Investors don’t act like a blip on a chart

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Nov 21, 2019

Fund managers and advisers have a keen interest in investors staying invested. The delivery of long-term goals demands that clients – however nervous – stick with the programme.

Those goals, of course, are shared; earning increasing revenue via an ad valorem, percentage-based charging model can tempt asset gatherers to be rather more enthusiastic about market prospects than may otherwise be the case.

JP Morgan recently presented historical performance data that has encouraged a number of our more fresh-faced intermediaries to assert that, even after an extreme event – such as the 1987 financial crash – markets will recover quickly. Some advisers excitedly shared this data on social media, pointing out that a valuation presented at an annual client meeting on 31 December 1987 would have illustrated that the FTSE All Share Index was 6 per cent higher in capital terms than at the start of the year.

FCA and Personal Finance Society data on adviser ages suggests more than two-thirds of today’s advisers were under 21 in 1987. Around a quarter were yet to be born. While this explains the rather naive description of adviser service 30-odd years ago, the trivialisation of a complex set of circumstances into a mere factoid is utterly at odds with the experience of those of us who were ‘there’. It is ignorant of the circumstances that in reality left tens of thousands of first-time investors utterly devastated, changing the public’s attitudes to investing for many years afterwards.

In 1985, the Pet Shop Boys released a single that peaked at 116 in the UK pop music chart. Re-released at the start of the summer of 1986, it became one of the most popular singles of that year.

‘Opportunities (Let’s Make Lots of Money)’ was only one example of a flood of cultural memes that reflected a post-Thatcher revolution zeitgeist where low-tax, free market fundamentalism was the new gospel.

As ordinary people began to feel richer and less interested in politics, the Tory government (with a post-Falklands war parliamentary majority of 144) had crushed trade unions’ power and introduced sweeping economic reforms. In entertainment, Channel 4’s ‘Saturday Live’ was dominated by Ben Elton and friends, including Harry Enfield’s satirical characterisation of plasterer ‘Loadsamoney’.

Wealth rush

Nowhere was this wealth rush more prevalent than in the City, where the ‘Big Bang’ saw the London Stock Exchange deregulated, enabling US and Japanese banks to take over long-standing stockbroking and jobbing firms.

The City became a magnet for anyone who wanted to make easy money; young urban professionals begat the term ‘yuppies’, and ‘barrow-boy’ traders drove Porsche sales to a record high while millions of people were persuaded to invest in the stockmarket for the first time.

Equities rode that wave of euphoria, and expectations of growth became self-fulfilling. In mid-August 1986, the FTSE All Share index stood at 790. British Telecom had already been privatised in 1984, but 1986 saw British Gas shares heavily marketed to the general public through a multimillion-pound ad campaign that instructed 98 per cent of the public: ‘If you see Sid, tell him.’

That share offer became a standard subject in taxi and pub conversations. Four million people raided their savings and queued for hours to buy in to a blue-chip utility at a discounted price, and around 1.5 million were successful – many selling for a quick profit in the next couple of weeks.

By mid-July 1987, the FTSE All Share index stood at 1,239, up over 60 per cent on a total return basis in less than a year. Few assigned any significance to the market weakening 10 per cent over the next four weeks and, for those who had, its subsequent recovery in early October to almost the mid-year high seemed to confirm the gravy train was still on track.

The public had also discovered unit trusts over that 1986-87 period. This culminated in ‘The Royal Event’, where Royal Life Fund Management spent millions on a marketing campaign of direct mail (a first for an industry previously eschewing ordinary advisers, let alone the public), huge billboards and TV spots designed to make a mutual fund launch look like a privatisation issue.

They raised the equivalent of almost £670m at today’s values. Later, many investors complained they had thought they were buying Royal Life. Of course, the impetus for their complaint was that the funds had the misfortune to launch on ‘Black Monday’: 19 October 1987, when the market fell by over 11 per cent (the S&P 500 plunged 20 per cent), falling 35 per cent over 16 astonishingly volatile trading days.

Our August 1986 investors had seen a gain of 60 per cent wiped out, and that was their anchor point – not the original investment.

Tracking of net sales told us that the highest volumes of new money over 1986 and 1987 entered the market in – you guessed it – Q2 1987. In other words, the bulk of investors, relatively new to the market, had lost money – many of them significant amounts. So much for the industry myth that most clients experienced a gain for that year.

And the idea that typical clients were seasoned investors having regular sitdowns with advisers is at best naive. Regulation was only months old and self-supervised to boot. In the aftermath of the crash, for example, hundreds of people gathered at the Assembly Rooms in Derby at an event organised by a local adviser for worried investors. He gained dozens of new clients as a result, many of whom had been sold investments by now less-than-visible advisers. That adviser’s business evolved to become Marlborough Fund Managers.

Most advisers recognise that investment research that relies on quantitative data to draw conclusions that suit a marketing case, while ignoring the potential complication of context and eye-witness accounts, is a shaky foundation on which to base decisions. There’s more to market and investor behaviour than a blip on a chart.

Graham Bentley is managing director of gbi2

You can follow him on Twitter @GrahamBentley

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