Rise of the super-savvy trader

Wealthy private investors are making better investment decisions amid the global financial crisis – breaking a damaging cycle of buying high and selling low – according to two new pieces of research revealed exclusively to FT Money.

Barclays Wealth has identified a spike in buy trades on falling equity markets, and a corresponding increase in sells following significant price rises – suggesting that clients are now consistently banking their gains. On Friday October 10, when the FTSE fell to 3932, the bank’s stockbroking arm reported that 73 per cent of trades were buys and only 27 per cent were sells. But on Monday October 20, after two days in which the UK market made consecutive gains of 5.2 per cent and 4.6 per cent, the proportion of sells rose to nearly 40 per cent. Sellers were even quicker to take profits a month earlier, when a 7.8 per cent rise in the FTSE 100 on September 19 pushed the proportion of sell trades up to 70 per cent.

Significantly, Barclays says it was not just day-traders who were buying low and selling high, as 68 per cent of the October trades were placed by “less active” clients.

Des Byrne, managing director and head of Barclays Stockbrokers, believes this marks a shift in investor sophistication since the dot-com bubble of 1999-2000. “Like the ‘dot-com’ boom, people are dipping their toes in the water for the first time, but this is happening when the market is weak and cheap, rather than strong and expensive,” he points out. “We have seen investors becoming increasingly savvy about their investments through a time of extreme turmoil within the markets.”

Evidence of more skilled trading strategies also emerges from the number of trades placed, and the instruments used. In the week ending October 10, when the FTSE 100 fell 21 per cent – the second largest weekly fall in its history – Barclays Stockbrokers says clients were placing “a handful of trades” in shares, spread-bets and contracts for difference (CFDs), indicating that they were “taking positions and thinking carefully about their investments”.

And on the following Monday, when the index rose more than 8 per cent in a day, more than double the usual number of “long” positions were opened using spread bets and CFDs.

From this, the research concludes that investors are displaying an increased maturity in the face of extreme market volatility.

It says: “If the dot-com boom and bust had one positive outcome, it was that that those who stayed in the market are much sophisticated and financially savvy than their pre-dot.com counterparts.”

Barclays’ findings are supported by trading patterns observed by the London Stock Exchange. “Private investors are growing in sophistication and increasingly taking advantage of weaknesses and anomalies in the market,” says director of markets, Martin Graham. “We have seen sustained activity from private investors in the last couple of months.”

Wealthy private bank clients have also become more proactive in their investment decisions, according to new research by Hotbed, the UK’s largest private investor syndicator. In its survey of private banks – including Credit Suisse, SG Hambros and UBS – more than half said their clients now wanted to be involved in decisions and choose assets for their portfolios, and this trend is growing.

Hotbed chief executive Gary Robins says: “The era when high-net worth investors left all the decision-making to their fund managers is coming to an end.”

Partly as a result of this hands-on approach from entrepreneurial clients, all the private banks surveyed said they expected to maintain or increase their holdings in alternative assets, such as private equity and commercial property.

“Assets like commercial property have seen their valuations fall rapidly so there are now some enticing opportunities for those who are willing to take a long term view,” argues Robins.

Barclays Wealth suggests that a new breed of investor is emerging: the “instividual” – an individual who demands the same products and services as an institution, but prefers online trading to dealing with a private bank.

As a result, wealth consultantcy the Scorpio Partnership concludes: “We are at a tipping point . . . most private banks do not have the online transactional capability.”