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Time will tell

It seemed to me for a while last week that the long-awaited (by some) pullback in share prices had begun.

Monday saw investors spooked by news that the global economy is shrinking faster than expected. But by mid-week, buyers had stepped in and – perhaps a consequence also of the distractions now available to professional managers through such social necessities as Wimbledon and the cricket – selling pressure quickly evaporated.

A colleague of mine writing in a publication aimed at investor clients referred to the “pain trade”. This, he claimed, was what those managers who had not trusted the post-March market rally felt as they surveyed their over-liquid funds. The choice – or trade, if you like – was between piling in late so as not to be left too far behind only to find markets in retreat and staying on the sidelines to discover the new bull market had really arrived.

We will, of course, only know for certain which will prove to be the case some months down the road. In the meantime, there is a somewhat unreal feel to markets just now. It could, of course, be a result of managers simply being unwilling to take any bets at all, such is the lack of transparency over the likely out-turn of events. Time for some lateral thinking, I feel.

I happened to attend some interesting investment presentations recently. Actually, “interesting” is too kind a term for one of the events. True, on the day in question the tube network in London was paralysed by strike action which kept many would-be seekers after alternative investments away, but stimulating it was not. More on this anon, I expect.

The second homily on behalf of a non-standard approach to investing fell more into the passive camp than alternative investments. Fundamental Tracker’s Rob Davies extolled the virtues of his Munro Fund, an Oeic which invests in FTSE 350 companies, but only if they are forecast to pay a dividend. And the portfolio is constructed using a quantitative approach.

Put simply, it is possible to forecast how much income the index will produce in aggregate based upon the expectations of dividend payments from constituent companies. In turn, the contribution from individual companies can be calculated as a percentage of the whole and shares included in the portfolio on that basis, rather in the way that pure index-tracking funds buy individual companies on the basis of their percentage of total index capitalisation.

Thus far, performance has been encouraging rather than stunning. The problem the managers face is the size of the fund. At £1.3m the TER is unsurprisingly high for a passive vehicle. They can point to back-testing and similar funds working well in the US, but in the end they need serious take-up if they are to achieve their aims. They deserve to succeed. Rather like the market’s direction, we will only learn if they do over time.

Brian Tora (brian.tora@centaur.co.uk) is principal of the Tora Partnership

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