Resist the songs of the sirens in churning seas
Resist the songs of the sirens in churning seas
By Philip Coggan
Published: April 29 2006 03:00 | Last updated: April 29 2006 03:00. Copyright by The Financial Times
Thrift is back in fashion. UK savers gave the fund management industry the best Isa (individual savings account) season for four years while also putting more money into building societies than at any time since 2001.
Perhaps all the warnings about the coming pensions crisis have finally hit home. Perhaps rising unemployment has made Britons more cautious. Perhaps the slowing housing market has made investors realise they need some other repository for their nest eggs.
Of course, whenever sales of investment funds perk up, contrarians should start to worry. Net retail sales of open-ended funds were £2.08bn in March, a fourfold increase on the £506m recorded in March 2005. In terms of Isas, net sales in the season (including the first five days of April) were just shy of £900m, up from £772m last year.
It is worth comparing those figures with the heady days of the dotcom boom. In March 2000, net retail sales of open-ended funds were £2.8bn while the Isa season raised a staggering £3.3bn.
So we have not quite reclaimed the heights of six years ago. In part, this is because Isas were new in 2000; there were few redemptions, while investors are nowadays cashing in some old plans. And the Investment Management Association says Isa sales were hit by the withdrawal of the dividend tax credit (one of Gordon Brown's little tinkerings) in 2004.
A similar picture can be seen in the US. Sales of mutual funds are up but are not at 2000 levels. According to the Investment Company Institute, US equity funds had an inflow of $27bn in February; monthly sales peaked at more than $50bn in early 2000.
In short, we are not in the kind of bubble territory seen six years ago. Nevertheless, it is disappointing to see that it is much easier to persuade UK investors to buy equities now, with the FTSE 100 index at more than 6,000, than it was in March 2003 (net retail sales £740m, Isa season £658m) when the index was at 3,200.
Twas ever thus. Market bottoms are only reached when no-one wants to buy. But investors still fail to regard equities as a good like any other, where a fall in price represents a buying opportunity. It is as if the January sales caused the department stores to empty.
Michael Mauboussin, the chief investment strategist of Legg Mason, this week cited some figures which showed how this kind of attitude damages investors' returns. Between 1983 and 2003, the average return of an S&P 500 index fund was 12.8 per cent a year. Thanks to charges, the average US equity mutual fund returned 10 per cent a year. But thanks to bad timing, the average mutual fund investor earned just 6.3 per cent a year.
Given that US Treasury bond yields averaged 7.3 per cent over this period, this means that bad timing negated the entire benefit of US investors taking the risks of investing in equities.
It is this kind of experience, of course, that makes so many people disillusioned with the financial services industry and causes them to rely on property instead. The illiquidity of property is in this case an advantage; investors are much less inclined to trade. And when the housing market is depressed, it is very difficult to sell your home, which makes it far less likely that you will exit at the bottom.
Excessive trading is a deadweight on investor returns. A study by academics Brad Barber and Terrance Odean found that active online traders underperformed the market by 3.5 percentage points a year.
And professional investors are also prey to this fault. Mauboussin says that mutual fund managers turned over just 20 per cent of their portfolios in the 1950s compared with more than 100 per cent today. And yet the most successful managers are those who trade just 20-50 per cent of their portfolios a year.
Professional fund managers are subject to institutional pressures with brokers and advisers analysing their performance over three-month periods. They may feel simply unable to take a long view.
But retail investors ought to be free of such pressures. Part of the problem may be that the kind of people who become very interested in investment tend to be gamblers by nature; if it wasn't equities, it would be horses. Another difficulty is that people are far too confident about their ability to make decisions. The availability of so much information these days (via the internet, business TV and newspapers) seems to have increased that confidence.
To be fair to investors, buying and holding has become more difficult, at least at the individual stock level. Mauboussin says the average tenure of a company within the S&P 500 index has gone from 25 to
35 years in the 1950s to 10 to 15 years today. It is harder to find the kind of stocks you can put in a drawer and forget about.
Nevertheless, that does not really explain why the average holding period for a mutual fund has fallen from 15 to four years. Investors have simply become more impatient.
The answer, I believe, is for investors to tie themselves to the masts, rather like Odysseus escaping the temptation of the sirens' song.
If investment strategies are based on asset allocation (a set percentage in equities, bonds, cash etc) and the use of trackers or exchange traded funds, costs and the temptation to fiddle, will be reduced. And annual rebalancing should help investors buy more at the bottom and less at the top of the market. Take advantage of others' impatience; do not fall prey to it.
philip.coggan@ft.com
By Philip Coggan
Published: April 29 2006 03:00 | Last updated: April 29 2006 03:00. Copyright by The Financial Times
Thrift is back in fashion. UK savers gave the fund management industry the best Isa (individual savings account) season for four years while also putting more money into building societies than at any time since 2001.
