The present crisis in financial markets and the economy is profoundly depressing. My mood was made even worse by Gordon Brown's admission that he had no idea that over 80 per cent of RBS's lending was overseas. Remember, this is the man who has been in charge of our economy for the last 11 years. Did he believe that RBS was lending all its money to trading estates in Scunthorpe?
Certainly, the probability of a depression has increased when you consider that the people in charge (and the Opposition, for that matter) have no idea what is happening. In essence, there is simply too much debt in the system, this is why our banks are in such a mess. In fact, I believe Barclays, RBS and the newly enlarged Lloyds are likely to be nationalised. You could argue that RBS already has been. These banks may be profitable in terms of their day-to-day trading, but they are working under the shadow of such vast liabilities that their future looks very dark indeed.
If we go into a 1930s-style depression, there will be little hiding place other than government bonds (gilts). However, no one really knows whether it will get that bad, and despite the problems, I think it still makes sense to have some exposure to the stock market. Seeking out top-quality managers is more important than ever, though, which is why I believe that investors should consider Neil Woodford's Invesco Perpetual Income and High Income funds. The two funds are essentially identical.
Woodford's track record is one of the most impressive you will find. His investment approach combines global economic analysis with selecting stocks that are best placed to benefit from the perceived situation. He has generally been streets ahead of most other fund managers, especially in recognising that the banks had problems. Indeed, he has not invested in any banks for many years, despite the fact that they made up at least 15 per cent of the FTSE 100 Index. This was a big decision to make, but one that has been absolutely right. He has been warning for some time about excess debt and sky-high house prices.
He has significant exposure in the pharmaceutical sector, which was an unpopular sector until the last year, when it has been relatively strong. His largest weightings here include the global firms GlaxoSmithKline and AstraZeneca. Since the turn of this century, he has been a great fan of tobacco stocks. Whatever your view of tobacco, from a pure investment point of view, he has been in the right place for some time; the sector has been prospering. Here, he has weightings in the US giant Reynolds American, plus BAT and Imperial Tobacco in the UK.
As you can see, he is looking for companies that are likely to be resilient to the deterioration in the economy. In the main, this means larger companies, which often have a lot of exposure to overseas markets. So, if you look at tobacco, it has huge barriers to entry (ie the existing companies have the market sewn up – who is going to start up a new cigarette firm and compete with them?) and excellent earnings. Another advantage to many of these international companies, including BP and BG, is that much of their operations are declared in overseas currencies. The depreciation of sterling is a huge advantage to them, and the fund has been able to benefit indirectly.
The funds currently have an attractive yield of over 4 per cent (net), which looks particularly good when you consider the appallingly low rates on cash deposit. While Woodford himself is bearish on the UK economy, he is bullish on the prospects for his portfolio. As the market begins to latch on to the value of the resilience and dividend potential of these companies, their share prices should start to appreciate – this, of course, depends on the economy avoiding a Great Depression scenario.
Neil Woodford remains one of the managers in which I have most trust, and if any fund can navigate through these treacherous waters, it is Invesco Perpetual equity income funds.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independentReuse content