'Destiny is not a matter of chance; it is a matter of choice. It is not to be waited for; it is to b...
'Destiny is not a matter of chance; it is a matter of choice. It is not to be waited for; it is to be achieved.'* It would seem that this is exactly the attitude that investors are adopting by taking responsibility for their own financial destinies. Investors today are demanding choice and in doing so are shaping the direction of the UK investment marketplace.
In the last twenty years the number of unit trusts available has quite literally exploded. In 1978 there were 414 UK authorised unit trusts. By the end of 1999 this number stood at over 1,700. Investors seeking returns from the stock markets have recognised the inherent risks of holding all their investments with one fund management group. They can see that no one investment group has ever had the expertise in all markets and all asset classes across all periods of time. However, when it comes to choosing which fund or combination of funds will allow them to realise their aspirations the decision is far from simple. Investors may well demand choice but in reality what they need is the tools and the information to make an informed choice.
For this newly emerging 'DIY' investor the media and the internet are tools that are already helping them make this informed choice offering access to a multitude of websites containing huge amounts of information about different investment houses and their product ranges. And this is only the beginning. Worldwide internet traffic is doubling every 100 days and 18 million users are coming online each month. In the US it is estimated that by 2002 more than 50% of households will be online and a similar pattern is developing in the UK.
There are, however, two drawbacks for this new breed of investor. The first is that they may be faced with too much choice and the second is that crucial commodity: time. Finding the time to trawl through all the different websites and the information stored on them, to keep updated of what is being written in the financial journals and to keep abreast of world markets is a considerable job. And of course that is just the starting point. The DIY investor would then need to filter and analyse this information before they would have the confidence to make their choice.
For those investors who find the maze of unit trusts out there confusing and are looking for guidance or for those clients for whom time is a scarce commodity multi- manager investment services can offer the ideal route to 'informed choice'. This approach to managing money has rapidly grown in popularity in the retail market over recent years. But actually as a style of investing it is far from new. The institutional pensions market has worked on the basis of this philosophy of not putting all your eggs in one basket for many years. So why the sudden popularity? The answer lies in the independent approach to selecting unit trusts. This form of investing recognises that investors need choice. It revolves around the premise that no one fund management group will be the specialist across all markets and asset classes. On this basis the only way to achieve consistent repeatable returns over the longer term with a relatively low level of risk is to try to identify the specialist expertise of the different investment funds and investment groups.
Sounds simple, but in reality it is not as easy as it first appears. Before you even begin you face the initial stumbling block; human nature. We all have a natural instinct to base our decisions on what works now or what has worked in the past. The problem with this is that History never exactly repeats itself. It may well teach us some important lessons but it cannot produce an exact template for future success. Now I am sure that Mary Astell was certainly not thinking about investment performance when she wrote in 1730: 'he who only or chiefly chooses for beauty will in a very short time find the same reason for making a new choice'. But the principle she stressed then is an important one to bear in mind if you are selecting unit trusts today. If you just base your choice of funds on past performance alone it will not be long before they loose their 'appeal'. This is certainly backed up by the statistics and by the decision this year of the Financial Services Authority (FSA) not to include past performance in investment league tables. The FSA have based this decision on what they say is the lack of hard evidence to suggest a correlation between the past record of an investment fund and it's future success.
So if you can't use the past as an indicator of success in the future how do portfolio managers select a portfolio of unit trusts that provide investors with consistent repeatable future returns. Well although 'winners may not repeat', winning strategies can, in similar economic conditions. At Henderson Investors we believe that it is the investment approach and style of the fund manager that and drives the way in which the fund behaves and hence performs at different stages of the economic cycle.
You will often hear managers being referred to as either "top down" or "bottom up." A 'top down' manger will think about sectors and themes, picking stocks to fit their thoughts. A 'bottom up' manager is a stockpicker who takes all their risk at the stock level. There is no right or wrong approach and each may work well over the long term. However over short term periods one approach may work better than the other.
What about investment style? The textbook terms of 'value' and 'growth' are continually banded around. There are many definitions of these terms but usually value stocks have a P/E below that of the market and growth stocks above. Value stocks tend to perform well in the recovery stage of a markets economic cycle whereas growth stocks fare best in periods of healthy economic growth. In addition to value versus growth, the average market cap of a fund's und
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