An 'International Equity Review' arrived this week from a Dr Rory Knight at Oxford Metrica. I tend to give myself the gift of not reading lengthy reviews of anything, but this one caught my eye because it forecast something I've been thinking about for a while: the all-over-the-place-but-going-nowhere market.
According to Knight, due to precarious investor confidence, to the "disruptive leadership changes" under way around the world, and to faltering growth, the near future of the equity markets is "likely to be flat in aggregate, accompanied by significant volatility with patches of superior performance".
There'll also be a fast rise in corporate bankruptcies and plenty of "spectacularly poor performance".
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If this is making older readers shiver slightly, it will be because they were working during the 1970s and the last really sideways market in the West ran from 1975 to 1982.
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During that time, however, Warren Buffett made annual average returns of 34% a year. How? Stockpicking.
Robert G Hagstrom, in his book Who's Afraid of a Sideways Market, looked at the 500 largest stocks in the US market over the eight-year period. He found that, in any one-year period, around 3% of the stocks doubled. Over a three-year period, 18% of them doubled. But, over a five-year period, 38% did. Almost four in ten stocks went up over 100% over rolling five-year periods.
The point? You can make a fortune in a market that looks like it is going nowhere.
It is also worth noting that it is not just stocks that can double in an apparently sideways market the market can do the same.
Look back to the UK in the 1970s I'm doing this via John Littlewood's brilliant book The Stock Market and you can see the point. From June 1970 to May 1972, the FTSE All-Share index rose 98%. From May 1972 to December 1974, it fell 73%. From December 1974 to May 1976, it rose 177%. From May 1976 to October 1976, it fell 32%. Then, from October 1976 to May 1979, it rose 144%.
However, had you slept through the decade, you would have woken thinking nothing had happened at all: the index started in June 1970 at 115 and ended in May 1979 at 116.
This, of course, is roughly what has been happening in the UK since 1999. We've been down 50%, then up 106%, then down 50%, up 76% and now, on our most recent about turn, down 9%.
This brings us back to one of our much mulled-over subjects: should you use an active manager or a passive manager?
Five years ago, I would have told you not to bother paying for active fund managers. They were so unlikely to make you back the 2% or year or so they were going to charge you in management fees that you might as well just have a cheap passive tracker fund instead.
This year, I'm not so convinced. In markets like these ie markets that could easily end the decade much where they started there isn't any point in holding passive market-wide investments, unless you are the only person in the world with perfect market timing.
If you are to invest, you need to choose an excellent active stockpicker. You need a manager capable of running what Knight calls a "super-focused" fund, of 15 to 20 great stocks. If you are too diversified, you'll end up with the same flat returns as the market.
And the good news is that, with commission for financial advisers on the verge of being banned thanks to the Retail Distribution Review (RDR), fund managers are starting to strip commission out their fees and show 'clean' prices.
Those clean prices look good. Take Edinburgh-based Baillie Gifford (I am, by the way, a non-executive director on a small investment trust they manage). Later this year, it will offer its funds direct to retail investors at prices that we couldn't have dreamt about a decade ago.
Most of the funds will come in with annual management charges of 0.65%. You will have to invest at least £10,000 if you go direct to them, but there is no minimum if you buy via a platform although a platform will levy its own fees as well.
Now for the tricky bit: finding a cheap, but excellent, focused fund. These are still thin on the ground.
You might look at the Senhouse European Focus Fund Senhouse likes to hold only 20 or so stocks in each of its portfolios so it fits into the 'super-focused' box. It has also performed well. It only falls down on cost a management fee of 1.25% seems high these days.
Another thought might be the CF Lindsell Train UK Equity Fund. It comes with an annual fee of 0.65%, has a very focused portfolio and a history of outperformance: it's up 60% since its inception in 2006 against 23% for the FTSE All-Share. All other ideas welcome in the comments below.
This article was first published in the Financial Times
