• Log in
• Register free
• Subscribe
• Help
• Tour & Trial IC Advantage

• Share Tips
• Trading
• Companies
• Markets Data
• Columnists
• Funds Data
• Covered Warrants
• Research Tools
• Investment guides
  • Shares
  • Retirement
  • Short-term trading
  • Funds
  • Alt. Investments
  • Tax
  • Attend IC events
  • Understand jargon
• Q and A
• Blog
• Video

Subscribe today

Celebrate our 150th anniversary with fantastic savings on a joint magazine and IC Advantage subscription.

Subscribe today and save £150

Drip feeding vs lump sum

Created:

1 June 2009

Updated:

2 June 2009

Written by:

Maike Currie

While investment gurus like Neil Woodford and Anthony Bolton say the bear market has bottomed out, the jury is still out on whether the UK is experiencing a false dawn or if we are indeed at the start of a new bull market. However, with equity markets looking perkier, directors buying their own shares and volatility easing, there are strong arguments favouring both drip-feeding your money back into the markets - or taking the plunge and going fully invested now.

What the research shows

Given the carnage that has characterised the last 18 months, it is hardly surprising that investors who drip-fed money into the market on a monthly basis fared considerably better than lump sum investors.

Research from the Association of Investment Companies (AIC) shows that a £50 per month regular investment in the average investment company over the year leading to 30 April 2009 is down 7 per cent to £558, while those who invested the same amount as a lump sum (£600) would have suffered a 30 per cent loss - a decrease to £419. Similarly, over the volatile markets of the past three years, regular investments have outperformed lump sum investments.

However, if markets are able to sustain their upward drive, historical data from the AIC suggests that the longer the time frame, the more lump sum investments tend to outperform regular investments.

Over the long term, markets have generally risen, and over the past 10 years leading to 30 April, a £6,000 lump sum investment in the average investment company is up 44 per cent to £8,638 whereas the same amount invested on a monthly basis has grown only 15 per cent to £6,921. Over 20 years, a £50 regular investment has increased 86 per cent to £22,313 whereas the equivalent lump sum investment (£12,000) has increased dramatically - 301 per cent to £48,120.

Annabel Brodie-Smith, AIC communications director, says: “The recent upturn in markets may well be tempting investors back into investment and if the market bottom has now been reached this could be the moment when lump sum investments begin to outperform regular investments. However, it is worth remembering that in the recent choppy market conditions, regular saving has outperformed lump sum investments. In this context, investors looking to re-enter the stock market may be prepared to give up some of the potential long-term outperformance of lump sum investing and gain a lower risk profile by drip-feeding their investment.”

Gartmore’s head of UK small caps, Gervais Williams, says the decision to drip-feed investments or make a lump sum, largely depends on conviction and return. “I largely tend to drip-feed money into investments which promise relative returns. However, occasionally, something very attractive will come along which warrants a lump sum investment. The trick for the fund manager is to be able to recognise such ‘peaches’.”

Mr Williams anticipates more exceptional opportunities to come out of the UK small cap sector, and expects it to outperform in the next five years. “It will really be a pity to drip feed into this space, when the sector is promising such attractive outperformance over the long term.”

Old adages die easy

While some might be bargaining on the old investment adage - ‘sell in May and go away’ - Jason Hollands, head of corporate affairs at F&C Investments, believes it is impossible to tell in May what will happen over the summer. “Rather than trying to time the market based on arbitrary sayings, it is better in the long term to stick to a sensible, sustained, regular investment strategy, perhaps using the summer lull to your advantage by buying on the dips when volumes are low,” he says.

Tim Cockerill, head of investment research at wealth managers Rowan & Co, agrees that drip feeding or phasing is a good way for investors to re-enter the market. “Splitting a lump sum into perhaps six equal amounts is a good way forward, this could then be invested on a set day irrespective of the market but with the flexibility to invest at another date if the market presents a very good opportunity,” he says. “The drawback is that with hindsight there will have been a time when it was best to have invested the full lump sum, but then hindsight is an exact science.”

According to Mr Cockerill, while fund managers are becoming more positive on the market outlook, most remain cautious. “Many are introducing more risk into their portfolios by adding cyclical stocks so they benefit from the up tick in the market, however for those who have been cautious this addition is at the periphery.”

He points to Threadneedle managers, Leigh Harrison of the UK Equity Income Fund and Chris White, manager of the UK Growth and Income fund.

Mr Harrison has been moving his fund to a less defensive footing, purchasing property company Hammerson and mining stock Xstrata in April. He comments: “While we remain cautious on the outlook for the economy, there is no doubt that the market tone has improved, at least in the short term. We are continuing to add cyclicality to the portfolio, but are maintaining a focus on quality.”

