By Lehmans’ collapse in September 2008 the FTSE 100, which had been above 6700
as recently as October 2007, was already down at around the 5000 mark,
spooked by the collapse of Northern Rock, the onset of the credit freeze and
growing anxiety about other banks’ strength. Between Lehmans’ collapse and
March 2009 the FTSE had fallen by another 1500 points to just above 3500.
That marked the trough.
Britain’s economy flatlined, but its stock market bounced back. The rapidly
growing economies of China, India, Russia and Brazil, by contrast, entered a
period of more stock market turbulence – especially of late. An analysis of
five-year performance across the 2,500-odd funds readily available to
private investors in Britain, covering all geographical sectors, shows that
the strongest market was, in fact, the UK. No fewer than 15 of the 20 top
funds are those where the underlying holdings are British household names,
such as Lloyds Banking Group and Tesco.
A number of UK funds that invest in less well-known stocks in the market also
fared well. They include Fidelity UK Smaller Companies, which returned an
astonishing 242pc, and Cazenove UK Smaller Companies, which has gained 170pc
over five years. UK funds with a focus on smaller companies produced average
returns of 90pc – or almost doubled investors’ money.
Juliet Schooling Latter of Chelsea Financial Services, the broker, said UK
smaller company funds had done well because many of Britain’s smaller
businesses went into the crisis with little debt. Many were also better
placed to grow profits here and abroad. “UK smaller company stocks have
been growing their earnings at a substantially faster rate than their larger
peers over the past four years or so,” she said.
“Smaller companies are also generally not in the telecoms, banking,
mining and oils sectors, which are dominated by larger players and have not
performed as well.”
Even so, an investor in the average “UK all companies” fund, which
invests across the entire London market, would have clocked up an average
return of 60pc. UK funds that place a greater focus on dividends – those
that fall into the “UK equity income” sector – have also done
well. The average portfolio here has returned 59pc.
Patrick Connolly, a financial planner at Chase de Vere, said many British
stocks did well because, despite being listed on the London market, they
positioned themselves to benefit from earnings in faster-growing areas of
the global economy – Asia and emerging markets. They increased this focus on
emerging markets as the crisis intensified, even though by being
London-listed they counted as UK companies. Around 80pc of the UK’s stock
market’s earnings come from overseas – and at some individual companies the
percentage is higher still.
There was an additional benefit in buying British when stock markets in
emerging countries such as China, India and Brazil suffered sharp falls.
This happened in 2011 and again, dramatically, in recent months. By being
listed in London, many businesses, even if they derived revenues from those
countries, were unscathed.
But as the graph above shows, investors’ money tended to flow away from
Britain in the years after Lehmans’ failure. Strong flows, on the other
hand, went into funds in the “global” and “global emerging
markets” sectors, which returned 44pc and 41pc respectively over five
years.
“Following Lehmans, investor sentiment turned from poor to downright
doom, gloom and despair,” said Mr Connolly. “What this meant is
that perceived riskier assets such as UK smaller company stocks, which were
already sitting at attractive valuations, were completely discarded.”
Investors appear to have noticed the UK’s strong performance, however – even
if they are late to the party. In the first seven months of 2013, sales of
UK funds have picked up markedly, with a total of £781m invested, according
to the fund managers’ trade body, the Investment Management Association.
How to decide which markets are best for your money?
With the benefit of hindsight, investors caught up in the aftermath of
Lehmans’ collapse appear to have made the wrong choice. They withdrew funds
from Western stock markets – which seemed to be at the epicentre of the
banking crisis – and instead funnelled their money towards Asia, Brazil,
Russia and other, apparently better, bets. How can investors make the right
decisions in these circumstances?
Examine key measures of the ‘value’ of a market
Do-it-yourself investors have a challenge on their hands when trying to gauge
if a share or stock market is cheap or expensive. But there are a number of
valuation devices that are worth a look.
The simplest yardstick of value is the dividend yield. This is the income paid
by an asset expressed as a percentage of its price. However, this measure
has many limitations, as not all businesses or investors place value on
income.
The price to earnings (PE) ratio is a more dependable measure of value,
pitting the price of a share or market against its earnings rather than the
income it chooses to pay out to shareholders. A more sophisticated version
of the PE is the “cyclically adjusted PE” or Cape, also sometimes
described as PE10 or the Shiller PE (after the Yale professor who invented
it). This measures the ratio of a share or market price against an average
of its earnings over the previous 10 years. The formula is commonly used to
determine whether an asset – a share or market – is cheap or dear.
But Cape measures are not straightforward “buy” or “sell”
signals. Markets might be cheap for a variety of factors. By the most recent
Cape valuations, Greece, Argentina and Ireland are among the cheapest
markets, while the US and Japan are among the most expensive. The UK
market’s Cape is currently below average. This suggests that our markets
have more to offer despite delivering stellar performance since the
financial crisis.
…or leave these decisions to an expert
If you do not trust yourself to spot which markets will perform best, leave it
to the experts. There are a number of “generalist”, globally
invested funds whose managers have the flexibility to navigate the world’s
markets hunting for the best opportunities.
A number of investment trusts – portfolios structured as companies that are
quoted on the London Stock Exchange – use this approach. A famous example is
Foreign Colonial investment trust, launched in 1868. The company
invests in stocks listed across the globe, with a particular focus on
valuations. At present the £2.7bn trust has 22.1pc of its money in Britain
and just 8.5pc in global emerging market economies.
Personal Assets Trust is a very different, smaller fund, whose overriding aim
is to preserve shareholders’ capital. It also has the flexibility to move
money across a wide range of markets and assets. Sebastian Lyon, the fund
manager who oversees the company, currently has the majority of the
portfolio split between gold, bonds and American and British shares.
Drip-feed your money in over a period
Buying shares or funds in small tranches rather than one-off lump sums saves
investors from buying high and selling low. Investors who do opt to invest a
lump sum can potentially make bigger returns but the risk of losing more of
your money is also far greater.
Revealed: The top ten funds since the financial crisis
Top of the pile is Alex Wright, manager of the Fidelity UK Smaller Companies
fund. Over the last five years he has returned 242pc, well ahead of its
average rival, returning 90pc. Mr
Wright is due to take over Fidelity’s popular £2.8bn Special Situations fund
in the New Year from Sanjeev Shah, who is leaving the front line of fund
management.
Juliet Schooling Latter of Chelsea Financial Services, the broker, said: “Mr
Wright has run the fund since its launch in February 2008 so had a real
baptism of fire. He’s proven himself to be an excellent smaller company’s
manager though and takes an unusual approach compared with his peers, being
value rather than being growth-orientated.”
In second place is a fund run by a small “boutique” firm which rarely crosses
investors’ radar because it is not run by a mainstream fund management
company. But despite this Unicorn UK Income, managed by John McClure, has
returned 184pc over five years. The fund invests in small UK business, such
as cinema chain Cineworld, rather than big blue chips such as BP.
Ms Schooling Latter said this had served the fund well as smaller sized UK
businesses have outperformed their larger peers since the credit crisis.
Taking the bronze medal is the Legg Mason Japan Equity, run by Hideo Shiozumi,
who has 40 years’ experience managing Japanese equities. The fund has
delivered a 170pc return over five years, but the majority of the returns
have come in 2013 on the back of Japan’s booming economy.
“This is a very volatile fund as it invests in small-cap Japanese stocks, but
when the conditions are right it can perform very well, very quickly as we
have seen in recent months,” added Ms Schooling Latter.
The rest of the top 10 is dominated by a number of UK equity funds which all
managed to double your money over the last five years despite UK economic
growth flatlining since the financial crisis.
Source: FE Trustnet and Chelsea Financial Services.
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