Banks a drag on putative ‘Scotsie 100’

Report by London Business School says investors' return would have been half that of FTSE


A ‘Scotsie 100’ index would have underperformed the FTSE 100 over the last 59 years, a new London Business School report shows, with investors making just over half as much money as they would have from an investment in the rest of the UK’s listed companies.

£1 invested in 1955 would be worth £648 today, compared to £1,168 in the rest of the UK. Advocates of a Yes vote in the Scottish independence refer- endum will note the stats are distorted by the near-collapse of Royal Bank of Scotland and HBOS in 2008. Exclude them and Scottish stocks would have slightly outperformed the rest of the UK.

For investors, the real lesson, perhaps, is the power of compound interest. In real terms, Scottish shares returned 5.7 per cent annually, compared to 6.8 per cent for the rest of the UK – a seemingly small difference, but one that severely affects returns over the decades.

Investors piling into overvalued equities Global fund managers are continuing to overweigh equities despite seeing them as increasingly overvalued, according to Merrill Lynch’s latest monthly survey.

A net 21 per cent regard stocks as overvalued, the highest reading since 2000. However, a net 61 per cent are overweight equities, the second-highest reading in history and the highest since early 2011, not long before a large summer swoon.

This reluctance to run against the herd crops up frequently in Merrill’s surveys. Last September, more managers viewed emerging equities as undervalued than at any time over the previous nine years , yet they said it was the region they were most keen to avoid.

At the bottom of the European bear market in June 2012, a record percentage said Europe was the most undervalued region. Their response was to hold the third-highest cash levels on record.

Most were underweight equities at the global bear market bottom in March 2009, even though they saw stocks as undervalued.

Fund managers recognise when equities are near extremes, but seem to think they can get in or out at just the right time.

Unfortunately, they can’t. The latest survey indicates they have learned nothing from past mistakes. Is Murdoch bid a warning signal? Might Rupert Murdoch’s $80 billion bid for Time Warner indicate a market top is near? Some commentators seem to think so.

A mania for mergers and acquisitions is always evident in exuberant markets, they say; look at Murdoch’s $5.3 billion purchase of Chris-Craft in 2000 and his $5.6 billion acquisition of Dow Jones in 2007, both before steep bear markets.

However, News Corporation’s biggest acquisitions were made in 2003 and 2005, buying Hughes Electronics and Fox Entertainment for $6.8 billion and $6.5 billion respectively.

In fact, Dealogic notes it made billion-dollar acquisitions in 1996, 1997, 1999, 2000, 2003, 2004, 2005, 2007, 2012 and 2013.

A market top may well be near, but don’t fall for this tosh about a Murdoch indicator.

World Cup effect endures Now that the World Cup is over, can stock markets go back to normal? I have noted in recent weeks the work of Prof Alex Edmans of London Business School, whose research indicates the event moves markets – and 2014 was no different, he suggests.

Argentina underperformed world markets following their defeat to Germany in the final (stocks actually eked out a slight gain, after earlier being down as much as 1.3 per cent), while Germany’s Dax was the top performer in Europe, gaining 1.2 per cent. Overall, 26 of 39 national markets underperformed after World Cup losses, Edmans notes.

The big exception – Brazil’s Bovespa soared in the days after the humiliating 7-1 defeat to Germany – only proves the rule, he adds. The result soured the national mood to the point it may endanger socialist President Dilma Rousseff’s re-election hopes, which would be cheered by many investors.

Only a game? Not in Brazil.

Stock-pickers pick wrong This was meant to be a year when active managers and stock-pickers would finally shine. Alas, just 19 per cent of large-cap US fund managers have beaten their benchmark this year, a recent Merrill Lynch report found. Meanwhile, a Goldman Sachs report found the most popular stocks among active managers have returned 6 per cent this year, compared to 8 per cent for the S&P 500 and 10 per cent for the least-loved stocks.

In previous years, managers protested their efforts were being undone by the extremely high correlation between the average stock and the overall market. Essentially, all stocks were moving in unison. Once correlations fell back to historic norms, it would be a stock-picker’s market, they said. Correlations have now fallen, but active managers continue to lag.

The case for a passive investment approach is embarrassingly obvious at this stage.

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