Most of the time past performance is no guide to the future
Posted in General on 20. Oct, 2010
Most of the time, past performance is no guide to the future.Investors only like to buy something they can see going up. They won’t buy when it is seen to have gone down, even though this is usually the most advantageous time to do so. Which brings us by a round about route to the continued boom in the housing market. House prices have defied virtually all predictions in continuing to rise strongly right through the business downturn. Yesterday’s Halifax survey showed some decline in the rate of growth, but at an annualised 16 per cent, it’s still unbelievably strong.The chief reason is now well understood.
Low interest rates have made high levels of borrowing more immediately affordable, and the manner in which central bankers flooded the system with liquidity post the terrorist attacks on America, has made credit more easily available. But there’s more to it than that.Among great swathes of the population, particularly in the South East of England where house price inflation has been at its steepest, property has come to be seen not just as a place to live, but as a high return alternative investment. Forget pensions and ISAs; they seem to bring nothing but grief. Borrow more to trade up, buy to let, cancel the AVCs, cash in the life assurance policy, however much it costs, just get onto that property ladder.For many it will end in tears. High debt may seem more affordable than it was, but it has got to be paid off eventually, and unless house prices carry on rising as they have been, there will be no inflater effect to diminish the size of the loan. Housing looks like another bull market that’s about to run its course.Enhanced mirageThe Quilter Global Enhanced Income Trust was another of those investment vehicles launched to take advantage of what we have just been discussing – the lemming like tendency of private investors only fully to commit to markets just as they are riding for a fall. Launched two years ago with the FTSE 100 near to its all time high, trading in all classes of security in this split capital investment trust was yesterday suspended after the trust was forced to abandon rescue restructuring plans It doesn’t look good.
Anything up to 30 split capital investment trusts are deep in the mire, but Quilter may be the first one to go under.There are more than 100 split capital investment trusts – so called because one class of capital is designed to pay income while the other is there to deliver capital – traded on the stock market, and most of them are basically OK. Indeed so seriously has the whole sector been tarred by the split capital investment trust crisis, that some of them are starting to look good value. Quite a few of them, however, are insolvent, and since many of them invest in each other, if one goes, there could be a domino effect with multiple bankruptcies and a fire sale of billions of pounds in assets.It’s hard to explain the phenomenon other than as part of the excess of the last boom Quilter is in some respects a classic. It doesn’t invest in anything other than corporate bonds and other investment trusts, and a large proportion of its shares is held by other funds too, most prominently those managed by Aberdeen Asset Management.