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Industry Sectors: Investment

Paul Farrow Deputy personal finance editor, Sunday Telegraph
When I was asked to write an article for Money Marketing’s 20th anniversary supplement on how the investment landscape has changed since 1985, being an ex-staffer, I agreed. However, it would be 13 years after the first issue that I would start writing about Peps, fund supermarkets and the Oeic revolution. While many City slickers were contemplating suicide in the aftermath of 1987’s infamous Black Monday, I was a fresh-faced bank clerk.

What was life like then? The retail fund industry was enjoying a golden summer in 1985, with unit trust sales at record highs. The Unit Trust Association reported July net sales of 172m, with account holders soaring to 2.45 million. There were around 740 unit trusts compared with three times as many today.

Manulife’s high income fund – just 1.7m in size – was the fund to watch, having topped the previous year’s performance tables with a return of 54 per cent. Other top 10 performers included Oppenheimer income & growth, M&G Midland, Wardley UK, Key equity & general and Vanguard special situations.

I could harp on about subsequent events – market crashes, the arrival of Isas, the ill-fated Catmark and the split-cap scandal – but they are well-documented. They are also just snapshots in time. Perhaps the bigger picture has not changed much at all.

Quotes from national newspapers over Money Marketing’s lifetime could be printed in tomorrow’s financial pages. Take this one, for instance. Fund managers report their margins are being squeezed – Financial Times, August 15, 1985. Or how about this on investment trusts? These are just two examples of the shake-up which is affecting the management of investment trusts as they come under increasing competitive pressure. Today, even the sleepiest boards are aware they must get into the performance business – Financial Times, June 22, 1985.

The following soundbites also have an eerie familiarity about them. During the past 12 months, it has been extremely difficult to convince clients they should have an investment in the UK. – Peter Hargreaves, Hargreaves Lansdown, March 3, 1990. Jason Hollands’ other choice is Perpetual high income, a high-yielding fund which he says has an outstanding record. – Daily Mail, November 17, 1993. Our priorities are to try to help find ways to get a better supply-to-demand balance. – Daniel Godfrey, AITC, June 8, 1998.

Investors still need to be educated about the merits of equity investing, the investment trust industry is still grappling with liquidity problems and the same funds are tipped year after year.

One pertinent question is whether the fund management industry has learned any lessons over the past 20 years and whether it is more responsible today. There have undoubtedly been bouts of recklessness. Fund management is about making money and you sometimes wonder if groups have too often followed the smell of lucrative bonuses rather than their heads.

Advertising mammoth gains to an unsuspecting public gave the impression that investing in the stockmarket was an easy ride. The decision by the likes of Gartmore and Jupiter to launch funds at the height of the technology boom backfired spectacularly. Invesco, with Rory Powe’s European growth fund, was another famous culprit for failing investors at the turn of the century.

Enter the precipice bond, promoting returns of 10 per cent a year along with a guarantee . Zeros jumped on the same bandwagon and who will ever forget Aberdeen’s One-year-old that lets you sleep at night advert?

Thankfully, the FSA has clamped down on advertising, warnings are more explicit and it is difficult to manipulate performance figures. Groups have been forced to reassess how they woo investors. Interestingly, Invesco Perpetual refrained from running newspaper adverts boasting of its UK aggressive fund’s fantastic returns after it trounced its rivals in 2003 because it had learned its lessons from the European growth days.

As Money Marketing embarks on its next 20 years, the fund management industry is tackling how it will win over the next generation of investors. Confidence is still low. Many of the bucket shops that once sold Peps and Isas by the shed load have disappeared while off-the-page advertising no longer produces the goods it used to. New marketing strategies will have to be established but there is no doubt IFAs will be an important part of groups’ armoury. Some things never change.

Richard Eats Communications director, Threadneedle
In 1985, the assets under management in unit trusts amounted to 17bn. At the start of 2005, they had grown to 275bn. Although this is great news, the rise in markets accounted for a big chunk of that growth (an investment in the UK All-Share index would have risen by more than 600 per cent) and institutional investment had also grown to be 45 per cent of the industry.

