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Investment view

T. Rowe Price, a noted growth investor, once remarked that change is

an investor&#39s only certainty. This most certainly applies at present.

In this industry of ours we are having to come to terms with the

ending of polarisation and a new, more demanding regulatory regime –

to say nothing of the fact that markets presently deliver few

favours. With interest rates and inflation both low as well, it is

hard to come up with a strategy for clients that does not look either

excessively optimistic or boringly defensive.

In the US, Stanley Roach of Morgan Stanley has been forecasting a

double-dip recession. Apparently, five out of the last six US

recessions were similarly difficult, so he appears to be making an

odds-on bet.

That said, economists are often accused of not always forecasting the

past accurately. Still, it reinforces my view that the downturn in

business activity in America may continue for longer than we thought,

with any recovery likely to be tentative.

Perhaps of more immediate concern was his contention that US tech

stocks are now as dear as in March 2000, when the new economy bubble

reached its point of maximum inflation. This is not a difficult

concept to get your head around. The Nasdaq index has bounced quite

comprehensively off the bottom (even though it still stands at less

than half the value it achieved at its peak), but more important is

the fact that profits in this sector have imploded. The 90s were a

boom period for the technology industry. Unless conditions return to

those enjoyed then, contends Mr Roach, tech stocks are too dear.

Among other recent snippets of information has been the fact that

pension funds recorded their second down year in a row during 2001

for the first time in more than a quarter of a century. It was the

savage bear market that accompanied the quadrupling of the oil price,

the three day week and the secondary banking crisis back in the

mid-70s that last treated pension funds so poorly.

Given that bonds have actually enjoyed a good run over the last two

years, these statistics speak volumes for the way in which the

British pension fund industry constructs its portfolios.

Not that it has been all bad news for equities. The latest Hoare

Govett&#39s Smaller Companies Index review disclosed that

higher-yielding smaller companies returned an impressive performance

last year. According to Professors Elroy Dimson and Paul Marsh of the

London Business School this half of the index – which comprises of

the smallest 10 per cent of the market in value terms – gave a total

return of 15 per cent last year.

This compares with a decline of around 15.5 per cent in the FT

Actuaries All-Share Index. It is so nice to be able tobe wise after

the event and know where we should have been putting our money as

2001 dawned.

And there was the news that a glass ceiling exists in the world of

fund management preventing women from reaching the top jobs. I dare

say Carol Galley and Katherine Garett-Cox might have something to say

about that, while the fact that the London Stock Exchange is run by a

woman surely points to growing change. However, according to yet

another survey published last week, women run fewer than 10 per cent

of the biggest funds available to private investors in this country.

But some American professors have concluded that female managers tend

to outperform their male counterparts. In their view, this is because

women take fewer risks, while men become over-confident about their

stock-picking abilities and often over-trade. I find this a

particularly interesting piece of research and one which might

usefully be taken into account.

Not that any of these surveys will necessarily help us determine any

better how markets are likely to behave in the months ahead. What is

clear is that the private investor is far less active than used to be

the case. Who can blame them? The chances are they will have lost

money during the last two years .

It will take a more active private investor community to render the

business models of many of the execution-only houses workable. For

that we need higher markets – but by then, of course, much of the fun

will be over.


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