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.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
- 1 President of Argentina adopts Jewish godson to 'stop him turning into a werewolf'
- 2 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 3 The 'Black Museum': After 150 years, public set to see exhibits from police’s grisly crime museum
- 4 AirAsia flight QZ8501 missing: Plane carrying 162 passengers from Indonesia to Singapore disappears over Java Sea
- 5 Naomi Wolf reacts to Isis 'conspiracy theories' critism after she questions whether beheading videos are real
British actor Idris Elba cannot star as James Bond because he is black, says shock jock Rush Limbaugh
Ukip member gets into Christmas spirit with Union Flag plea to Santa 'for our country back'
Germany anti-Islam protests: 17,000 march on Dresden against 'Islamification of the West'
Immigrants make UK racist, says Ukip councillor Trevor Shonk
Millions of Britons struggling to feed themselves and facing malnourishment
Nigel Farage: Ukip leader named 'Briton of the year' by The Times
iJobs Money & Business
Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...
Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...
Not specified: Selby Jennings: SVP Model Validation This top tiered investment...
Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...
Day In a Page
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
A three-bedroom villa with self-contained flat, minutes from Lake Windermere
A deceptively spacious, beautifully presented Georgian home with 3000sq ft of living space and five reception rooms
A five-bedroom Victorian home with four receptions, superb gardens and paddock in Pembury
An eight-bedroom house on the south side of the The Green with cinema, wine cellars and summer house
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens