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Alternative universes

What might be the outcome for markets in 2007, mused the chairman of the curiously named Betelgeuse Investment Funds as he looked out of his office on to the floor where his investment managers sat engrossed in the information displayed on their multiple screens.

The year just ended had been kind to investors and the firms providing the funds. For four years in a row now, the major equity markets had delivered positive returns. Was it unrealistic to hope for a fifth year of profits?

Even if, as he feared likely, 2007 turned out to be a tougher period for long-only equity managers, at least there were a number of alternatives available to ensure the inflow of new money was not wholly dependent on the fortunes of shares alone. Property should be a particular feature, he mused. Reits were already in existence – and not before time.

But the sheer range of investment products was becoming alarming. Launching marketneutral hedge funds had been a no-brainer. Demand from investors, or more particularly from their advisers, had ensured a robust launch. Property, too, had proved an easy sale for people operating in the adviser community. It was ironic that the long/short hedge funds had underperformed the traditional long-only vehicles but what do you expect in a rising market. He wondered how property might fare if economic conditions turned tougher.

The stars of the previous year had been emerging markets. This surely had to be an unrepeatable performance. But he remembered how all the received wisdom at the beginning of the year just ended had been to dump small and mid-cap stocks in favour of the market-leaders. The FTSE 250 mid-cap index had broken the 11,000 barrier just in time for Christmas and the bottom end of the market had seen off the FTSE 100. It seemed that the appetite for risk was undiminished.

Smaller companies appeared positive models of conservative investing compared with some of the offerings around. Products giving direct access to commodity price moves, to infrastructure assets and even to fine wine could all form part of an adviser’s tool kit these days. According to the London International Vintners Exchange, Lafite Rothschild 1998 had risen in price by 91 per cent during 2006.

Turning back to the pile of emails printed out by his secretary, the founder and undisputed leader of the investment firm reflected on how his customer base had changed over the years. These days, schmoozing the big investment IFAs was not enough. The growing numbers of multi-manager operations were becoming an important market for the sales effort. With the growth of fund supermarkets and trading platforms, new alliances and different approaches were needed.

Then there were the new breed of so-called wealth managers, with their risk-profiling and tactical asset allocation techniques. Wealth management was becoming a hackneyed phrase these days.

Still, with people becoming ever more prosperous, not least because of the rise in property values, was it any wonder the banks, domestic and foreign, were falling over themselves to grab a slice of the action. True, they were often competitors as fund managers, but there was still plenty of scope for a smaller operator able to deliver alpha.

The chairman smiled to himself. 2007 might prove tricky – which year didn’t start off that way – but it would be a year of opportunity too. Brian Tora ( is principal of The Tora Partnership


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