‘More wor­ried than in 2008’

The Daily Telegraph - Your Money - - MONEY -

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


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


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.


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

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