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Make your mind up: small investors
The signs are growing that small investors are piling back into the stock market. Retail buyers added a net £2.6 billion to their shareholdings in August and September, after unloading nearly £6 billion in June and July.
These figures from Capita Registrars, which administers the share registers of more than half the UK’s quoted companies, are supported by information on unit trust sales collated by the Investment Management Association (IMA), a trade body.
The IMA says that net sales soared to £11.3 billion in the first three quarters of this year. This is the highest level of purchases since the boom year of 2000, when net sales hit a record £17.7 billion just before the market tumbled.
For many, that merely proved that small investors tend to rush into the market just before it falls off a cliff.
Jeremy Batstone, of Charles Stanley, the stockbroker, is pleased that people have regained confidence in the market. However, he also points out that, less positively, the return of private investors is also a sign of an increased appetite for risk.
Mr Batstone believes that the outlook for the US economy and corporate sector is darkening sharply and adds: “The concern I have is that small investors tend to be momentum investors. They piled in on the way up in 2000 and they probably weren’t buying in 2003, when the market bottomed.
“The fear I have is that there is a decoupling between rising expectations for share prices and slowing corporate earnings growth.”
Roger Lawson, spokesman for the UK Shareholders’ Association, is also conscious of the tendency for people to buy at the top. In particular, he says that the rising interest in hedge funds and the new property-backed real estate investment trusts (Reits), which will be available from next year, looks badly timed. “Once again, retail investors are going to be suckered into these things at the top of the market,” he says.
Indeed, it is notable that the IMA figures show investment in property funds has grown steadily this year and now totals £2.37 billion, or two thirds of the level of straightforward equity funds.
Annabel Brodie-Smith, of the Association of Investment Companies, which represents investment trusts, says: “I have to say that our slightly more sophisticated investors are beginning to hold back, whereas our more mainstream investors are not.”
If Mr Batstone’s fears are realised, many of these buyers may soon be unwinding their positions. He points out that this time last year a number of international companies were shovelling into their results as much bad news as possible on the back of Hurricane Katrina.
This has flattered the profits they are now reporting. “If you look at the third quarter of last year compared with the third quarter of this year, everything in the garden looks rosy. But if you do a sequential analysis of quarterly earnings, the growth is slowing,” he says.
Others, including Fidelity’s Anthony Bolton, are equally cautious. So if you are one of those gung-ho small investors, now may be a good time to stand back and question your enthusiasm.
Mark Atherton: It's a case of once bitten, twice shy
Private investors do have a string of previous convictions for making the wrong calls when they put their money into the stock market, but there are signs that they are becoming more canny with their fund selection.
A study by Aneel Keswani, of Cass Business School, and David Stolin, of Toulouse Business School, says that there is clear evidence that money invested by UK investors today tends to go into funds that produce above-average performance.
The “new” money is also achieving better performance than “old” money invested several years ago. Mr Keswani says: “It is clear that UK investors are making smarter decisions about where to put their money.”
This trend is backed up by the latest study of investment trust Isas bought through the Alliance Trust Savings selfselect plan. It shows that investors tended to pick trusts that performed consistently well.
The most popular pick was British Empire Securities, which was the third-best performer in its sector over five years and top over ten. Just behind British Empire in the popularity stakes was Caledonia Investments, which was top of its sector over three, five and seven years. It was followed by RIT Capital Partners and TR Property Investment, both of which have excellent track records.
A similar pattern emerged from a study of the bestselling funds bought through Fidelity FundsNetwork, the UK’s biggest funds supermarket. Most heavily purchased was Neil Woodford’s Invesco Perpetual High Income fund, which has generated outstanding returns over periods ranging from one to ten years.
Other consistently good performers to feature among the bestsellers were Fidelity’s European and Special Situations funds and Jupiter’s Merlin Growth and Merlin Income funds.
Justin Modray, of Bestinvest, the independent financial adviser (IFA), says that the recent bear market was a sobering experience for private investors. “They are more wary now and take greater interest in analysing funds and noting any management changes,” he says. “This greater scrutiny is made easier by the development of many online monitoring tools.”
Brian Dennehy, of Dennehy Weller & Co, another IFA, says that there are signs that today’s investors are less “gung ho” than their predecessors of the late 1990s. He says: “This year the greatest unprompted demand from our clients has been for Indian funds, but after listening to our arguments against such a high-risk purchase, they all decided against buying one.
“This is in marked contrast to what happened in 1998 and 1999, when dozens of clients insisted on buying technology funds despite our best attempts to dissuade them.”
The verdict
Overview: In previous market cycles fund investors have tended to pile in money to the stock market just when it is peaking. But now there is some evidence that they are making shrewder choices.
Experts’ way in: To smooth out market rises and falls, individuals can make regular monthly investments in a unit or investment trust with a consistently good track record.
For more investment articles visit www.timesonline.co.uk/invest