November 2008


‘People need to take a deep breath and get a historical perspective’, says Paul Merriman (pictured) ... paul_merriman.jpg Things aren’t all that bad. At least if we keep things in perspective they aren’t. Let’s take two issues particularly relevant to fund managers: macro-economics and fund sales.

When headlines in October screamed that China’s growth had fallen it seemed like the final domino had toppled in a catastrophic financial chain reaction. But China’s growth only fell a bit, to just under an exceptionally high 10%, and it was the first time this had happened for five years. Importantly, optimists said this new level of growth may still be enough for China to keep the world economy moving.

When worried investors bombarded Merriman Berkman Next at the height of the recent market falls – the firm said its switchboard received a phone call every minute – Merriman, a US money manager, responded with an open letter to clients on its website and a podcast in which Paul Merriman, founder, urged clients to put the current turmoil into political and macro-economic perspective.

“[The crisis] is not unprecedented,” he said. Merriman told investors to consider that in 1981-1982, Paul Volcker, then chairman of the Federal Reserve, raised interest rates to over 16% and the prime rate to 20%, which compares to around 5% today. Prior to Volcker’s action the US had experienced inflation of 13.5%.

Merriman told people to remember the Opec oil crisis and the dotcom collapse. “If you look at the losses in 2000 to 2001, the market was down twice what it was in this recent decline.”

He urged clients to view with scepticism the news media. It wasn’t in the media’s interest to give a broader perspective, he said.

The firm is advising investors of the need for a diversified portfolio. When the US market was depressed in the recession of the early 1980s, the Japanese markets were strong. Japan’s crisis of the 1990s, on the other hand, contrasted with strong US markets in the same period.

The panic among Merriman’s clients is reflected in the State Street Investor Confidence Index for October 2008, which focuses
on institutional investors. Global investor confidence decreased by 17.5 points from 75.7 in September to 58.2 in October, the index revealed. But even here there is a wider perspective. It was North America that weighed down on the index the most. Elsewhere the declines were less dramatic. European confidence fell just 1.5 points to 79.6, and Asian confidence declined just 0.6 points from 87.1 to 86.5.

Believe it or not, earlier in the crisis, admittedly before the Lehman Brothers collapse, European equity fund sales had been surprisingly positive in August. French investors led the way with a €2.7bn boost. Lipper Feri, which published the figures in October, had been expecting flat sales. The positive sales were “a dramatic reversal of fortunes for an industry that has suffered equity redemptions of over €17bn since the crunch started a year ago”.

A return to redemptions seems likely, said the firm, but their scale may be tempered by the fact that “most retail investors are already on the sidelines”.

Although net sales of ISAs, a type of UK-domiciled investment fund, saw outflows of £250.9m in September 2008, at least this was lower than the £298.7m outflow the previous month.

And it’s not as though all these equity outflows went to cash, either. The UK equity income sector, the most popular UK-domiciled net retail sector, saw inflows of £174.3m. 

Richard Saunders, chief executive of the Investment Management Association, the UK trade body, said: “Investors are sitting tight. There has been very little new investment over the last year, but there are still no signs of widespread withdrawals. 

“This suggests there is little appetite for crystallising the losses that many will have made over the recent period.”

It may be, then, that retail investors have learnt the lesson of history, which is to not sell at the bottom of the market.

And if history teaches us anything else it is that crises like this are necessary for wealth creation in the long run. As Merriman told his clients: “People need to take a deep breath and get a historical perspective and understand that it is a serious problem, but historically this is part of what we have to go through to get that outperformance from portfolios over time.” ©2008 Funds Europe

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