| THE VOLATILITY ROLLER-COASTER This is the 10th edition of Tracker Magazine and the first in 1999. We
would like to take this opportunity to wish all our readers a Happy and Prosperous New
Year.
And what a year it promises to be. Millennium bugs apart, we all have
our last opportunity ever to buy a new PEP – don’t forget the deadline is 5th
April the last day that your cheque must be receieved. Then we have the introduction of
the PEP replacement - the ISA. Remember existing PEPs aren’t affected so stick with
them unless you want to transfer
them to netPEP. And last but not least there has been the launch of the Euro. To put
your mind at ease this won’t affect your investment with netPEP.
Already this month the stockmarket has set a cracking pace, reversing
most of the losses notched up in October. Volatility has become a regular feature of
stockmarkets right round the world and there is little to indicate that this will subside.
Modern travel and communications has made the world a much smaller place and financial
markets in all the major economies are now freely accessible to professional investors
managing vast amounts of money on a global basis. With the arrival of the Internet, fund
managers can react even more rapidly to good and bad news and this inevitably increases
the volatility of share, bond and currency markets.
What effect does this high volatility have on the fund management
industry? It will almost certainly mean an increase in the attractions of passively
managed index funds. Active fund managers who try to beat the index are finding the job of
stock picking and cash management impossibly difficult. The performance statistics
published by Micropal show that 98% of actively
managed UK invested unit trusts failed to beat the FTSE 100 Index in the last 12 months to
the end of 1998. The reason is very simple. Active managers use different strategies to
beat the Index, such as managing the cash element of the portfolio in order to be
uninvested in falling markets or fully invested in rising markets. This worked well years
ago when markets rose or fell gradually over long periods of time. But rapid swings - plus
and minus 15% in the last 4 months - mean active managers have to remain fully invested at
all times.
The main strategy for trying to beat the index is of course picking
companies using analytical skills to identify exceptional growth potential. However,
advances in information technology mean that news reaches the public domain so quickly
that there is insufficient time to amass holdings of these companies in sufficient size to
make a difference on the overall performance of the portfolio. And if the news is bad
there’s insufficent time to offload big holdings before the world and his wife hears
the same news.
The flip side of this problem is that big portfolio managers who try to
keep their portfolios fully invested will prefer to buy those companies in which they can
deal easily and rapidly without moving the price against them. This explains the
popularity of large companies right around the world and why they have out-performed the
mid-size and small companies by a very large margin as the table shows in the FTSE 100
Index Statistics section. This accounts for the reason why the FTSE 100 Index has beaten
all other UK Indices on a consistent basis.
So in uncertain and volatile markets investors over recent years have
done well by sticking to the big companies. Maybe this will prove to be the right policy
for the future as well.
|
