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Thursday, 18th April 2024
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Editorial Back  
The Defenders
The global equity markets have entered an extremely interesting phase - interesting because from here on, opportunities to buy value stocks with long term growth potential will arise.

But, let there be no doubt about it… there should not be any compunction to rush in. The overall equity market, having moved sideways for nigh on two years now (the Dow Jones Index (DJIA) peaked in March 1999 - one full year before the (silly) NASDAQ) and only entered bear territory (i.e. moved significantly downwards) in the past month.

Let there be no doubt about it, the markets will not quickly snap back - it will take time for the message to sink in to all investors that valuations had become excessive; but reality has to reassert itself before the bull resumes. Meanwhile, for investors, fund managers and pension fund trustees the question arises as to what best to do.

‘Bottom fishing’ or speculative purchasing of value stocks in a bear market is only for the foresightful, the well informed (on individual equities) and for those who can afford it. The principles of portfolio theory (vide Harry Markowicz - spread your risk) apply now more than ever. Thus the proportion of ones savings devoted to the purchase of cheap equity stocks in this bear market should be small (no more than 10 per cent). Secondly, as always, the stocks purchased should be value stocks, and, don’t forget, in a recession, value stocks will often be those with cash-rich balance sheets.

For those people who might be tempted to begin a bit of bottom fishing (with long term objectives in mind) we would recommend a consultation of Finance’s latest PLC Survey - published in December 2000 as part of one’s research into Irish equity opportunities.

Meanwhile in this month’s issue we look at the issues for pension fund trustees. Certainly it would be ludicrous for a disgruntled pension fund trustee to liquidate his or her portfolio on foot of the poor results that are now flooding in on a weekly basis on overall fund performances but it is clear that today’s trustees demand more from their fund managers.

Now is a good time to remind ourselves that the role of a fund manager, to use a sporting metaphor is akin to the defender, not the striker. In rugby parlance, the fund manager might be compared to the full back, with ‘a safe pair of hands’. Sure the defender can occasionally score goals or the full back a try, but most important of all they must provide reasonable security.
‘Reasonable security’ can not mean preventing losses on overall portfolio performances (what player has never lost a game?) But it does mean providing security against the wilder excesses of the equity markets (such as NASDAQ) - and that is what our fund managers and fund administrators are paid to do.

Another dominant theme in this month's headlines is the issue of financial regulation - both at the domestic and European level. Seismic shifts are afoot on both fronts. On the domestic side the issue is the establishment of the Irish Financial Services Regulatory Authority - on the European front the issues is the integration of the financial markets following the Lamfalussy report.
Delegates at the recent Finance Dublin conference raised concerns that there could be an over focus on the consumer protection role in the recently announced IFSRA. But the Taniste Mary Harney was quick to ally these fears. Her speech from the conference is printed opposite and makes for interesting reading.

Meanwhile in Europe the rapid adoption of the Lamfalussy recommendations and the creation of two new Securities Committees at the Stockholm meeting heralds a welcome attempt to speed up the integration of the European financial markets. We can only hope it works.

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