The stock market rally over the past 10 weeks has been a positive one, with more legs than many initially suspected, which I take to be an encouraging sign. I share the view of Anthony Bolton, Fidelity's star fund manager, that this is beginning to feel like the start of a new bull market, though this not a view that is shared by all the professionals whose pronouncements I follow.
The impressive Edinburgh loner Ian Rushbrook, for example, whose career I have followed for years, said in his recent annual report that the market remained fundamentally overvalued, though he has been careful to structure his portfolio so as not to miss out on strong rallies. Jim Slater and Andrew Smithers have also expressed caution.
But there are powerful factors on the positive side. The market rally has been a global phenomenon, and led by many of the sectors that did worst during the long haul of the bear market. More remarkably, it has deigned to include some of my modest holdings. I have been struck, in particular, by the strength of the Japanese market, where the Nikkei and Topix indices have put on an impressive performance in the past two months.
Intuition began to tell me Tokyo was about to rally strongly when I felt a strong urge to realise my losses on the Japanese investment trust I have held in an Isa account for nearly two years. This is the first, and only, investment I have made which, for a time, lost more than 50 per cent of its value. Although most of the best investments I have made have usually begun by falling 20 per cent, reflecting my poor timing, but keen sense of value, this one has tested my patience to the limit. On a long perspective, the case for buying Japanese equities seems overwhelming, in the sense that there is a high probability of above-average returns, and a low risk of losing money over anything but the short term.
That I was tempted to throw in the towel so recently gives me added comfort that this might be the start of a significant recovery in Japanese equities. We shall have to wait and see, but I am glad to have resisted such a strong and visceral urge to sell.
In markets, while we cannot sustain this kind of advance for long in the short term, the chart action of many shares looks promising to my half-tutored eye and that we may end this year with the markets significantly higher than they began it remains a reasonable bet. The US presidential election cycle is a powerful factor at this point (years before an election are traditionally the best in the four-year cycle) and I remain unconvinced by the doomsters' warnings of global deflation. The market certainly no longer seems to be trying to tell us it can go a lot lower.
Clearly, if this stage of the market cycle does prove to be something other than another sucker's rally, we are going to see further changes in market leadership, the kind of shares that do well.It looks significant to me that tobacco, the ultimate defensive kind of stock, has been among the worst-performing sectors recently, while battered, high-beta sectors such as insurance and media have done particularly well.
* The latest fund-performance figures provide interesting reading. The performance figures for all main kinds of equity funds have gone from bad to terrible in the past 12 months. The third year of the bear market, being by definition even less expected than the first two, seems to have resisted the best efforts of the very best fund managers to do much about.
Out of more than 450 UK equity funds in my database, not one is showing a positive return over the past 12 months, despite the market rally. Of the 10 best performers over that period, six are relative newcomers not around long enough to boast a three-year track record, suggesting they may have benefited from timing factors as much as skill. (New funds that feed their initial cash into the market get an artificial boost to performance that lingers in their longer-term performance record, despite their subsequent performance being anything other than pedestrian.)
Only 10 of more than 450 equity funds in the database were showing a positive Sharpe ratio over the three years to the end of May this year. The Sharpe ratio is the most popular academic measure for assessing the risk-adjusted performance of a fund. It aims to show whether funds are producing a return over that which you would expect, given the riskiness of the fund, relative to the market.
Connoisseurs of advanced financial theory will know that unless a fund is genuinely producing consistently positive risk-adjusted returns, investors can do just as well for themselves by buying an index fund and determining the amount of risk they wish to take by borrowing some of the money they have decided to invest.
This is not something promoters of the average equity market fund would like you to know, just as many hedge fund providers do not want you to know that what you are buying in many cases, while it may have outperformed the average equity market fund handsomely in the past three years, is actually something which is little different to an expensive money market fund.
But what continues to strike me after nearly a decade of studying fund-performance figures is how the same names keep reappearing in the list of those few funds that do show positive, risk-adjusted returns. Some are hedge-fund managers, and a few are traditional long-only fund managers. Their margin of outperformance is often very small, but such luminaries exist.
One of them is Anthony Bolton, though the irony in his case is that, as an out-and-out stockpicker, he is the first to acknowledge that his views about whether the market is going up or down are of little value. That said, his gut feeling about the market still merits a little respect.Reuse content