So the real wow factor is the growth in the number of unitholdings from 2.4 million 20 years ago to 18.26 million today. What caused this change? Tax relief is the obvious answer. Over 14 million of these new holdings were via Peps and Isas.

But, for me, that is not the most significant change. When it comes to the effects of fiscal privilege, as Bachman- Turner Overdrive put it: You ain’t seen nothing yet.

The most profound change for the fund industry will prove to be the potent combination of pension simplification, technology platforms and the death of definedbenefit pensions.

A pension is the most important financial asset that most people possess and, to date, this has been the preserve of employers’ defined-benefit schemes and life insurance companies. That’s history.

With pension simplification, there will be little technical difference between company schemes in contractual form and personal pensions. The product structures will sit on platforms and investors, together with their advisers, will be choosing the investment funds that they want to hold.

Disparate pension products will be consolidated on to platforms and valued and properly managed online. In future, individuals will own the assets that institutions control today.

Over the next 10 years, this opportunity will revolutionise the structure and significance of asset management. Randy Bachman wrote: Here’s something that you’re never gonna forget. And he’s right.

Anne McMeehan Director, Cauldron Consulting
A river of burgundy has flowed through the City since the days when a mobile phone was the weight of a house brick and insiders felt that their deals could go through unquestioned.

I don’t throw darts at a board. I bet on sure things, said Gordon Gekko, the villain of Oliver Stone’s 1987 film Wall Street.

And after a global stockmarket crash, ordinary investors had the same idea too, albeit they were looking for legitimate guarantees.

Unsurprisingly, fear and greed remain dominant investment themes.

The UK authorities believe that education, transparency and simplicity, specifically at low cost (commercial viability still merits little attention), will encourage more individuals to save for their long-term financial security.

Doubtless they are right but those who have put money aside need further encouragement which cannot happen when a Chancellor invades their pensions to extract a cool 5bn a year.

Gekko’s spirit lives on, perhaps. It’s a zero sum game. Somebody wins, somebody loses. Money itself isn’t lost or made, it is simply transferred from one perception to another, as he once explained.

Concern for the poor – or the socially-excluded, as they are usually described nowadays – is right and proper. Yet it can also be a disguise assumed by those more motivated by malice against the relatively betteroff – although these people have not acted to exclude the less fortunate.

Envy, jealousy, resentment and greed are human weaknesses. However, it is one thing to acknowledge their existence, another entirely when public policy is seen to come perilously close to dignifying them. No change in Westminster’s relations with the City, then.

Mark Dampier Head of research, Hargreaves Lansdown
It is hard to believe that Money Marketing is 20 years old and I am still only 30. From an investment point of view, much has happened. When I first started and, indeed, when Money Marketing first came out, there was no regulation and anyone could set themselves up as a financial adviser. How times have changed.

I have picked out two events I remember well – one a big shock, the other highly significant but more of a slow burner. I am afraid I have missed out some of the more salacious items such as the Peter Young affair and also the big changes to the stockbroking community such as Big Bang and the privatisations.

First, the big shock for me was the stockmarket crash of October 1987. I started in the industry in 1983 and, apart from a summer of setbacks for the UK markets in 1984 due to the miners’ strike, UK and worldwide equities had broadly gone straight up. Returns of 20 per cent a year were common and, indeed, expected. New unit trusts were launched every week.

By 1987, this culminated in the Royal Event in September. Billed like a privatisation (yes, I think some tried to stag the issue), every broker in the land was offered free mailings by Royal Sun to mail their clients. Some members of the public received more than 20 mailings. It had parallels with the technology boom. It all had to end and it did on Monday, October 19, when the London market fell by 11 per cent and did the same the following day. On Friday, the London market had been hit by the aftermath of the hurricane the night before, which had caused so much damage in the South-east that the market closed. This led to considerable selling that over spilled to Monday.

