Investors should take notice of trend following strategies

Investors should take more notice of trend following strategies, according to head of advisory portfolio management at Kleinwort Benson Andrew Thompson.

Trend following looks to establish objectively whether an asset class is in an uptrend or a downtrend based on past performance, and Thompson believes that UK investors should be capitalising on the strategy, which is becoming increasingly popular in the US.

"Financial markets have a tendency to trend", he said.

"Not all the time, but often enough to give a statistical edge. I was speaking to Anthony Bolton recently, and he told me that the final thing he would do before he made an investment decision would be to look at the technical picture."

Kleinwort Benson uses a moving average crossover system. If the 50-day moving average of an index crosses above the 200 day moving average, Thompson automatically invests into the iShares of that index. If the 50 day average falls below the 200 day average, the relevant asset class is said to be in a downtrend and is sold.

Over a 20-year period, the system has had a great deal of success. Since May 1990, Thompson's strategy would have returned 360.7 per cent when investing in the S&P 500, compared to a buy and hold return of 237.34. Moreover, the maximum drawdown would have been only -19.32 per cent, compared to -56.54 per cent.

The results are similarly impressive for the Nasdaq 100, Nikkei 225 and DAX, though buy and hold returns of 134.25 per cent exceed trend following strategy returns of 97.54 per cent for the FTSE 100 over a 20-year period.

Thompson said: "I think the track record speaks for itself. Trend following offers the potential for attractive returns with far lower volatility compared to buy and hold, or attempting to interpret the market."

"Even though the FTSE 100 figures aren't as impressive, it's important to put these results into context. Investors were only in the market for 60 per cent of the time, and had a maximum drawdown of 25.53 per cent, compared to 52.2 per cent if they had bought and held."

Thompson said that he would never listen to market forecasts, and would only move his investments when given a clear signal by the trend following model.

"I have currently gone into property as I have been given a buying signal", he said.

"Many of my clients have rejected this advice, which is understandable given the consensus view at present. However, in trend following one must be consistent and disciplined."

Despite an impressive track record, commentators continue to be sceptical of trend following.

Tom Winnifrith, manager of the SF t1ps Smaller Companies Gold fund was particularly forthright with his criticism.

He said: "Anyone who follows trends is misinformed. Trend followers would have been staying with IT stock as it plummeted in the early 2000s, and sold out on gold along with Gordon Brown in the late 1990s. I am utterly opposed to this investment strategy."

Senior investment adviser at Bestinvest Adrian Lowcock was of a similar opinion: "I am not comfortable only looking at past performance. I would feel much more comfortable investing in an active manager with a good track record."

"Macro issues have got to be considered. If the manager is not entirely comfortable with going into property, something is definitely wrong here for me. No system is infallible."

Thompson added that Kleinwort Benson is considering the possibility of setting up the strategy in a wrapper form in the near future.