There’s more to life than stocks
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Tim Price, senior investment strategist at Ansbacher & Co tells MoneyWeek where he’d put his money now.
Of all the investment opportunities available today, the financial media tends to focus only on the stockmarket and therefore on stock tips. This implies that the equity market is everyone’s default investment choice, and that ‘beating the market’ is therefore their default investment objective. But it shouldn’t be.
Bill Miller, manager of the Legg Mason Value Trust, has outperformed the S&P 500 for the 14th consecutive year, and in the UK, Anthony Bolton, the manager of Fidelity’s Special Situations fund, has for over 20 years delivered an investment performance that is twice as good as the next-best manager.
But these undoubtedly talented individuals are as atypical as they are successful. For every Warren Buffett there are a thousand, and probably more, fund managers badly lagging the indices. Unless investors’ expectations of future returns are moderated, anyone paying for professional fund management is likely to be disappointed.
What I am suggesting is that there is more to life than stocks. At Ansbacher, we do invest in the stockmarket for our clients, but we do so in an attempt to generate positive returns throughout market cycles. The absurdity of index-tracking has been well demonstrated by the post-2000 bear market. If we don’t like the prospects for a company or its sector, we choose not to invest, and our investment benchmark is not an index but cash.
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What, then, are we investing in? Firstly, ‘market-neutral’ investments, such as hedge funds. Although these have been excoriated by financial commentators who really ought to know better, they are the only funds that endeavour to deliver positive returns regardless of market direction. Equity funds cannot do this, because stockmarkets inevitably fall as well as rise. To diversify risk, we favour funds of hedge funds. With these, the risk of catastrophic failure is one step further removed.
Our second asset class is debt. Unfortunately, bond-market valuations have been distorted by buying from central banks (where investment returns are not the key driver for purchases) and from pension institutions with a perverse attitude toward long-term growth. Because the outlook for inflation is mixed, we are currently concentrating on short-duration, high-quality bonds. Inflation-linked government bonds are a particular favourite. They may be expensive, but then everything is right now. Inflation-protected bonds are, however, the supreme defensive investment.
Which leaves us with equity risk. It’s worth noting that this is where we conclude portfolio construction, rather than where we start. Our clients are invariably wealthy people. They pay us to guard their wealth and to grow it prudently, not to bet it all on black. For this reason, our equity portfolios are heavily defensive. Food groups, brewers, tobacco groups, and utilities all play their role. We love yield.
Some of my personal favourites are as follows: Anglo-American (AAL), a diversified mining firm and a relatively cheap commodities play; Tesco (TSCO), perhaps one of the safer ways of gaining exposure to the retail sector, with a huge online business; and United Utilities (UU/), a core defensive stock with a 7% yield.
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