Jeff Salway: Euro crisis tests investors’ nerves

FOR a time last year it seemed investors had learned not to panic every time markets were rocked by volatility.

Then the Eurozone crisis escalated. Private investors pulled a record £864 million out of equity funds in November, according to new figures from the Investment Management Association.

As concerns grew over European sovereign debts, the investor flight to safety boosted sales of absolute return and bond funds. The uncertain economic outlook makes it entirely understandable that investors want to de-risk (although it also points to IFAs “churning” clients in and out of funds).

But in some ways this reaction is akin to timing the markets – never a good idea for the average investor. How do you know the best time to take your money out of a fund? It isn’t when they’ve already fallen in value, as that merely crystallises the losses. Presumably many of those investors will buy back into equities at some point. But how will they know the best time to re-enter?

The surge in demand for absolute return and cautious managed funds raises further questions. Funds in the cautious managed sector are able to hold up to 60 per cent of cash in equities. Over the last year, the average fund in the category is down 1.6 per cent, the same as the average North America fund, generally perceived as far riskier.

Absolute return funds, the current flavour of the month, aim to produce positive returns regardless of economic conditions. Over the last three months, absolute return funds rank 31st out of 35 sectors. In that period the biggest returns have been posted by funds investing in North America, China, the UK All Companies and emerging markets. Yet investors are stampeding out of UK and North American funds in huge numbers.

With economic confidence so low, investors seem certain to continue ditching equities. But while we’re undoubtedly in a low-growth environment, many equities are attractively valued now, with company balance sheets strong and signs of improvement in the US. More volatility is on the way but, as so often, those that hold their nerve will reap the greatest rewards.

Energy minnows offer customers best deals

EDF was lauded for being the first of the big six energy suppliers to cut its prices this year, with Scottish & Southern Energy and British Gas following within a day.

If the 5 per cent reductions are anything to go by, however, the big six still have a very selective approach to the way in which wholesale prices are reflected in household bills.

Don’t forget that EDF hiked its gas prices by 15 per cent just before winter. Yet the wholesale costs on which suppliers largely base their pricing have fallen by 17 and 20 per cent respectively in the last four months, according to comparison website TheEnergyShop.com. If passed on to consumers in full that would equate to a £120 a year cut in bills, on average.

As it happens, however, EDF’s 5 per cent correction averages out at £35 per customer, meaning customers will still be paying 10 per cent more than a year ago.

It’s time for households to look more seriously at the minnows, including Ovo and First Utility. The former set the price cut ball rolling in the first week of January, lowering fixed prices by 5 per cent just weeks after cancelling a proposed increase in costs for households on its variable rate tariff. First Utility, a smart meter specialist, still offers the cheapest deal on the market, with its online tariff.

Like Virgin in the banking market, these relative newcomers face an uphill battle. But in both energy and banking the big players continue to give customers ample reason to give the lesser names a chance.