Wednesday, 17 June 2009

Recession: How to invest

Recession: How to invest – an expert's view
Britain is on the brink of a recession and stock markets have been falling, leaving investors in a dilemma of where to invest. Nick Sketch, senior investment director Rensburg Sheppards Investment Management gives his view on where to put your money in the months ahead.

By Nick Sketch
Published: 9:14AM BST 24 Oct 2008

Nick Sketch at Rensburg Sheppards advises investors where invest for the recession. "Our policy remains to selectively increase risk, taking some cash off the sidelines to deploy into firstly corporate bond funds. We think that equities are cheaper than corporate bonds, in the same way that the latter are cheaper then gilts.

Nevertheless, we expect corporate bonds to outperform gilts before equities start going up in any useful way. In fact it is close to being a required precondition before equities can post a major & sustained recovery. Equities in aggregate should rise further on a (say) two or three year view than corporate bonds, but corporate bonds will rise first. What to buy depends on your risk tolerance and particularly on whether you are looking for a shorter term bounce or simply to buy long term value. After all, an active investor might buy corporate bonds now and then simply move some of that cash to equities if and when corporate bonds see a price recovery over the next few months.

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Much the same argument applies within the bond sectors. Non-financial-sector bonds may well start doing better before financial sector bonds, even though we expect financial sector bonds in aggregate to outperform non-financials over the next two or three years, as what we regard as their excessive undervaluation unwinds. However, financial sector bonds are in general a good deal more risky than non-financial bonds and are not likely to stop being so any time soon.

On this basis, a long term, risk-tolerant investor who does not want to trade too actively might just leap the intermediate steps and buy equities now. However, that would be going up the risk curve a long way. A cautious investor might buy some non-financial corporate bonds, but regard anything else as too risky.

And an active investor might well reckon that the best risk/return trade-off will come from owning non-financial corporate bonds now, then increasing the weighting in financial sector bonds.

Well-run corporate bond funds with low exposure to financial sector bonds certainly include the M&G Corporate Bond fund. Fidelity's corporate bond fund is still underweight in financial bonds too.

Corporate bond funds managed by Henderson are generally overweight financial bonds. Our favourite Henderson Bond funds, however, are not like-for-like competitors to the M&G & Fidelity funds – the Henderson Preference & Bond fund is in the riskier "Other Bond" category.

It is also worth remembering that well run funds in this area tend to have low fees. The Annual management fees of the Henderson, Fidelity and M&G funds are all well below 1 per cent. Thus, the hurdle of covering the fund's costs and then outperforming the benchmark is not being made impossible as a result of high fees on any of these funds. Moreover, given the high stock-specific risk in the sector, fees of that level look a small price to pay for good management and good diversification.

For the more contrarian-inclined, diversified global growth funds and the highest quality equities are additional options. Admittedly, this is some way short of advice to wholeheartedly “embrace” equity risk again, but until credit spreads narrow further and stocks reaction to “bad news” is more favourable, this is not felt to be advisable.”

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