Investment: Forget the gloom, it's a bumper year
Wednesday 22 December 1999
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?
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