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Run rally run

When markets behave erratically, it is easy to cling to familiar territory but managing money is about taking a long-term view – of the future, not the past.

All things are relative – even absolute performance The absolute versus relative debate has been hotting up. After the TMT bear market, the “you cannot eat relative performance” mantra was repeated ad nauseam by wealth managers and media commentators alike but it all depends on what the customer wants. If they would like absolute returns, then fine, there is at least now a growing absolute return sector to choose funds from and, at last, many of them are delivering on their aims. If, however, the customer is investing for the longer term and can live with some volatility, then relative investment may prove better for them.

For a relative house such as ours that takes a long-term pro-equity view, we would be less concerned if the absolute fraternity were not so smug. Many of the same people who say absolute is the only way to invest are currently opining the market’s recent strength is just a “bear market rally”. All things are relative – even bear market rallies When a bear rally becomes a new bull market is an interesting question. One of the most impressive analysts is Russell Napier, author of Anatomy of the Bear: Lessons from Wall Street’s Four Great Bottoms. His thinking suggests this is a bear market rally but one that may yet last two years or so. That is a long time to be on the sidelines watching a rally unfold, especially as cash is paying so little.

There is then a dilemma for those on the sidelines, similar to the Greater Fool Theory (essentially, the belief supporting a questionable investment that it will be possible to sell it later to “a greater fool”), in that if you have not reinvested by now, when should you? Many are waiting for a pullback before investing again but what if that pullback does not occur for quite a while, as per Napier’s view?

The fuel of all rallies is cash and with a record amount of cash on the sidelines – the ratio between US money market funds and US stockmarket capitalisation has risen to over 40 per cent for the first time since analysis began – this rally could run and run and run and run.

Jason Britton is a fund manager at T Bailey



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