In the last 12 months, the stock market has enjoyed one of its greatest-ever rises; the FTSE 100 is 2500 points higher than its low point on March 3 2009. However, it is not just the size of the rise in the market that's notable. There have been two other curious features of the rally.
First, it's been a great time for stock-pickers, because shares' returns have been positively skewed. For example, in the 12 months to March 15, 60 out of 102 stocks in the FTSE 100 rose by more than the index's 44.8 per cent. Such outperformance is unusual.
What's more, many more FTSE 100 stocks have done exceptionally well than have done exceptionally badly. Across the 102 stocks in the index, the standard deviation of price changes in the 12 months to March 15 was 68.6 percentage points. However, only one stock (Resolution) did one standard deviation worse than the median stock (Experian), whilst 12 stocks did one standard deviation better. Ten stocks did half a standard deviation worse than the median, whilst 29 did half a standard deviation better.
This means that if you had picked stocks at random 12 months ago, there was a better than evens chance that would would have beaten the market. Take, for example, the 10th worst stock in the index - United Utilities. It rose 17.1 per cent in the year to March 15, under-performing the index by 27.7 percentage points. However, the 10th best stock - Anglo American - rose 139.8 per cent, beating the index by over 90 perce ntage points.
A stock-picker with an unbalanced portfolio and only average luck would therefore have out-performed the index handsomely; a random picker had an equal chance of picking United Utilities or Anglo American a year ago.
A second odd thing about this recovery is that high-beta stocks have done even better than one would expect. For example, in the five years to March 2009, Barclays had a beta with respect to the All-share (based on monthly returns) of 1.7. You'd therefore have expected it to rise by 79.2 per cent, given the All-share's 46.6 per cent rise in the year to March 15. In fact, it rose 372.9 per cent. This is not an isolated example. Of the 10 highest-beta stocks in March 2009, nine subsequently did better than their beta predicted; the exception was Lonmin, which rose just 59.5 per cent. On average, these 10 rose 200 per cent - that is, they tripled in price - compared to the 97.4 per cent gain predicted by their betas.
There might be a common theme linking these two curiosities - and indeed, the sheer scale of the rise in the market. The connection is disaster risk. A year ago stocks such as Barclays, Prudential or Vedanta were carrying not just market risk (the danger they'd fall a lot if the market fell), but disaster risk too - the danger that they'd be almost wiped out by a financial cataclysm. They were priced lowly to reflect this danger. As the danger of catastrophe has receded, so these stocks have gained a double boost - once from disaster risk being priced out, and again from the ordinary beta effect.
Because the FTSE 100 has a disproportionate number of stocks which carried some disaster risk - banks, resources stocks and highly-geared firms - so a disproportionate number have done well in the last 12 months.
If this theory is right, it could have a slightly unpleasant implication for stock-pickers. With disaster risk now largely priced out, the potential for many stocks to significantly beat the index is a lot less. That suggests that stock-picker s might find the going tougher in the next few months.
Written by: Chris Dillow
Friday, 19 March 2010
High Yield Treasures
For all but the last two months of 2009, sales of corporate bond funds trounced everything else in the UK investment universe, as income-hungry investors balked at the meagre returns on cash and fled from equity funds after the meltdown of late 2008. Then, the tide turned. Bond fund sales are in retreat, and many experts now think it’s time to take the 'fixed' out of 'fixed income'.
Some institutions have started doing just that. Chris Taylor at Blue Sky Asset management says institutional money managers are reducing their exposure, because they're afraid of a price bubble developing. T Bailey recently reduced the bond exposure of its cautious managed fund from 20 per cent to 5 per cent, while John Chatfield-Roberts at Jupiter told The Sunday Times that the 'easy money' had been made and that now was the time to sell.
Spreading it thinner
The stampede into corporate bonds and bond funds kicked off when credit spreads – the difference between corporate and sovereign debt – widened sharply in late 2008, as fearful markets priced in Depression-era default rates. Seeing the opportunity, investors moved in quickly. As prices recovered, those spreads narrowed again, to pre-crisis levels. The risk-reward equation is no longer so favourable. Bonds look fully priced.
