As turmoil in the markets continues, which assets should investors buy to avoid losses – or even make money?
1:16PM BST 16 Aug 2011
8 CommentsStock market crashes can be terrifying for investors – even when, as happened last week, they are followed by dramatic recoveries.
What can we do to make our portfolios less susceptible to these disasters? After all, we now have access to a huge range of assets that were previously hard for private investors to buy – gold and government bonds, for example, which you can own easily via exchange-traded funds.
With these options available, there's no longer any need to put all your money in a UK equity unit trust and simply hope for the best. Private investors can now build portfolios as diversified as those put together by the biggest fund managers. But what exactly should they buy? We asked some of the City's best asset allocators where they were putting their money to ride out the storm and even make money amid the turmoil.
Sebastian Lyon runs Troy Asset Management's multi-asset Trojan fund, and has built a reputation for being a defensive manager, able to protect investors' money in the most difficult trading conditions. He said: "Delegate to someone with experience of moving in and out of asset classes. If you're in a fund that is fully invested in shares all the time, you are going to go up and down with the market."
In line with this philosophy, Mr Lyon's fund, which aims for capital preservation and long-term growth, currently has just 35pc of the fund in equities. This is down from 75pc following the market crash in the wake of the collapse of Lehman Brothers in 2008.
"If the correction continues, high-quality firms with good dividend records and low debt will come down with the rest." He mentioned Unilever, GlaxoSmithKline, British American Tobacco, Nestlé and Sage, the software company, as examples that should be on investors' buy lists if prices fell.
Thirty per cent of the fund is in index-linked bonds issued by the British and US governments. This is because Mr Lyon believes the threat of inflation will continue to be a problem. "We think policy in Britain and America is very inflationary," he said, "and can see the danger with inflation at 5pc and interest rates at zero."
He added: "Conventional bonds don't insure you against this. So non-index-linked government bonds are very dangerous assets. However, index-linked ones do cover you to some extent." However, he said he hadn't bought index-linked bonds for three to four months because they had been "overbought" in the "flight to quality". But for retail investors NS&I index-linked certificates are a sensible alternative.
Mr Lyon has 20pc of the fund in gold and gold shares, saying that he "can't see gold going down very far".
"The environment is right for gold at the moment. We are long-term investors, buying on weakness rather than selling on strength." But he said he was avoiding miners, banks and cyclical sectors such as industrials, as well as property and corporate bonds.
Lord Rothschild, the chairman of RIT Capital Partners, the investment trust, said he had anticipated this kind of market turmoil and had already positioned the fund to withstand it.
"In June last year I said we had more to worry about than at any other time in my 50 years of working in the City," he said. In his recent annual chairman's statement he wrote: "The risks ahead are glaring and global." This week he reiterated that these risks remained. "Few people listened at the time – now they are," he said.
To reduce the trust's exposure to risk, he put about 10pc in gold, avoided being fully invested in equities but increased exposure to big, US-listed global stocks. "We'll stick with that," he said. "We are concerned about inflation over the longer term. We don't own any bonds."
David Stewart, the chief investment officer of the Butterfield Group, described the current market crash as a "nightmare". He said the bank was holding 50pc of a typical client's funds in equities, 40pc in fixed interest and 10pc in cash.
"We believe in winning by not losing – making sure we avoid those asset classes we think are going to fall," Mr Stewart said.
Among shares, he favoured "megacap blue chips" quoted in Europe or the US. "We like emerging markets as a growth area but would rather access them via Western companies.
"Which would you rather own for the next 20 years: bonds issued by indebted Western countries or Unilever, Nestlé, Proctor & Gamble and the like?" he asked, adding that he also favoured the big pharmaceutical firms and General Electric.
Some of his clients' money is also in equity income funds, such as Veritas Global Equity Income and Schroder Global Equity Income.
"We look for growing yields and well covered dividends. Income has become a more important part of the total return. By holding on to equities we are also not throwing away the chance of participating in the recovery when growth returns," he said.
Mr Stewart was not worried about inflation, for now at least. "At some point, inflation will be a problem – if not, all attempts to jump-start economies will have failed. But that's not where we are now; we are in the middle of the credit crisis of 2008-2015."
Fidelity's Richard Skelt, the co-head of investment solutions at the fund manager, said investors faced a difficult task in trying to build a portfolio that could cope with the market response to either inflation or low growth – it was still unclear which outcome the economy faced.
"There are two ways to deal with this uncertainty," he said. "Either you own an incredibly broad spread of assets to cope, or you take a view." The danger with the latter route is that if this view is wrong, your portfolio could be hammered.
He suggested balancing your portfolio between growth assets and those that do well in low inflation, while pointing out that liquidity was also really important. "Illiquid strategies became badly unstuck in 2008, so have a lot of assets that can give you the liquidity you need," he said.
Mr Skelt called the wisdom of owning government bonds yielding 3pc "highly questionable" but said investors had to be "really careful" when buying index-linked bonds. "They are among the asset classes that have most disappointed people. There are some technical factors at work so buy carefully.
"Over the long term we like emerging markets. Buying a broadly based emerging market fund probably makes sense, although it's likely to be volatile."
The Ruffer Investment Trust, which has an enviable record of capital preservation, held almost 30pc of its assets in index-linked bonds at the end of last month, with 25pc in Japanese equities. It held 16pc in British shares and 8pc in US equities, with smaller allocations elsewhere. It also owned 6pc in gold and 4pc in cash.
