It does not matter whether you believe in value or growth, big cap or small, global titans or emergi...
It does not matter whether you believe in value or growth, big cap or small, global titans or emerging markets, it is what the rest of the market thinks that counts. So it is important to spot the next trend if you want to boost investment performance.
It now seems more likely that interest rates in both the US and UK have peaked, which if true should be good news for equity markets. With the current market volatility, identification of trends is vital when running a managed fund.
Consider the Japanese market, which was the place to be in the early 1980s. The market rating was sky-high but still the growth kept coming through and with it market performance. In the late 1980s performance turned down. Gradually investors gave up as concerns grew over cross-holdings, government support for bankrupt companies, deflation, poor economic growth, ageing population and lack of political support for necessary corporate change. So are we at a point now where there might be a change in the trend?
The factors mentioned above are priced into the market and many are being addressed, so it feels like we are somewhere near. However, we have not had the total capitulation seen at market bottoms so I am increasing weighting without going too heavily into the area.
An area I do believe has turned is smaller companies, particularly in the UK. In the first half of the 1980s this was the place to be. In 1988 small started to underperform large and while everyone thought it was just a blip and recovery would occur, it didn't.
After 10 years of underperformance, small companies have outperformed large caps but discounts of smaller company investment trusts remain wide, which tells me that few investors believe this will continue. Share ratings remain low, specialist managers tend to outperform the index because the stocks are less researched, so I believe we are at the early stage of a long up-trend and am therefore heavily overweight in this area.
Are technology stocks in a long term up-trend? From an investment trust viewpoint the answer has to be no. Looking at Finsbury Technology and Henderson Technology Investment Trusts before 1998, they performed somewhere near the FTA All share and World Indices and traded at a reasonable discount. In 1998 they showed good outperformance but the discount widened as investors expected performance to slide.
The wave of excitement for technology stocks in 1999 and early 2000 gave the two trusts explosive asset performance and moved the share prices to significant premiums. Since then the downturn in technology has lost about half the previous outperformance but the stocks still stand at a premium, showing investors' belief/hope for recovery to previous levels and beyond. I therefore believe we have experienced a bubble that is yet to totally deflate.
Peter Metcalfe is investment director of the Premier Enterprise Fund
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