Companies weren't slow off the mark, either. With bank lending moribund, there was also a flood of new bond issuance. Dealogic estimates that 2009 European corporate bond issuance alone increased by 55 per cent in 2009 from 2008, to over $1.34 trillion.
Bubble trouble
That's led to fears of a bubble, and there are several sharp objects that could burst it. One is resurgent inflation, triggered by the energetic expansion of narrow money around the world. Inflation is always bad for bonds because their interest payments are fixed, and so easily eroded by rising prices. Another is potential problems in the sovereign debt market. Gilt auctions are still well subscribed, but as Chris Dillow has pointed out, sentiment can sour quickly. If it does, falling gilt and Treasury prices would certainly drag corporate debt down with them.
Bond-market veterans point to the precedent: 1994. Back then, interest rates were slashed to drag economies out of the early-1990s recession. But they soon went back up when growth resumed. Mark Holman, managing partner at TwentyFour asset management, points out that at the start of 1994, 10-year gilt rates were a little over 6 per cent, but had topped 9 per cent by September, thanks largely to a series of US interest-rate hikes. "In price terms, that eroded almost 20 per cent of investors' capital," he said.
So if bonds are no longer the answer, what is? You need to get creative, and look beyond the traditional income-generating staples. Hybrid securities, structured products and dividend growers (as opposed to yielders) are some examples.
Some institutions have started doing just that. Chris Taylor at Blue Sky Asset management says institutional money managers are reducing their exposure, because they're afraid of a price bubble developing. T Bailey recently reduced the bond exposure of its cautious managed fund from 20 per cent to 5 per cent, while John Chatfield-Roberts at Jupiter told The Sunday Times that the 'easy money' had been made and that now was the time to sell.
Spreading it thinner
The stampede into corporate bonds and bond funds kicked off when credit spreads – the difference between corporate and sovereign debt – widened sharply in late 2008, as fearful markets priced in Depression-era default rates. Seeing the opportunity, investors moved in quickly. As prices recovered, those spreads narrowed again, to pre-crisis levels. The risk-reward equation is no longer so favourable. Bonds look fully priced.
Companies weren't slow off the mark, either. With bank lending moribund, there was also a flood of new bond issuance. Dealogic estimates that 2009 European corporate bond issuance alone increased by 55 per cent in 2009 from 2008, to over $1.34 trillion.
Bubble trouble
That's led to fears of a bubble, and there are several sharp objects that could burst it. One is resurgent inflation, triggered by the energetic expansion of narrow money around the world. Inflation is always bad for bonds because their interest payments are fixed, and so easily eroded by rising prices. Another is potential problems in the sovereign debt market. Gilt auctions are still well subscribed, but as Chris Dillow has pointed out, sentiment can sour quickly. If it does, falling gilt and Treasury prices would certainly drag corporate debt down with them.
Bond-market veterans point to the precedent: 1994. Back then, interest rates were slashed to drag economies out of the early-1990s recession. But they soon went back up when growth resumed. Mark Holman, managing partner at TwentyFour asset management, points out that at the start of 1994, 10-year gilt rates were a little over 6 per cent, but had topped 9 per cent by September, thanks largely to a series of US interest-rate hikes. "In price terms, that eroded almost 20 per cent of investors' capital," he said.
So if bonds are no longer the answer, what is? You need to get creative, and look beyond the traditional income-generating staples. Hybrid securities, structured products and dividend growers (as opposed to yielders) are some examples.
Saturday, 27 February 2010
New Oil Finds
The rising oil price and the return of risk appetite pushed many oil shares higher during 2009. With sector conditions remaining benign, identifying the real stars of 2010 could prove more challenging, although with exciting exploration campaigns under way or about to start around the world, this year's winners are likely to be those most successful with the drillbit.
BP statistics show that the world has vast proved energy reserves of 1.3 trillion barrels of oil and 185 trillion cubic metres of natural gas. At current rates of usage, that's equivalent to over 40 years' usage of oil and over 60 years' usage of gas – even if we never find another barrel of either.
