THE FTSE 100 has enjoyed its best summer rally since its inception in 1984,
but economists are divided over the outlook.
The stock market jumped 15% in July and August and pushed through the 4,900
mark last week, helped by comments from Ben Bernanke, the US Federal Reserve
chairman, that “economic activity appears to be levelling out”. The index of
Britain’s leading shares closed the week at 4,908.9.
However, leading economist Nouriel Roubini, the New York University professor
who predicted the downturn in 2006, thinks the economy could be heading for
a double dip, or “W-shaped”, recession. In this scenario, the current upturn
would be followed by a second downturn before a sustainable recovery
emerges. At best, he suggests a “U-shaped” recovery, with anaemic growth for
a couple of years.
Neil Woodford, Britain’s largest fund manager with £15 billion under
management, believes there will be no significant recovery for three to four
years. He has remained in “defensive” stocks such as tobacco and
pharmaceuticals. As a result, his Invesco Perpetual Income Fund has lagged
the market, increasing by only 9% since the Footsie’s March lows compared
with a rise of nearly 40% for the index.
By contrast, a manager such as Barry Norris, who runs the Ignis Argonaut
European Alpha fund, predicts a “V-shaped” recovery. “European equities are
at their cheapest since the 1970s and 1980s, while interest rates are at
historic lows. It makes for a very good environment for strong recovery,” he
said. He expects the Footsie to hit 5,500 before the end of the year.
The wide disparity in outlooks highlights the need to spread money across a
range of funds. Ben Yearsley of Hargreaves Lansdown, the adviser, said: “The
general rules are that you should spread your money across a number of
managers with different styles investing in different markets.”
Here we list 10 investment styles to cover most eventualities.
1 INCOME
Income funds, which invest in shares with above-average dividend yields, are
among the most popular in the UK with £24 billion invested in the
equity-income sector. However, they have not performed well this year, with
the sector rising an average 11.7% compared with a gain of 18.5% for the
All-Companies sector, which focuses on growth funds.
Many popular funds such as Newton Higher Income and Jupiter Income have
performed even worse with gains of only 3.9% and 7.7% respectively.
Income funds have performed relatively badly because the stocks that tend to
pay the highest dividends, such as utilities and tobacco, are also the
stocks that have lagged behind the market’s recovery since March. However,
advisers suggest not to lose faith in the investment style. “Over the long
term, income funds tend to outperform growth so it should always form part
of your portfolio,” said Yearsley.
He recommends George Luckraft’s Axa Framlington Equity Income fund. It has a
flexible approach and invests in a combination of smaller companies that
tend not to provide much income but have growth potential, as well as larger
companies with higher yields.
The fund is up 21.9% since the start of the year.
Best time to invest: in early or middle bear stages of the market cycle.
2 VALUE
Value investors aim to buy when a share is undervalued and sell when
overvalued. They have many of the characteristics of income investors
because an above-average dividend yield can be a sign that a stock is
undervalued — yields rise when prices fall and vice versa.
Value investors did well in March when the market bottomed out as they were
able to snap up many undervalued stocks on high yields. The banking sector,
for example, yielded about 5.5% and has since rallied 72%. Meanwhile,
general retailers yielded about 6.4% and has also jumped 49%.
In the later stages of a bull market, value investing can lag as there are
fewer undervalued sectors to choose from. A good performer has been the M&G
Recovery fund, which is up 24% this year. It has benefited from strong
rallies in financials as well as groups such as Rolls-Royce, up 26.7% this
year, and Invensys, the software firm, which has gained 50%.
Best time to invest: in recession, but it can also form a core long-term
holding.
3 GROWTH
Growth investment has been the leading investment style this year as economic
gloom has given way to increased optimism.
For example, growth funds such as Ian McVeigh’s Jupiter UK Growth and the
Standard Life UK Smaller Companies fund have produced spectacular gains of
27% and 36% since the start of the year.
