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Who wins in a war?

The FTSE 100 lost around 25 per cent of its value last year, its worst-ever performance. Do you think the decline will continue or will the index recover some – if not all – of that loss?

Owen: While there is scope for the index to recover, given its fall of over 40 per cent over the last three years, this will still be a difficult year. The American market is not out of the woods yet and we still have major issues, such as the possible Iraq war and an overheating property market. It is possible though that the worst may be over and there will be good stockpicking opportunities this year, but it is not easy to find a catalyst that can spur this market to life. On balance, perhaps more towards the second half of the year, I expect the market to recover some of its losses, but by no means all the loss that we witnessed last year.

Merricks: I can&#39t see any reason why it should recover substantially but then I would take any rise at all after the three years we have had. It does worry me that in 1973 it lost heavily, then lost even more heavily in 1974. There is no rule that says good news must follow bad. The other thing that worries me is that most commentators are expecting this year to be better and they are rarely correct en masse. There was a similar suspension of belief throughout the 90s when every year saw Japan being tipped as the next good thing simply because it had gone down each year previously. Like West Ham, it just kept losing. I would like to be more optimistic but I do not think the index will do anything much this year.

Craven: The answer, in my view, is categorically yes, the market will I am sure recover all that loss and indeed over time show further gain. The question is not one of if, it is one of when, and in the current uncertain world climate I can see little hope of a dramatic recovery in the foreseeable future. As the US trading and currency position continues to deteriorate, the inexorable link which has developed between our two markets will, I am sure, be maintained irrespective of price/earnings ratios and market-cap values of companies.

War in Iraq now seems inevitable. What impact do you see this having on world stockmarkets and the global economy? Will the Isa season be affected?

Owen: A possible Iraq war could hold markets back in the first half of 2003. After all, markets hate uncertainty and so any drawn-out conflict will adversely influence confidence. Conversely, if the conflict can be resolved quickly, that could pave the way for some recovery in the market later in the year. What is left of the Isa season would certainly be affected by an Iraq war because the public would become even more risk-averse. They would retreat to defensive choices for their Isas, such as fixed interest, structured products or higher-yielding equities.

Merricks: It all depends on the length of any conflict. If it is a quick in and out job, the effect will most likely be beneficial. If it is a slow, difficult to get started and even more difficult to finish the job, the effects will be pretty dire. The more noise there is, the more chance the neighbours will get involved too. With North Korea turning up like an ex at just the wrong time and that old feuding couple India and Pakistan only patching things up for now, the world looks more Les Dennis and Amanda Holden than Richard and Judy right now.

Strangely, it could be the very fact that there is so much doom and gloom around that eventually sees the markets recover – invest when there&#39s blood on the streets and all that. But the Isa season was a dead duck already in my opinion. There is only so much spin that you can put on the “benefits” of tax-free losses.

Craven: It is very unlikely that the Isa season will be affected as the prospect of dramatic net cash inflows is virtually nil and, while the prospect of war produces a degree of uncertainty, I feel it has effectively been terminated by economic factors over the last three years.

On the question of war itself, it is my belief that war would actually benefit world markets in the medium term as a degree of uncertainty will be avoided by direct action. The bank of stocks that would traditionally benefit from hostile activity is now dramatically extended, taking in large elements of the tech sector as well as the traditional munitions and construction-orientated stocks. So, sadly, conflict would, I feel, have the potential of being a turning point in market sentiments.

Bates Investment Services is urging IFAs and investors to shun the risk ratings that fund managers attach to funds as it says they do not paint an accurate picture of volatility. Do you agree or do you see any worth in fund managers&#39 classifications?

Owen: I agree with Bates, because fund managers will simply look at their own universe of funds in isolation. They will attach a low risk rating to fixed interest and medium risk to equities but if the investor and the IFA are to get any meaningful information, such risk comparisons have to be undertaken across the board so we can then present information on a fund in relation to its peer group. I think in time the FSA will probably drive a move towards defined measures of volatility but we, for example, look closely at volatility ratings, information ratios, etc and would much rather use our own research than rely on an individual company.

