Coronavirus has ushered out a decade-long bull run, bringing a market rout and levels of volatility that were unknown to most people aged under 30. An era of cheap borrowing, the proliferation of fintech and a siren song of steady returns have encouraged investors to put their money to work. Now the young must navigate choppier waters, balancing a sudden and pressing need for cash against long-term investment objectives, such as buying a house.
The early evidence suggests young investors did not cower as the markets crashed around them. After all, UK markets have rebounded from every major sell-off within five years. Rather, investors between the ages of 18 and 30 appear to have capitalised on the chaos. From mid-February to the end of March, young people opened 112 per cent more individual savings accounts (Isas) compared with the same period in 2019, according to The Share Centre. The number of opened share-dealing accounts rose 196 per cent.
The prospects of companies operating in crisis industries, such as the aviation sector, haven’t deterred young investors from buying their shares, either. easyJet (EZJ) and International Consolidated Airlines (IAG) featured among their top 30 trades for the quarter, with 52 per cent of millennials expressing a preference for shares in companies they purchase from. “Despite the unabating risk of further volatility and the growing likelihood of a recession as the lockdown continues, young investors have not sought to play it safe,” says Andy Parsons, head of investments at The Share Centre.
Buying shares represents just one investment method for young investors. Passive funds, which track an index’s performance, proved a popular low-cost strategy to hook up investors to the seemingly indefinite bull run. Indeed, index fund assets crossed the $11 trillion (£8.84 trillion) mark last year. And even in March when the first hints of unease were hitting the markets, passive strategies were eight of Interactive Investor’s top selling funds.
In April, UK-based actively-managed funds, which have been spurned by investors over their perceived underperformance against benchmarks and their fees, witnessed a £1.7bn outflow, according to Calastone, representing their second-worst month ever. During the same period, passive funds drew £1.4bn, suggesting that investors aren’t willing to trust active managers to meet their requirements, even during moments of high volatility.
Innovation and technology have broadened the investment sphere, offering young investors more opportunities to put their money to work. Peer-to-peer lenders such as Funding Circle (FCH) have come under pressure and restricted withdrawals during the crisis, while cryptocurrency transaction volumes have spiked. Interviews with young investors conducted by Investors Chronicle indicated a resolute interest in environmental, social and governance (ESG) investment, which has been catered for by app-based investment platforms such as Tickr. Understanding how to allocate cash (and indeed, when to conserve it) will prove vital as young investors leave the security of the bull market behind.
Is now the time to invest in a tracker fund?
Last year, UK investors put a record £18.1bn into tracker funds, according to the Investment Association. Of this total, £8.9bn went into equity trackers, while active funds experienced an aggregate £3.2bn outflow in 2019.
“There are points in market cycles when trackers are the right thing to buy,” says Ben Yearsley, director at Shore Financial Planning. Quantitative easing rounds since the global financial crisis have sustained equity market growth that, bar a few hiccups, has largely continued in a straight line. “In the last decade, passive is the place to have been,” he adds.
Dire economic forecasts and continued uncertainty surrounding the coronavirus pandemic have brought this upwards glide to a halt. Passives have, by their very nature, followed violent market movements, and a choppier period for markets may play to the hand of the active manager. “The more volatility there is in markets, the more you want active over passive,” Mr Yearsley argues.
“If the volatility we’ve seen in the last couple of months carries on for the next couple of years, then realistically the index isn’t going to go anywhere,” he adds. “But companies can still prosper within that, and therefore you’re better off in active than passive.”
The problems with P2P
Peer-to-peer lending is an alternative investment option for those who are keen to support the UK’s small- and medium-sized businesses. Its popularity growth has epitomised a period of cheap money. Companies such as Funding Circle facilitate loans to small and medium companies, which are repaid with interest. The company advertises returns ranging from 4.5 per cent to 6.5 per cent. In 2018, Funding Circle lent £200m more than the entire UK banking system.
Adrian Lowcock, head of personal investing at Willis Owen, sees peer-to-peer investment as an alternative to cash saving that resembles investing in a corporate bond. “Usually these are companies that aren’t necessarily able to tap the main market as easily, so they are riskier,” he says. “The yields you’re getting reflect some of that risk, but I don’t think it reflects necessarily the full risk that’s priced in,” he adds, although he observes that the quality of the market is improving.
In its full-year results released in March, Funding Circle said that it had not observed an impact on recent trading from coronavirus, but continued to monitor its impact on borrowers and investors. It has since paused loans to its secondary market – where users can sell loan parts to other investors. The problem is that withdrawals from peer-to-peer lenders are not straightforward in normal times – a period of turbulence won’t help users capitalise their investments. Meanwhile, the challenges of coronavirus are biting small business (the type many P2P specialists lend to) especially hard.