Growth funds invest in companies where there is an expectation of aboveaverage
growth in earnings. A common characteristic is that such firms tend not to
pay dividends, preferring to reinvest profits in the business for further
growth.
Adrian Lowcock of Bestinvest, the adviser, urges caution. He said: “We don’t
think that the markets can continue to rise at current heady levels. We
would advise investors to go for a more balanced approach to not get caught
out.”
Best time to invest: during the growth phase of the market cycle.
4 GROWTH AT A REASONABLE PRICE (GARP)
This is where the investor combines growth and value investing. A Garp
investor will often use the price/earnings growth (Peg) ratio. This rates a
company’s share price relative to its earnings, and how fast those earnings
are expected to grow.
Richard Plackett, who manages the Black Rock UK Special Situation fund, uses
this technique. The fund has increased by more than 20% this year.
This investment style is usually better when rallies start. “It is good to
have some exposure to this style as share values are still relatively
depressed,” said Lowcock.
Best time to invest: any time.
5 MOMENTUM
Momentum investors tend to follow the prevailing trend, on the basis that once
markets have latched on to a theme it can continue to perform well for some
time before the bubble bursts. The classic example was technology in the
late 1990s. Many believed tech stocks were overvalued — and they were
ultimately proved right — but that did not stop others making large sums
while it lasted.
More recently, the managers who have performed best have been those who
followed the momentum in banks and housebuilders, up 72% and 93%
respectively since the March lows. Advisers warn against this type of
investing without specialist knowledge, however. Lowcock said: “It can be
dangerous if you don’t know what you’re doing. By its nature, momentum will
be popular in a bull market as it takes you into stocks leading the market
but you can lose out if the market turns rapidly.”
Best time to invest: middle and late bull stages of the market cycle.
6 CONTRARIAN
Some of the most famous investors have been contrarians, such as Anthony
Bolton and Warren Buffett — when everyone buys, they sell and vice versa.
Bolton took out a put (an option to sell shares) in the summer of 2007 just
before the market peaked, allowing him to cash in when share prices later
collapsed.
Richard Buxton, who runs the Schroder UK Alpha fund, bought retailers and
banks when everyone was against them earlier this year. His fund is up 57%
since March.
Now the worst of the recession seems to be over, the contrarians are those
such as Neil Woodford who think conditions could get worse before they get
better.
Best time to invest: when markets are overly optimistic or pessimistic.
7 SPECIALIST INVESTING
Specialist funds tend to be among the most volatile. Commodity funds, such as
Junior Oils, soared 21% last year as oil hit a high of $147 in July. The
fund subsequently plunged almost 60% when crude dropped back to a low of $33.
Due to the narrow focus of specialist funds, they should form only a small
part of your portfolio, said Lowcock. If the market continues to rally,
however, such funds could be among the best performers.
Best time to invest: late bull market.
8 ABSOLUTE RETURNS
These aim to offer positive returns at any point in the cycle. However,
Financial Express Analytics found that out of nine funds more than a year
old, the average return was a fall of 0.52%. Though well above the FTSE
100’s loss of about 15% in the same period, this suggests you must not
expect positive returns at all times.
One of the best performers is the Black Rock UK Absolute Alpha fund, which has
risen 27% over three years and 3.3% over the past 12 months. Nick Osborne,
who co-manages the fund, said: “The idea is to offer protection on the
downside of the cycle, mitigating volatility while also offering some gains
in better markets.”
Best time to invest: in bear markets.
9 PASSIVE INVESTING
Tracker funds, which simply follow an index, are one of the cheapest ways to
buy into a rising market. Yearsley likes the HSBC FTSE 100 tracker fund,
which has a fee of only 0.25%.
Best time to invest: in bull markets 10 ETHICAL INVESTING Investors pulled
£18.4m out of green or ethical funds in the second quarter, according to the
Investment Management Association. The average fund has dropped 16.74% in
the 12 months to July 2009. Lowcock said: “During downturns, green funds are
unable to buy into defensives such as tobacco and energy stocks.”
Best time to invest: in bull markets.
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