faster than any other sector.
So the news from the Investment Management Association (IMA) that investors bought a net £1.4 billion of funds in February — nearly three times the previous February figure — could set the alarm bells ringing. Are they coming back into the market at the wrong time once again? No, say a range of financial experts. Their first argument is that the stock market is not overvalued, so investors may yet profit from buying now. Jeremy Batstone, head of research at Charles Stanley, the stockbroker, says: “Shares have risen sharply over the past three years, but earnings have kept pace with the market rise. Shares are trading on a multiple of 13 times forecast earnings, which is not high by historic standards.”
Hilary Cook, director of investment strategy at Barclays Stockbrokers, says: “There are very solid reasons why the markets should continue moving upwards, even if the pace is slower than in recent years. Companies are making real profits and have learnt the hard way that cash is king.
“Investors are no longer just buying a technology stock that they heard about on the internet, they are looking more closely at companies and rewarding those that are throwing off cash and returning it to shareholders.”
Equally importantly, it appears that private investors are becoming smarter at picking funds. A study of the most popular funds bought last year through Fidelity FundsNetwork, the UK’s biggest fund supermarket, produced some truly outstanding performers among the top ten.
These included Invesco Perpetual’s Income and High Income funds, Jupiter’s Merlin Growth Portfolio and its Merlin Income Portfolio, along with Fidelity’s European and Special Situations funds. All have produced consistently good returns in each of the past five years.
A similar picture emerges from a study of investment trust Isas bought through the self-select plan run by Alliance Trust Savings. The favourite was Caledonia Investments, which is second out of more than twenty trusts in its sector over seven years and has been consistent in each of the past five. In second place comes British Empire Securities and General Trust, another peerless performer that tops its sector over five, seven and ten years. It is followed by other funds that have produced very good returns, such as RIT Capital Partners and TR Property.
Justin Modray, of Bestinvest, the independent financial adviser, says: “Having had their fingers burnt in the past bear market, investors seem to be more selective about the funds they purchase. As well as buying more of the good funds, they are getting better at avoiding the bad funds.
“However, only time will tell whether today’s selections prove to be a good bet over the long term. And in some respects, investors’ judgment of when to buy is still far from perfect. Purchases of equity funds bottomed out in 2003 and 2004, just when investors should have been filling their boots.”
Magnus Grimond:
Lemmings to the slaughter
INVESTORS thinking of piling into the stock market just now should learn the lessons of history, not those of the golf club guru.
Unfortunately, the buyers who pushed up retail share trading on the London Stock Exchange by 50 per cent to £6 billion in January may already be forgetting what the tech bubble taught us six years ago. More likely to be at the front of their minds is the resurgence of share prices that has boosted the FTSE 100 index by 61 per cent in three years.
Some observers, however, are urging caution. Justin Urquhart Stewart, of Seven Investment Management, a private client advisory firm, is “seriously concerned” about what he calls “the cappuccino market”. It has been supported by a clutch of takeovers that have removed 26 companies from the FTSE 250 index since the beginning of 2004.
He says: “That creates an M&A (mergers and acquisitions) ‘froth’, as people chase the next M&A candidate. But where does the froth end and the coffee begin?” In fact, outside of the top 100 stocks, company earnings have been falling, Mr Urquhart Stewart says. “When private equity and trade buyers realise that the earnings are not there to support these takeovers, they may walk away,” he suggests.
He advises investors currently piling into the market to spread their risks across a wider range of investments than shares. That warning is echoed by Fidelity International, the fund manager. It says that the most favoured areas for investments in individual savings accounts (Isas) have not always been the best performers subsequently.
For instance, the mainstream UK all-companies sector proved a popular but poor choice in 2002, since the average loss on such funds was 23 per cent that year. There is, however, evidence that people are learning.
The UK all-companies sector was again the top choice for Isa buyers last year, while UK equity income headed the league table for overall net sales. In the event, both turned in respectable gains of more than 20 per cent last year.
Doug Naismith, head of European personal investment at Fidelity, says: “The message is getting home to the man in the street: if you are coming into fund investment for the first time, the aim should be diversification — diversification across sectors, diversification across manager and diversification across asset classes.”
While most observers acknowledge the growing interest in shares, nearly all agree that people are becoming more discerning. Clem Chambers, of ADVFN, the financial information provider, says that many more people are using its website.
“They are definitely coming back,” he says. “There has been no sudden dam-burst, it’s been more like going from a trickle to a big river. There are a lot more sensible investors back in the market, but a lot of crazy speculation going on too, because they are seeing a lot of success in small-caps.”
Even so, with global interest rates rising and consumers laden with debt, the headwinds are rising. Investors late to the party should keep their heads.
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