Bill Jamieson: How panic saw funds lose a fortune
It's Brexit Armageddon '“ run for the hills! Many investors did just that last year '“ and missed out on one of the best stock market rallies since the 2008-09 slump.
Investment Association (IA) figures last week showed the Brexit vote sparked a big sell-off in equity and property funds. Fund purchases by retail and institutional buyers slumped to £13 billion, the lowest level since the depths of the financial crisis in 2008, when the figure stood at just £202 million. Retail investors were even more bearish than institutional investors. Retail sales stood at a net £4.7bn in 2016, below even 2008’s £4.8bn.
Yet since late June, the FTSE 100 index barnstormed ahead with a gain of 20 per cent. Many shares may now be looking “toppy” now and profit-taking is already setting in. But the IA figures stand as a warning to investors against knee-jerk reactions to fast-changing news.
Very few ever get the timings right on sales and purchases. But the quiet, passive retail investors with regular savings plans – feeding in, say, £70 or £100 a month – will have benefited without lifting a finger from the June-July dip and the effect of pound cost averaging. The sales slump was sparked by a big sell-off in equity and property funds in June and July, when retail investors withdrew a net £6.6bn from these funds.
As Citywire’s Daniel Grote comments, investors may now be ruing that decision, as stock markets and property investments proceeded to mount an impressive recovery from their Brexit lows.
Amid the flight to safety, Targeted Absolute Return funds, which aim to deliver a positive return in all market conditions, topped the sales charts for the year. Money Market funds attracted £2.7bn, nearly four times 2015’s inflows.
Too late now to make good the missed opportunity with a big buying splurge. Not only have many shares been pushed to the extremes of valuation but doubts are also setting in about just how strong the much-vaunted “Trump uplift” will be once deficit-hawk Republicans in Congress seek to clamp down on a borrowing binge and the widely forecast interest rate rises kick in.
Here in the UK, profit-takers have clipped back the rise in the FTSE 100 and investors need to be much more selective in their purchases. But some sectors may prove more resilient. For example, it was widely feared that UK mid-cap and smaller companies would be the most vulnerable to Brexit consequentials. But the sector has rallied since the summer shake-out, though “mid cap” stocks (generally speaking, companies listed on the FTSE 250, with a market worth of £4bn down to £500m) have continued to lag.
Optimism among smaller company managers is being drawn from valuations, which are at low levels compared to those for blue-chip stocks. The FTSE Small Cap index is trading on a price-earnings ratio of 9.5 times, well below the 25.2 times rating on the FTSE 100. This, say managers at Aberforth Partners, leaves small firms on their widest price-earnings discount to large since 2000. While smaller companies may be cheap, small value stocks are even cheaper. But Aberforth believes investors are overestimating the capacity of the mega cap growth stocks to weather a recession. Others argue that smaller companies are not as domestically-focused as some perceive, and so not as vulnerable to a UK downturn.
Insurance and investment giant Aviva has agreed to sell its 11.9 per cent stake in Scottish Investment Trust back to the company. The sale removes an overhang on the stock of the trust widely held by private investors.
The plan is that Scottish will buy Aviva’s holding of 11.4 million shares for around £87m and cancel them. The shares will be bought at 10.75 per cent below net asset value, in line with the current discount. The effect will be to boost the holdings of the remaining shareholders and add 1.3 per cent to the value of its £824m portfolio.
Charles Cade of Numis Securities says it is a good result for Scottish shareholders but the trust’s inability to place Aviva’s stake with other investors reflected its weak position and “dull” long-term performance record. “As a result”, he added, “there is no compelling valuation reason for other investors to buy the shares being repurchased.”
But since the trust is up 45.3 per cent over the last12 months and has outperformed trusts in the global sector over one, three and five years, that seems a tad peevish.