Who knows best?

There’s often quite a divergence between private and professional fund investors in terms of what they’re buying and selling – which prompts the question, who knows best?.

Every month I take a look at the unit trust sales figures published by the Investment Management Association to see what’s selling and what’s not. The figures that interest me most are the net sales (i.e. new money less redemptions) in each sector for both retail and institutional investors.

Retail investors are private investors like you and I who either buy direct or via advisers and discount brokers, while institutional investors are the investment managers who run the likes of pension funds and funds of funds.

Why do I like these particular figures? Well, it’s like comparing amateurs with the professionals and there’s often quite a divergence between the two in terms of what they’re buying and selling – which prompts the question, who knows best?

The latest figures, for January, particularly caught my eye as there was such a big difference of opinion re: UK (investment grade) corporate bonds. It was the biggest selling institutional sector taking £1.3 billion net, yet it was also the worst selling retail sector with £228 million of net redemptions.

So the professionals couldn’t get enough of UK corporate bonds while the amateurs sold them like they were going out of fashion.

Perhaps the professionals were taking 2009’s profits on stockmarket funds and investing the proceeds in bonds as they’re worried about the outlook for stockmarkets. And maybe the amateurs, having enjoyed a good run on bonds, are selling out at what they believe to be the top of the market. You could make a convincing argument for both at the moment depending on which way the economy swings, which is why I’m fairly comfortable sitting tight on modest bond exposure for the time being.

As for other sectors institutional investors sold heavily out of global emerging markets with £113 million net redemptions whereas retail investors bought £78 million. And UK strategic bond funds (which include high yield bonds) were the second highest retail seller at £284 million whereas institutional investors sold to the tune of £29 million.

However the amateurs and professionals do seem to agree on two sectors, the UK stockmarket and commercial property. Both sold heavily out of the UK all companies sector and bought into commercial property, although retail investors favoured property rather more.

In the past the professionals generally seem to have had the upper hand in making what turn out to be good investment decisions, although they’ve made their fair share of mistakes. Will they be right this time? I suppose only time will tell who really did know (or guess) best on this occasion.

A final thought. If you accept that the professionals get it right more often than the amateurs, then would private investors do better to follow the professionals rather than make their own decisions?

Please post a comment below if you have views either way.

(If you’re interested, the most and least popular sectors are updated each month on the unit trust page).

Read this article at http://www.candidmoney.com/articles/article78.aspx