Merricks: I think what Bates have done is brave and correct. I have my doubts sometimes whether the investment companies themselves actually understand what they are dealing with and have generally been becoming more and more remote from the aspirations of their customers. Their definition of risk is related more to their own peer group than to returns for unitholders. By most definitions, Hugh Hendry&#39s Odey European fund is the least volatile of all European unit trusts, yet most fund management groups would rate it very high risk by their measures because it does not handcuff itself to an index and the manager is allowed to buy what he wants.

Craven: I am in complete agreement with Bates as we have seen a catalogue of fund management houses over the last few years who quite clearly see the necessity to err dramatically from their stated volatility position throughout the trading year without direct reference to those who distribute the funds or indeed those who have bought them. I feel that external rating agencies are a far more reliable route to assessing volatility and fund house statements are both innocuous and very often misleading.

Henderson is bidding to consolidate investment in the technology sector by offering investors free Isa transfers into its global tech fund through Cofunds and Skandia. Are you pleased to see a fund manager nailing its colours to the tech mast? Can you imagine firms with funds in other ailing sectors making a similar move?

Owen: I am a little indifferent to the Henderson move. After all, we can transfer a number of funds into Cofunds via free transfers. It will take far more than this for investors to regain any sort of confidence as supporting their own interests. I think firms with funds not just in ailing sectors but also in other sectors will make similar moves to try to facilitate transfers into supermarkets. Specialist funds, such as technology, are going to be off investors&#39 radar screens for the time being.

Merricks: I applaud Henderson for continuing to allow investors to invest in technology if they want to. They are actually treating their customers like grown-ups. I thought Gartmore&#39s recent decision to fold its Techtornado fund and default unitholders into the Irish and smaller companies fund was a dreadful decision as it forces people out of the sector that they chose originally. If they had wanted Irish and smaller companies they would have chosen it in the first place as it has always been offered.

It seems to me that companies which wind up struggling sector funds are admitting that they only launched them in the first place to attract hot money and had no long-term faith in the sector itself. I sincerely hope that others follow Henderson&#39s lead by providing access to sector funds for those who want them.

Craven: It is widely accepted in the retail sector that new money is not likely to be forthcoming and therefore consolidation is the only route to attracting funds. I do, however, question the likelihood of success in this particular instance because the degree of despondency within the tech sector is so great that consolidation activity would be more orientated to leaving the sector and accessing other world markets in the hope of recouping what has often been quite staggering levels of capital loss.

Fidelity has decided to bolster its Isa campaign with the launch of the high-risk global focus fund, which will invest in any region or country under the stewardship of Brenda Reed. With investor sentiment so poor, can you envisage such a fund being popular and do you see other companies launching similarly risky funds?

Owen: Well, it is a courageous move by Fidelity and I do not expect too many companies to launch high-risk funds in this marketplace. The public are becoming more and more risk-averse and I expect a number of companies will tailor their development plans accordingly by promoting bond funds, equity income funds, etc.

However, this industry will always market products at the top of the cycle and, for brave investors who can look long term, the Fidelity offering could be opportune but I do not think they should expect too much money at launch.

Merricks: We are back to the “what&#39s risky?” argument.I believe that an actively traded focus fund is less risky than a “safer” benchmarked fund in the current climate – but only if the manager knows what he or she is doing. We are in the age of taking manager risk rather than just market risk.

It makes me laugh when I hear virtually every fund manager claiming to be a stockpicker nowadays. Often, these are the same managers who were “thematic” not so long ago. The truth is they have always been stockpickers. It is just that most of them had trouble picking the right ones.

Investors will always buy performance. If the comp-anies can deliver good returns, the appetite is there from the retail investor.

Craven: From a retail point of view, I do not feel this launch will be successful. However, from an institutional or fund of funds point of view, I am sure that the merits of valuations worldwide are clear to see and unfortunately, as so often happens in the retail arena, the private investor will not follow themes or regions until the level of growth achieved is already substan-tial and they lose the opportunity to gain.

I feel that the whole notion of any retail fund labelled as “deliberately high risk” will not be successful until consumer confidence returns, which will be many years away.

Mike Owen, joint managing director, Plan Invest,

Andrew Merricks,partner, Simpsons of Brighton IFA

Richard Craven, partner, HCF Partnership.


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