STATE OF FLUX
With instability and uncertainty the new normal in markets, investors are becoming more cautious and indecisive
Investment dilemmas
There comes a time when investors just don’t know what to do: Buy or sell? Stick or twist? As a conservative estimate, I’d say this is true of investors 95per cent of the time. Moments of total conviction are rare. I once asked a leading Scottish fund manager what advice he had for fearful investors. His reply was as swift as it was mischievous: ‘Never look back!’
Certainly nothing better describes the strategy of choice now for investors than ‘dither’. The stock market may look to have got 2017 off to a flying start with several record highs, but there’s little conviction behind these peaks. Indeed, conviction has been markedly absent for most of the past year. Since the EU referendum investors have fled to the hills for fear of a Brexit Armageddon, but those who did so missed out on one of the best stock market rallies since the 2008-09 slump.
Investment Association figures show that the Brexit vote sparked a big sell-off in equity and property funds. Fund purchases by retail and institutional buyers slumped to £13bn, the lowest level since the depths of the 2008 financial crisis when the figure stood at just £202m. Retail investors were even more bearish than institutional investors with retail sales at a net £4.7bn in 2016, below even the 2008 figure of £4.8bn. Yet since late June, the FTSE 100 index has barnstormed ahead with a gain of 20 per cent.
Today there is little conviction to be found, whether it’s Brexit fears or the trauma and turbulence of Donald Trump’s opening week, many just don’t trust the market as a safe place to invest.
The Association of Investment Companies (AIC) recently reported that the number of investors saying they will not use any of their ISA allowance has almost doubled over the course of
this year, from 21 per cent in 2016 to 38 per cent.
Annabel Brodie-Smith from the AIC says it’s easy to see why investors remain cautious. ‘There are concerns about Brexit and the Trump presidency and worry over a market crash hanging heavy in many investors’ minds. However, none of us can predict the markets’ next move. Who would have thought, at the start of 2016, that markets would have had such a strong year?’
Indeed, many shares are now looking ‘toppy’ and bouts of profit-taking can be seen. But last year’s experience stands as a warning to investors against knee-jerk reactions.
According to the AIC, investors remain cautious with 71 per cent planning to hold, rather than buy, investments although the number of active sellers has fallen significantly. Of the quarter of investors who were planning to increase their exposure, it was miserly rates of interest on cash deposits which was the greatest motivator (30 per cent), followed by general optimism (just 12 per cent), and the fact that they have more money available now (11 per cent). The most commonly cited financial worry amongst investors was that uncertainty over Brexit negotiations may slow economic growth (18 per cent), followed by a possible stock market crash (13 per cent) and the Trump presidency (12 per cent).
Despite concerns about the impact protracted Brexit negotiations might have on the UK economy, the UK was still by far the favoured region amongst active investors (21 per cent), although slightly down on recent years – 26 per cent in 2015.
This was followed by Emerging Markets (9 per cent), China (7 per cent), North America (6 per cent) and Asia Pacific, excluding China and Japan (6 per cent).
Some 25 per cent of investors this year say they are only planning to use the cash element of their ISA allowance – level pegging with a year ago – with cash remaining king for nervous investors. Some 18 per cent of investors plan to use only the stocks and shares element of their ISA, down from 30 per cent last year.
Very few investors get the timing right on sales
and purchases. But the first of the two Golden Rules is that quiet, passive retail investors with regular savings plans – feeding in £70 to £100 a month – will have benefited without lifting a finger from the June-July dip and the effect of Pound Cost Averaging.
The second rule is to maintain as diversified a portfolio as possible. As the AIC points out, despite the tough market conditions during the financial crisis, the average investment company is up 107 per cent over ten years.
What of investment trusts, considered as long-term holds, which may offer some protection against a market correction this year? There are three investment trusts which have a record of low volatility and which may appeal to the apprehensive.
Edinburgh-based Personal Assets Trust (PAT) could be considered one of the most defensive trusts available. The portfolio is heavily weighted towards gold and gold-related assets and US Treasury stock. PAT has been a contrarian outrider for many years and regards its role more as capital protection than chasing performance. It certainly has not performed well when the market has been buoyant, but earns its spurs in a downturn. The shares are anachronistically ‘heavy’ – around £400 apiece – but then many features about PAT are unfashionable which accounts for its cult-like status among devotees.
A marked counterweight to PAT is the Bankers Investment Trust. This £925 million trust seeks to maximise returns through a broadly diversified international portfolio, aiming to deliver capital growth in excess of the FTSE All-Share Index, and regular dividend growth that exceeds the rise in the Retail Prices Index (RPI). It recently announced 50 years of consecutive annual dividend increases.
The trust is standing on a small discount to net assets, yields 2.25 per cent, and is well diversified – 30 per cent in the UK, 28 per cent in North America, 14 per cent in Europe and 13 per cent in Asia Pacific. It is a solid, durable performer.
Finally, the £219 million Martin Currie Global Trust, managed by Tom Walker, offers a portfolio spread slightly more skewed to the US where 57 per cent of the portfolio is invested. Europe accounts for 21 per cent and Asia Pacific 8.6 per cent. The trust has gained 94.8 per cent over five years, outperforming the global sector average of 83.7 per cent. The shares stand on a small discount to net assets and yield 1.83 per cent.
Such stalwarts won’t shoot the lights out but they do offer a spread of investments both geographically and by asset type. Ditherers may prefer to feed in small regular amounts over time.
‘Very few investors get timings right on sales and purchases’