Secrets Of Success: This is the time to be quite contrary
Saturday 01 April 2006
The latest figures for sales of unit trusts and other funds such as Oeics make their usual interesting reading. All the signs are that this year, again, is going to end with a flurry of first-quarter investor money flowing into funds, especially those held in an individual savings account (ISA) or self-invested personal pension (Sipp) tax wrapper.
The late rush for ISAs and Sipps is so dominant that between 30 and 40 per cent of annual sales, on average, come in over the first quarter of each year.
Gross sales of unit trusts and Oeics are already back close to record levels in the current year. If March provided the usual last-minute boost, the figure could yet match the best year to date, which was the internet bubble year of 2000.
This is not quite the investment spree it might appear, as levels of repurchases have also been rising steadily as investors cash in funds they bought in previous years.
Even so, net sales are also looking healthy, which is good news for those who make a living out of selling or managing funds. The exhortation not to miss the ISA deadline is still one of the industry's most powerful marketing messages. It has long since learned that nothing sells quite like a real or apparent tax break, preferably one with a deadline attached.
This will become clear again when the final figures for venture capital trust inflows in the current financial year come out. As the Chancellor is reducing the attractions of VCT investment in 2006-07 - by reducing the tax relief from 40 to 30 per cent and cutting the size of company that the trust managers can buy - you can be sure there will be an even bigger last-minute rush than normal into this sector.
It is unfortunate that the first quarter of the year (March in particular) is more often than not one of the worst times of year to put money into the market. I don't know the figure for how much money is lost by investors behaving in this herdlike way, but the figure will surely run into hundreds of millions of pounds.
The first quarter of the year tends to be the one in which stock markets do best, which means that last-minute investors are usually buying their funds at their cyclical peaks, rather than at their cyclical lows. This can cost you a lot of money over several years.
Sensible advice, then, is to do one of two things. If you must put all the money in at once, do it six months before the end of the year rather than at the last minute. Better, feed the money into the market on a monthly basis throughout the year. If you have left it too late for either of those routes, put the money in your ISA but keep it in cash for a few months before starting to invest it.
That still leaves the question of where to put the money. Here, as readers will be aware, it is a good rule of thumb to avoid doing what most other investors in aggregate are doing. In other words, look where the bulk of the sales of funds is going, and start your search by looking somewhere else. The reason for saying that is not sheer bloody-mindedness, nor wilful contrarianism, but simply common sense and experience.
The fact is that fund sales are still, in practice, quite closely correlated with recent past performance, which reinforces the natural tendency of investors to buy what has done well in the past and what others are buying, rather than what will do well in the future.
If you believe in mean reversion, investing in the worst-performing sectors gives you a much higher chance of matching or beating the market's returns over, say, three to five years.
Avoiding the best-selling or best-performing sectors is not a totally hard and fast rule, but as a starting place it has a lot of merit. In the same way, following the "dogs of the Dow" theory in stock-picking (another simple contrarian methodology) is also a relatively safe habit to adopt - if you had chosen five shares on this basis in December last year, you would have seen a 15 per cent gain already this year.
The unit trust and Oeic sectors selling best in recent months have been property funds, equity income funds, global growth, Asia and Japan. Those that are seeing net redemptions are Europe (ex-UK), technology and telecoms and UK smaller companies.
Comparing the latest monthly figures with previous years reveals interesting contrasts. In round figures, net sales of funds in February 2006 are roughly £1bn higher than in February 2005 and £3bn higher than in February 2003 (when the stock market was about to recover but investors were still pulling money out of it).
Net sales in February this year in fact exceeded those of February 2000, when the market was about to peak. Seventy per cent of fund sales were into equities of some kind.
The poor showing of smaller-company funds looks anomalous, as smaller company shares have performed surprisingly well in the last year and exceptionally well for five years, not just in the UK but across the world.
You might expect them to have sold better (though the competition from VCTs, which are not included in these figures, is part of the explanation).
The relatively strong showing by equity income funds has been a fairly consistent trend, as the sector includes some strong and experienced managers with particularly loyal IFA followings; Neil Woodford at Invesco Perpetual, Adrian Frost at Artemis, George Luckcraft at Framlington and Anthony Nutt at Jupiter, for example.
In 2000, looking back on the 10-year trends in funds, I suggested that, if you believed in mean reversion, two sectors would probably produce above-average performance in the following 10 years, as both had significantly underperformed at that point. Those were smaller companies and Japanese funds, and both have done well since.
Smaller companies have so far outperformed the average UK equity fund by about 50 per cent, and I think the Japanese stock market recovery story, which admittedly took some time to get going, still has a way to run. Property funds would be high on my list of current avoids however, despite the recent surge in sales.
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