Investment: Forget the gloom, it's a bumper year

If only life could always be viewed through the rear-view mirror, how easy a business investment would be. At this time of year, when everyone starts to look back on how well their portfolios have fared (or not as the case might be), it is easy to be wise after the event - and, I fear, to don rose-tinted spectacles to explain why this year has not been quite as good as it once looked like being, at least in your mind's eye.

Actually, I doubt if anyone will be feeling downcast this Christmas, given that this has been another remarkable year in which almost every mainstream equity market has performed most satisfactorily. You had to be exceptionally unlucky or unwise in order not to have run up a gain of at least 20 per cent over the past year. Given that only 14 months ago, we were all discussing doomsday scenarios in the wake of the Russian default and the Long Term Capital Management hedge fund collapse, this is good going. Only the bond market has failed to come up trumps, which remains a concern for the medium-term outlook.

Of course, we all know the way to have made money was to buy Internet stocks on absurd multiples and hope to unload them before the proverbial hit the fan. I am indebted to Warren Buffett for the observation that Internet stocks today stand where automobile and aviation stocks stood at the start of this century - of the thousands of new companies which sprang up to cash in on the new technologies, virtually none survive today. In aggregate, the airline business, notoriously, has failed to make a profit at all over the whole of the last 60 years.

In the long run, as with all new technologies, the benefits will accrue not to those who pioneer the technology, but to those companies whose operations stand to gain most from it. We don't know for certain who those companies will be, but I have a strong suspicion the gainers will contain some surprises (what price retailers and manufacturers?).

It is perfectly legitimate to take a punt on a few Internet technology stocks in the hope of getting out alive before the Greater Fool theory bites in. Nearly everyone I know seems to be doing it, but let's not make the mistake of calling the practice investment. The good news about the last year has actually been that you didn't need to ride the technology boom to make some very good returns.

Among the main markets, Japan has done very well, with the highest rewards going to those who were prepared to depart the main Nikkei 225 index (up 50.8 per cent in sterling terms) and plunge down into the lower reaches of the market. The Nikkei 500, a broader market index including many secondary stocks, was up by 95.9 per cent and the Japanese OTC market (not one I would care to investigate too closely) rose by a remarkable 258 per cent.

The recent revival has not stopped Japan from having been a disaster for most Western investors over the last decade: the Nikkei 225 index is still down more than 10 per cent on five-year view. But finding Japan attractive in the last couple of years has not been a difficult call. The Japanese economy is not out of the woods, and the way their authorities handled the 10-year crisis stands as a monument to blinkered vision and (more charitably) the downside of a consensus system of government which served Japan so well on its way up.

But such residual concerns aside, I believe Japan has further to run. Mike Thomas, who runs the AAA- rated Japanese funds at Martin Currie, says the best of Wall Street came after the economy had clearly pulled out of its recession, and he guesses Japan will prove to be the same. That seems a sensible view.

Elsewhere, of course, Europe continues to have experienced the biggest structural changes of any leading economic bloc, with investment bankers getting fabulously rich on an unprecedented level of M&A activity they instigate, and then execute. In the UK, anyone who opted for the view that smaller companies were long overdue a revival were reasonably well rewarded. November in particular was a remarkable month in which many aggressive growth and special situations funds zoomed to the top of the performance tables after several lean years.

This has had gratifying results. Since I do well to manage five good calls in a year, and prefer to stick with my stolid medium- to long-term perspective, modesty cannot prevent me from blowing a micro-trumpet for the investors featured in my book Money Makers, published two years ago.

While remaining wholeheartedly of the view that low-cost index funds are the essential core of any sensible investment portfolio, I cling stubbornly to the belief that some active fund managers are well worth following - providing you know exactly how they invest and can get close enough to them to form a judgement about their characters and investment methodologies.

If you follow a strategy of buying a handful of outstanding managers' funds when their investment styles are out of favour, and diversify across, say, half a dozen funds, then over years, without dramatic changes, you have a reasonable chance of coming out ahead of the relevant index funds, even after costs, and doing so while continuing to sleep well at night. This strategy didn't look so smart a couple of years ago, but has come good with a vengeance this year - hence the appearance of the trumpet.

The chart summarises how money invested in funds managed by the investors in my book has fared over the most relevant periods. On the surface, the figures are impressive. The European portfolio has grown 13 times since 1986, compared with seven times for the All-Share index. The UK portfolio, which dates only to 1990, has returned around 17.6 per cent per annum, compared with 13.7 per cent for the All-Share index over the similar period. It has done twice as well as the All-Share index this year alone.

Of course, I have shamelessly manipulated the figures to ensure they look as favourable as possible, a practice I learnt from the fund management industry. But even after stripping out the distortions, I am confident my thesis remains broadly intact, given that the strategy of buying the funds when out of favour would have materially added to the overall returns. But there are reasons why the stock market is referred to by one of my favourite American investors, Ken Fisher, as the Great Humiliator. Can nemesis be far behind?

Arts and Entertainment
Gregg Wallace in Summer's Supermarket Secrets
tv All of this year's 15 contestants have now been named
Arts and Entertainment
Inside the gallery at Frederick Bremer School in Walthamstow
tvSimon Usborne goes behind-the-scenes to watch the latest series
Life and Style
A picture taken on January 12, 2011 shows sex shops at the Paris district of Pigalle.
newsThe industry's trade body issued the moratorium on Friday
Winchester College Football (universally known as Winkies) is designed to make athletic skill all but irrelevant
Life...arcane public school games explained
Arts and Entertainment
Could we see Iain back in the Bake Off tent next week?
tv Contestant teased Newsnight viewers on potential reappearance
Life and Style
Silvia says of her famous creation: 'I never stopped wearing it. Because I like to wear things when they are off the radar'
fashionThe fashion house celebrated fifteen years of the punchy pouch with a weighty tome
i100(and it's got nothing to do with the Great British Bake Off)
Angelina Jolie with her father Jon Voight
peopleAsked whether he was upset not to be invited, he responded by saying he was busy with the Emmy Awards
Bill Kerr has died aged 92
peopleBill Kerr appeared in Hancock’s Half Hour and later worked alongside Spike Milligan and Peter Sellers
news It's not just the world that's a mess at the moment...
footballPremiership preview: All the talking points ahead of this weekend's matches
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
ebooksAn evocation of the conflict through the eyes of those who lived through it
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Data Scientist (SQL,Data mining, data modelling, PHD, AI)

£50000 - £80000 per annum + benefits+bonus+package: Harrington Starr: Data Sci...

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone