HAMISH MCRAE: The pros don’t always know best

Sometimes it is the grand professionals who get things wrong and the little people who are the ones who get it right.

There is a rule of thumb in equity markets that retail investors are sucked into buying at the top of the market. Remember how, years ago, whenever shares boomed there would be pages of adverts in the newspapers for unit trust launches? And when the markets went into reverse nobody wanted to buy, and the adverts dried up?

We hear a lot these days about Fomo – fear of missing out – but in investment it’s a long-established human characteristic.

This year the triumph of small investors vis-a-vis the big boys has been the dominant theme of investment across the Atlantic. At the start of the year, as highlighted here last week, most top analysts forecast shares would fall further. Yet, thanks in part to continued buying by retail investors, the most important index, the S&P500 is up nearly 20 per cent this year.

In a notable mea culpa, the chief analyst for Morgan Stanley, Mike Wilson, acknowledged last week in a client note that ‘we were wrong’. Hats off to him for the confession, but hats off too to the millions of small investors who kept faith with corporate America.

Little people: On a ten-year or longer view, UK personal investors will in general have done at least as well as their professional counterparts, and probably somewhat better

Back here, the market has moved sideways, so the past six months haven’t really been an example of retail investors beating professionals, as they have over there. But over a longer period, which of course matters more, a rather similar story emerges.

On a ten-year or longer view, UK personal investors will in general have done at least as well as their professional counterparts, and probably – though it is hard to find the data – somewhat better.

That is not because they are better stock-pickers. There doesn’t seem to be much evidence of that. It is because of asset allocation. Individuals have held on to a decent stake in UK equities, while the professionals have sold out.

As we have highlighted recently, the share of UK equities held by British insurers and pension funds was down to about 4 per cent in 2020, against a peak of more than half in the late 1990s.

The share of UK equities held by individuals also fell – from 15 per cent in 1999 to 12 per cent. But add in the 7 per cent of unit trusts and 1 per cent from investment trusts, and personal holdings will be over 20 per cent of the market.

And individuals don’t hold many gilts. There was a long bull market in gilts until two years ago. Since then it has been one of the most catastrophic periods in history for holding fixed-interest securities.

The biggest holder of gilts is the Bank of England, thanks to the quantitative easing programme. The latest estimate for its loss was published on Tuesday – just under £150 billion. That is a beefy sum even by public accounting standards and must be paid by us as taxpayers over the next ten years.

The losses incurred by pension funds and insurance companies will also be huge, another example that the professionals can give awful advice. The fundamental point is that we need, as a society, to encourage our savers to buy and hold equities. It is a lesson that has to be learnt and relearnt.

Over any long period they give better results than fixed-interest securities, and much better results than leaving money in a bank. So what’s to be done?

Well, there is an organisation, ProShare, founded back in 1992 to promote wider share ownership. Now it focuses solely on employee share ownership, but I think it would be fair to say that the zip has gone out of that movement.

In any case, it isn’t a great idea for employees to have too much of their assets invested in their employer. If the company goes through tough times they may lose both their job and their savings. It’s far better to spread the risk over a range of investments.

Earlier this year, Archie Norman, chairman of Marks & Spencer, launched a scheme called Share Your Voice.

The idea was to update company law so firms could communicate directly with shareholders with holdings in nominee accounts, as well as making company annual reports shorter and simpler, and so on.

Most of this is sensible, and it is in line with the views of this newspaper that we should try to encourage greater investment in stocks and shares.

But ultimately the killer argument is that, aside from buying a home of one’s own, money put in a spread of the shares of solid companies will in the long run almost certainly do better than anything else.