With such reserves to fall back on, one might question why oil and gas exploration is even necessary, particularly with the growing (albeit from a low base) contribution from renewable sources. The answer has two parts. First, usage will almost certainly not remain at current levels.
Second, an often-quoted industry mantra is that "the easy oil has been found", or at least the easy oil still accessible to western explorers has been found. BP statistics show that 86 per cent of global proved reserves lie under the control of Opec (Organization of Petroleum Exporting Countries) and Former Soviet Union countries. With a flourishing global oil services industry to provide technical extraction expertise where necessary, these countries no longer need to call in western major oil firms to help them develop their fields. If they do call in western majors, it's now more likely to be on contracts to increase production.
BP statistics show that the world has vast proved energy reserves of 1.3 trillion barrels of oil and 185 trillion cubic metres of natural gas. At current rates of usage, that's equivalent to over 40 years' usage of oil and over 60 years' usage of gas – even if we never find another barrel of either.
With such reserves to fall back on, one might question why oil and gas exploration is even necessary, particularly with the growing (albeit from a low base) contribution from renewable sources. The answer has two parts. First, usage will almost certainly not remain at current levels.
Second, an often-quoted industry mantra is that "the easy oil has been found", or at least the easy oil still accessible to western explorers has been found. BP statistics show that 86 per cent of global proved reserves lie under the control of Opec (Organization of Petroleum Exporting Countries) and Former Soviet Union countries. With a flourishing global oil services industry to provide technical extraction expertise where necessary, these countries no longer need to call in western major oil firms to help them develop their fields. If they do call in western majors, it's now more likely to be on contracts to increase production.
Friday, 26 February 2010
The Investment Page: Spotlight on Multi Asset Funds
Investors desire to spread investment risk, coupled with a low interest rate environment in which it is difficult to get reasonable returns on cash, are two of the main reasons behind the increased popularity of 'multi-asset' funds.
The term 'multi-asset' refers to funds which invest across several asset classes and fund managers, which means investors are not exposed to the market gains or losses of just one asset class (or fund manager). Ultimately, multi-asset managers create the potential for capital growth and the conditions where the better performers may offset the poor performers.
The rationale is straightforward. No single asset class can be guaranteed to top the performance charts each year, so it seems prudent to have exposure to a broad mix of investments, including property, private equity, commodities and hedge funds. Relatively new as a concept, this new breed of multi-asset fund (brought about as a result of 'UCITS III' legislation) is a natural extension of the more traditional 'balanced' fund, which is restricted to invest in just two asset classes - equities and bonds.
Balanced funds grew in popularity in the wake of the stock market slump, triggered by the bursting of the dotcom bubble in the late 1990's. It is no coincidence then that multi-asset funds are proving so popular amidst the current market uncertainty. It is following such times that investors have become increasingly attracted to funds that can effectively act as a one-stop-shop for all of their investment needs.
Such funds are often referred to as 'core funds', the idea being that, given their diverse yet balanced remit, they account for the majority of the investment at the core of a portfolio, with other smaller, themed funds (known as 'satellite' funds) serving as an exposure to riskier assets. The notion is that a 'core' fund acts as a constant, stable base, whilst the 'satellite' funds are regularly re-assessed and changed in accordance with market trends. The 'core/satellite' approach is one that lends itself to medium to long term savings, such as pension provision or holdings in life assurance contracts.
There are obviously no guarantees, although basic theory around diversification suggests that investors can maximise their chances of making good returns over the long term by building a balanced portfolio that invests not just in a range of different equities, but in a variety of assets too. So, if one investment takes a dip - as invariably happens over the medium to long term- the whole portfolio doesn't get wiped out.
Steve Brann, manager of the Hansard Forsyth Wealthbuilder Balanced fund (X806 (EUR), B11(GBP) and C551 (USD)), available in HIL and HEL, commented on the outlook for his multi-asset fund in 2010 "Regardless of the prevailing shape of the current recovery, the unique nature of this crisis means volatility is likely to remain high whatever the trend direction.
