Thursday, January 05, 2006

Property or shares?

Where is the best place to put your savings? In your house or in the stock market? Most Brits are instinctively drawn to the property market for three principal reasons.
• Firstly, it gives you somewhere to live – you can’t live under a share certificate.
• Secondly, it’s tax free. You can build up a store of wealth and not have to pay any of the proceeds to the government.
• Thirdly, it’s easy to borrow against. You can put up as little as 5% of the house value, get your name on the deeds, and then enjoy the highly geared growth of your equity, the 5% you put in. Except of course during those awkward moments when the price of houses falls, as happened from 1988-1993.
• It’s just easy to borrow to buy investment property. You can get 90% mortgages on buy-to-lets, if you know where to go.

Against this, the attraction of owning stocks and shares looks limited, because although there are tax shelters available with pensions and ISAs, they are much more restricted than you get with your own home and no one will lend you huge chunks of money to buy BP or Glaxo. Plus also the stockmarket has a nasty habit of throwing up horrible headlines like “£25billion wiped off shares in ten minutes of carnage.”

But the stock market is not without its fans. For one thing, whilst average returns on the stock market are pretty similar to the housing market over the past 25 years, it is not that difficult to find ways of beating the stockmarket’s average return, whereas it is much harder to do this in property.

Anyone who doubts this should be aware of the returns achieved by Anthony Bolton, star fund manager for Fidelity Investments. Bolton’s flagship fund, Fidelity Special Situations, was launched in December 1979, in the year of Mrs Thatcher’s ascendance to power, with an offer price of 25p per unit. Today, the value of each unit is almost exactly £30, more than a hundred-fold increase. The key to Bolton’s success is consistency: many fund managers beat him in the annual race to be top dog but none has his record over the long term. Consistency and compound growth. At an average return each year of 20%, Bolton’s fund has hardly ever had a bad year. Even now, this £5billion trust, by far the largest mutual fund invested in the UK stockmarket, still makes above average returns year-on-year. Most people would feel that the years since the dotcom boom finished have been lousy for the stock market and excellent for the housing market, and they’d be right, but Bolton’s fund has still outperformed both. Since the start of the new century, British houses have roughly doubled in value, the FTSE 100 first halved in value and has now all but returned to where it was, but Fidelity Special Situations has increased in value three-fold.

Looked at over the long term, the effect of this year-on-year outperformance is staggering. In 1979, when Bolton’s fund opened for business, an average house in Cambridge, where I live, was worth around £35,000. Today it's £200,000. If that seems like a good return, it is. The house has gone up in value by 7% per annum on average, doubling every 10 years.

But compared to Bolton’s Special Situations Fund, it's useless. Had you or I put £35,000 into this fund in 1980 and left it to mature, it would now be worth a £5million, with which we could have bought 25 typical Cambridge houses at today’s prices. OK the taxman might have had a quarter of them when you came to sell, but with that sort of dosh, does it really matter?

Don’t get too excited about Anthony Bolton and his investments because he is about to retire and Fidelity are shortly going to stop any new investments into their Special Situations Fund. But there are others out there who can all but match Bolton’s uncanny ability to make consistent returns over the long term. And you don’t have to dig very deep to find them.


Anonymous Jeremy Olm said...

This IS an interesting topic! Although a little advanced for people who are just starting out to invest though. But honestly speaking, as an estate agent, I wouldn't recommend clients to put ALL their eggs into one basket no matter what. Diversity is the key! It's the proportion that needs to be finetuned

3:41 am  

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