So which way do you run? Do you go with the herd? Or do you go the other way? Going against markets can be a brave act, but in the long run, if you get the timing right, it can also be very profitable.
Take the recent rises and falls of the markets. The savvy investors bailed out in the late’90s, because the market tide in favour of investing was too strong. And then three or so years on, when all around there was miserable selling, the same investor jumped back in. It’s easier said than done, of course, but then again back in 2003, you didn’t need to be a genius, or expert in market movements, to work out that a good buying opportunity was emerging
Pity the big insurers- the likes of Standard Life, for example. No doubt run by extremely smart fund managers, who could see the writing on the wall, and sniff a buying opportunity within a mile. Their problem was that they weren’t allowed to buy when, no doubt, they wanted to.
The FSA’s rules on solvency meant that when equities fell earlier this decade, insurers were forced to swap equities for cash – giving rise to a selling frenzy, which perhaps prolonged the length of the bear market. Yet, if these big investors had been allowed to stay put, no doubt, they would be counting a lot more bucks right now- and perhaps, by avoiding the losses FSA rules enforced upon them, they would be flush with money today – and markets would be even higher. Maybe the FSA is a potential explanation for why the FTSE 100 has failed to pass its all time high, when the Dow did this with such aplomb recently.
But while all around the herd and regulator said sell, BT stayed where it was.
It faced a potentially crippling pension deficit – but did it cower with the rest- and run for cash? It did not. On the face of it, this fortitude for equity investment didn’t help much, but scratch beneath the surface, and it was a very smart decision.
In fact the pension deficit has risen at BT; it’s now standing at a superficially alarming £3.4 billion. That compares with a deficit of £2.1 billion in 2002. But here’s the good news. There have been changes in the way the deficit has been calculated, making more cautious assumptions on returns, and allowing greater longevity for workers. Back in 2002, BT had expected the members of its pension scheme to last until they were 83.8, now it reckons its average retiree won’t draw his last breath until he is 85.4.
Apparently, BT reckons that if it had calculated the pension deficit under the previous methodology, it would be in credit now.
Some analysts reckon that if BT had changed tactics and went from equities to bonds, like so many others- then the company itself may have been drawing its last breath today, – and the crown guarantee, which means the government protects BT’s pensioners, would have had to come into force.
Moving forward, BT plans to pump £280 million into the scheme each year, making three payments in 2007, and now reckons it will have the deficit licked in no time at all.
© Investment & Business News 2013