Personal Finance: Brian Tora's column
Saturday 22 August 1998
It would be wrong to read too much into this week's bounce, though. City streets are still bereft of traders and it has seldom been easier to find a restaurant table within the Square Mile. Moreover, the big bounce we saw was almost entirely confined to FT-SE stocks and was heavily futures driven. Look at the next 250 shares and the rise is much less. The Small Cap Index was actually down on the day. Where have I heard that before?
Is this the time to bang the drum for smaller companies? Sadly I fear not. It is not just that the increasing globalisation of the investment management business is forcing managers into the most liquid stocks. Many smaller companies are in manufacturing industry, which does seem to be turning down with extremely worrying rapidity. It does not follow that a small company has to be a widget maker, but there are no banks or insurance companies in the Small Cap Index, while any that are involved in telecoms or pharmaceuticals will inevitably be highly speculative.
Still, it is among smaller companies that you are now beginning to find real shareholder value. Where else can you obtain yields of double the average on the Actuaries All Share Index, with the likelihood that dividend levels will be maintained? Unfortunately this may prove to be the only reason for owning shares in smaller companies. Without strong capital performance, they will have to yield sufficient to compensate investors. With the global players still likely to eschew illiquid stocks, this seems to be all too likely a scenario.
The other big call at present must be on when to go back into South-east Asia and emerging markets. Not yet, I fear. The arguments are much the same as those that can be used against smaller companies. Frankly, the big boys really do not want to know. Arguably this has been helping our own market (although you could have fooled me last week) and certainly the illiquidity in markets such as Russia is a mega disincentive. Is there no other place to go than developed markets and the big board stocks?
This will not be the first time that I have sung the praises of smaller companies. They are fun. Trying to spot next year's big winner can be quite stimulating. Still, as anyone who backed the Virgin cosmetics and fashion group in the form of Victory will attest, the risk-reward ratio remains loaded against the smaller-company investor.
I need to return to this again. In the meantime - and prompted by a recent inquiry - I am taking the view that pound-cost averaging is the way in which we should all invest. Take advantage of today's high interest rates while they last to set up a fund that is ultimately destined for shares, and drip your money into the stock market on a steady basis. That way you will be preserved from making silly mistakes. I should have done it years ago.
Brian Tora is chairman of the Greig Middleton Investment Strategy Committee
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