The Analyst: The only safety is in the price you pay

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The Independent Online

I have never seen markets like these; the mood can change rapidly from one minute to the next. Given the current environment I will revisit a fund I covered only recently: PSigma Income. I want to use it to reinforce the views I expressed last week that interest rates must come down.

Obviously, being a share investor has been no fun over the past year. In particular, income funds have been hit because they have little exposure to the low-yielding mining sector. The PSigma Income Fund has, in fact, performed well over the last couple of months relative to its peers. Bill Mott is beginning to build positions in some international companies because sterling weakness should start to favour them. The fund has risen by 7.2 per cent over two months, compared to 2.9 per cent for the sector average.

I find myself in complete agreement with Bill Mott (and Richard Woolnough of M&G who I covered last week) on inflation. This week the headline inflation figure reached 4.7 per cent and the governor of the Bank of England, Mervyn King, seemed to hint that there was no chance of an interest rate cut. Yet Bill Mott and I believe that inflation is yesterday's story – the figures only tell you about what has happened in the past. The inflation in our system is coming from external influences we cannot control.

Significantly, those influences are subsiding. The oil price has fallen over $50, food prices are falling, there is little or no wage inflation (let's hope the government doesn't give in to the public sector) and house prices are falling. All of these have a strong deflationary effect. Indeed, we are in the midst of an economic slowdown, shortly perhaps a full blown recession, which hardly suggests that inflation is a threat. The danger is that interest rate cuts may be too late to actually stimulate the economy, because it is only when credit becomes available again that we can start to climb out of this hole.

In our meeting, Bill Mott made one of the best points I have heard for a long time. He said there was no intrinsic safety in any business, however large; there is only safety in the price you pay for its shares. By this, he means that you can make a loss investing in even the best and strongest businesses if you buy the shares when they are overvalued. A prime example is Vodafone, the share price of which hit 399p in 2000 – since then it has fallen to just 131p, despite the fact that the company has been trading successfully in the meantime. For this reason, he puts a great deal of thought into the price at which he buys shares, not just in picking the shares themselves.

At present, too many investors are treating the stock market like a casino; I have seen more gambling in the market this week than at any other time in my 25 years in the industry. This is a recipe for extreme volatility, but it does present an opportunity for proper long-term investors such as Bill Mott to pick up some real bargains. It is at times like this you need the steady hand at the tiller, which a manager of his experience can provide.

He remains confident about the yield of the fund and that he can avoid the worst of any dividend cuts. With the possibility of sharply lower interest rates next year, the yield on his fund of 4.6 per cent (net, variable and not guaranteed) could look very attractive in a few months time.

In conclusion, I do not believe that investors should forsake income funds, and particularly the PSigma Income Fund. Note too that Mr Mott's entire personal pension is invested in the fund – so his own interests are most certainly aligned with those of his investors. He remains one of the most focused individuals that I have seen and I believe long-term investors in his fund will be duly rewarded.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visitwww.h-l.co.uk/independent

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