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Investment View: Good time for stockpickers

The US reporting season has produced few unpleasant surprises so far.

Back home, interim results are coming in fast, with Thursday last week seeing a whole raft of companies. Again, the general tone has been upbeat. All this, of course, is serving to underscore the market at levels few expected to see before the end of the year, if then. But just how representative is the FTSE 100 index when it comes to judging the health of equities overall?

This is a topic I have visited before. The reality is that our headline index is dominated by a small number of comp-anies and sectors which distort perform-ance. We know that smaller companies’ indices moved into new high ground at the start of this year when the FTSE 100 was still standing some 30 per cent below its January 1999 peak. Interestingly, the same picture is painted on the other side of the Atlantic. Little wonder that stockpickers are having such a good time.

Even so, with the market dominated by institutional investors and an increasing amount of foreign money flowing in and out according to the expectations for returns, it remains hard to see where you add real value as an equities manager. The Brinson report of 12 or so years ago sugg-ested stockpicking contributed little, with the asset allocation calls determining the delivery of outperformance. This has not stopped investment houses building ever more sophisticated black boxes to screen out likely poor performers among individual stocks.

The new FTSE fundamental indices suggest that bigger companies do, over time, underperform. In a way, this should be expected. It is much easier to push up the profits of a small business than an industrial giant while the bigger you become, the more you are at the mercy of regulators and your competition.

As a damp late July translates into a hopefully hotter August, it is clear that market volumes lack muscle. Interest rates seem set to fall in this country and rise in America. This was certainly the message that arose from the minutes of the July MPC meeting and from Alan Greenspan’s biannual testimony on monetary policy. The chances are, though, that neither move will be that significant. This is only to be expected. It was previous decades that were the aberration in terms of inflation and interest rates rather than the more sedate new millennium.

Meanwhile, property remains centre-stage, with many seminars and conferences aimed at rekindling interest ahead of the personal pension fund changes due next year. A recent survey suggested that many believed property had been the best-perf-orming asset class over the past three years, whereas it was actually equities. Moreover, Halifax last week suggested there was a likelihood of a modest decline in residen-tial property prices over the coming 12 months. Yet property remains the asset of choice for a wide range of investors. Hist-orical evidence in the UK gives some supp-ort to this view but we have seen falls before. It is, after all, only another asset class.

As for bonds, the real fun has long since passed. As an asset class, it clearly demands inclusion in those portfolios where income is a consideration or where derisking or removing volatility is the aim. But it is equities that provide the most fun in my book. How we extract value from this particular asset will, I am sure, consume many hours of debate.

Brian Tora is head of the intermediary division at Gerrard Investment Management


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