Perhaps all the warnings about the coming pensions crisis have finally hit home. Perhaps rising unemployment has made Britons more cautious. Perhaps the slowing housing market has made investors realise they need some other repository for their nest eggs.
Of course, whenever sales of investment funds perk up, contrarians should start to worry. Net retail sales of open-ended funds were £2.08bn in March, a fourfold increase on the £506m recorded in March 2005. In terms of Isas, net sales in the season (including the first five days of April) were just shy of £900m, up from £772m last year.
It is worth comparing those figures with the heady days of the dotcom boom. In March 2000, net retail sales of open-ended funds were £2.8bn while the Isa season raised a staggering £3.3bn.
So we have not quite reclaimed the heights of six years ago. In part, this is because Isas were new in 2000; there were few redemptions, while investors are nowadays cashing in some old plans. And the Investment Management Association says Isa sales were hit by the withdrawal of the dividend tax credit (one of Gordon Brown's little tinkerings) in 2004.
A similar picture can be seen in the US. Sales of mutual funds are up but are not at 2000 levels. According to the Investment Company Institute, US equity funds had an inflow of $27bn in February; monthly sales peaked at more than $50bn in early 2000.
In short, we are not in the kind of bubble territory seen six years ago. Nevertheless, it is disappointing to see that it is much easier to persuade UK investors to buy equities now, with the FTSE 100 index at more than 6,000, than it was in March 2003 (net retail sales £740m, Isa season £658m) when the index was at 3,200.
Twas ever thus. Market bottoms are only reached when no-one wants to buy. But investors still fail to regard equities as a good like any other, where a fall in price represents a buying opportunity. It is as if the January sales caused the department stores to empty.
Michael Mauboussin, the chief investment strategist of Legg Mason, this week cited some figures which showed how this kind of attitude damages investors' returns. Between 1983 and 2003, the average return of an S&P 500 index fund was 12.8 per cent a year. Thanks to charges, the average US equity mutual fund returned 10 per cent a year. But thanks to bad timing, the average mutual fund investor earned just 6.3 per cent a year.
Given that US Treasury bond yields averaged 7.3 per cent over this period, this means that bad timing negated the entire benefit of US investors taking the risks of investing in equities.
It is this kind of experience, of course, that makes so many people disillusioned with the financial services industry and causes them to rely on property instead. The illiquidity of property is in this case an advantage; investors are much less inclined to trade. And when the housing market is depressed, it is very difficult to sell your home, which makes it far less likely that you will exit at the bottom.
Excessive trading is a deadweight on investor returns. A study by academics Brad Barber and Terrance Odean found that active online traders underperformed the market by 3.5 percentage points a year.
And professional investors are also prey to this fault. Mauboussin says that mutual fund managers turned over just 20 per cent of their portfolios in the 1950s compared with more than 100 per cent today. And yet the most successful managers are those who trade just 20-50 per cent of their portfolios a year.
Professional fund managers are subject to institutional pressures with brokers and advisers analysing their performance over three-month periods. They may feel simply unable to take a long view.
But retail investors ought to be free of such pressures. Part of the problem may be that the kind of people who become very interested in investment tend to be gamblers by nature; if it wasn't equities, it would be horses. Another difficulty is that people are far too confident about their ability to make decisions. The availability of so much information these days (via the internet, business TV and newspapers) seems to have increased that confidence.
To be fair to investors, buying and holding has become more difficult, at least at the individual stock level. Mauboussin says the average tenure of a company within the S&P 500 index has gone from 25 to
35 years in the 1950s to 10 to 15 years today. It is harder to find the kind of stocks you can put in a drawer and forget about.
Nevertheless, that does not really explain why the average holding period for a mutual fund has fallen from 15 to four years. Investors have simply become more impatient.
The answer, I believe, is for investors to tie themselves to the masts, rather like Odysseus escaping the temptation of the sirens' song.
If investment strategies are based on asset allocation (a set percentage in equities, bonds, cash etc) and the use of trackers or exchange traded funds, costs and the temptation to fiddle, will be reduced. And annual rebalancing should help investors buy more at the bottom and less at the top of the market. Take advantage of others' impatience; do not fall prey to it.
philip.coggan@ft.com
posted by Carlos T Mock at 9:30 AM
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