Young investors see ESG as a low-risk opportunity
This bigger picture and the growth of ESG is reshaping the investment landscape. A 2018 MSCI study found that 90 per cent of US millennials wanted to configure their investments in line with ethical values. Covid-19 has also laid bare the fragilities of old industries and commodities, with a collapse in oil demand driven by short-term travel and manufacturing shutdowns, which have cast doubt over the longevity of sectors including the aviation and automotive sectors. Aided by the rise of fintech and apps giving young investors quicker access to their funds than the clunky platforms of bygone days, coronavirus is unlikely to dampen demand for ethical investment.
Tom McGillycuddy, Tickr co-founder, says that the platform has experienced withdrawals during the crisis, although monthly numbers are roughly the same as they were in January and February. The platform has not changed its investment strategies in response to the downturn.
“When we built this, we built it in a way with a market downturn in mind,” Mr McGillycuddy says. The average age of a Tickr user is 31 years old. “We were trying to acquire tens of thousands, hundreds of thousand of millennial first-time investors,” he adds. “Now, when the market’s going fine, they’re going to be fine, generally speaking. When the market is going down, that’s what we wanted to prepare for.”
Cryptocurrencies have been popular
Cryptocurrencies such as Bitcoin (BTC) perhaps haven’t recently garnered the attention they held in 2018 that accompanied an astonishing bull run before a collapse in price, but they are still proving popular among young investors. Cryptocurrency proponents argue that they are uncorrelated from markets (a view that is difficult to justify, given their steep fall during March), and that the currency represents the future of transaction dealings (more reasonably evidenced by Facebook’s (US:FB) attempt at establishing its Libra currency). Detractors have concerns over cryptocurrency price volatility, the security of investment platforms and their carbon footprint, owing to the high energy output required to ‘mine’ these currencies.
But as investors retreated from stocks during the recent sell-off and gravitated towards perceived safer investments such as passive funds, others appear to have headed in the other direction. Cryptocurrency currency platform ‘2gether’ observed a 236 per cent spike in retail cryptocurrency transactions as coronavirus wreaked havoc across markets in March. Three-quarters of these transactions were crypto purchases, with Bitcoin the most popular currency, making up 63 per cent of all transactions.
Financial wellbeing expert Jason Butler says that blockchain, the technology that underpins cryptocurrencies, is valid, but that the currencies themselves are vulnerable to speculation. “Crypto is just whatever you believe it is,” he says. “It relies on everyone believing in it. And at the moment, people believe in it because they don’t necessarily believe in everything else as much. So they’re believing in something that’s never actually proven the test of time, and turning their backs on things that have,” he adds, such as equities and property.
Take your time
Most young investors will not have witnessed a direct impact on their personal finances from recession before. After a steady decade of watching investments rise in value and taking this ascent for granted, they will have to adjust investment objectives and time horizons.
For many savers under the age of 30, a feeling of resignation towards the prospect of buying a house will not be a new sentiment. That is despite the launch of the Help to Buy Isa scheme, which provided a government loan to first-time buyers with a 5 per cent house deposit, and the Lifetime Isa (LISA), which lets savers put up to £4,000 a year towards a first home and receive a cash bonus of as much as £1,000 more. The LISA has been a subject of controversy during the pandemic, as users are normally subject to a 25 per cent withdrawal penalty. With many job insecure savers looking to their LISAs in a desperate rush for liquidity, this charge has temporarily been reduced to 20 per cent. Help to Buy closed to new applicants last year.
Ben Yearsley says that deciding how to to allocate funds with a house purchase in mind must heavily consider their time horizon. “If you think you’re going to buy your house in the next three years, then actually you probably should be in cash now and not in the equity market,” he says, “because your time frame is too short.”
“If you’re 25 and you think you’re going to buy your house at 35, well actually you probably should be in equities, as a 10-year play, and that’ll give you the best chance of making money,” he adds.
Encouraging a 25-year-old to take their first steps into their equity market during its most turbulent period for over a decade may be easier said than done – many will miss out. In the years from March 2009, most investors were too nervous to re-enter the markets, according to Greg Davies, head of behavioural science at Oxford Risk. Those who opted for the sanctity of cash subsequently missed out on at least part of the longest bull run in history.
“In times like this our emotional time horizon shrinks, to the point where we start making decisions based on today,” he says, rather than looking to the long term. “That means a lot of flip-flopping, it means a lot of emotionally-led decisions, and those are where the mistakes come in.”
“The amount of money that was not made by people sitting on the sidelines in those years was absolutely astronomical,” he adds. By not investing when markets were down, you were giving up something like 12 or 13 per cent per year, compounded over five years, and that would have been for a moderate risk portfolio.”
“Young investors right now have a great opportunity. What they need to find is the emotional resilience to take advantage of it.”
