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Can we bear another grizzly year of bruin ruin?

With the bear market now almost three years old, fund managers are struggling to persuade investors to pull their money from under the mattress and plough back into equities.

Not only must they overcome investors&#39 attitude of once bitten, twice shy, they also need a positive story to tell. But such stories are very thin on the ground at the moment.

A herd mentality has therefore developed, one which will see dozens of fund managers focus their Isa ad campaigns on fixed-interest and equity income.

Whether this is wise for groups with second or third-quartile funds in these sectors is debatable but it does not take into account other areas of interest which could make 2003 more bearable.

Hargreaves Lansdown senior analyst Meera Patel says: “People will ignore higher-risk funds and be content to jump on the equity income bandwagon. But it is worth considering the new funds coming out. We think distribution funds will be popular as they give clients exposure to both bonds and equities and we like focus funds, such as the UK opportunities fund from DWS Investments.”

Patel identifies the distribution fund that New Star is rolling out for star manager Theo Zemek next year as one to watch and says emerging markets funds will remain good value, provided they account for no more than 5 per cent of a portfolio. Prise some fund managers away from their marketing departments and it is surprising to see how they also steer away from equity income and bonds.

At a recent IFA UK conference in London IFAs asked a panel of fund managers – comprising Gerrard, Jupiter, Henderson and Credit Suisse – to give their tips for the coming year. Without fail, they all pointed to the UK smaller companies sector. Against an underperforming index, Gerrard said smaller companies managers had a real chance to outperform.

Credit Suisse said smaller firms without a monolithic parent offered “amazing potential”. The multimanager specialist also suggested emerging markets, where it has two top-performing funds of funds, singling out Angus Tulloch&#39s First State global emerging market fund for special praise.

Henderson&#39s second pick after smaller companies was Pacific Rim but advised IFAs to keep an eye on China – a country with enough growth potential to get fund managers excited.

Japan was roundly dismissed again. On a wider note, the panel did not believe a war in Iraq would do as much damage as expected. Most said the market has already priced in a conflict, with Jupiter even suggesting it could prove to be a marker for a “reasonably positive 2003” – assuming a swift conclusion.

But there were words of warning. Gerrard head of intermediary division Brian Tora said: “If the war is contained to Iraq, then there is no real problem. The real threat is collateral damage in the Middle East. If there are attacks on Israel or there is a popular uprising in Saudi Arabia, then all bets will be off.”

What they all agreed on, however, was that bonds are expensive relative to equities. With the exception of bond houses such as M&G – and firms with particularly strong bond managers – fund groups say they should only be used as a small part of a portfolio and then purely for income.

The same is true for property funds, they believe – in the sense that the market is at the top of its cycle and there is only one way for it to go. Nevertheless, Schroders chief investment officer Mark Pignatelli believes corporate bonds will be the most attractive asset class in 2003, returning up to 20 per cent.

Schroders says progress next year will be determined not only by Iraq but also by whether investors can look beyond the difficulties in the US to the better prospects it believes exist in Europe and Asia.

IFAs have their doubts. Chief economists provide evaluations of the year ahead from a statistical, detached perspective but advisers are on the ground, talking to investors on whose business they and fund managers rely.

This has led many IFAs to paint a gloomy picture for the first six months of 2003 at least. Plan Invest joint managing director Mike Owen says investors have lost patience with the stockmarket. He says: “Despondency is high at the moment – 2003 will be critical. People are losing faith in equities and we are starting to get complaints about fund manager charges. But it looks like it will be much the same as this year.

“The FTSE is stuck in a narrow trading range and for the first half of 2003 it is hard to see how that will change.”

The problem is that unless investors start seeing absolute returns they will continue to shun markets. Only professional investors see the merit in relative performance but they do not need wooing.

Investment houses remain reasonably upbeat given the circumstances but, as Tora says, it is in their interests to be optimistic.

Owen says the only comfort is that the industry always calls it wrong and could be too pessimistic about next year although this statement was delivered with tongue firmly in cheek. Prospects in 2003 are shaping up to be no joke.


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