Worse was to come when Wall Street opened that afternoon, falling by over 200 points. Massive selling kicked in in the final hour and a half, pushing the market down by 508.32 points on the day – a fall of 22.6 per cent, surpassing the one-day fall of 12.9 per cent at the beginning of the 1929 crash. Many of us thought it was the end of the world as we knew it. Now it looks like a small blip on the chart. Such was the shock that 1988 proved to be the worst year I have ever had in financial services. The phones never rang and no one wanted to invest in unit trusts.

The second big event, although it did not seem it at the time, was Chancellor Nigel Lawson’s introduction of Peps in 1987. It undoubtedly helped to rescue the unit trust industry from the 1987 crash. Initially, very small amounts could be invested in unit trusts and it did not capture the imagination of investment groups (with Fidelity withdrawing from offering them) or the public. However, gradual increases in unit trust contributions over the next few years allowed Peps to become a very meaningful part of portfolio planning.

The broader IFA market, which had never touched unit trusts and bought investment bonds mainly because of the commission, started to promote Peps because of their tax breaks. It is unfortunate that their successor, Isas, are a poor imitation of the original. Peps were a major boom for investment groups, which Jupiter under John Duffield and Perpetual under Martyn Arbib fully capitalised on. It is perhaps no coincidence that they had two of the very best income fund managers – William Littlewood and Neil Woodford. Without Peps, it is doubtful whether either company be the household name they became.

Brian Tora Head of intermediary division, Gerrard Investment
Back in 1985, the investment world was awaiting two significant events. The first was the introduction of comprehensive legislation which would facilitate regulation following Professor Jim Gower’s report on the financial services industry.

Second, following discussions between the Office of Fair Trading and the Stock Exchange, financial institutions – many foreign – were taking strategic stakes in stockbrokers hitherto closed to outsiders. Fixed commission was to be abandoned and other changes implemented. The restructuring of the London market, known as Big Bang, was set for October 1986.

The 20 years following the birth of Money Marketing also brought market movements of seismic proportions. Investor optimism was rife in the mid-1980s. The privatisation issues ushered in by the Thatcher Government had broadened share ownership considerably. This new breed of wannabe capitalists were in for a rude awakening, however.

Just a year after Big Bang, Black Monday saw markets tumbling around the world. The Hong Kong Stock Exchange closed for a week as a consequence of the disconnect between the futures and cash markets. To many in the investment world, it felt like the end of an era. Yet, amazingly, the UK market finished 1987 higher than it started.

Markets gradually regained their poise following Black Monday but there were unfortunate consequences. Fearing the market crash presaged wider economic problems, Chancellor Nigel Lawson eased monetary policy, encouraging a return to double-digit inflation and setting the scene for a crash in house prices. The early 1990s were not a wholly comfortable time for investors.

However, the trading of derivatives was developing massively and facilitated a whole new asset class – hedge funds. Little known in their early days, the withdrawal of the UK from the Exchange Rate Mechanism, with the rumoured $1bn profit earned in George Soros’s hedge fund, catapulted them into the limelight.

Overall, the 1990s came in with a whimper but they certainly went out with a bang. Increased spending on technology and the development of the worldwide web led to an investment boom of major proportions. By the end of the decade, technology shares stood on extravagant valuations and once again private investors were drawn into a market preparing for a crash.

The most popular unit trusts in February 2000 were technology funds, accounting for more then 50 per cent of all sales. Yet this market peaked just a month later and the wealth attrition that followed was considerable. Not only had investors misjudged likely trends in technology spending, it was clear that business models for internet-related businesses were hopelessly optimistic.

As we entered the new millennium, the slowdown in the US economy deepened and the bear market that was to follow endured for three years. All this took place against a crisis of confidence in pensions and life insurance, resulting in widespread rebalancing of portfolios from gilts to equities. The market has recovered much of its poise but remains fragile. It has been an exciting 20 years. We can look forward to more exciting times ahead.