Other managers introducing more risk into their portfolios include Mark Costar, manager of JO Hambro Capital Management UK Growth Fund and Adrian Frost of the Artemis Income Fund.

Meera Patel, senior analyst at Hargreaves Lansdown, says the problem with most fund managers is that they won’t tell you they have brought their cash weighting down until long after it has been done.

She, however, points to Philip Gibb, manager of the Jupiter Financial Opportunities Fund, as an example of a manager who has been drip-feeding money back into the markets. “The fund looks more like an equity fund again compared to a cash and bond fund in 2008.”

Trevor Greetham, manager of the Fidelity’s multi-asset funds, has also just gone overweight in equities for the first time since September 2007, saying that he will use the dips in the market to increase his weighting in equities gradually.

Ms Patel says that in the more risky areas of the market, such as emerging markets, it often pays to drip feed because of pound-cost averaging, a technique which can take advantage of price falls.

Pound cost averaging involves regular investment in a fund - when prices dip, a regular investment will buy more shares and vice versa. Over time, investors may end up paying a lower average cost per share.

Another factor which favours regular investing over a lump sum investment is the question of how well investors, and in particular, fund managers can time the market.

James Norton, director of independent financial adviser (IFA) Evolve Financial Planning, says research published by S&P last month showed that 71.09 per cent of fund managers underperformed the S&P between 2004 and 2008. The outcome was similar in all international markets. “The figures give little comfort that active managers are any good at timing markets, despite often claiming they come into their own when stock markets are falling. I believe that the rebalancing process is a better method of getting market exposure.”

The case for going all-in?

While many favour the merits of drip feeding into the market, Philippa Gee, head of marketing and communications at T Bailey, says in principle drip feeding at a time of recovery tends to be the wrong approach.

“While the market will still be choppy and further falls are not ruled out, to phase your money in over the next 12 months would be ludicrous,” she says. “The way the market is currently positioned, investors should make sure they are almost fully invested by the end of the summer, so that you are ready to capture further uplifts in value. The much more cautious investor should use a time horizon of three to six months.”

Ms Gee says the principle of investing your money on a monthly basis over a 12-month period does not hold up at this time of overall market improvements. “Yes, I would not invest all of my money into equities today, but I would use the quieter trading time in June, July and August to make sure I was well positioned. While investors have suffered as the market has fallen, they will lose out even more by leaving it too late to get back in.”

Ms Gee points out that managers, Rob Burnett of the Neptune European Opportunities Fund and Alister Hibbert of the Blackrock European Dynamic Fund are already repositioned for market recovery, with some stocks to hold for the longer term and others to be held as short-term plays.

Peter Heckingbottom, investment director at independent financial advisor (IFA) Pearson Jones, agrees that now is time for investors to go all-in.

“Stock markets on average recover six months before the end of a recession. Markets need to remain relatively flat at today’s levels, so they are poised for when the economic news improves further - at this time we should see a big bounce and if you drip feed over a long period, you might miss it,” says Mr Heckingbottom.

He believes long-term investors should be investing into equities given the current market levels. “With a five-year view, these markets are cheap and returns should be very positive. Government policy - in particular quantitative easing - may create inflation and equities are generally a good hedge against inflation in both capital values and income.”

Given the uncertainty around which country will exit the recession first, Mr Heckingbottom adds that investors should consider diversifying into global equities. “UK equities might perform better than Europe because 60 per cent of the earnings of FTSE100 companies are sourced from overseas. As a result, UK equities may perform better than the UK economy might suggest.”

Finding a happy medium

There is a strong case to be made for both drip-feeding and lump sum investing. However, it need not be one or the other. Investors can attempt to de-risk their overall portfolio by balancing cash flows with a mix of lump sums and regular drips.

Glyn Williams, investment analyst at IFA Mac Financial, says what investors can do to very good effect is to pick a falling market or asset class which they believe will recover in due course and drip money into this. He believes property could be a good bet for this strategy right now, but prefers ‘bricks and mortar’ investments to real-estate investment trusts (Reits).

An alternative strategy would be to apply drip feeding to a more aggressive, volatile fund than to a steadier fund. “For example Neil Woodford’s Invesco Perpetual Income or High Income Funds should serve you pretty well for a lump sum investment from here on in, whereas Richard Buxton’s Schroder UK Alpha Plus or Schroder UK Growth Fund would be far better suited to dripping in over a few months,” says Mr Williams.“At base level you need to work out if you might want to invest on each and every occasion when you are planning to drip money into the market - if not, you might then take your money out to protect gains up to that point but continue investing, starting afresh. This can be incredibly effective.”

Investment Trusts: returns from regular versus lump-sum investing

All timeframes are end-April to end-April, returns assume 3.5% deduction for fees. Source AIC.