You never know what you’ll come across when you start cleaning out old cabinets. I recently came upon a couple of handwritten sheets on which I faxed an article to The Scotsman in late September 1995. The contents underline how little things change in the investment world.
Back then, commentators were all convinced the stockmarket was due for a big fall and at the same time they were trying to convince everybody the only way to invest properly was to buy an index tracker. In the article, I was critical of both stances.
I wonder how many of you would have thought that back in late September 1995 the FTSE stood at 3,508. Early in May that year it was 3,248, yet another year when the "sell in May and go away" crowd was wrong.
At the same time, the Dow Jones Index was 4,647, having risen from 4,315 at the beginning of May. So both markets showed an 8 per cent rise during summer months when, according to experts, stockmarkets were dangerously high. Indeed, investors with a decent memory may recall that was the early stage of a four and a half year bull market.
The article also mentioned a mistaken belief, propagated by experts, that most managed funds cannot outperform a stock market index. And thanks to this belief, canny fund management marketing departments jumped on the bandwagon creating more index tracker funds.
But index trackers are seriously flawed, and inefficient. Essentially a tracker is a cheap and simple investment fund designed to mimic the performance of the stockmarket. But that's not easy.
The companies making up the index change every year. More than half the members of the FTSE in 1987, at the top of the market, had disappeared within six years.
Now I don't know about you, but when you’re comparing something it's surely sensible to compare like with like. If you want to know whether it is going to rain or be dry tomorrow, a barometer is handy. And it's accurate because it has, every year, the same constituent parts. A stockmarket index however is a barometer telling you it's sunny when it's about to rain, and vice versa.
But the key point is most index trackers only track the movement of share prices. And yet we all know a significant proportion of stockmarket returns are derived from dividends – which trackers don’t include.
Reflecting back on 1995 from the present is interesting. If you had invested £10,000 in that FTSE tracker from the May of 1995 it would be worth under £17,000 by the beginning of this month. If you could find a tracker with reinvested dividends, your investment would have risen to over £29,500.
But if you'd been wise enough to recognise that trackers are flawed, and were instead attracted to the skills of a contrarian money manager, such as Neil Woodford of the Invesco Perpetual Income fund, who has managed the fund all the way over the last 15 years and more, your original investment of £10,000 would now be worth £52,590.
What has changed is communication technology. When I wrote the piece back in 1995 I was on holiday so I had to handwrite it, find a shop with an archaic fax machine, manually transfer the sheets into the machine to send them to my office. They were then typed in my office in Linlithgow, checked and faxed to the only fax machine I believe The Scotsman had at the time.
Article courtesy of The Scotsman
Saturday 22 May 2010
