Investors hope for an eastern promise

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I HAVE just returned from the South of France, where I attended last week's annual international Funds Forum conference in Juan-les-Pins. This is an annual jamboree for the fund management business. Fifteen years ago no such conferences existed, or if they did, they were resolutely parochial and held in the likes of Harrogate or Bournemouth.

The change of location is one indication of how fund management, once the poor relation of the more illustrious investment banking business, has become a sexy business. You will not be surprised to hear that holding the event on the Cote d'Azur has had a remarkably positive impact on the calibre and international diversity of the participants.

Was it worth it? Well, it was a good opportunity to find out what is on the mind of several leading figures on all sides (investment, marketing, distribution) of the investment industry.

The fund management business, on this evidence, is primarily concerned with three main issues. They are: (a) The continued overvaluation of Wall Street; (b) The much- vaunted move towards pan- European investment markets, after monetary union, and (c) The potential impact the Internet is going to have on the way consumers buy and sell investments.

There seems to be a growing belief that the combination of a new and powerful technology (the Internet) and the opening of many hitherto cosy and profitable European markets is going to have a profound impact on how, where and in what we put our money to work.

If this change happens the way visionaries see it, this will be an enormously powerful and liberating event for consumers. Mark Collier of Investia Ltd, a leading Internet consultancy, believes the chances are that within a very short period we will be able to buy and sell any fund we want from a new generation of fund supermarkets.

These are online sites thata allow you to check the performance of competing funds from all the leading providers (not just one tied supplier), match them to your personal financial needs and risk profile, and - after taking advice if need be - buy whatever you want at discount rates.

In the US, the march of online technology started with online trading through discount brokerage services, before moving to banking, investment in funds and more recently financial advice. Fund supermarkets and personalised interactive web sites are now common.

In Europe, where a share trading culture has never been so strong, we are likely to move directly to a world where online share trading, fund selection and personal financial planning become routine.

This trend poses a challenge and a threat to the biggest financial service companies. In most European countries, the selling of funds and other investments is dominated by a small number of big banks. The hunt is on for competitors (including foreign entities) to try to secure a foothold in the new market for cross-border investment products. For consumers, who have been largely kept in ignorance of the fat profit margins the banks have extracted from them, this promises to be a liberating experience, at least for those prepared to take some control over their finances.

For a UK investor, says Cliff Condon of Forrester Research, the bad news is that we are still lagging behind the market leaders in the move towards this brave new world.

True, we have a much more segmented and competitive market, measured by the number of competitors in the fund management and marketing business. But in many other respects, including the sophistication of our Internet sites, we are still a long way behind other countries such as Norway, Sweden, Switzerland and Luxemburg.

Most financial service providers have yet to progress beyond establishing simple transactional website functions for their customers. The profit margins in the UK on sales of unit trusts, investment trusts and so on are still excessive from a consumer's standpoint, suggesting that consumers are not yet fully empowered with the knowledge of how much they are paying (which must come).

Overshadowing this, in the minds of many delegates at the conference, is the big question of whether - and also when and how - Wall Street is going to come to its senses. Last week's interest rate rise from the Federal Reserve, after all the hints that it was going to grasp the issue of the market's overvaluation and the US economy's unsustainable growth rate, has proved too timid to stop the market's seemingly relentless rise. This is a serious concern: at least two of the prominent speakers in Juan les Pins openly predicted that Wall Street cannot now avoid a potentially destabilising reversion to more normal levels.

One, Peter Everington, a well-known emerging markets investor, expects the Dow Jones to fall to 6500 within 18 months, and maybe sooner. He is not alone.

The best hope investors now have that the world economy will avoid a Wall Street-inspired slump, says the chief investment officer of the large insurance company AXA, lies in the signs that Japan and other parts of Asia may now at last be in a position to provide a home for the excess liquidity slopping around the world monetary system, counterbalancing the knock-on effect from any slowdown in America. For anyone who has been disappointed with their investments over the past extraordinary 18 months, while watching valuations in the US and several other markets depart from any historical or empirically justifiable basis, another consolation to take home from the south of France is that last year has now officially been declared an exceptional year in investment terms.

As the charts indicate, 1998 will go down in history as the year which saw the most lopsided market performance of any in recent memory. Investment styles do move in and out of fashion; one year value stocks are all the rage, another growth stocks do much better. Ditto with large cap versus small cap stocks. Yet the investment consultancy Frank Russell says never in living memory has the bias towards large cap growth stocks been so great as it was last year.

What can investors learn from these charts? One thing is that small cap shares and those chosen by value investors have rarely done so poorly as in 1998. The past 14 years have disproportionately favoured large growth stocks, but there is no guarantee the same will continue to be true. Indeed, the presumption must be that other types of stock will outperform more often.

A similar chart of the "Performance Lottery" covering 50 years of relative performance instead of just since 1985 would show a much more even distribution across the four quadrants. Although the broking community will not sleep in its efforts to find new rationalisations for still favouring large cap growth stocks (which involves investors buying overvalued companies in the expectation that they will simply become more overvalued), it cannot, and will not, persist. As always, the best value lies elsewhere than in today's favourites.

Now more than ever is the time to be putting your faith in the unfashionable, with Japan and smaller companies well to the fore of any list of potential beneficiaries of a return to greater investment normality.