Chastened investors dabble in equities

Shares are back in vogue, but this time investors are doing their homework,writes Laura Slattery

The fine line between confidence and arrogance was tested frequently at the end of the boom years, as novice investors caught up in the late 1990s rash of market activity found out the hard way that the market was not their friend.

Now, almost four years later, individual investors are returning to the scene, trusting either their own judgment or that of their advisers to plump for nice little earners with performance graphs free of ominously dramatic zig-zagging lines.

The value of private client activity at Merrion Stockbrokers is up more than half year-on-year, according to Mr Shane Nolan, head of private clients at the stockbroking firm. "We're seeing a lot of people getting back in the market," he confirms. "But they are not getting back into the same areas where they got burnt in 2000 i.e technology."

On Goodbody Stockbrokers' ordinary portfolio business, there has been "a big uptake" over the past two to three months, says Mr Eamonn Glancy, head of its private clients division.

But he attributes the growth in activity to investors who have made land sales, sold privately owned business or downtraded property. "It's new wealth, new money," Mr Glancy says.

So far, "very few" of those who lost substantial amounts of money during the market's repeated plunges over the last three years have come back for more, he believes.

Although markets have rebounded significantly since they bottomed out, the net effect of the bear market experience has been to instill a sense of caution among investors. "We're trying to keep a tab on what is happening with investor confidence in Europe and the US, and from April onwards, we were beginning to see net inflows into equity funds," says Mr Eugene Kiernan, head of asset allocation at Irish Life Investment Managers.

"My sense of what is happening here in Ireland is that a lot of the inflows are into funds with some sort of capital guaranteed structure," Mr Kiernan says.

However, investors are increasingly prepared to settle for an 80 or 90 per cent guarantee on a fund that will give them a greater shot at gaining from the upside, he adds. "This is how a lot of people dip their toes back in to start with. It's the gateway at the early stage of interest in equities."

At Goodbodys, online execution-only services have seen some of the action, but it is advice that is most in demand, Mr Glancy says. "Before people would take stock market bets on the back of rumours, hunches, the expertise of golf partners, dinner party conversations, office talk and gossip."

Now people are a lot more conscious of messing up. "Most people put in a spreadsheet the 10 stocks they own and monitor it themselves. People are very interested in it, they do follow the financial media and check prices every day," says Mr Glancy.

Even clients whose stake in equities is wrapped up in a long-term vehicle like a self-directed pension will keep score, he says.

Meanwhile, Goodbody's Market Desks service, which instructs short-term traders to sell based on a specific "trading range" rather than hold out for miracles, has attracted new clients over the past year, each with an average of €100,000 to invest.

"Before nobody was ever there to actually tell them to sell," Mr Glancy says.

Instead of taking massive gambles on unknown quantities, investors are seeking out blue-chip stocks that are not overvalued and have safe dividend yields, according to Mr Nolan.

A lot of Irish investors have made money on the market capitalisation of Irish-listed companies like the Grafton group and Kingspan in recent months, Mr Nolan says.

"Other than that, it's the blue chips like AIB and Bank of Ireland. There's been a yield of almost 5 per cent on AIB which is very attractive to investors."

The currency risk attached to investing in the US market is worth taking into account, Mr Nolan cautions. The US market in is up 15 per cent in dollar terms over the year to date, but in euro terms it is up only about 5 per cent.

"For euro investors, which most private clients in Ireland would be, the US may not be as attractive basically because of dollar depreciation," he says.

The move to equities has been prompted partly by a feeling that they are at the beginning of a new cycle, while other asset classes, including property, have come to the end of theirs.

"Certainly property has been a very, very powerful market over the past three to five years in Ireland. We are well up there on the property cycle, while equities have had a torrid time," Mr Glancy says.

"When equities move, they will move fast as well. They are up 30 per cent since March."

Mr Nolan has also seen some top-slicing of property holdings and re-directing into equities this year, but Mr Robbie Kelleher, head of research and chief economist at Davy Stockbrokers, says it has seen little evidence of disenchantment just yet.

"I personally wouldn't favour property, I think it's very overextended, but that wouldn't be the view of a lot of people," Mr Kelleher says.

So will investors, after a successful testing of the water, forget about the crashes of the past and get blindly carried away with equities again?

It depends on what happens next, says Mr Kelleher. Confidence has built up, but there is still nothing like the level of activity that there was.

"If markets continue to rise dramatically, then memories will fade, they always do. But at the moment investors are more sanguine and more sensible than they were, yes," he says.

Four frequently used words during any market cycle are "this time it's different", notes Mr Kiernan from Irish Life.

"In time, people will fall in love with the market, but as for a return to 'irrational exuberance' as [US Federal Reserve chairman, Mr\] Alan Greenspan called it, I can't see that happening."

For many investors, it is enough to pocket a good dividend and see those comforting green triangles pointing upwards next to their stocks' daily price listings more often than not.

Expectations have "gone way down", according to Mr Nolan, with people prepared to settle for an annual return of 10 per cent on their equity portfolio.

Late 1990s-style returns of 20-25 per cent per annum are no longer the target for most private investors, agrees Mr Kiernan.

"They would be happy with equities just being the superior asset class," Mr Kiernan says. "Investors prefer solid, sustainable returns, not the boom and bust of the last few years."