The world of investing has changed dramatically with investors grappling with the worst bear market since the 1930s, Old Mutual Unit Trusts (Omut) managing director John Bryant said on Tuesday.
”Investors have fundamentally altered their views on risk following the bursting of the US technology share bubble,” Bryant said.
”In spite of market corrections since then, valuations are far from compelling and a near-term recovery is uncertain.”
Bryant said there had been a huge flight into cash and bonds and a shift in the way equities were valued.
He said: ”In the late 1990s, company profitability was not a requisite for a strong market ‘buy’ recommendation. Price-to-sales and price-to-turnover ratios were used to value equities instead of price-to-earnings.”
The focus was on capital gains while fundamentals such as dividend and income flow were ignored. Gearing for growth was fashionable.
”Currently the markets are focusing on core earnings and the expensing of options and the impact of the bear market on pension deficits.
”There is sharp focus on cash flows and dividend yields. Debt is no longer in vogue with illiquid firms being downgraded.
”There is also intense focus on transparency and disclosure following the Enron debacle.”
Bryant said that given the new challenges, Old Mutual had moved to use derivatives to provide equity fund investors with increased protection. Legislation enabling the use of futures was enacted about 12 months ago and had recently seen the emergence of a new breed of funds designed to minimise market risks and smooth volatility.
Omut’s Dynamic Floor Fund — which is being made available to the retail market for the first time — limited losses to 10% over 12 months.
But Bryant said the fund would not only help on the downside, but would significantly lock in profits on the market’s upside. ”Currently investors are faced with weak global equity markets and sagging share prices, but equally they are aware that markets could rebound sharply once the Iraqi conflict is settled.”
The Dynamic Floor Fund has been designed to offer protection if markets move lower and yet to lock in any gains should the markets rebound. – Sapa