Mark Dampier: Short-term moves are impossible to forecast
Saturday 27 August 2011
Our investment objectives are always challenged in times of extreme market volatility. Despite investing with the intention of keeping holdings for the long-term, many investors I speak to become more short-term focused, often on the next three to six months. As a result they attempt to yo-yo between risky, volatile assets and those they perceive as safe havens. This is an unsustainable investment strategy. It might seem easy, but in practice investors get whipsawed around and end up on the wrong side of a market move just when it matters most.
We have volatility in spades at the moment, but while the market is dancing to every piece of macro-economic data that comes out, investors should concentrate on having a clear objective of what they want and look for investments that should help them to achieve it.
The crux of the matter is that short-term moves are impossible to forecast. The specific issue at the moment is that economies are poised on a knife-edge with low growth on one side and recession on the other. Central banks and politicians have little room for error, and actions such as lowering VAT tax or increasing spending, whilst simulative for the economy, simply add to the underlying problem of too much debt.
During these times I like to invest in funds whose managers have clear objectives and longer term thinking rather than being swayed by short-term fluctuations. I have highlighted Neil Woodford's Invesco Perpetual High Income Fund many times and I continue to do so today. In truth, no one really knows whether the western world will slip into another recession or whether we simply face a sustained period of low growth, but for many of Mr Woodford's holdings the exact trajectory of GDP is somewhat academic.
Last year, Mr Woodford was heavily criticised for not being invested in more economically sensitive stocks. Yet he has maintained his view that the western world has got to tackle its debt problems, and in doing so will inevitably experience a long period of lower growth. Mr Woodford is often portrayed as a bear, but although bearish on the economy he is upbeat on the prospects for the companies in his portfolio. He believes he owns a collection of shares that will see investors through these difficult times and will, in due course, increase in value. In particular he highlights pharmaceutical stocks as exhibiting tremendous value and he has a considerable overweight in this sector. So far the market hasn't shared his view, but then the market didn't agree with him on tobacco stocks in 2000 – and they are now up over 500 per cent against a market that is down.
The obvious factor in Mr Woodford's favour is that an equity income fund with a yield of around 4 per cent compares well against persistently low interest rates – especially if the income can grow over time as underlying companies increase their dividends. There must surely be a revaluation of these stocks at some stage, but many investors seem to prefer to pile into government debt (ie gilts). Yet with a 2.4 per cent gross yield on the 10-year gilt do you really expect an inflation-matching return?
Personally I would prefer to own a fund, or indeed individual companies, which look to be well-financed, are economically insensitive and have yields over 4 per cent net which could rise further. If we are (as I suspect) in a low growth environment then income will play a much more important part in shareholders' overall returns. Therefore Mr Woodford's funds, and others with a similar strategy, are excellent places to invest for the long-term. And for those who believe the markets have gone nowhere in the last 10 years (which as measured by the FTSE 100 is by and large right), factor in the reinvestment of dividends plus Mr Woodford's expertise and the result is quite different. Over the last 10 years the fund is up 128 per cent.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.h-l.co.uk/independent
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