Jonathan Davis: Another poignant footnote to stockmarket history

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The Independent Online

The fallout from the tech stock mania of a year ago may be painful for many, but it is not without its poignant moments, the kind that often end up as footnotes in stockmarket history.

The fallout from the tech stock mania of a year ago may be painful for many, but it is not without its poignant moments, the kind that often end up as footnotes in stockmarket history. Scanning the news pages for details on the latest high-flying company or fund to come crashing to earth recalls uncanny parallels with the great oil and mining stock boom of the early Eighties, when many millions were also made and lost in 18 months or so.

Then, as now, the promoters of the scores of new issues which appeared at the time tended to fare rather better than the investors who bought them ­ at least those who thought they were making a medium-term investment and failed to duck in and out of the shares before they eventually cratered.

At the time, I remember detecting an amusing correlation between the grandeur of the name of a new issue and the subsequent performance of the shares. In general, any company with the words "oil and gas resources" in its name tended to have only limited amounts of the stuff on its books, though there was always a bucketload of good intentions to find or acquire them in due course. But it was the companies with the most expansive names, the likes of Universal Oil and Gas Resources, or Pan-Ruritanian Mining, which were particularly dangerous.

It was therefore not entirely surprising to read in The Wall Street Journal the other day of the sad demise of the splendidly named Zero Gravity Internet Fund, which has, it seems, sadly failed to live up to its name and has had to shut. The fund is down nearly 60 per cent since it was launched less than a year ago, and no doubt sensibly has opted to return to investors the $2m (£1.2m) of assets it has left from the $8m it raised initially. Other internet funds in the United States have also been liquidated.

In this country, to my knowledge, we do not have anything quite so hubristic to compare to the Zero Gravity Internet Fund, but the travails of the Framlington NetNet investment trust are not dissimilar. This trust, which was launched a year ago, and is distinct from the unit trust of the same name, launched two years ago by the same management group, can scarcely be deemed to have been a triumph.

The impact of the plunge in technology share prices has been magnified by the trust borrowing £40m to gear up the potential returns from its investments. As the value of its portfolio has plummeted, the trust has been forced to repay its debts to avoid breaching bank covenants, leaving shareholders with assets worth barely a tenth of the size of the trust at launch last March. The shareholders will now have to decide whether to keep the trust alive or liquidate it.

Scanning through the unit trust and investment trust performance figures for the year to the end of March this year demonstrates how brutal the fallout in technology shares has been. Most of the specialist technology unit trusts around long enough to qualify for a 12-month history are down by between 50 and 75 per cent over that period. Even the long-running stars of the sector, highly rated funds such as Henderson Global Technology and Aberdeen Technology, have lost around 60 per cent of their value in a similar period. This is proof, if proof were needed, of the old Wall Street adages that bear markets are fairly indiscriminate in their impact: frequently the baby does indeed go out with the bathwater.

The month-by-month performance figures for the technology funds also make instructive reading. While all the technology funds have lost more than half their value in the last 12 months, there have been at least three months (June and August last year, January this year) when they have enjoyed significant rallies, often running to double-figure percentage gains. That was just enough, given the cruel ways markets tend to work, to keep alive the hopes of investors that the worst might finally be over.

In this case, investors' hopes have not been helped by the recycling of impressive-sounding but evidentially valueless statements to the effect that technology shares "almost always" do well in the first quarter of the year, which has often been the case in the past few years, but not, evidently, this time round.

When you consider how much money poured into technology funds a year ago, a goodly chunk on the advice of financial advisers who pocketed commission for recommending these funds, the experience of the past 12 months will not go down in history as the fund industry's finest hour. Ultimately, investors can blame only themselves for being taken in by the hype surrounding technology, but it is hard to avoid the conclusion that some of the fund launches of a year to 18 months ago were cynical exercises in exploiting prevailing market conditions.

The performance statistics also show that the impact of the technology sector fallout has been much wider than on the technology funds alone. The distortions the telecoms, media and technology (TMT) craze introduced into the markets are reflected all the way through the panoply of funds investors can now choose from.

The graphs show, for example, two ways in which the TMT craze at its height between October 1999 and March 2000 affected the European fund sector. They are taken from the latest Standard & Poor's Fund Research survey of retail funds that invest in Europe (including pan-European funds, those that include the UK as part of Europe, and those that exclude the UK from their investment focus). What the graphs show is, first, that the TMT boom was a global phenomenon, not just a UK or US one, and second, that it had a big impact on fund-manager behaviour. For that brief period, the dispersion of returns between those funds which chased the TMT story and those that did not widened dramatically. Historically, the middle 50 per cent of funds were all within plus or minus 2 per cent of the median performing fund, but the gap widened to 10 per cent at the height of the TMT boom. At the same time, since the TMT boom ended, the disparity in performance between so-called value and growth shares (of which technology shares are merely the most extreme example) has widened more dramatically than at any time in the past 25 years. Value suddenly is back in favour, with many fund managers reacting to the drama of the 1999-2000 period by retreating to more traditional investment criteria.

Although technology shares will recover one day, and will continue to be volatile, the markets will have to navigate the bearish climate before they have another heyday like the one we have just lived through.

Funds specialising in smaller companies are also taking a beating, as always happens in developing bear markets, but there will be above-average returns to be made from them for those brave enough to decide the bear market has run its course.

How long investors have to wait for that moment is not clear, but the signal that the bull market has resumed has not yet arrived.

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