Running with the herd can be very comfortable – few people genuinely like to go against the crowd. But when it comes to stock picking, sticking with the masses can be disastrous, as investors who piled into the technology sector at the end of the 1990s found out to their cost.
As David Lough of Heartwood Wealth Management tells The Sunday Times: “Fashion can be short lived, high risk and result in unnecessary losses.” Recent research from his firm shows that only two of the 100 best-performing investment funds in the five years to 2001 managed to stay in the top 100 in the five years to 2006 (both were HSBC funds investing in India). And in fact, many of the worst performers were those that had once been table-toppers. The Finsbury Technology Trust was in the top ten between 1996 and 2001, but in the past five years has fallen to 6,114th place out of 6,484 funds.
So how do you avoid becoming a fashion victim? One solution is to build a portfolio with a sensible mix of equities, fixed interest investments and commercial property, Patrick Connolly of Towry Law tells The Times. But that’s not necessarily good advice ¬– why buy commercial property, for example, if you believe (as we do) that it’s greatly overvalued? And it’s not just us – Lough also points out that property is one of today’s most fashionable sectors and therefore perhaps best avoided.
A contrarian attitude is a better bet. “If a sector has been unfashionable, then the price of the units is likely to be low,” observes Mark Dampier of Hargreaves Lansdown in The Daily Telegraph. So focus on stocks from unpopular sectors and you might just find a bargain. One sector that may be ripe for reappraisal is biotechnology. Biotech trusts have fared badly recently, with even the best stock – Finsbury Emerging Biotech – returning £982 on a £1,000 investment over the past year, against a £1,142 return for the average investment trust.
But the biotech sector seems to “come back to life” every five or six years, says Dampier. “While the population is living longer, they are not staying healthy in their old age, so there will be growth in the need for drugs and hospital equipment.” Philippa Gee of Torquil Clark in The Daily Telegraph agrees, suggesting pharmaceuticals as another out-of-fashion play. She favours the Framlington Health Fund, while Philip Pearson of P&P Invest recommends Legal & General Health & Pharmaceutical Index Fund.