If 2008 was the year of near apocalyptical collapse and 2009 the year of the rally on a rising tide of recovering confidence, then 2010 is likely to be a year of divergence and volatility. The rally in risk assets has been driven by an abundance of virtually-free central bank credit and unprecedented peacetime spending spree by governments.
The outlook for 2010 will vary depending on which country you are looking at. This year will be all about managing the exit of Quantitative Easing and will be the year for true asset allocators and multi-asset investors to come to the fore."
The term 'multi-asset' refers to funds which invest across several asset classes and fund managers, which means investors are not exposed to the market gains or losses of just one asset class (or fund manager). Ultimately, multi-asset managers create the potential for capital growth and the conditions where the better performers may offset the poor performers.
The rationale is straightforward. No single asset class can be guaranteed to top the performance charts each year, so it seems prudent to have exposure to a broad mix of investments, including property, private equity, commodities and hedge funds. Relatively new as a concept, this new breed of multi-asset fund (brought about as a result of 'UCITS III' legislation) is a natural extension of the more traditional 'balanced' fund, which is restricted to invest in just two asset classes - equities and bonds.
Balanced funds grew in popularity in the wake of the stock market slump, triggered by the bursting of the dotcom bubble in the late 1990's. It is no coincidence then that multi-asset funds are proving so popular amidst the current market uncertainty. It is following such times that investors have become increasingly attracted to funds that can effectively act as a one-stop-shop for all of their investment needs.
Such funds are often referred to as 'core funds', the idea being that, given their diverse yet balanced remit, they account for the majority of the investment at the core of a portfolio, with other smaller, themed funds (known as 'satellite' funds) serving as an exposure to riskier assets. The notion is that a 'core' fund acts as a constant, stable base, whilst the 'satellite' funds are regularly re-assessed and changed in accordance with market trends. The 'core/satellite' approach is one that lends itself to medium to long term savings, such as pension provision or holdings in life assurance contracts.
There are obviously no guarantees, although basic theory around diversification suggests that investors can maximise their chances of making good returns over the long term by building a balanced portfolio that invests not just in a range of different equities, but in a variety of assets too. So, if one investment takes a dip - as invariably happens over the medium to long term- the whole portfolio doesn't get wiped out.
Steve Brann, manager of the Hansard Forsyth Wealthbuilder Balanced fund (X806 (EUR), B11(GBP) and C551 (USD)), available in HIL and HEL, commented on the outlook for his multi-asset fund in 2010 "Regardless of the prevailing shape of the current recovery, the unique nature of this crisis means volatility is likely to remain high whatever the trend direction.
If 2008 was the year of near apocalyptical collapse and 2009 the year of the rally on a rising tide of recovering confidence, then 2010 is likely to be a year of divergence and volatility. The rally in risk assets has been driven by an abundance of virtually-free central bank credit and unprecedented peacetime spending spree by governments.
The outlook for 2010 will vary depending on which country you are looking at. This year will be all about managing the exit of Quantitative Easing and will be the year for true asset allocators and multi-asset investors to come to the fore."
The Investment Page: Dollar Falls
The dollar fell for the first time in three days on Wednesday against the euro on speculation that Bernanke will hold interest rates near zero to support growth in the world's largest economy. The dollar weakened versus 14 of 16 major counterparts.
The Investment Page: Gold Falls
Gold fell more than 1 percent to USD1,089.75 an ounce as a price slip below USD1,100 sparked technical selling, and amid caution ahead of Federal Reserve chair Ben Bernanke's congressional testimony later on Wednesday. "If, as we suspect, he maintains the clear stance to a loose monetary policy, the market will buy dollars on the hoped-for support this will give the economy," said Credit Agricole in a note.
The Investment Page: European Orders Rise
European industrial orders unexpectedly rose for a second month in December led by a surge in demand for capital goods such as machinery and equipment. Orders to industrial companies in the 16-nation euro area rose 0.8 percent from November, when they gained 2.7 percent, the European Union's statistics office said on Wednesday. The euro's 9.6 percent drop against the dollar in the past three months is making European exports more competitive just as the global economy gathers strength.
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