Bill Jamieson: Why I want a ‘correction’ for 1980s ‘big bang’

By BILL JAMIESON
Published on 03/09/2012 00:00

WHY is a sudden downwards break for the stock market almost always described as a “correction”? This implies that the rise that preceded the fall was falsely based, or incorrect. But you rarely hear stockbrokers calling an upward surge a “correction” or “an incorrect “rally.

It’s a dilemma that engaged Jim Wood-Smith in his final bulletin under the Williams de Broe banner. He is staying on, I am glad to hear, and he will continue his commendable stock market summaries, but under the name of WdB’s new owner, South Africa-based Investec – “fewer leaves, more zebras” is his crisp summation.

I have written before about my misgivings over the loss of yet another resonant stock broking name. It was bad enough when Bell Lawrie disappeared into Brewin Dolphin. Perhaps we should not be sentimental over broker names. Investec is a successful and well-regarded investment business. Its core activity is wealth and capital management. It is not with this that I have a quarrel. But I do suspect a number of WdB clients would have preferred the name to have been kept.

Williams de Broe has had a long and convoluted history. Its very name is reminiscent of a world now almost totally lost; the days when stockbrokers were discreet private partnerships and when service really was bespoke and personal.

The “Big Bang” reforms of the mid 1980s swept all that away. Also abandoned was a largely informal system of regulation and supervision that, for all its shortcomings, functioned more effectively against rogue traders than the box-ticking behemoth of the Financial Services Authority. Looking back, “Big Bang” was a monstrous mistake by the City of London. Given what has transpired in the banking realm and the mis-selling scandals of recent years, few could argue it brought out a more trustworthy or effective regulatory system. For it was not just the names that disappeared but a culture. Individual good behaviour mattered. “My word is my bond” was the catchphrase. And it meant far more than all the numbered paragraphs of deadpan official prose in the FSA code of conduct handbook. How I wish there could be a tumultuous “correction” here that could reverse the vandalism of the past 25 years.

A “correction” is convenient shorthand to describe the onset of a fall after an over-exuberant rally. The shrewd investor does not mourn corrections. In many instances they can provide opportunities to buy back in at more realistic prices.

Nevertheless, they can be brutal affairs and we need to be alive to the risk of them. I was particularly struck by a warning reported on the TrustNet website that the UK equity income sector is overvalued and companies in it are susceptible to “a severe de-rating” – correction by another name. It came from fund manager Leigh Himsworth who has slashed his exposure to dividend-paying stocks in favour of those with better growth potential. Mr Himsworth manages the newly-launched CF Eden UK Opportunities fund. He believes the time for holding dependable FTSE 100 stocks has run its course, and that many could be set for a correction. “Everyone still seems to be going on about income, but as far as I’m concerned it’s now yesterday’s game… I think the time to be buying up these companies has passed.”

Now that’s quite a warning. Buying for income has been the prime advice of this column for several years – as it has also been for many market watchers. The warning underlines the cautionary principle always to check on the sustainability of a company’s profits and dividend record. Is the pay-out well covered by profits? Might a high dividend be functioning as a warning signal rather than an invitation to buy?

It was with this caution in mind that I read another Joshua Ausden report on TrustNet with interest. He had picked up on the number of equity income investment trusts now standing at a premium to net assets.

Examples include the highly-rated Murray International Trust, now trading at 5.2 per cent above net asset value, while Neil Woodford’s Edinburgh Investment Trust is on a premium of 6.7 per cent.

One way round this conundrum is to look at the yield on trusts that do not have the word “income” or “yield” in their name but which offer an attractive dividend. A quick check on the investment trust tables revealed several trusts in the “global growth” stable yielding 3 per cent or more: Caledonia Investments at 3.02 per cent; Bankers Investment Trust with 3.09 per cent; Law Debenture on 3.4 per cent; and Jupiter Primadona on 3.8 per cent.

Seven trusts can be found in the “UK growth” sector yielding three per cent or more and three yielding more than 4 per cent. These include Invesco Perpetual Select UK Equity yielding 4.01 per cent and JP Morgan Mid Cap at 4.10 per cent. Just outside the 4 per cent group is the Scottish Widows-managed UK Select Trust with an eclectic portfolio yielding 3.36 per cent and standing on a discount of 13 per cent.

These may not provide total protection from a “correction”, but their income merits should not be overlooked.