by Paul Farrow

Saturday 13 November 2010

Investors' habit of following the herd has cost them hundreds of millions of pounds in lost returns as the FTSE 100 continues to climb.

The blue chip index has returned more than 50pc over the past 20 months. Yet hundreds of thousands of investors will have missed out on those gains because they were busily withdrawing money from equity funds as the market fell.

Go back to the start of 2009 and investor confidence was at an all-time low after the banking crisis. The FTSE 100 had fallen sharply and investors sought sanctuary in bond funds and absolute return funds (which aim to deliver positive returns in falling markets). During the first three months of 2009 net sales of corporate bonds were £4bn, compared with just £200m in equities, official figures reveal.

The timing of their run to safety couldn't have been worse. Since January 2009 the FTSE 100 has risen by 52pc - by comparison, the average corporate bond fund has returned 28pc, the average absolute return fund 9pc and the average cautious managed fund (another big seller) 23pc. The bestselling absolute return fund, BlackRock Absolute Alpha, is up by just 4pc - it is not designed to deliver bumper returns in a bull run.

Alan Steel of Alan Steel Asset Management asked: "Why is it the herd always piles into the wrong sector or investment at the wrong time?" One reason for a herd approach is that investors follow performance and this frequently sees them buy at the top of the market and sell at the bottom.

In 2000, for example, investors waded into technology funds when they should have been avoiding the sector. Those who bought at the peak soon saw the value of funds more than halve.

The 2006 commercial property phenomenon was another classic example. Many investors bought the funds as valuations reached unsustainable heights; the ensuing credit crisis triggered sharp falls in fund values.

Mr Steel said contrarian investors were often mocked, even though they can be proved right. "In February 2009 I suggested that stock markets were likely to rise imminently. I received comments from people who, anonymously, suggested I should be locked up or burned at the stake," he said.

"As doomsters on the telly continue the constant bad news with predictions that never come true, such as the double dip that's supposed to happen or the British economy that's supposed to collapse, I think it is better to share what's actually happened since the terrible days early in 2009. And it's good news."

Mr Steel is feeling smug with some justification, as the funds he recommended have soared. Neptune Russia and Greater Russia are up by 150pc, First State's Global Emerging Market fund has risen by 140pc, J P Morgan Natural Resources is up by 120pc and M & G Global Basics by 80pc, he says.

So what now? Investors will be chewing the cud, wondering whether they are at risk of buying shares at the wrong time again, given the FTSE 100's lofty rise to a 28-month high.

Mr Steel said he was expecting a correction, but insisted that investors should not avoid buying shares for fear of a setback. "We've been hoping for a little correction just to get a bit of common sense back into expectations for equities and it may still happen over the next couple of weeks. But we believe this is a time to embrace equities, not only in emerging markets and the Far East but in other places including Britain and the US," he said.

Quote courtesy of The Daily Telegraph
Saturday 13 November 2010