Anxiety measures for investors are at very low levels but the implied complacency is no longer surprising, according to Liontrust’s James Inglis-Jones.
‘There’s some very constructive economic news that has been coming out which points to a global recovery, so it’s no surprise to us that investors seem to be comfortable with the current environment,’ he said at a conference in London.
‘What is clear is that if you are in an uptrend and you’ve got very low levels of investor anxiety, or indeed even high levels of anxiety as it actually doesn’t matter, the trend is more important and you have to stick with it.
‘The problem really begins when you have suppressed levels of anxiety and where we are today with complacent investors means if the market was to break down then that would be a worrying scenario.’
Inglis-Jones said investor behaviour is something the cash flow solutions team takes a keen interest in. This is especially true in the L/S category, where Inglis-Jones said selectors have struggled to find new ideas.
‘When we look at normalised levels of value, book value and normalised cash flows, it’s clear that Europe is expensive, but so is the US.
'We have to be mindful of these things and remember that even though there are positive trends in the market we need to be constructive.
‘But we are aware of the low level of investor anxiety, we are also aware that we are in a high valuation state.’
This behaviour from investors, Inglis-Jones said, has made it difficult for fund managers to find good deals in the equity market.
‘When you get periods where investors are running for the hills, they are terrified, they think a recession is unfolding, which would usually create high readings on the anxiety measure. This is a great time to get hold of some equities as they would deliver some really good returns.
‘What happens when investors are more complacent is that you get a rather meagre return from equities, its low volatility but not a great average return.’
Inglis-Jones said, despite these concerns, relative to the past several years the market is actually looking cheap.
‘From 2012-2016 the market has been expensive relative to history, but since then it has come down and now it’s more in the middle ground. It’s actually looking pretty cheap relative to historical figures.
‘The quintile we are selecting from has good valuations compared to history. We are still positive on Europe but we will continue to monitor adverse trends,’ he added.
Over the three years to the end of December 2017, Inglis-Jones returned 15.87% in euro terms in the L/S equity category. This is while the average manager in the sector returned 8.35% over the same time period.