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Investment view

Investors who spot opportunities and get into a sector early can get big returns but can face big risks, says BRIAN TORA

Having spent a large proportion of my life watching share prices move up and down, it is interesting to reflect on the way in which investment decision-taking has changed over the years.

Back in the days when the London Stock Exchange was market facilitator, trade body and regulator, inside information was not illegal. Indeed, it was virtually a prerequisite of the job, providing it was acquired properly. The reality was that those with access to markets and company information had a real advantage. Making money, if not exactly easy, was a matter of following simple disciplines rather than the more demanding skills required today.

Change has not wholly been for the better. A consequence has been a dumbing down of performance. The best investment opportunities remain reserved for an even narrower group of wealthy insiders.

Has nothing changed then? New opportunities arise but over time they become more accessible. Those in early are likely to gain the most.

Perhaps the best recent example is hedge funds. They have, in fact, been around for longer than many people realise but were available to only a privileged few until comparatively recently. Some of the earlier, high-profile players in this market, using techniques which were not then widely understood, made significant gains by being ahead of the rest of the investment community. But, like arbitrage, the more who participate in a particular way of executing financial transactions, the slimmer the margins become.It leads to a more efficient market but also results in a reduction of investment returns.

The area which currently appears to be enjoying widening interest is private equity. The money that has been flowing there has been significant. Inevitably, it will lead to lower returns. However, in theory this is one area of the market where the level of risk demands higher rewards. It remains to be seen whether the very considerable boost which smaller companies have received over recent years will allow the same sort of returns to be achieved in the future.

Innovation is essential and competition is good but it is looking to me as if trying to be clever in the investment game is no longer worth the candle. Investment asset classes enjoy specific characteristics which can be matched to needs and risk attitudes. But recognising when valuations get out of kilter with expectations is essential. This is not always easy. There were plenty of arguments supporting the heady valuations of tech firms at the end of the 1990s but the fact that many of the valuations proved to be spurious was not easy to spot.

And since change is an investor’s only certainty, what will be different in future? Executing deals has become commoditised. The great majority of trades no longer require human participation. Linking execution with settlement and delivery is the ultimate goal for this industry. When achieved, a whole new world will open up for those in the business of managing financial assets.


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