The perils of investment fashions

Following the herd can cost investors dear

Analysis
Julian Knight BBC News Online personal finance reporter

Hot pants, leg warmers and flares may make you look ridiculous but they do not cost you your shirt.

But following the crowd into the latest investment craze can spell big losses.

Some [property funds] only invest in one development - as a result they are as risky as a single share

Justin Urquhart-Stewart, Seven Investment Management

Think back to the turn of 2000 - the FTSE 100 share index was touching 7,000 points, and the technology sector was the darling of investors.

Unit and investment trusts - which pool investors money to invest in a basket of shares - were on the shopping list of many.

It seemed every day brought a new glitzy fund launch.

But the party was soon over as some funds plunged by two thirds, or more.

Recently two fund managers - Credit Suisse and Legg Mason - pulled the plug on once fashionable telecom, media and technology (TMT) trusts.

Come 2003, and the investment landscape is transformed: three years of falls have knocked the life out of many stock market investors.

Unit trust and investment trusts have lost their shine but investors money has to go somewhere.

Fresh fashion victims

Bonds and property based investment are now particularly in vogue.

Given courage by the housing market boom, many profit hungry investors have plunged headlong into commercial property funds, a move they may regret later.

Investment fashion faux pas

Early 1990s: Emerging Market funds

Mid 1990s: European funds

Late 1990s: Technology funds

Early 2000s: High income bonds

Future?: Commercial property funds, corporate bonds

On Tuesday, the City watchdog the Financial Services Authority (FSA) announced that it was investigating property funds, over concerns that consumers are over-exposing themselves to risk.

"Many people see property funds as offering safety and golden returns," Justin Urquhart-Stewart, co-founder of Seven Investment Management, told BBC News Online.

"But some only invest in one development. As a result they are as risky as a single share."

Mis-selling

Likewise, investors have piled into bonds during the last three turbulent years - as a rule during that time they have completed the not difficult task of outperforming shares.

But not all bonds are the same - high income bonds have left often elderly investors nursing heavy losses and regulators investigating claims of mis-selling.

Many investors then switched to Europe and technology funds and have lost heavily with the fall in telecoms stocks

Mark Dampier, Hargreaves Lansdown

And, according to Mr Urquhart-Stewart, even corporate bonds - loans made to firms in return for interest for a specified period - are far from secure.

"Against a backdrop of falling profits and some spectacular business failures some corporate bonds, even in established names, may be not such a good bet," he said.

Track record

Throughout the 1990s, it seems investors followed the herd time after time and ended up counting the cost.

"Always attracted by high performance, first investors rushed into emerging market funds only to suffer during successive economic crisis," Mark Dampier, technical director of Hargreaves Lansdown, one of the UK's largest IFAs, said.

"Many investors then switched to Europe and technology funds and have lost heavily with the fall in telecoms stocks."

And, according to Mr Dampier, when investors rush into a well performing stock market fund, they are in effect killing the goose that laid the golden egg.

Size matters

Big funds rarely take substantial potentially lucrative stakes in young upcoming companies - put simply in order for it to be worthwhile they would have to virtually own the smallest quoted firms lock, stock and barrel.

Performance tables show that the nimbleness of the smaller fund is a big advantage.

Investors playing follow the leader lose out

Nearly two thirds the top 20 best performing unit trusts in the UK over the last three and a half years are smaller in size than average - many are tiddlers in the investment ocean.

And when investors get a sniff of high returns and follow the herd the negative effect on performance can be considerable.

The Invesco European fund was one of the best performers of the mid nineties - its top of the class performance brought a wash of investment cash.

As a result the fund increased in size 10-fold in a couple of years and promptly slipped to the back of the field.

"This is a prime example of yesterday's high fashion investment turning into today's tank top," Mr Urquhart-Stewart said.