Even as outlook brightens, it may pay to be cautious

Many unresolved issues still have the capacity to inflict nasty surprises

Seldom has a new year began with such optimism and positivity for investors. Brexit and election uncertainties lifted, a thumping majority for Boris Johnson and the spectre of Corbynism banished: it’s a struggle not to get swept along with the stock market euphoria of the past few weeks.

The FTSE 100 has blazed into the new year with a gain of 7.7 per cent since late October and is up 13 per cent on a year ago. And the performance of the FTSE 250 index, comprising mid-size companies more exposed to the domestic UK economy, has been little short of stellar: up some 13 per cent since October and by a stunning 22 per cent on its level a year ago.

I do not doubt that the outlook has improved and the case for buying shares looks hard to resist. When the overriding mood is one close to exuberance, it takes a particularly perverse type of bravery to take a more cautious stance.

It’s not just that markets are prone to a burst of profit-taking after such a strong performance. This is less the onset of a marked change in our economic fortunes than a relief rally – that the worst of the forebodings of forecasters has been avoided. It is certainly true that 2019 proved to be a more conducive year for markets than many had predicted – and not just because the clouds of uncertainty over the UK have lifted. In the US, the Federal Reserve dropped its plans to push ahead with monetary tightening and opted instead to cut interest rates. This was in response to concerns over a slowing domestic economy – though the policy easing came in for a barrage of criticism from President Donald Trump.

In the last few weeks of 2019 hopes rose of a Us-china trade deal, easing fears that an escalation could tip the global economy into recession.

But while the outlook looked more positive as we entered 2020, there are still many unresolved issues, both here and internationally, with the capacity to inflict nasty surprises on markets.

We have some formidable geopolitical tensions to contend with, as fears of Iranian revenge attacks against the US have triggered a spoke in oil prices. And here at home a more sober reflection of our prospects is likely to come to the fore as all-too-familiar problems reassert themselves: continuing uncertainty over the detail of trade and tariff negotiations with the EU, sluggish domestic demand as a constraint on business investment, the standstill performance on productivity and further woes in our high streets and shopping centres as more retail businesses succumb to retreat and failure.

For these reasons, many investors may prefer to err on the side of caution before we can be truly confident that a new era of growth and expansion is upon us. And, as the fundamental objective of investment is capital protection, the attractions of those more defensive funds and trusts are worth keeping in mind.

Chief among these is an old favourite of this column: the Edinburgh-based Personal Assets Trust. This fund, now sporting assets of £1.1 billion putting it among the top 20 investment trusts by size – an astonishing achievement for a trust so long regarded as an esoteric cult – seldom makes it to the financial headlines. Indeed, in recent times it has lagged major stock market indices. This is a trust with a notably conservative, low-risk portfolio that tends to underperform when markets overall are bubbling with boisterous enthusiasm and only comes into its own when markets overall are on the retreat.

Managed by Sebastian Lyon and ably assisted by trust veterans Hamish Buchan and Robin Angus, the trust’s largest holdings are in global index-linked bonds (33 per cent of the portfolio), US equities (21 per cent), money markets (20 per cent) and commodity and energy investments (10 per cent). UK equities account for nine per cent.

Biggest stock holdings are Canada-based Gold Bar Resources, Microsoft, Unilever, British American Tobacco, Nestle and Coca Cola – less a portfolio favoured by woke millennial investors, one might think, than a list of must-have survival items for an underground bunker.

The heavy share price of the trust has gained 10.8 per cent over one year, marginally better than the average for the Investment Association Flexible Investment category, and is up 32 per cent over five years, again ahead of the average for this group. It trades at a 0.9 per cent discount to net assets and the shares yield 1.31 per cent.

The Trustnet website also singles out the Allianz Gilt Yield Fund for cautious investors. This £2.3 billion fund, overseen by Mike Riddell, aims to outperform the FTSE Actuaries UK Conventional Gilts All Stocks benchmark “in a relatively consistent and incremental manner without taking significant relative risk”.

It made a return of 14.10 per cent over the three years to December 16, outperforming the Investment Association UK Gilts (13.3 per cent) and the FTSE Actuaries UK Conventional Gilts All Stocks (12.2 per cent).

Another “cautious” suggestion is the £6.3bn BNY Mellon Real Return fund. This multiasset strategy with three managers has a core element which invests in shares, cash, government bonds and derivatives in order to reduce risk.