Investors left behind in rally

From The Sunday Times
October 18, 2009

Investors left behind in rally

The market’s stellar rise has eclipsed UK equity funds with fewer than a quarter beating the market since its low in March

Jennifer Hill
The FTSE All-Share has surged 51% from its trough on March 3 while the FTSE 100 is up 48%, after gaining 28 points last week to close at 5,190. But just 101 out of 405 funds (24.9%) have managed to equal or better that, said Morningstar, the data firm.

The average UK equity fund is up 45%, with the worst performer, Manek Growth, managing a mere 15% return.

Some of the biggest names have also lagged the market. Invesco Perpetual High Income, run by Neil Woodford with £8.6 billion invested, has gained 19% since March; the £2.7 billion Newton Income fund managed by Christopher Metcalfe has risen 18%; and Anthony Nutt’s £9 billion Jupiter Income fund is up 35%.

Fund managers have been caught out because they backed the wrong sectors going into the rally. Most had big holdings in “defensive” stocks, such as pharmaceutical firms and utilities, but financials and miners have led the charge, pushing America's Dow Jones through 10,000 on Wednesday.

Michael Hartnett at Merrill Lynch Global Research, said: “Equities remain in a sweet spot. Fears of a double-dip recession have receded, while worries about inflation and rising interest rates are not imminent enough to have prevented an October surge in risk appetite.”

However, advisers say some of the stellar performers, such as commodity stocks, could be in line for a setback. Conversely, the equity income sector — which tends to invest in defensive stocks because they traditionally pay higher than average dividends — could come back into fashion.

Danny Cox at Hargreaves Lansdown, the adviser, said investors should keep faith with popular income funds. He said: “Woodford believes the UK economy is in for a difficult period, so is very focused on defensives. Despite his recent underperformance, if he is right his fund will come good again.” We look at the experts’ tips for the bull market’s next stage:

Take some profits

Most commentators recommend banking some profits from the stocks and sectors that have led the recent rally, ahead of any setback later in the year.

Dirk Wiedmann at Rothschild Private Banking and Trust said: “After an exceptionally strong run, there is a growing danger that risky assets will suffer a setback.”

Kazakhmys, the London-listed metals company, is the market’s top performer since March, soaring 450%, followed by Vedanta, another miner, up 376%. Nick Raynor at The Share Centre said: “The FTSE 350 Mining index plunged 74% from May to December — and the same thing could happen again.” He also recommends selling out of retailers Marks & Spencer and Next, which could struggle amid rising unemployment and a 2.5% increase in Vat to 17.5% on January 1.

Rebalance your portfolio

The rally in miners and financials means many investors will now be taking on more risk than they want to, and they are being urged to review their portfolios.

Say you built a portfolio of 60% equities, 30% bonds and 10% cash. If left for 20 years, that could turn into one with, say, 84% stocks, 13% bonds and 3% cash. If your goals haven’t changed, you need to rebalance it. Doing so every year boosts returns by 16% over a 10-year period, according to Skandia, the investment firm.

As a rule, advisers recommend rebalancing when assets drift 5% or more away from your initial allocation.

Darius McDermott at Chelsea Financial Services, the broker, suggests investors reduce their holdings in some financial stocks — Barclays is the third top-performing share this year, with a 364% surge — and emerging markets, which have powered ahead. The MSCI Emerging Markets index has soared 80% since March 3.

Go for laggards

Defence firm BAE Systems, publisher Reed Elsevier and a string of utilities have grossly underperformed the market since March. Raynor tips National Grid, up only 5.8%, and Scottish & Southern Energy, which has gained only 8.3%.

Diversify overseas

British shares tends to lag other markets in periods of strong growth. Cox likes the Aberdeen Emerging Markets and First State Global Emerging Market Leaders funds, which have big holdings in Brazil, India, Hong Kong and China.

http://www.timesonline.co.uk/tol/money/investment/article6878766.ece