In­vestors need to roll up their sleeves and get stuck in

The Pak Banker - - OPINION - Tom Steven­son

IF you feel like in­vest­ment has be­come a lot more dif­fi­cult in re­cent years there may be a good rea­son for that. As my chart shows this week, the re­turns from equity in­vest­ing have in­deed got pro­gres­sively worse over the past 40 years.

Ac­cord­ing to the ex­cel­lent Bar­clays Equity Gilt Study, out this week, the av­er­age in­fla­tion-ad­justed to­tal re­turn from UK shares be­tween 1975 and 1985 was an im­pres­sive 11pc. That dipped un­der 10pc in the fol­low­ing decade, halved to 5pc in the 10 years from 1995 to 2005 and halved again in the pe­riod from 2005 to date to 2.3pc.

The long bull mar­ket from the early 1980s un­til the top of the bub­ble in 2000 re­ally was a golden age for stock mar­ket in­vest­ing. You didn't need to do any­thing par­tic­u­larly clever in those years to en­joy re­mark­able (and his­tory has shown, un­sus­tain­able) re­turns. Just turn­ing up was enough.

No won­der in­vestors started to be­lieve that time in the mar­ket not tim­ing the mar­ket was all that mat­tered. No won­der, too, that pas­sive funds should have grown in pop­u­lar­ity. If track­ing the mar­ket, at low cost, is so prof­itable why go to the trou­ble, or ex­pense, of try­ing to beat the in­dex?

Just as old gen­er­als fight the last war, I won­der whether this pas­sive, buy and hold ap­proach can still cut it for in­vestors in to­day's low-growth, low-re­turns world.

Credit Suisse re­cently made a con­vinc­ing case to me that the strong re­turns en­joyed in the bounce-back from a fi­nan­cial cri­sis tend to mu­tate into an ex­tended pe­riod of much less ex­cit­ing re­turns.

A re­cent note from Gold­man Sachs de­scribed the out­look for the mar­ket from here as "fat and flat" - in other words volatile and dis­ap­point­ing. A col­league this week de­scribed his vi­sion of a trad­ing range capped by high-ish val­u­a­tions and unim­pres­sive earn­ings growth but un­der­pinned by cen­tral bank largesse and an ab­sence of al­ter­na­tives to equity in­vest­ment.

If th­ese mar­ket watch­ers are right, this en­vi­ron­ment poses a prob­lem for dis­en­gaged in­vestors with­out the in­ter­est or in­cli­na­tion to re­ally man­age their port­fo­lio. A glance at a chart of the FTSE 100 over the past 20 years sug­gests a lot of heartache with pre­cious lit­tle in re­turn for an in­dex-track­ing in­vestor.

Mad­ness, as they say, is con­tin­u­ing to do the same thing and ex­pect­ing a dif­fer­ent out­come, so per­haps now is the time to think about how to thrive in a side­ways-mov­ing and volatile mar­ket. If suc­cess­ful in­vest­ing is about some­thing more than just tak­ing part, what strate­gies might a risk-averse in­vestor adopt? The first ap­proach is to tilt the over­all an­gle of your re­turns up­wards by pick­ing win­ners and avoid­ing losers. By def­i­ni­tion, ac­tive in­vest­ment does not al­ways get it right. It may even be a zero-sum game. But if the al­ter­na­tive is to travel side­ways, I would sug­gest that we don't have any al­ter­na­tive.

Se­cond, be a con­trar­ian. Equity in­vest­ment as a whole may de­liver un­ex­cit­ing re­turns, but at any one time cer­tain mar­kets are in or out of favour. His­tory shows that rum­mag­ing through the metaphor­i­cal in­vest­ment dust­bin pays off in the long run. If the mar­ket has over­cooked the pes­simism, the po­ten­tial gains are sig­nif­i­cant.

Third (and I'm whis­per­ing this be­cause I've said the op­po­site many times) a bit of mar­ket tim­ing may just be nec­es­sary now. You won't catch the top or the bot­tom but rein­ing back your ex­po­sure when sen­ti­ment is high and be­com­ing more gung-ho when the head­lines are grim is a char­ac­ter­is­tic of all suc­cess­ful in­vestors.

Fourth, re­mem­ber that the best way of tilt­ing the tra­jec­tory of mar­ket re­turns up­wards is to re-in­vest your div­i­dends. Do that re­li­giously and even a flat mar­ket starts to feel re­ward­ing. Fi­nally, fo­cus on qual­ity. Com­pa­nies which en­joy sig­nif­i­cant bar­ri­ers to en­try, strong brands and pric­ing power have the abil­ity to earn higher re­turns on the cap­i­tal they em­ploy, sus­tain­ably year af­ter year. If you can find this kind of in­vest­ment op­por­tu­nity you don't need to worry about mar­ket tim­ing or be­ing a con­trar­ian.

Time and com­pound­ing will do the work for you. Re­mem­ber, too, that noth­ing lasts for ever in in­vest­ment. Mar­kets are mean-re­vert­ing over time. The very fact that I am writ­ing an ar­ti­cle ex­trap­o­lat­ing the re­cent past of low real re­turns into the fu­ture will for many be the clear­est in­di­ca­tion of bet­ter times ahead. Let's hope so.

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