Investors are not very good at timing. At least that’s what was inferred this week from Investment Association data. As Patrick Sanders wrote, UK investors ploughed almost £1.2bn into equity funds in June, while removing almost £1.2bn from bond funds.
Most of the money went into passive funds, the report found, meaning investors were fully at the whims of the markets.
At the time, things looked pretty rosy. The Bank of England was expected to (and indeed did) cut interest rates, the Labour party won an enormous election victory providing stability and, generally, things seemed okay.
This trend continued in July, according to Calastone Fund Flows data this week, which showed the big inflows into equity funds in June were backed up the following month. It was one of 10 best months for equity inflows over the past decade, with investors pouring in £2.2bn.
Again, there was logic behind it. The Federal Reserve is expected to cut rates soon, with some pricing in several cuts this year. This should boost equities and, in particular, growth stocks, who are priced on future earnings. These earnings become more valuable when rates are lower.
Fast forward to the first nine days of August, however, and markets are down. The worst of the lot has been Japan's Topix, which has lost 5.7%, but the S&P 500, FTSE All Share and MSCI World are all around 1.7 to 2% lower. The only one near to par is the Euro Stoxx index, down just 0.7%.
There are a variety of factors that have led to the falls. As Gary Jackson wrote, the Fed’s delay to cutting rates last month was one, compounded by weaker than expected economic data in the US such as non-farm payroll numbers on Friday last week and contracting purchasing managers’ index data did not help.
In Japan, the strength of the yen was another contributing factor to the sell-off. Investors were shorting the weak currency, using it to go long on non-Japanese assets to turbocharge their returns.
So, as ever, it was the unforeseen factors that impacted markets. I am not trying to belittle investors, so few could have seen it coming.
But it appears investors got the timing wrong, ploughing their cash in just before a market fall. Now the question is whether it is a buying opportunity.
But this strategy of getting in and out of markets at the right time is a notoriously difficult one. Liontrust fund manager John Husselbee told Matteo Anelli this week that, while “it is true that volatility can present buying opportunities”, staying invested is better than attempting to time the market.
“History has shown that while investors will experience market dips and volatility from time to time, these events won’t stop the long-term positive performance of markets.”
It will be interesting to see whether there were more buys in August, or if investors are taking the market falls as a sign to ditch equities and rotate back into other areas. One would hope not, give the advice around staying invested.
Regardless, those who drip feed their money in each month will capture some of the cheaper prices, while those already invested should probably put their head in the sand and ride this short-term blip out.