Don’t fall victim to short-termism in equities, warns Barron
Investors are in danger of being too short-term in their view of equities, according to an investment trust expert.
By Alex Paget, Reporter
Wednesday October 17, 2012
Investors are in danger of being too short-term in their view of equities, according to JP Morgan's David Barron, who says historical lessons illustrate the importance of ignoring immediate macro concerns and concentrating on the long-term.
In spite of the various macro headwinds facing equity investors at the moment, Barron, head of investment trusts at the firm, thinks you only have to look back 25 years to see the merits of being patient and holding on to your investments.
Barron believes that Black Monday on the 19 October 1987 – almost a quarter of a century to the day – shows that if you take equities for their true long term value, periods of economic uncertainty, such as the current environment, are only a blip on the radar.
The investment trust manager urges equity investors not to get too hung up on the timing of a rally and focus instead on finding sustainable investments for the long term.
“The important lesson for long-term equity investors is to stay invested through the ups and downs,” he said. “It is very hard to time entry and exit points accurately, and the best days of returns often come soon after the worst days.”
He continued: “Over the long term, if you pick good funds and managers, diversify your asset allocation and reinvest your dividends, you are unlikely to go wrong.”
While many at the time believed Black Monday was the end of the world in financial terms as share prices dropped to seriously low levels across the globe, Barron thinks its significance is now very limited.
“Although there was a feeling of panic around Black Monday, looking back on it now, it was a small blip in overall equity market performance,” he said.
“Markets have periods of excessive discounting of future earnings and periods of over-optimism, but as very long-term data sets like the Barclays Capital Equity Gilt study show, ultimately, there is a reversion to fair value.”
“The overall trend is for equities to do better than cash or gilts for long-term investors.”
His comments come in light of research compiled by JP Morgan Asset Management, which tracked the performance of their investment trusts since ‘Black Monday’.
According to the research, if you had made an investment in the JP Morgan American Investment Trust
a few weeks before ‘Black Monday’, you would have lost 33.12 per cent by the end of October 1987.
However, you would have made your money back by June 1989 and if you had held the trust until the end of August this year, you would have made 743.72 per cent on your original investment.
Comparably, the FTSE 100 has returned 826.59 per cent since the start of 1987, according to FE Analytics
. As the graph below shows, Black Monday is barely even visibly in the grand scheme of things.
Performance of FTSE 100 since Jan 1987
Source: FE Analytics
Barron also believes that investors should consider the tax benefits of investing in equities over a long period of time.
“It is worth remembering that 1987 was also the year that personal equity plans, or PEPs, were introduced, giving the opportunity to own shares and funds in a tax-favoured wrapper, so investors would have had the chance of largely tax-free income and gains since Black Monday, too,” he said.