While the official start of the credit crunch is difficult to determine, most experts point to the 31 July 2007 as the big turning point. On that day, doomed American bank Bear Stearns closed two mortgage-based hedge funds, initiating a chain reaction which brought about financial meltdown across the planet.
On 9 August BNP Paribas expressed concerns of a “complete evaporation of liquidity” which shut the door to inter-bank lending and pushed a swathe of big-name firms – most famously Lehman Brothers – into collapse.
From peak to trough, the initial crash in September 2008 wiped an astonishing 42 per cent off the value of the FTSE All Share index. A loss not felt since the bursting of the dotcom bubble and one which investors will not easily forget.
The biggest financial crisis in living memory and the deepest recession for 100 years have changed the landscape of investment and left deep scars in investor sentiment.
In the years preceding the crisis, investors were happy to plough their money into the world’s riskiest markets. Funds based in China and the other BRIC economies such as Gartmore China Opportunities and Invesco Perpetual Latin America had quadrupled investors’ money in the five years to the start of the crisis.
Performance of funds 2002-2007
Source: FE Analytics
Elsewhere, funds like M&G Global Basics and BlackRock Gold & General were enjoying a commodities boom and funds with large exposure to financials, such as Jupiter Financial Opportunities, were the beneficiaries of the huge dividends being paid out by banks.
Following the initial shock of the stock market crash funds in these areas once again continued to do well throughout 2009 and 2010, fuelled by the huge quantitative easing packages used by central banks across the world.
However, this momentum soon petered out after it became clear that developed world sovereigns, heavily laden with debt after bailing out systemically vital financial institutions, were in crisis. The debt problems in the eurozone and the US have plagued the markets with extreme levels of volatility.
Against this backdrop, cyclically focused funds have done poorly and the balance has tipped in favour of managers who put an emphasis on capital preservation.
The likes of FE Alpha Managers Francis Brooke, Martin Gray and David Ballance have all remained relatively bearish on the global economy throughout the financial crisis and have been rewarded with stellar returns.
Performance of managers over 5 yrs
Source: FE Analytics
Brooke’s Trojan Income fund is a top five performer in its UK Equity Income sector over a one, three and five years period, and is also among the least volatile, for example.
Cautious multi-asset funds – particularly those with an income focus – dominate the inflows tables, and with commentators such as Bank of England Governor Mervyn King and hedge fund manager Hugh Hendry predicting worse to come from the UK economy, investors are likely to favour low-risk, defensive funds over their riskier rivals for at least the medium term.
Julian Chillingworth, chief investment officer at Rathbone’s, says that one of the major impacts of the financial crisis is that investors now have a clearer picture of what to expect from their portfolios.
“There is a greater understanding of what is going on in the world of investment,” he said. “People understand the importance for lower volatility funds. They also realise the need to be well diversified.”
“Over the course of the five years since the crisis hit, the appetite for risk has lessened and people are taking a much longer-term view.”
“There are going to be ups and downs and I think the average client needs to have a buffer of liquidity such as cash to spend when they need it or to take advantage of any falls in the stock market.”