15 hours ago
Investors should remember Churchill's wise words
If someone had said in January what the first six months of 2025 would bring, I don't think we would have expected stock markets to be flirting with another record level at the half-year stage.
We live in strange times when investors respond to an erratic assault on global trade, seemingly uncontrollable debts and deficits in the world's biggest economy, and war in both the Middle East and Europe, by pushing the S&P 500 to within 1pc of its all-time high.
There may well be a useful lesson here about switching off the rolling news and focusing on the investment horizon. Stock markets have survived all this and more over the years – there is a reason equity investing is called the 'triumph of the optimists'.
But it demands a Pollyanna-like view of the world not to see a long list of reasons to worry. If you are in the fortunate position of having already accumulated some wealth, you would be excused for thinking about how you might hang on to it.
A good week, then, to sit down with Sebastian Lyon and Charlotte Yonge, the managers of Personal Assets Trust, an investment company whose stated goal for the past 35 years has been to 'protect and increase (in that order) the value of shareholders' funds per share over the long term'.
That is a neat description of how investors of a certain age (me and, I suspect, many people reading this) view the task in hand.
I also had the pleasure of hosting a lunch this week, with some of our own investors, most of whom seemed to share my surprise at the mismatch between the current value of our portfolios and what we see in the world around us. If ever there has been a need to focus on capital preservation, this feels like the time.
This is a market that refuses to lie down. Superimpose the V-shaped recovery since the 'liberation day' correction in early April on comparable falls from the past, and you will see only a few instances where markets have continued to rise after a similarly rapid round trip. It does happen.
One notable episode was in 1998, when the collapse of the Long Term Capital Management hedge fund triggered a policy response that poured fuel on the fire of the dotcom bubble. Another was the recovery from the pandemic in 2020. In most other cases, over more than a hundred years, a quick recovery from this kind of 20pc-plus fall has quite quickly run out of steam.
The professionally pessimistic Personal Assets team thinks an important 'regime change' began with policy decisions made during the pandemic. A combination of interest rate cuts by central banks and excessive spending by governments created an inflationary environment that is proving hard to contain.
Most worryingly, in the US, the 'fiscal genie is out of the bottle', with government spending growing even as the American economy has been firing on all cylinders. This is unsustainable.
It might not have mattered while interest rates were close to zero, but in an inflationary environment, with rates and bond yields closer to 5pc, the interest burden has become a material part of government spending.
Three years ago, the US was spending 8pc of tax receipts servicing its debts. Today it is 19pc, says Jefferies, an investment bank. That's more than America spends on defence. No wonder investors are demanding more to lend for longer. Greater uncertainty, higher inflation and a bond bear market. It's an odd backdrop for an equity bull market.
So how is Personal Assets positioned in this new environment? How is it squaring the circle of protecting and growing (in that order)? 'Sailing close to the shore' is how the managers put it.
That's a nice way of framing the job of an investor today. History cautions against battening down the hatches and sheltering from a storm that hasn't even arrived yet.
As Winston Churchill said, you've got to 'keep buggering on'. But it is wise to not go too far out to sea when the clouds are massing.
For the trust, that means just over 40pc in short duration bonds, the kind that are least affected by worries about inflation. Two thirds of them are inflation-linked. A 10th of the portfolio is in gold, another 10th in cash.
The remaining nearly 40pc is in just 19 blue-chip shares, the kinds of companies that it is hard to imagine will not be around in 10 years' time – Unilever, Microsoft, Alphabet, American Express.
The managers share my view, laid out here a couple of weeks ago, that the shift from 'American exceptionalism' to what might be termed Abusa – 'anything but the USA' – is an over-simplification.
About half of the small equity portfolio comprises American companies – businesses which 'are not available elsewhere'. They represent a fifth of the total portfolio, which seems sensible.
If your priority is growth rather than protection, you might think their approach is unnecessarily pedestrian.
If you had invested £100 in the trust 30 years ago, you would, by my calculation, have about £900 today with dividends reinvested, about half of what you would have if you had instead invested in an S&P 500 tracker, with income reinvested.
But all of that outperformance by the US index has happened in the past, extraordinary 10 years. For the first 20 years of that period, the two delivered pretty much the same return, and the trust did so with less volatility.
With the S&P 500 threatening to break out into record territory again, there is a temptation to submit to wishful thinking. We all do it. But it's a shaky investment strategy.
Tom Stevenson is an investment director at Fidelity International. The views are his own