Anthony Bolton Fund manager, Fidelity Special Situations Fund
After more than three decades of running money, I have come to the firm conclusion that investment is more an art than a science. Certainly, I know of no successful professional investor who has not had to learn from experience the many pitfalls that lie in wait.

In the early days, you could gain an edge by going out and gathering more data than the competition. It was an approach pioneered by Fidelity, both in the US and here in the UK. As Peter Lynch, former manager of the Magellan fund, has said many times, it is not rocket science – you just have to turn over more stones than the other guys.

When I started out in the City in the early 1970s, meeting the management of companies in which you invested was pretty much still the exception. Few companies came to the City and, when they did, it was not often to visit investors. Instead, you would have to go to them or attend group meetings hosted by their brokers.

From the mid-1980s, this began to change. More and more companies came to our offices for one-to-one meetings. When I also ran European funds, I used to do three or four company meetings each day. Now I do one or two on average, keeping notes in hardbacked books which have become an invaluable reference in dealing with companies.

The broking community has also changed dramatically in the past few decades. Although Fidelity’s internal research is the best one can have, I have always liked to use external research as a complementary source of ideas and information. Despite a flurry of mergers in the broking community, the research output from such firms has remained valuable.

What has changed is what analysts can put in writing. It is also true that, in many cases, broking research is being used increasingly for investment banking purposes. Nevertheless, I believe that if you know how to use research and which analysts to talk to, it can be very useful. This is particularly true of the nuances of thought that an analyst cannot put into writing.

Nowadays, it is much harder to gain an advantage over your competition by simply gathering more information than they do. So many fund managers have copied Fidelity’s model that investor meetings are now part and parcel of the work of any chief executive and chairman. Instead, the emphasis has shifted to the interpretation of that data.

Along the way, I have learned many lessons – occasionally the hard way. For example, I used to think the dynamics of a strong-looking business would make up even for dodgy management. After investing in a few companies that have subsequently blown up, managements that are either unethical or which sail too close to the wind are no-go areas for me.

Even with corporate governance checks and outside accountants, there are too many ways that senior people can pull the wool over an investor’s eyes. Several years ago, an Italian contact told me not to touch Parmalat for this reason. It turned out to be an excellent piece of advice.

Other lessons I have learnt include favouring simple businesses over the complex. It may be difficult to work out with a complex business whether it has a sustainable franchise. The ability to generate cash is very attractive. A private-equity specialist once told me that the stockmarket overvalues growth and undervalues cash generation. Private equity investors do the opposite. I am on the side of the private equity investors.

When dealing with management, key attributes to look for are candidness and lack of hyperbole. Having met hundreds of companies in many different industries over the years, the thing I value most is hearing a candid, balanced view of a business. That means the minuses as well as the pluses. Be most wary of the managers who promise the sky – they are unlikely to deliver.

If a stockpicker has to learn only one lesson, it has to be understanding balance sheet risk. Balance sheet risk has been the most common factor behind my worst investments. As well as debt in its various forms, one needs to be able to analyse pension fund deficits and value redeemable convertible preference shares where there is little likelihood of conversion.

It also pays to reexamine your investment thesis at regular intervals. Investment management is all about building conviction for an investment opportunity and then looking at this afresh when new information arises. Conviction is important but must not be allowed to turn into pig-headedness. If the evidence changes, so should one’s views.

You should forget the price you paid for shares, too. It is totally irrelevant, save in a psychological sense. Have no hesitation in cutting losses if the situation changes. Investors must also pay attention to absolute valuations – you need a reality check to avoid being sucked into a stock at times of great exuberance. I like to buy stocks which within the next two years you can see will be on a single price-earnings multiple or have a free cashflow yield that is well above prevailing interest rates.

Above all, be a contrarian. If the investment feels comfortable, you are probably too late. Try to go against the crowd and avoid becoming more bullish as the share price rises. When almost everyone is cautious about the outlook, they are probably wrong. Equally, when very few are worried, that is the time to be most wary.


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