Despite a tricky few days towards the end of the first quarter of 2012, shares held on to the bulk of the gains made early in the year to recover much of 2011’s falls. There is still plenty of uncertainty out there and we remain depressingly short of regaining the heights achieved at the end of the last millennium – but investors can feel a little cheered by the re-establishment of a little equilibrium.
If you are an investor in Europe or the US, your experience would have been even better. Not that too much should be read into bare statistics. European bourses suffered more than our domestic market in the shake- out that accompanied last year’s sovereign debt crisis while the performance of our own benchmark index is heavily influenced by how the resource stocks listed in London behave – and they have been particularly volatile.
Forecasting is a notoriously uncertain game but the whole business of investment management is predicated on trying to foretell the likely direction of markets and based on a belief that, over the long term at least, equities are likely to outperform cash and bonds.
We are presently going through one of those periods when this basic belief is being undermined by the actual behaviour of markets, but this does not necessarily mean popular wisdom is being turned on its head. The whole capitalist system rests on receiving greater potential reward for taking on higher levels of risk and professional investment management is about controlling that risk through diligent research and diversification.
So far, so good, but recent events have demonstrated that even if it is still dangerous to say this time things are different, some aspects of how markets behave and the influences brought to bear on them have undoubtedly changed.
Technology delivers information to a wider audience with great rapidity and also allows a degree of financial engineering through the use of increasingly sophisticated derivative instruments, which we now know is not fully understood by the rocket scientists that devise these strategies.
But perhaps the most important recent aspect of change is the realisation by governments that their future success is bound up with stable and manageable financial markets. Prosperity is delivered through the market, which encourages them to interfere more. In some cases, their interference is an understandable consequence of change, through both technology and globalisation, such as in regulation but sometimes policy-driven intervention can be less welcome.
What does this all mean for investors and advisers?
The days of buy and hold strategies, which worked well for much of the post-war period, are behind us. That does not mean that active management will automatically produce superior returns. The reality is that failure is punished very swiftly these days, whether it is an underperforming company or a fund manager who has fallen on tough times.
One of the most successful private investors I know – a retired investment banker – tells anyone who seeks his advice on the best strategy to adopt to buy a range of index- tracking vehicles and spread risk through diversification across markets and asset classes.
But he does not follow this approach himself, preferring to take an active approach to researching and buying individual companies. His philosophy is value-driven and he is prepared to sell but seldom to avoid the market altogether.
It seems the role of the stockpicker should remain secure, even in these tougher conditions.
Brian Tora is an associate with investment managers JM Finn & Co