Outlook: Investors check out of equities and into housing

Enhanced mirage; British Airways

The fund management industry seems to be under siege on all sides. The stock market has tanked, and with it the fees fund managers can earn, since they are directly linked to the value of funds under management. The cost of customer acquisition has soared after the second disastrous ISA selling season in succession, and the Government wants the practice of soft commissions outlawed.

The fund management industry seems to be under siege on all sides. The stock market has tanked, and with it the fees fund managers can earn, since they are directly linked to the value of funds under management. The cost of customer acquisition has soared after the second disastrous ISA selling season in succession, and the Government wants the practice of soft commissions outlawed.

To add to the misery, the Financial Services Authority yesterday announced a clampdown on the use of past performance tables for marketing purposes. Past performance is to be banned as the predominant message in financial promotion.

Not that it really matters as things stand. The best past performance in all the world would have been insufficient in today's depressed stock market conditions to the task of persuading savers to take up their ISA allowances. In February, ISA sales were only a half of the already depressed levels of the same month last year, and there's no evidence to suggest they've improved since then as the tax year draws to a close.

When stock markets are going down or sideways, few are interested in buying. Promotional activity sinks to a bare minimum. It is only when they are going up that the savers come flocking back. What's more, they tend to do so in their greatest numbers just as the markets are peaking.

This is also when the industry's promotional activity traditionally reaches its zenith. It's the wrong way round, of course, but no amount of lecturing from this column and others is capable of changing the lemming like behaviour of small private investors. The majority of savers buy at the top, and even if they don't sell at the bottom, they won't buy there.

The industry compounds the effect by concentrating its marketing drive in periods when markets are at their most euphoric. After a long bull market, any old chump can make his performance look impressive. The FSA is right to question the way the figures are manipulated to sell more ISAs, life policies, and unit trusts. One lucky year out of an average run of them can make the five year performance record look spectacular. 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 mirage

The 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. There will, no doubt, be examples within its armoury of funds that are both investors in Quilter and are held by Quilter as investments.

As the bull market reached its peak, lots of trusts like it that pushed the envelope of acceptability were launched. In the most extreme cases, the portfolio was split between corporate bonds and high-tech growth stocks, but the costs charged to the equity account so as to make flatter the available yield on the income capital. In order to diversify the risk to the bond portfolio, the trusts also invested in other trusts since they would have a similar risk profile. It was a crazy merry go round.

As the technology sector collapsed, the equities lost their value and the bonds became junk. Since most of the trusts were highly geared, banking covenants were breached, and as a consequence, what income there was to pay out is instead being earmarked for bankers. No wonder so many investors are turning to the housing market. Housing may be riding for a fall, but at least it is not a complete mirage.

British Airways

Rod Eddington's plan to turn British Airways into a budget airline may be as plausible as a flying pig. But at least he's learnt a a lesson in marketing from the two kings of low cost air travel, Ryanair's Michael O'Leary and easyJet's Stelios.

Yesterday BA launched its long-awaited low fares initiative with a mouth-watering promise of 70 per cent reductions on many of its domestic destinations. But as with Ryanair and, to a lesser extent easyJet, the low fares only exist if you are prepared to travel at inconvenient times.

The real caveat, however, is that BA cannot be a genuine competitor in the discount market until its cost base matches its fares. Until that happens, BA-Lite could be a recipe for losing even more money in Europe, while Go, easyJet and Ryanair increase their hold on the market.

j.warner@independent.co.uk