Brian Tora asks what we should read into investor buying patterns - if anything.
An interesting press release emerged from the Investment Management Association (IMA) earlier this month. It seems that in October, the latest month for which detailed figures are available, Global Emerging Market funds established the highest level of sales on record.
Global Bonds, which had led the field in September, dropped to third place, with Absolute Return climbing from sixth to second.
What, I wonder, should we read into these buying patterns – if anything? One strategist of my acquaintance took these statistics as evidence that a bubble had developed in these markets. His take was that Joe Public follows, not leads, so when retail investors are piling in, it must be time to head for the hills.
He cited the technology boom as an example of how the crowd has a tendency to get it wrong. The bestselling month for Technology funds was, after all, February 2000 – just days before the bubble burst.
But the valuation levels accorded to emerging market stocks, while undoubtedly more stretched than for some time, have not achieved the fantasy heights we saw as hysteria set in among investors in telecommunications, media and technology as the new millennium dawned.
There are some similarities, though. Technology was reviewed as a recession-proof industry a little over a decade ago. We now know it is anything but. The crossover between the three components of TMT, while evident, has not resulted in the wholesale restructuring of these industries that many expected. (article continues below)
There were some other interesting snippets to come out of October’s IMA figures.
The worst-performing sector, in terms of sales, was UK All Companies which shrunk by nearly £240m. Now, I could understand if it had been Europe excluding UK that enjoyed this accolade. This sector has proved the worst performing sector on average so far this year, the only one to deliver a negative return, and it was the second-worst performing sector in net sales terms, falling by £155m.
As it happens, this is a worst performance in relative terms. The European sector is smaller, with just over 100 funds, compared with more than 270 for UK All Companies, so it has taken a bigger hit in percentage terms. However, with the UK sector in the top half of the tables for the year so far, delivering a return of nearly 10%, this seems harsh treatment from investors.
The IMA figures do, of course, cover the entire universe. What can be interesting is comparing what is happening on the platforms, which are adviser-led, with the overall picture. Platforms did well in October, with total funds under management topping £100 billion for the first time.
Net sales for the past year at £9.6 billion accounted for not far short of 50% of the overall total of £22.5 billion. According to Cofunds, Global Emerging Markets took 6% of net sales in October, up from 4% for the previous month.
In November, they slipped to 5.5% (the IMA figures for last month have yet to be released) but they still massively trail Cautious Managed funds, which continue to account for about 33% of net sales. This sector does not even make the top five in the IMA tables.
But I must return to Absolute Return. Second in the October sales figures, it remains a sector of which I believe investors and their advisers should remain wary.
This sector was fourth from bottom in the performance tables for the year to date, returning just 1.6%, and the range achieved by the 30 or so funds in the sector ran from +11% to -12%. Absolutely, what sort of return is that?
Brian Tora is a consultant to investment managers at JM Finn & Co