‘More worried than in 2008’

Adecade on from the collapse of Lehman Brothers, today’s choppy markets have left analysts and investors wondering when the next big downturn is due. The FTSE 100 index of the largest British stocks is nearly 12pc below the record highs recorded in May this year. So far it’s been a slow grind down over several months. By comparison, there were 11 days in 2008 when the FTSE All Share index fell by 5pc or more in a day.

Only a handful of investment trusts managed to make any money that year (see table, right). Those that did were either cash funds or specialists in areas such as property and infrastructure – with two exceptions. The £407m Ruffer Investment Company returned 23pc over the calendar year, while £273m Capital Gearing produced 4.7pc for shareholders.

Telegraph Money spoke to the managers of both funds about how they managed to reward investors during the industry’s annus horribilis – and how they are preparing for the next crisis.

Capital Gearing

Yield: 0.5pc Premium: 2.2pc Peter Spiller has run this conservatively managed trust for 36 years and has only once failed to produce a positive return, in 2013. In the run-up to the crisis the fund cut its exposure to stocks to around a third.

“Instead we were holding a high proportion of index-linked and conventional bonds,” said Mr Spiller. “The main reason we did well in 2008 was that we avoided the downturn by having relatively few risky assets.”

Ten years on, how does he think today’s investing landscape compares?

“We are actually more defensive now than we were then because we think the risk/reward trade-off is poor.

“The key difference now is that nothing looks like good value. We

WE HAPPY FEW Company

Ruffer Worldwide Healthcare Biotech Growth JP Morgan Elect Managed Cash HICL Capital Gearing Invesco Perpetual Select Liquidity MedicX

Sector

believe the impact of central banks printing money – quantitative easing – has been to distort the price of absolutely all financial assets – you have to be really careful.”

Mr Spiller said the only assets to offer any real value were inflationlinked bonds issued by the US government, known as “Tips”. Flexible Biotechnology and healthcare Biotechnology and healthcare Liquidity funds

Infrastructure Flexible Liquidity funds

He argued that today’s economic environment was more like the Sixties than 2008. Prices rose steadily over that decade, driven by President Lyndon Johnson (above, centre left) spending on welfare and the Vietnam War.

“The parallels with today are striking. I don’t think inflation will explode but gradually build just like it did towards the end of the Sixties,” Mr Spiller said. “When the economy stops growing, with debt at this level, everyone will be desperate to avoid a recession. Who knows how severe a recession could become, whether it would spiral down to something worse? I expect central banks and governments to return to printing money. With rising wages, I expect that to drive inflation.”

He favours inflation-linked bonds issued by the US government because the yield on UK equivalents has been driven through the floor by mass purchases on the part of Britain’s final salary pension funds.

Ruffer

Yield: 0.8pc Premium: 0.9pc Another fund concerned primarily with capital preservation, Ruffer returned 23pc in 2008, largely because of its exposure to Swiss francs, explained co-manager Hamish Baillie. “We actually had a pretty flat

performance in 2007, when we were laying the foundations of what went well the following year,” he said.

“The rate that debt was growing in the West was unsustainable, the house of cards was going to tumble. In mid-2008 we had about 30pc of the fund in short-dated Swiss government bonds and about 13pc in the Japanese yen and another 20pc in short-dated British government bonds.

“When everyone rushed into bonds we made a lot of money.”

Mr Baillie agreed that the return of ruinous inflation was the biggest risk investors faced. He said markets remained in a state of “mania”, where low interest rates had justified paying extortionate prices for stocks. So-called bond proxies, such as Unilever, the consumer brands giant, or Diageo, the drinks maker, were particularly at risk, he added.

Like Capital Gearing, Ruffer holds a large proportion of inflation-linked bonds, as well as gold.

“There are two risks. Inflation accelerates or there is a panic around the falling value of currencies. In that second scenario gold is the ultimate place to be,” Mr Baillie said.

“Gold didn’t do well in 2008 but now makes up 8pc of the fund. We use exchange-traded funds (ETFs) for our exposure, as well as gold mining shares.”

Just a handful of funds made money in the financial crisis. Sam Brodbeck asks how they are investing now