In a volatile and ever-changing investment universe, timing is of the essence
Market timing is a difficult exercise and it is especially tough to be consistently right all the time. However, getting one’s timing slightly wrong is one thing and completely missing the bottom (or top) quite another. As far as global emerging markets go, retail investors failed to spot the bottom as strong inflows continued long after the peak of the market in November 2007 and despite the meltdown in 2008. Investors who were late to the global emerging markets party saw poor timing eat into their returns, exposing them to a notably higher downside risk.
The net retail sales in the IMA Global Emerging Markets sector in 2008, at an estimated £345m, were higher than that in any single calendar year since 2005 (prior to 2005, IMA did not split total fund flows data into institutional and retail). 2008 was a bad year for the MSCI Emerging Markets index, which nosedived 35.4% in sterling terms (53.3% in dollar terms). The staggering decline outpaced the other major global indices – MSCI Asia Pacific ex Japan (fell 33.4%), FTSE All Share (down 30%), MSCI Europe (dropped 25.8%) and S&P 500 indices (slipped 13%), according to Morningstar.
The carnage on global stock markets failed to deter retail investors as net retail sales into the IMA Global Emerging Market sector remained positive in every single month in 2008. In fact, a shocking £104m in net retail sales was still recorded following the Lehman Brothers collapse in September 2008, an event that brought the global financial system to the brink of disaster due to heightened systematic risk. It is unlikely this was a contrarian call on behalf of retail investors.
Professional nature
In comparison, the institutional net sales were negative in five out of the 12 months, and the cumulative inflow was pegged at an estimated £117m, much less than that of their retail counterparts. Given the professional nature of institutional investing, it is likely that some of their net sales in 2008 were on account of contrarian investing, a concept almost alien to retail investors.
Furthermore, the total net retail sales in the IMA Global Emerging Market sector in 2007 and 2008 – years in which brakes should have been applied to new inflows as emerging markets were decidedly hot – were nearly £600m, according to the IMA. In contrast, net retail sales in 2005 and 2006 when the global emerging markets were relatively less hot were notably lower, around £240m. In fact, the global emerging markets tide had begun to rise in 2003 and carried on until November 2007. But, retail investors failed to pick up on that resurgence early on its curve, as the best-selling IMA sectors in 2003, 2004 and 2005 were UK Corporate Bonds and UK Equity Income.
Dot.com hangover
This was the hangover from the dot.com crisis which ended in March 2003 but its reverberations were still being felt in net retail sales until 2005 – another example of retail investors falling behind the curve. Although income investing is an all-weather investment strategy, it is considered a lower-risk approach as stocks offering both dividend and capital growth are targeted. Needless to say, balance-sheet strength is an important determinant of a firm’s ability to keep up its dividends. In times of a market downturn, companies with a stronger balance sheet tend to suffer less compared with their more racy counterparts.
The experience of retail investors who piled on to the global emerging markets bandwagon in the later stages of the rally, including those who joined after the bear market was underway, was notably different to those who got on in the early and middle stages of the boom cycle. This is reflected clearly in fund returns over March 2003-December 2006 and January 2007-February 2009 (the latter phase excludes the recent market recovery, seen since early March).
In the first pre-defined period, the IMA Global Emerging Markets sector was up 31.3% but in the second it was down 11.4%. This means investors who arrived late to the party ended up suffering declines. But, for those who got in early and remained invested during the meltdown, the outcome was not too bad as the IMA sector average was still up 14% over March 2003 to February 2009. Clearly, the worst affected were those who arrived late and sold out at the bottom of the market; there were some who did that as the IMA data shows a £243m outflow in April 2009, the single highest level of withdrawals since 2005. Poor timing therefore hurt returns even if asset allocation was not at fault. In contrast, a buy-and-hold strategy served investors well.
Three kings
Three funds in this sector are worth pointing out for their ability to protect capital in uncertain times. Aberdeen Emerging Markets, Lincoln Emerging Market and First State Global Emerging Market Leaders have all posted negative returns during the current crisis but the extent of decline is notably lower, resulting in strong relative outperformance. Back in the dot.com crisis years, these funds distinguished themselves with strong relative returns. All three funds are run by highly experienced teams who have been working together at their respective companies for more than a decade. They work within a team-orientated culture and the depth of experience is among the best in the market. These are disciplined investors who are unlikely to pay too much for growth or chase momentum; this is an integral part of their investment strategy, which helps them avoid speculative plays and protect investors’ capital on the downside.
A lot of what has been said here has been with the benefit of hindsight; similarly, it is difficult to get market timing consistently right all the time. But, it is also true institutional investors displayed better judgement in timing their entry into emerging markets plays – they did not plough record amounts in new money when the sector was in the midst of a meltdown. That implies there is scope for improvement here; the investment into this century’s most attractive opportunity could have been more rewarding had retail investors’ timing been better. All is not lost yet as the current bear market has begun its descent, presenting early birds with opportunities.
