FOOL'S EYE VIEW
Investors Bolt For The Exit

By James Carlisle
September 30, 2002

With the stock market tumbling ten per cent in July, it's no surprise to see that investors were in full flight during August. Figures today from the Investment Management Association show that a total of £604m flowed into investment funds during August, compared to £949m during July. August is traditionally the quietest month of year, but £604m is the worst August figure since 1998.

Institutional investors were mostly to blame for the drop, with their net investment of £273m in July dropping to just £48m in August, thanks mostly to a big drop in investment by insurance companies. Retail investors are a little more stable because of their use of regular savings plans, and they actually increased their monthly investment during August, with £229m compared to July's £222m.

Switching from shares into bonds

Probably the most notable thing about the figures, however, is the continued shift in emphasis away from shares towards bonds, in the wake of the stock market's poor performance over the last couple of years.

In August, the UK All Companies sector (the main sector for shares) saw a net inflow of just £24m compared to the £275m that was invested during July. This drop was shared by both institutional and retail investors, with institutions putting just £20m into the sector compared to £200m in July and retail investors contributing only £4m compared to the £76m that they had invested in the sector the previous month. The biggest fans of shares seemed to be Independent Financial Advisers, whose clients channelled a net £93m into the sector in August, compared with £106m in July.

Institutional investors were also putting less into the UK Corporate Bond sector, with a net investment of £138m compared to £212m in July. Retail investors, on the other hand, increased their monthly contribution to the sector, with a net investment of £251m compared to £161m in July.

Shutting the stable door after the horse has bolted

It's tempting to infer from this that investors were spotting a bad September (in which shares have fallen another 10% ahead of events, but history doesn't suggest that they should be credited with such prescience. The truth behind the figures is that investors have a terrible habit of shutting the door after the horse has bolted. Shares have been on the slide for a couple of years, so investors are now running scared. Back in 2000, when the market had been going up and everyone was full of optimism, everyone was still pouring money into the market. In fact, a lot of it was piling into technology funds and we all know how that's turned out.

This approach of investing money when the market has been going up, and "feels safe", and then running away when it has gone down, and "looks scary", does not make any sense. The stock market isn't like a Ryder Cup match where you can see the momentum gradually building in favour of a 119th ranked Welshman. It's more like a bookie giving odds on how likely he is to win the match. Just as things start to look good, so the odds shorten -- everyone else can see the putts going in just as well as you can.

The global economy has been slicing a few drives into the woods lately and more than a few putts have gone begging. But that's precisely why the boys in red braces, the stock market's equivalent of bookmakers, have lengthened the odds. Prices now take account of a significant loss of form and they've moved to that point as the loss of form has become apparent. There's no point waiting for an improvement before investing again because, by then, the odds will have been shortened again and the market will have already risen.

Where you invest your money should depend on what you want to get out of it -- not what the market has done over the last couple of years or where you or your favourite pundit fancies it might lurch next.

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