Bill Jamieson: When it pays to pause before jumping in or out

The Banks response was signalled by Mark Carney within 24 hours of the Brexit result. Picture: AFP/Getty
The Banks response was signalled by Mark Carney within 24 hours of the Brexit result. Picture: AFP/Getty
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Over-reaction, or too clever by half? Few boasts are more irritating than the know-it-all investor who says he jumped into the market just before a rise, or pulled out before a hefty fall. But the know-it-alls have been silent in recent weeks: they jumped the wrong way.

In the immediate aftermath of the Brexit vote, investors pulled a record £3.5 billion from funds. The net withdrawals from private investors reported by the Investment Association are the highest on record and five times greater than during January 2008, which was the worst month for withdrawals during the financial crisis.

But contrary to widespread fears of a stock market collapse, the FTSE 100 has returned 8.34 per cent since the Brexit result. And while shares in small and medium-sized domestic-facing companies were initially hit, both the FTSE 250 and FTSE Small Cap indices are now up 
6.3 per cent and 6.8 per cent respectively.

Property, UK and funds specialising in European equities were in the eye of the storm. Investors withdrew £1.4bn from property funds, several suspended redemptions or imposed exit fees, trapping investors like wasps in a jar. Equity funds experienced withdrawals totalling £2.8bn, with Europe funds seeing £754 million of outflows, followed by UK All Companies funds, at £581m.

Such was the blind rush to the doors that many sold their ISA holdings, losing the tax shelter altogether.

Cannier investors waited for the dust to settle and made useful gains by buying into the very trusts and sectors from which the crowd was fleeing. It’s not a response that always and universally works, but in highly volatile times standing back from the herd and looking for bargain investments works more often than not.

In what many considered a “flight to safety”, investors charged into bond funds: some £258m flooded in while money market funds took £157m. So-called “absolute return” funds attracted £220m of new money. However, not all such funds have succeeded in capital protection.

Figures for the full month of July may reveal the extent of the sharp about-turn after the initial exit stampede, with bargain hunters helping to drive the stock market higher. And prices were further boosted by the Bank of England’s package of monetary loosening last week. Such measures have traditionally given a boost to asset values – but the Bank’s response could hardly have come as a surprise, being signalled by governor Mark Carney within 24 hours of the Brexit result. But many investors were too preoccupied with getting out to listen to what he had to say.

Bring back British assets

Life never stands still – even in the conservative world of investment trusts. Back in 2011, a long-time favourite of this column, the Edinburgh-based British Assets Trust, part of the F&C portfolio, saw a dramatic change in management. For 11 years this solid, income-biased trust had been prudently managed by Julie Dent. Unlike some of her peers, Julie did not chase the headlines but quietly got on with the job of running an equity income portfolio.

That came to an end as management of the trust passed to BlackRock, and the name was changed to BlackRock Income Strategies. New manager Phil Doel set out a more complex investment philosophy and approach. As a key aim was to reduce the persistent discount to net assets, I was happy to go along.

Then in February last year, new manager Adam Ryan was brought in. The investment strategy switched from diversification into global equities to a broader range of assets. Holdings now range over high yield bonds, international corporate bonds, “alternatives” and “volatility strategies” – whatever they may be. What set out to be a smoother ride over volatile markets has turned decidedly bumpy.

Shares in the trust have fallen by 15.3 per cent over the past 12 months compared with gain of 5.9 per cent across the “flexible investment” sector. Over three years it is down 5.9 per cent against a sector gain of 13.6 per cent.

The trust has now announced that it will review its investment strategy – just 18 months after the previous overhaul – and in the meantime it has suspended share buy-backs. The result is that the discount to net assets, far from narrowing as was the initial objective, has widened out to 9.3 per cent.

The board says: “Since the implementation of the new investment objective and policy interest rates have fallen and there has been a significant decline in the universe of investment trusts which could support a multi-asset approach to meeting the stated investment objective and total portfolio return target”.

Looking for a steady hand? Why not just give Julie Dent a ring?